Big banks have been consolidating their hold on the U.S. personal-trust business for years, but they have left smaller banks an opening — albeit a hard one to exploit.

The business of managing trust assets and providing fiduciary services for wealthy clients ought to be one at which community banks, with their emphasis on personal relationships and customer service, should excel.

Yet it is dominated by the very largest banks, according to a recent report by the Spectrem Group, a research and consulting company in Illinois. The top 10 trust companies hold 60% of all trust assets, the report said.

That is where the hint of daylight comes in: the use of trusts has been on the decline, and many customers appear displeased with the service they are getting from the megabanks, said George Walper, Spectrem's president.

"The opportunity is there for banks to take advantage of the low utilization of trust, and some banks are doing better than others at focusing on it," Welper said. "This is a significant opportunity, but many community banks may not be effectively getting the message out that they do these trust services."

Last year saw the continuation of the long-term trend toward fewer trusts with more trust assets, concentrated in larger institutions. Personal trust assets increased 8% last year, to about $949 billion, but the total number of personal trusts continued its long slide, to 614,000 at the end of the year, 35% below its peak in 2002, Spectrem said.

Of the 1,400 banks and holding companies that control trust assets, the largest, Bank of America, controls more than $100 billion in trust assets, while the bottom 1,350 control about $132 billion combined, according to Spectrem. JPMorgan Chase, Wells Fargo, Northern Trust and PNC Financial Services Group round out the top five.

In part, this massive concentration reflects two trends: consolidation in the banking industry, and wealth concentration in the U.S. "There have been so many bank mergers over the past 20 years that it has magnified the difference between the top 10 banks and the rest of the field," Walper said.

Mergers and wealth concentration have put more trust assets under the control of fewer institutions, and left fewer clients in the mid-range, between mass-affluent and ultra-rich, which has traditionally been community banks' most successful market.

Community banks that have thriving trust businesses say that the increasing dominance of the field by large banks presents a challenge and an opportunity. By constantly looking to the top of the market to maximize revenue, the largest banks are leaving some customers behind, they say.

"To the extent that the larger banks are focusing on trust services, that just raises the bar for the rest of us," said Gary Madeira, wealth management head for Bryn Mawr Trust. "But I think we do have an opportunity to compete on service."

The Pennsylvania-based Bryn Mawr has one of the largest trust businesses of any mid-size community bank, with $1.5 billion in trust assets, according to the Federal Deposit Insurance Corp. It has succeeded, Madeira said, by emphasizing client service — a priority sometimes lost at the largest institutions, he said.

"If you want to grow your trust business, you can lose the service side," he said. "The farther you get away from the community, the more opportunity there is to diminish and sour the relationship with the customer."

The $2.4 billion-asset Peapack-Gladstone Bank is another community bank with a large wealth-management division; with nearly $1 billion in trust assets, it is the largest bank-owned trust company in New Jersey. It also has been growing its business at the expense of large banks. "Our business has in large part been built by the disenfranchised clients from institutions that have been swallowed up by bigger banks," said John Babcock, Peapack-Gladstone's president of wealth management. "As those clients got swallowed up by those larger institutions, they didn't feel as important — they felt like an account rather than a client. They didn't have as much access to the portfolio managers who were managing their money."

Large banks have also provided some of Peapack-Gladstone's best employees, Babcock said.

"We have been fortunate to attract some high-level talent that has gotten its training at large institution, and has grown frustrated by their inability to serve clients in the face of bureaucracy," he said.

Community banks also have a huge untapped opportunity in serving as trust fiduciaries, or the legal guardian of the trust following the trustee's death, Spectrem's Walper said.

Many people choose a family member or loved one as trustee. In these cases, the trustee will usually need to hire a lawyer and often an accountant, as well as an asset manager for the trust — services that banks can usually provide bundled at a discount.

Smaller banks with long-standing, personal relationships in their communities could be an appealing choice for many customers.

"In the trust business, the circumstances can be prickly and complex," said Madeira. "Knowing the specifics circumstances, knowing personally the grantor and the beneficiaries of the trust, can help in a way that a black-and-white document may not."

Breaking into the trust business is an extremely tough task, requiring years of reputation-building, plus legal expertise and sophisticated asset-management personnel, bankers say. But for banks hoping to expand their trust business, Spectrem recommends having informational sessions with potential clients, reaching out to small-business owners, and building strong relationships with local estate-planning attorneys and independent advisers.

Babcock urges community banks to remember what they do well.

"People with $2 million or $4 million are very valued clients for us, and we build a whole team around them," he said.  "You can't do that at a large institution. There, if you don't have $5 to $10 million, you get the J-V team, the model portfolio and the 800 number." 

Chris Cumming is a reporter for American Banker 

Read more: