Banking Exchange Magazine Logo

Revenue solution?

The potential is real, but it’s not a slam dunk. Segmentation is key

Revenue solution?

Traditionally, wealth management was the bastion of the largest banks. Now, regional and community banks, hungry for revenue, are considering it or expanding existing products and services. “There has been an uptick in the number of banks of all sizes getting serious about wealth management in the past few years, as banks search for a non-correlative source of fee income in an economic climate that constrains traditional spread business,” says Michael Kostoff, a WISE Gateway LLC partner.

The numbers are appealing: A bank can expect an average profit margin of 20% to 25% within two to three years of start-up, says Barry Dayley, executive vice-president of Money Concepts International.

To turn a profit, though, banks must budget for people and technology expenses, change marketing strategies, and leverage existing retail banking infrastructure.

Too little, too late?

The good news: While significant wealth management brands exist, the business is fragmented and no one player has a dominant market share, says Mark Jordahl, president of Minneapolis-based U.S. Bancorp Wealth Management. Also, it’s a market with attractive growth prospects. According to Aite Group, North American banks have captured less than 15% of non-qualified investments from the some 30 million mass-affluent investors.

But Sophie Schmitt, Aite senior analyst, wonders if it’s too late for smaller banks. Many mass-affluent consumers are entrenched with low-cost online broker/dealers like Charles Schwab and TD Ameritrade. She says the five largest U.S. banks have attracted clients, but few community banks have. In an Aite study, only 10% of community bank customers not using their bank’s wealth management services say it’s because their bank doesn’t offer them. Other factors lead that 90% to go elsewhere.

Big expenses lead to outsourcing

For smaller banks, a downside of entering the wealth management business is the potentially staggering expense. At a minimum, banks need compelling products delivered through self-directed and online channels. “Large banks, such as Bank of America with its Merrill Edge platform, and online brokerages have really raised the bar,” notes Schmitt. “Clients want a full gamut of services and unique products. They don’t want quarterly statements, and they don’t want to come into the branch.”

Technology costs can be prohibitive, says Eileen Van Scoy, banking and trust sector manager, SunGard’s wealth management business. The price tag to build out a full-scale wealth management offering suitable for ultra high-net-worth clients is between $1 billion and $5 billion, she says. The cost for a less robust platform suitable for the mass-affluent market is lower.

Outsourcing all or part of wealth management operations can minimize capital outlays. ABA-endorsed Money Concepts and independent broker/dealers like LPL Financial and Cetera Financial Group provide front, middle, and back-office processes like clearing, reporting, and billing. For instance, Lancaster, Pa.-based Fulton Financial Advisors (FFA), an operating division of $16.1 billion-assets Fulton Financial Corp., is not large enough to develop a brokerage platform, so it leverages the Raymond James platform. Although it hires financial advisors, employees also include independent, registered investment advisors through Raymond James. 

Kostoff agrees that outsourcing is viable. “You can explore a relatively cost-efficient methodology by sharing revenues and commissions with independent broker/dealers. There are lots of third-party administrators willing to work with banks.”

Alvi Abuaf, partner at financial services consultancy Capco, uses the analogy of a grocer selling various cereal brands to a bank offering broker/dealer products and services. “Banks can provide a service that is segregated from the product, but still own the client relationship and meet client suitability standards,” he says. “Don’t outsource the relationship, but use mature outsourcers to manage brokerage functions and technology.”

Talent-intensive business

Unlike retail banking, generally a transaction-based business, wealth management is a relationship business supported by products, services, and, yes, transactions. Says Jon Dargusch, executive vice-president, $5.5 billion-assets WesBanco Bank, Columbus, Ohio, “Your investment and trust products have to perform, but it’s the rapport with the client that makes the business work.”

FFA staffs its wealth management business with homegrown talent, such as branch managers or commercial lenders, and brings in experienced (and licensed) wealth management professionals. FFA Chief Executive Dave Hanson explains that the parent company has a management training program, and while it’s not specifically designed to feed the wealth management division, “We tend to be a pretty attractive spot for graduates.” He adds, “It takes a special person to succeed in wealth management and create a connection with the customer and earn their trust.” (See sidebar, below, for how BB&T taps internal talent.)

It’s not unusual for banks to look outside for wealth management employees, too, says Money Concept’s Dayley, since the skill set is different. He says banks offering a full wealth management program should require employees to hold, as a minimum, Financial Industry Regulatory Authority (FINRA) Series 7 and Series 66 licenses and insurance licenses for the states they do business in, and he encourages bank employees to become Chartered Financial Professionals (CFP). “If you’re going to hold your program out as true wealth management, then you need the competence to deliver what clients expect. Designations give you credibility.” He notes that Money Concepts works with banks to help employees earn those designations.

Banks that acquire a wealth management business often make the mistake of implementing traditional bank culture, along with inferior compensation and referral programs, into what needs to be a more dynamic way of doing business, says Chip Roame, managing partner at Tiburon Strategic Advisors in Tiburon, Calif. He suggests that banks take a “hands-off” approach to integrating such acquisitions, and points to the integration of Wachovia Securities into Wells Fargo Bank as an example of an integration done right.

Targeting the right market

Large banks tend to segment their wealth management offerings, providing full service to high-net-worth clients and more cost-effective, self-service platforms such as online and call centers to emerging and mass-affluent customers. U.S. Bank has three wealth management offerings: Ascent Private Capital Management (APCM) for clients with more than $25 million in investable assets; Private Client Reserve for those with more than $1 million; and Private Client Group for those with more than $100,000. Combined, they manage $78.8 billion. “We’ve taken a finer pencil to the business model and have become more thoughtful about building a delivery model to meet each segment,” says Mark Jordahl. For example, APCM offers video-conferencing, catered dining, and private offices for family members.

Indeed, ultra-high-net-worth clients require sophisticated products more akin to a corporation, says Capco’s Abuaf. Adds Jordahl, the needs of wealthy, multi-generational family clients in APCM go beyond portfolio management and asset allocation to strategizing how to use accumulated wealth to make positive, long-term impacts on families, communities, and even the planet.

Segmentation is important for smaller banks lacking the scale of larger firms, says Isabella Cagnazzo Fonseca, wealth management research director for Celent. She advises banks to focus on customer segmentation and then determine the services, products, and channels best suited to those segments.

What about customers who don’t meet investable asset criteria now but may later due to small business growth or inheritance? Banks have to decide whether to offer high-touch services at a loss now or risk a nonbank financial firm poaching them later. WesBanco believes if the bank gives customers a taste of its offerings before meeting the bank’s criteria, it has a good chance of retaining the customer’s investable assets and capturing a larger share.

It’s challenging for smaller banks with one delivery model, says Jon Dargusch. “You have to be very diligent about whom you work with.”

It’s a different way of looking at business, adds Kostoff. In traditional lending, customers must persuade the bank they are worthy to get a loan. In wealth management, the bank has to prove it is worthy.

Leverage the cross-sell

For banks to be successful in wealth management, they need to leverage their existing customer base and cross-sell fee-based wealth management products and services to the appropriate customers. Transactional products and a vast distribution network give banks a good starting point, says Fonseca.

Raymond Hand, Private Financial Services sales and service director at BB&T, describes the big regional’s efforts at cross-pollination as “wonderful.” The branch offices sent 35,000 client referrals to the wealth management division in 2011—more than twice as many as in 2010. He attributes the significant increase to executive support and instilling referral accountability.

Clermont Wealth Strategies, part of FFA and also located in Lancaster, relies partly on its community bank subsidiaries to provide brand building and drive referrals, says Paul Nicholas, executive vice-president. “We don’t do a lot to market Clermont as a separate brand, but rely on the strength of our community bank brands,” he says. Commercial lenders often provide introductions to Clermont advisors. Clermont has assets under management of $6.5 billion.

Although wealth management does encompass some product sales, the marketing strategies banks use to sell new deposit products on the retail side, for instance, don’t work. Instead, most banks rely on referrals plus targeted marketing in the form of events and seminars. For example, Northern Trust, RBC, Barclays, Wells Fargo, and others sponsor PGA golf tournaments.

“For us, marketing is about reaching out to existing customers for referrals,” says Carolyn Garner, vice-president and senior trust officer with WesBanco Trust and Investment Services. “If customers are pleased, they are the best marketing you have.”

Besides, it’s rare that a high-net-worth client will choose a financial advisor based on an advertisement alone, concurs FFA’s Hanson. 

Is now the time?

Wealth management is not a business that you can test drive. You need to jump in. Banks willing to invest time and money can reap stable, recurring revenues.

But success won’t come quickly. Hanson’s advice: Pick a strategy and stick with it. “The wealth management relationship and sales cycle could be as long as three or four years. If you change strategy every six months, you don’t give your team enough time to learn the playbook.”

Lisa Joyce

Banking Exchange Senior Contributing Editor Lisa Joyce has 20 years of experience as a freelance writer and editor, with expertise across the full spectrum of the financial services industry, including banking, insurance, and capital markets. She specializes in interviewing high-level executives about business challenges, strategies, and transformations. She can be reached at [email protected]

back to top


About Us

Connect With Us


Webinar: Real-Time Payments in the U.S. Market

Time/Date: June 16, 2021 2:00 p.m. ET

The U.S. has come a long way in its journey to real-time payments, with TCH and Zelle in market and FedNow just around the corner. COVID-19 has accelerated that demand to move to real-time. Yet many financial institutions remain unconvinced of the need to move, with less than 3% of financial institutions signed up today.

In this Banking Exchange hosted webinar Celent’s Gareth Lodge, Senior Analyst, Global Payments, and Alacriti’s Mark Ranta, Payments Practice Lead, discuss the findings in the Celent research report, Real-Time Payments in the US Market: Speeding Up or Slowing Down? A Call to Arms.


This webinar is brought to you by:
Alacriti logo