Affluent investors are increasingly turning their backs on what was once considered the preeminent choice for wealth management: the bank personal trust department.
Only 4% of ultrahigh-net-worth investors - households with more than $5 million of investable assets - consider a trust department as their primary financial adviser; just 5% look to a private banker. Meanwhile, full-service brokers, financial planners, and other investment managers and advisers have continued to gain influence with these households. They are often affiliated with nonbank trustees.
As baby boomers age, it seems logical that they would recognize the need for trust services. So why are the trust departments losing market share?
Wealthy investors are not opposed to trusts, but they would rather manage their own wealth than name an institutional trustee. In our most recent study of ultrahigh-net-worth households, in 2003, respondents said that more than half of their assets (54%) were held in trust, but less than a third of those investors used an institutional trustee. Most often they self-trustee or appoint a family member or attorney. Today 88% of all very wealthy investors who have trusts choose this method for one or more of them.
Bank trust departments must evaluate their practices and views, as well as market needs, to capitalize on what should be a growing demand for their capabilities.
- Up to now bank trust departments have relied on their fiduciary expertise, and what trust consumers really want is financial and tax advice. New competitors - independent trust companies, as well as trust companies established by mutual fund firms, insurers, and brokerages - are more advice-based, visible, and easy to work with.
- In addition to seeking advice, ultrahigh-net-worth investors want alternative asset classes, including real estate, hedge funds, and other investments. Sixty-nine percent of those in our survey said they did not consider banks providers of innovative solutions for investments, estate planning, or taxes.
- Bank trust departments must connect with the needs of different generations. Their focus has traditionally been on the person who establishes the trust, with little attention given to other family members. Younger generations are comfortable with Internet tools and information. Failure to provide these things will quickly lead these beneficiaries to move their assets.
- Small-business owners who have come to the bank for commercial needs are not being effectively and seamlessly serviced for personal financial needs by other areas of the bank (brokerage, trust, investments). These businesspeople are a huge potential source of assets, yet almost all those surveyed said their primary adviser was not with the company that held their commercial loans.
Only 20% of ultrahigh-net-worth investors think bank trust departments have talented advisers and staff, and only 23% strongly agree that the departments are wealth management experts.Alternatively, 35% believe brokers have talented advisers and staff. This may be startling news for many large bank trust operations, which have focused on building personal relationships. The critical message is that providing personalized administrative trust service does not equate to credible wealth management.
Not all news is bleak, however. In fact, 73% of wealthy investors who do have an institutional trustee use a bank trust department. There is great opportunity in soliciting the two-thirds who do not have a trustee.Another area where banks excel in these turbulent times is reputation. Of all financial service providers, banks, including trust departments, ranked highest (48%) for being trustworthy and objective. This attribute is particularly noteworthy in a time when other providers are plagued with scandal. But that alone will not turn the tide for bank trust departments, they must:
- Highlight that they have traditionally provided the open-architecture services that ultrahigh-net-worth customers seek.
- Be willing to let customers self-trustee while developing the role of the primary adviser.
- Review business models and organizational structures to determine the most effective approach for building the wealth management business - this is not just trust services.
- Build stronger internal relationships across units to leverage clients not currently served by the trust department. Specifically, business owners must be offered products for both commercial and personal needs, which are closely intertwined and require specialized services.
Bank trust departments must reexamine their services, shed the fiduciary mask, and give customers what they really desire.
