As lenders continue to struggle, banks are turning to new or forgotten businesses such as trust services and investment management that generate fees in good times and bad.
During the boom years, trust officers labored in obscurity as their colleagues in lending got all the glory.
But now that lenders are shepherding distressed borrowers and making fewer loans, the light is shining on the trust department and other areas, such as money management, that generate fees not tied to lending.
A handful of community banks on the Gulf Coast have created investment management and trust departments, areas traditionally limited to much larger regional and national banks.
But it's likely that more community banks will join them because of the ongoing challenges in traditional lending.
These fee-generating services give community banks greater diversification of revenues, they draw customers into the bank for other services and they help retain customers.
Plus, these services don't consume as much precious capital as lending. “There's very little capital required,” says Bill West, president of the Bank of Tampa, which has offered money management for 17 years. “You can grow that business as rapidly as you can find clients.”
Money managers and trust officers say the recent market disruptions have benefited them as prospective clients seek more personal advice on their investments and estate planning. Besides losing money last year, some longtime investment firms have disappeared and brokers have jumped to other organizations.
“If you think about the dislocation, it's probably the best time to entering that business today,” says Daryl Byrd, president and chief executive of IberiaBank, the Louisiana-based lender that recently acquired Orion Bank and Century Bank. Byrd cited opportunities in providing money management services as one reason his bank is expanding to Florida.
But even as they generate fees, it's not likely that these services will replace traditional bank revenues any time soon. And they won't save community banks from the rapidly deteriorating real estate market that has forced many institutions to set aside millions for potential loan losses.
Wealth management and trust departments take years to build and manage profitably. That's because it takes specialized talent to run well. “It is not a risk-free proposition and you can end up losing a lot of money,” cautions Scott Kellett, president and chief executive officer of Bank of Florida Trust Co.
Rapid growth potential
Money management and trust departments have the potential to grow revenues at a faster rate than the lending business. For example, revenues from investment advisory and trust fees at TIB Financial grew 69% in the first nine months of 2009 compared with the same period in 2008.
The market downturn in 2008 has created opportunities to attract wealthy investors. For example, Kellett says recent surveys show that as many as 85% of affluent people reported being dissatisfied with their investment provider. “Over the next 12 to 18 months, lots of people are looking to move,” Kellett says.
“People want to get closer to who is managing their money,” says West, who added trust services eight years ago. Estate planning and money management usually go hand-in-hand because wealthy people often manage their fortunes for future generations.
Just because your broker's investment firm is headquartered on Wall Street doesn't mean he has a lock on personal-finance expertise.
“We believed that intellectual capacity was not limited to Manhattan,” says Michael Morris, president and chief executive officer of Naples Capital Advisors, a subsidiary of Naples-based bank-holding company TIB Financial.
Because Naples Capital Advisors is located inside TIB Bank, clients tend to drop in unannounced to chat. Morris says this helps him gauge any concerns his clients have that he would not have otherwise detected if the investment firm had a separate office. “This is why it works in a community bank environment,” Morris says.
But money management revenues don't shoot straight up year after year. At Bank of Florida Trust Co., for example, trust fees dropped 10% in the first nine months of this year because clients shifted their assets from stocks to bonds and cash as the financial crisis worsened. Management fees on bonds and cash are usually lower than on stocks.
Lending remains the lynchpin of most community banks and money management will likely remain a smaller contributor, ranging from 10% to 35% of profits. “Your fee-only business is not going to carry your bank,” Kellett says.
Profits can be elusive
Money management is a challenging business to turn profitable because the overhead can be high, at least initially. That's because competent trust officers and money managers can be expensive to hire and the more clients there are, the more managers you need.
For example, Bank of Florida Trust hired more money managers in 2008, just as the financial markets were falling.
That meant the firm had fewer assets to manage and more clients shifted their assets to lower-fee bonds and cash.
In 2007, Bank of Florida Trust Co. had pre-tax profits of $1 million. In 2009, Kellett says, that amount will likely be closer to $300,000 before rising back to between $800,000 to $1 million in 2010 as the markets recover.
“It's a fairly people-intense business to start,” says IberiaBank's Byrd. “Ten years ago we had $1 billion in assets and I couldn't afford it at the time,” he says. The Louisiana bank now has $10 billion in assets.
Still, Morris says money management can be profitable as long as each customer brings in substantial assets. A Naples Capital Advisors, the minimum is $1 million.
But trust officers and money managers are quick to point out that the business shouldn't be viewed in isolation to the rest of the bank. Wealth management and trust customers need loans and make deposits, too.
“In 2008, we referred $30 million worth of loans to the bank,” says Kellett. “Is the relationship in the aggregate profitable to the whole institution?”
Money management and trust services also help retain existing clients who might be tempted to visit the competition if they don't offer them. “When we got into the trust business, we got into it because our clients wanted us to,” says West. It took Bank of Tampa about five years to make a profit in the trust business, but it helped retain existing clients who might have taken their money elsewhere.
Bankers say the more services they can offer to their clients, the less likely they are to leave the bank. In bank lingo, they call these “sticky” client relationships. “About 95% of our clients in wealth management bank with our bank,” Kellett says.
Trend. Money management and trust services
Key. Controlling costs are key to driving profits in fee-generating businesses.