(Second in a two-part series. To see the first part from yesterday, click here,)
In Portland, Ore.-based Umpqua 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 arrangementswhich usually involve the bank and broker-dealer sharing revenueis often the most practical way for smaller banks to provide a full suite of services, says Wayne Cutler, a managing director with the consultancy Novantas. 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.
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."
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