Forget the digital race: Regional banks must focus on their wealth businesses

Regional banks can be forgiven for being a little distracted lately.

Amid a historic shift to digital, national bank brands have made tremendous gains in account growth. Meanwhile, fintech startups have started encroaching from the other side with digital wallets, person-to-person payment apps and low-cost, online-only checking and savings accounts that threaten the tried-and-true midsize banking business model. 

The result: While regional and mid-cap banks hold nearly 30% of the country’s banking assets, they are underperforming both larger and smaller institutions from an account growth perspective.

The writing on the wall should be clear if it’s not already. Regional banks can no longer afford to play catch-up on tech with the big banks and fintechs. They need to double-down in areas where they can excel and differentiate from the increasingly homogenized experiences being offered by competitors. They need to focus on wealth management.

Ripe opportunity
Fortunately, the stars are aligned for them to do just that. First, the size of the market opportunity is both large and growing rapidly, with the number of high net worth individuals — those with $1 million or more of investable assets — in North America increasing by 10.7% in 2020 to exceed 7 million, according to Capgemini’s June 2021 World Wealth Report. These individuals represent $24.3 trillion in financial wealth, a large percentage of which is expected to change hands over the next two decades as boomers begin passing assets along to succeeding generations.

And while competition in wealth management is fierce, regional and midsize banks have some key advantages. For a start, they have strong relationships and have set the pace on client satisfaction and trust — particularly among younger clients. This is especially true in the regional bank wealth management segment. Currently, 33% of regional bank wealth clients are millennials, compared with just 14% of investors industrywide. Millennials also have higher levels of overall client satisfaction with their regional bank wealth offerings.

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That’s not all. Among the Generation Z cohort of banking clients, 52% say they are already actively receiving advice and/or guidance from their retail bank. Similarly, 39% of Generation Y bank clients look to their banks as a source of financial advice.

The growth opportunity is there. The trust is there. The clients are there. Unfortunately, however, the regional banks are largely absent from this space. Just 10% of regional bank clients currently have an investment account with that institution. While those that do also have higher client satisfaction scores and Net Promoter Scores (NPS), very few regional banks are maximizing the opportunity in wealth.

Missing the mark on comprehensive advice
Worse, just 5% of regional bank wealth management clients are currently receiving comprehensive advice from their advisors. This is a big miss.

According to our research, comprehensive advice is the key to achieving best-in-class client satisfaction and NPS scores in the wealth management industry. Comprehensive advice — as defined by J.D. Power research — includes criteria such as making recommendations in a client’s best interest, understanding their goals and needs and having a documented financial plan.

All of these, of course, are very straightforward ingredients in the making of a strong wealth management relationship. Yet we’ve continually found that, industrywide, wealth managers only manage to deliver this level of advice 14% of the time. While that is not good, it far exceeds the frequency with which we’re seeing comprehensive advice delivered by regional bank advisors.

Regional banks are in prime position to improve their wealth management businesses. They are already providing a great deal of financial advice and guidance to clients through their traditional banking operations, and their audience is highly receptive. With the right focus on recruitment, training and incentivization, it would not be difficult to start driving dramatic improvements in their wealth management and advisory offerings.

Seizing the opportunity
With the “great wealth transfer” now hitting its full stride, there has never been a more opportune time to build a regional bank-based wealth practice. The first step is to simply acknowledge the opportunity and commit to addressing it. From there, banks will want to get serious about where they currently sit on the comprehensive advice continuum and take proactive steps to improve by consistently putting clients first and benchmarking and measuring ongoing performance.

Banks go all in on wealth management, but can they all succeed?

The forces of disruption have been beating up on regional banks for a long time now. Throughout, they have consistently set themselves apart from the pack of larger rivals and upstarts by forging closer relationships with their clients, delivering more personalized, tailored solutions and hands-on customer support.

Those are exactly the strengths that, if applied correctly, will help regional bank wealth management practices flourish. The key is to stop chasing weaknesses and start making a concerted effort to capitalize on those strengths.