Insights from Pacesetters

Transcription

1 Perspectives on Wealth Management in Banks: Insights from Pacesetters While banks continue to face many challenges, the recent Fidelity Bank Wealth Management Study showed their wealth management practices appeared to be a bright spot, providing a potential growth path. Over half (%) of the bank executives interviewed for the study expected the revenue contribution from their wealth management practices to grow % or more in the next five years. Although the future of wealth management appears positive for banks overall given this expected growth rate, a group of Pacesetters stood out from the pack, with wealth management typically estimated to represent % of total bank revenue in the next five years, versus 0% for other banks. A close look at Pacesetters revealed five key traits that may provide important lessons for other banks to consider when looking to accelerate their wealth management businesses. In this brief See how wealth management may provide a potential growth path Look at five key traits of Pacesetters See some of the challenges Pacesetters still need to overcome Take away lessons to consider to potentially accelerate a wealth management business This paper looks at these traits in more detail, along with some of the challenges Pacesetters still need to deal with, and actions other banks may want to consider to help them become more successful with their wealth management practices.

2 Wealth management provides a potential growth path The past several years have been very challenging for banks. Tighter lending criteria after the 008 financial crisis and a low interest-rate environment have stifled growth. At the same time, heightened regulations have made it harder to collect debit and credit fees. After a heavy focus on compliance and cost management, however, banks main priority in 0 is likely to shift to repositioning for growth. One strategy banks have turned to is reshuffling their product mix to generate increased revenue, particularly from fee-based businesses like wealth management. Over half (%) of bank executives who participated in the Fidelity Bank Wealth Management study expected to see % or more growth in revenue contribution from this business in the next five years. Wealth management is a very relationship-centric business, and banks with a high-touch and easily accessible service model are well positioned to compete. Almost half of those interviewed (7%) said clients feel comfortable in the bank setting, and % felt banks can offer more personalized services than larger brokerage houses. Wealth management provides a conduit for deepening relationships beyond traditional banking % Expected growth in revenue contribution from wealth management practices in the next five years products, offering the possibility of having assets and liabilities in one place. It can also provide potential benefits both for institutions and for their clients, as business moves from asset gathering to asset management, revenues to returns, and transactions to relationships. Our study showed that banks face a number of challenges that are centered on culture, compliance, and competing platforms as they look to grow their wealth management businesses: Culture: One-quarter of bank executives (%) felt there were cultural differences between the banking and the wealth management side of the business. Compliance: Over one-fifth (%) felt it was difficult to stay current with wealth management regulations and compliance rules. Competing Platforms: Around 7% said there were still isolated and competing platforms across different business lines within the bank. A group of Pacesetters seems to have made better progress on these fronts than others. Pacesetters stand out from the pack Pacesetters (% of all banks in the study) had wealth management practices that, on average, contributed 8% to the institution s overall revenue at the time of the survey, and that contribution had increased 0% over the past two years. Looking forward, Pacesetters typically expected to see revenue contribution from wealth management at % of total bank assets in the next five years, versus % versus 0% Revenue contribution from wealth management practices in the next five years for Pacesetters versus other banks 0% that other banks typically expected to see. A close look at Pacesetters revealed five key traits that may provide important lessons for other banks to consider when looking to grow their wealth management practices. Traits of Pacesetters Pacesetters comprised community (9%), regional (%), global/national (6%), and super-regional (%) banks. About one-third (%) were headquartered in the Northeast. Total median assets were 8% higher than other banks, and wealth management accounted for 8% of total assets versus 0% for other banks. They also had a significantly larger number of employees allocated to this business. Pacesetters stood out with five traits that may provide insights about wealth management for other banks. They had:. A consistent focus and commitment from leadership.. Integration and collaboration, not competition, with other bank lines of business.. A comprehensive wealth management offering.

3 Profile Pacesetters Other Banks Total bank assets* $6 billion $. billion Wealth management share of total bank assets* 8% 0% Number of wealth management employees* 7 *Median. Leveraged the registered investment advisor (RIA) approach.. Outsourced noncore back-office operations. A consistent focus and commitment from leadership The study showed that, typically, leadership at Pacesetters was highly focused on the wealth management business, and committed to growing and developing it (% versus 6% for other banks). The majority (87%) of bankers interviewed who work at these leading firms felt there had been an increased focus on wealth management over the past five years (versus % for other banks), and one-third (%) felt this focus would increase significantly over the next five years (versus 8% for other banks). When considering the competition for wealth management assets, 76% of all bankers felt other banks with this type of offering were the strongest rivals, while % felt online/discount brokers were the ones to look out for with self-directed investors. While only 0% saw RIA firms as a threat, many banks have partnered, purchased, or developed RIAs organically to help grow the business. Integration and collaboration with other bank lines of business Wealth management practices in banks typically fall into one of four stages of development: Infancy: Have made the decision to develop a wealth management practice, and are now in the process of gathering information and resources. Developmental: Still working on the best approach for staffing, allocating resources, crafting a compensation model, and more, for their wealth management practice. Mature: Have had a wealth management practice for a number of years, and it is fully staffed and integrated with the rest of the bank from a strategy, resource allocation, and technology perspective. Transitional: Have had a wealth management practice for many years and are now working on a major shift in focus or strategy, such as a large technology spend or an acquisition. The study showed that more Pacesetters were in the mature or transitional stages of development compared to other banks (66% versus %). As a result, they may have had the opportunity to take more steps to integrate their wealth management practices with other areas of the bank (79% have integrated versus 6% for other banks). In addition, only 6% of Pacesetters felt they competed somewhat with other parts of their bank for client assets and internal resources, versus % for other banks. With less competition and more synergy, Pacesetters may be better positioned to grow the business. A comprehensive wealth management offering While study participants gave a range of definitions for wealth management, it was defined both at a functional level and based on the intrinsic value being provided to clients. These banks saw it as a comprehensive relationship that went beyond deposits and lending to include financial planning, investment management, estate planning, insurance, and more all wrapped with a high level of service that enhanced the client experience. Typically, Pacesetters had a more comprehensive wealth management offering than other banks, and tended to focus less on commoditized products, such as insurance and annuities. Two-thirds (66%) of Pacesetters provided wealth advisory services, compared to % for other banks. In addition, 8% provided investment management services, versus % for other banks. It is the bringing together of all of our capabilities to help clients build, maintain, protect, and transfer wealth. Bank Executive

4 Pacesetters were more likely than other banks to say the primary objective of their wealth management practice was to increase their share of wallet 6 with clients (% versus % for others). They were also somewhat more likely than other banks to see wealth management as a strategy for attracting new market segments (69% versus 8%), like women and younger clients, as well as for entering new geographies (% versus %). Leveraged the RIA approach While the study showed that standalone RIAs were not viewed as an important competitive threat for wealth management practices at banks, many banks use them as part of the delivery model. A large proportion of Pacesetters (8%) were using RIAs, versus 7% for other banks. There are three possible models: () organically grow an RIA; () work with external firms; () acquire a firm. The first model was most popular with Pacesetters, followed by having an external partner, and then acquiring a firm. A large portion (88%) of Pacesetters who made an acquisition did so to gain RIA Strategy Pacesetters Other Banks Organically grow % % External partner % % Acquire a firm % % Need resources? Pacesetters Other Banks Increasing advisor productivity through technology % 7% Outsourcing back-office operations % % Consolidating the wealth management assets with one service provider access to clients and markets served by the RIA. Almost two-thirds (6%) pursued this strategy to quickly grow their wealth management business, and more than half (%) felt an acquisition would help position the wealth management practice as one having expertise normally associated with an RIA. Outsourced noncore back-office operations The study showed that Pacesetters seemed to have experienced more success than other banks when it came to increasing advisor productivity and outsourcing noncore operations. When compared to other banks, fewer Pacesetters felt they would benefit from having additional resources devoted to these areas, suggesting they had already made good strides. Only one-quarter of Pacesetters saw a need to add technology resources to increase advisor productivity, compared to almost half for other banks. Pacesetters also seemed to be further along with outsourcing noncore back-office operations, with only % feeling they could benefit from additional resources in this area, compared to % for other banks. The RIA model, I think will be increasingly popular Part of that is fee-based. Part of that is a little bit more perception. % % Finally, consolidation seemed to have taken place already, with few Pacesetters (%) feeling they needed resources to consolidate wealth management assets with one provider, compared to almost one-quarter for other banks. Pacesetters still face challenges Pacesetters showed that a consistent focus from leadership, a culture of collaboration across the bank, an expanded offering, leveraging the RIA model, and a strategy of enhancing efficiencies can potentially have a positive impact on revenue growth from wealth management. Considering five traits of Pacesetters may help other banks build their wealth management businesses at a faster rate as well. While Pacesetters are making headway, they felt they needed to continue to hone their wealth management practices and take action on the following issues: Investor perceptions that service breadth is limited Eighteen percent of Pacesetters felt clients think banks lack the investment expertise or breadth of services that other channels offer. Banks might consider actively showing they can bring a range of services to the table through advertising and other outreach initiatives. Bank Executive

5 Internal development and training Thirty percent felt training for business development was a challenge. Banks might consider devoting additional resources to training in order to raise the capabilities and confidence levels of teams to help win and nurture new wealth management relationships. Streamlining platforms Twenty-three percent felt isolated and competing platforms remained across banking functions. Banks might consider encouraging collaboration among different functional areas to discuss possible solutions for these roadblocks to growth, and consider bringing in third-party technology experts to help evaluate alternative routes to take. Recruiting and retaining advisors with wealth management expertise Forty-five percent found it challenging to increase the number of advisors/ wealth managers. Banks might consider accelerating hiring and retention strategies, and reviewing their compensation model to enhance their bench strength and demonstrate their wealth management expertise. Keeping up with technology Fifty-eight percent found it difficult to keep up with all the developments on this front. Banks might consider tapping into the expertise of thirdparty providers and outsourcing additional capabilities. Lessons from Pacesetters As Pacesetters address these remaining challenges, they could have an opportunity to further build their wealth management assets and position their practices as growth engines. It will be important to keep track of what Pacesetters are doing to gain helpful insights into some of the best practices in the wealth management space. Other banks may want to consider: Ensuring leadership focus and internal collaboration. Moving toward a single technology platform that reflects a comprehensive view of the client relationship. Pursuing an RIA model to complement and expand service offerings, and demonstrate wealth management expertise. Devoting additional resources to advisor recruiting and business development training to help staff better understand offerings and identify crosssell opportunities. Outsourcing back-office operations to improve efficiency and focus on core competencies. TRAITS of Pacesetters A Integration A Leverage Outsource consistent focus and commitment from leadership and collaboration with other bank lines of business comprehensive wealth management offering Challenges for banks to overcome Investor perceptions that service breadth is limited Internal development and training Streamlining platforms the RIA approach Recruiting and retaining advisors with wealth management expertise noncore back-office operations Keeping up with technology

6 To learn more about Fidelity s research and insight on building a wealth management strategy, please contact your Home Office or Fidelity Representative. The research was conducted by Market Strategies International, an independent firm not affiliated with Fidelity Investments, and consisted of two phases: () a qualitative phase that involved in-depth phone interviews of approximately one hour in length (blind; Fidelity not named) conducted in mid-october to early November 0; and () a quantitative phase that involved online/phone, -minute interviews conducted in late November through mid-december 0 (blind), where completes were weighted by total bank assets to ensure the findings are representative and projectable to the universe of U.S. midsize and large banks. The sample for both phases included U.S. midsize and large banks that have a wealth management practice (excluding the following: Bank of America, Citibank, JP Morgan Chase, and Wells Fargo); banks with a minimum of $00 million in total assets (excluding deposits and assets from trust and wealth management activities); C-level executives and other corporate decision makers who are involved with the strategic direction of the bank/wealth practice, or lead a group of wealth management advisors or trust officers. A wealth management offering was defined in the Fidelity research as including private/premium banking, trust management services, securities/ brokerage, wealth advisory, investment management, and RIA services. All statistics in this paper are from the Fidelity Bank Wealth Management study unless otherwise noted. These banks have wealth management practices that contribute more than 0% to the institution s overall revenue, and they have experienced more than % growth in this contribution over the past two years. 0 Banking Industry Outlook: Repositioning for Growth, Deloitte Center for Financial Services, January, 0. 6 Percentage of assets a bank has of a client s total assets. For investment professional use only. Not for distribution to the public as sales material in any form. Fidelity Investments does not provide advice of any kind. You should conduct your own analysis, review, and due diligence based on your specific situation. You are responsible for evaluating your own specific needs and making appropriate decisions. Those decisions may be based on these and other factors you deem relevant. The information provided herein is not meant to be exhaustive of all possible options you may consider. The experience of the firms that responded to the Bank Wealth Management survey may not be representative of the experiences of all banks and is not indicative of future success. The third parties listed are independent companies and are not affiliated with Fidelity Investments. Listing them does not suggest a recommendation or endorsement by Fidelity Investments. Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC. Fidelity Institutional Wealth Services provides brokerage products and services and is a division of Fidelity Brokerage Services LLC. National Financial is a division of National Financial Services LLC through which clearing, custody, and other brokerage services may be provided. Both members NYSE, SIPC. 00 Seaport Boulevard, Boston, MA 00 Fidelity Investments Institutional Services Company, Inc., 00 Salem Street, Smithfield, RI FMR LLC. All rights reserved