How Small Banks Are Succeeding in Wealth Management

In banks' furious scramble for wealthy customers' investments, size is sometimes overrated.

Banks of all sizes are competing to get more of their most affluent customers' asset management business, hoping to lock down a steady source of fee revenues. The market is dominated by the country's largest banks and investment specialists, from JPMorgan Chase (JPM) and Bank of America's Merrill Lynch (BAC) to UBS and Credit Suisse.

But regional and community banks are also managing to carve out a piece of this lucrative business, in part by offering perks and personalized service to a somewhat less affluent clientele that might not interest bigger institutions.

"It's a jump ball," says Bruce Van Saun, the new chief executive of RBS Citizens Group. "I don't think that just because somebody's bigger they're necessarily going to have an advantage."

That sentiment was echoed by several bankers and asset management specialists in recent interviews. For regional and community banks hoping to make a go of the business, they say success involves: picking the right battles, sticking to home turf, offering unique perks and remaining willing to share revenues with outside vendors.

Wealth management is "an attractive business, a good generator of fee income and capital-efficient," says JP Nicols, a partner at the consultancy Bank Solutions Group. "In this new environment we're in, it's a bit of a holy grail."

Small banks that ignore asset management also pass up an opportunity to make more money from their existing affluent customers, says Wayne Cutler, a managing director with the consultancy Novantas.

"The money's already somewhere," he says. "Either it's at a specialty advisor or brokerage firm … or it's sitting in nonoptimized products, like CDs and basic savings accounts, and that money is being underutilized."

Many big banks and investment specialists are increasingly concentrating on so-called ultra-high-net-worth customers, who have at least $25 million to $50 million in assets. Now smaller banks are trying to serve the smaller fry among wealthy Americans—those with substantial assets but not enough to rate in the top 1%.

"Our sweet spot on the investment management side is that $500,000 to $3 million range, which is underserved right now by our regional and national competition," says Thomas L. Hall, executive vice president of wealth management and private banking at Seacoast National Bank (SBCF) in Stuart, Fla.

"If they go to some of our competitors, they're not going to be afforded face time. They're going to get a 1-800 number," he adds.

The $2.2 billion-asset Seacoast has branches in Palm Beach and what Hall calls other affluent "Treasure Coast" counties in Florida. It started devoting more resources to the business about a year ago, naming Hall to focus exclusively on running the wealth division and hiring more advisors and a program sales manager on its brokerage side. The investment has paid off: wealth management revenues have grown 25% in the past year, Hall says.

"Our footprint kind of lent itself to an orientation to wealthy clients," says Hall, adding that the bank has identified 18,000 of its 70,000 retail bank customer households today as potential wealth management customers. "We have this unique opportunity right under our noses."

Seacoast is also capitalizing on a long-running marketing program that encompasses some of the exclusive sorts of events and perks that credit card companies offer their top customers. The bank organizes several invitation-only events that customers pay to attend—from a charity fashion show to a waiting-list-only group retreat on the Mayan Riviera in Mexico, at a cost of $4,000 per couple.

The "softer sell" aspect of these programs yields "account additions, deepening relationships and referrals," Hall says. "If you have one investment management sale out of [one event] like that, the program is more than paid for."

Across the country, Portland, Ore.-based Umpqua (UMPQ) is expanding its wealth management business by targeting a slightly more upscale clientele that is likewise underserved by big national rivals. Its private-banking division is now aiming to serve customers with $1 million to $10 million in assets.

"We focus on small-business owners. They tend to be the millionaire next door," says Kelly Johnson, executive vice president of wealth management at the $11.4 billion-asset bank.

Johnson joined Umpqua in 2009, when Chief Executive Raymond Davis decided to start expanding his bank's wealth management offerings, and he says that it has benefitted by investing in the business during the financial crisis.

"The war for talent is much stronger today than it was four years ago," Johnson says. "As margins have continued to compress, all institutions are out there looking for opportunities. For those of us who have the infrastructure in place, that's paying off."

Both Umpqua and Seacoast rely on outside vendors to provide some wealth management services, which Johnson and Hall say has worked well. Such arrangements—which usually involve the bank and broker-dealer sharing revenue—is often the most practical way for smaller banks to provide a full suite of services, says Novantas' Cutler. Most banks with less than $20 billion in assets would find it prohibitive to start a stand-alone asset management operation from scratch, due to high costs related to hiring, establishing infrastructure, regulatory compliance and ongoing program management, he adds.

The downside of partnerships: they limit potential returns. Some community bank chief executives have also balked at running the risk that customers will have bad experiences, resulting in damage to their banks' reputations, Cutler says.

Community bankers are "always nervous about wealth management because [with a partnership program], you lose control," Cutler says.

Those bankers who do plan to start up their own asset management arms should be prepared to lose money for five to ten years, warns Dick Evans, CEO of the $22.6 billion-asset Cullen/Frost Bankers (CFR).

The San Antonio bank has operated an investment advisory business for almost a century and has also acquired banks that have offered similar services via partnerships. Evans regards such offerings as a stopgap rather than a viable long-term business model.

"I'm not being critical of that at all; that's one way to put your toe in the water," he says. "If you want to help your customers through this low interest rate environment with alternatives, there's some ways to do it by partnering. But you've got to recognize that that's what it is, and your partner is in control."

Evans' advice for bankers who are thinking of taking the plunge: recognize up front that wealth management will only build wealth for banks willing to make a long-term commitment.

"I think there're a lot of small banks, and even regional banks, that jump into this business and probably shouldn't," he says. "It takes a continual investment in people, expertise, software and all the investment to support those people on an ongoing basis."