Web Bank for Newly Rich Profitable in Just a Year

Though the online banking landscape is littered with dozens of failed niche players, some have achieved success by finding proven hot markets and catering to them.

One-year-old VirtualBank in North Palm Beach, Fla., for example, sells investment products to the newly rich and is already profitable.

Rory A. Brown, chairman and chief executive officer, has taken VirtualBank down the investment road because he thinks the Internet should be the center of a wealthy person’s investing relationship. And if Mr. Brown has his way, his bank will be the investment and asset management hub — as well as the banking hub — of choice for as many wealthy clients as he can gather.

The route he is taking is akin to that of a bank trust department or a financial advisory practice. In addition to offering standard banking products and services, VirtualBank employs financial planners who work with clients to assess their portfolios and determine their investment needs. But unlike other wealth management practices, it charges commissions on the products clients buy.

The online channel for banking and investing “doesn’t work for everyone. The infrastructure cannot support people with small balances,” Mr. Brown said. So VirtualBank’s account minimums are high — $2 million.

Setting high minimums means a bank can “deal with people who can afford to bank with you” and can take more time serving each of a select group of very wealthy clients, he said. The average account size at VirtualBank is $15 million, according to Mr. Brown.

He also makes sure a sufficient variety of products are available to serve the investment needs of his selective clientele. VirtualBank offers more than 15,000 shelf mutual funds, hedge funds, and separately managed accounts from outside vendors.

“In order to get wealth management assets you have to provide innovative products. You can’t make all of those,” Mr. Brown said.

VirtualBank’s investment assets under management have nearly doubled since its founding, from $1.45 billion on March 31, 2000, to $2.8 billion on March 31, 2001. The increase can be attributed in part to its purchase of Capital Management Strategies Financial Services Inc. in Rockville, Md.

VirtualBank is one of the very few small online banks to focus on wealth management. Niche banks seeking wealthy investors are usually brick-and-mortar companies that set up Web sites to reach their target market.

United Community Bank Holding Co. of San Francisco plans to attract its clients’ investable assets via its 18-month-old Web site, ibankunited.com. It provides banking and investing information, as well as community announcements, to its predominantly Chinese-American client base in both English and Chinese. By the end of the year the site will be selling annuities, mutual funds, and stocks and bonds via a third-party wholesaler. United Community already sells these products in its branches.

Eleanor Chang, marketing director and first vice president, believes there is a lot of opportunity for affinity banks such as United Community to sell investment products online. “People comfortable online will do more online” she said. “I think we’re well positioned to compete for investors.”

Christine Barry, a technology analyst with Meridien Research in Newton, Mass., said mining a specific niche is a great way for small banks to compete with the investment sales efforts of larger banks. The key is selecting a tech-savvy potential client base that has money to invest.

“You need to reach for [customers] who are using the technology, are not intimidated by online banking, and don’t have to be trained,” she said.

Ms. Barry said there is a misconception that high-net-worth individuals do not want to buy investment products online. Banks like VirtualBank, she said, are not targeting 75-year-old retirees — their sights are set on new money.

“You can never replace human interaction with technology,” she said. “These people are not afraid of technology. They don’t just want a live adviser, and they are not afraid of self-service. They are really looking for both.”

Mr. Brown said VirtualBank is not trying to replace branches — in fact, the company just broke ground on its brick-and-mortar office, in Palm Beach Gardens, Fla. But he thinks that the old saw that wealthy customers need a branch to go to is silly.

“What makes [bank customers] comfortable is not a warm branch office. What makes them comfortable … on the investment side is a personal relationship. And that personal relationship is something you develop over time. It doesn’t matter how large a building you have.”