So why bother?
The addition of a wealth management department to a bank provides the ability to manage both the asset and liability sides of a client’s net worth. The coordination of client asset/liability placement between the two departments is accomplished using comprehensive and integrated financial planning that provides clients access to professional wealth managers trained to work with high-net-worth individuals.
Economists have predicted that the next 10 years will experience the largest wealth transfer in history, as upwards of $50 trillion is expected to be passed down from the Boomer generation. The creation of a wealth management department will position a financial institution to participate, facilitate and profit from that transference. But the bank must have a focused and clear understanding of how both departments function and complement each other through the life cycle of wealth: accumulation, preservation and distribution. Wealth management departments and the bank must work together to provide specific strategies to minimize taxes, monetize and protect assets, maximize growth and transfer wealth.
A wealth management department involves a considerable investment in staffing, technology, facilities and compliance. Once established, the department can take up to five years to reach profitability. But if the proper steps are employed to design and align the two business lines, a strong financial presence is developed through the implementation of effective service models, leading to a growth of trust, wealth and development within the community it serves.
Where to begin
First, there has to be an understanding of the intended clientele the bank, via a wealth management department, wants to serve. Customers for wealth management services include existing clients of the bank, trusts, high-net-worth families, foundations and endowments, family offices, IRAs, Roth IRAs and SEPs.
Staffing
The next consideration is staffing. A wealth management group requires staffing to include:
- Department head (serves on bank executive committee with a CFP, MBA, some banking experience)
- Trust officers (JD, or other professional designations)
- Financial planner (CFP, CPWA, CWS)
- Portfolio manager (CFA, CIMA, MBA)
- Operations personnel
- Marketing
- Compliance
Training
Training is paramount and can be obtained via educational and designation resources, such as:
- Canon Financial Certified Wealth Strategist
- Certified Financial Planner
- Certified Wealth Strategist
- Certified Private Wealth Advisor
- CFA Institute
- Investments & Wealth Institute
Organization chart
An organization chart is not difficult to design. The major hurdle to address early in the development of the wealth management department is to make sure banking personnel understand the role wealth management plays in the gathering and shepherding of client resources. Although this sounds obvious, it’s not.
Collaboration
There is a serious lack of knowledge surrounding the necessity of collaboration when creating holistic client strategies and portfolios across banking and wealth management.
For example, on the wealth management side, portfolio securities are often used as collateral for specific types of loans. The bank loan department needs to understand this opportunity and the characteristics of its use. A portfolio loan expands the bank’s loan book, allowing for greater discovery in the overall relationship between the two departments. It creates “stickiness” for the wealth management relationship. Because the collateral is controlled by the wealth management department, lower loan costs to the client and higher margins for the bank are presented, but only if that relationship correlation is understood.
Company culture
Office politics is another important issue for the department heads to address. Staff consists of highly trained/educated professionals who can exhibit strong opinions about how things should be done. Coming from a variety of former firms, they have developed styles and expectations that have proven successful in the development of their careers.
It is important the bank has a culture already present that cultivates and includes all staff when considering preliminary, final or directional departmental strategies.
Teamwork and a sense of participation is critical. Monthly staff meetings that review each department, current or ongoing prospective and existing client issues/projects and the state of the bank balance sheet/income statement are highly recommended.
Goal-based success
Financial institutions considering a wealth management department — or those striving to increase profitability of an existing one — need to lead with financial planning. A coordinated and logical goal-based process is essential to creating long-term success with clients. Wealth management departments should not lead with expertise, but rather with how to implement proven investment strategies within a comprehensive financial plan, showing the financial pyramid as an example and how it must all be assembled into an integrated whole.
Establish processes
To provide scalability, there must be a standardized planning and investment process that permits customized client goals, expectations and horizons to be established.
Planning, portfolio construction, trading, rebalancing, tax-loss harvesting, and the construction and maintenance of qualified and non-qualified accounts must be consistent in design and implementation. Otherwise, each relationship becomes a stand-alone solution and will result in a cacophony of portfolio solutions.
There are several excellent scalable software platforms that integrate planning, investment solutions and monitoring, offering flexible yet powerful parameters to ensure a high degree of customization. With that being said, it should be a given that the bank has well-written and dynamic policies and procedures to address this standardized approach.
In-house or outsource?
One additional question the financial institution and wealth management department needs to consider is whether to in-house or outsource client investment management. Should the wealth management department use an internal portfolio construction and maintenance process or use outside, existing solution providers?
The most flexible — but potentially costly — approach is to create internal investment solutions. This approach can be effective if the CIO is an experienced allocator and investment strategist with a strong knowledge of modern portfolio theory, the business cycle, sector and factor alignment, economics and other components of the financial business.
On the other hand, there are excellent outside providers for asset allocation, portfolio construction, trading and monitoring available through a variety of firms, providing an avenue for the rapid deployment of the wealth department’s reach.
Finding the right tools
Lastly, knowledge and preparation are powerless without the necessary resources and tools. A wealth management department needs sources for quotes, custodianships, compliance and education.
And herein lies the heart of a wealth management department business: the wealth management software platform. This platform should seamlessly integrate front, middle and back-office operations. This is a critical issue to consider.
A department’s solution must integrate all core platform tasks quickly, interface with the custodian, provide principal and income accounting, real-time portfolio management (to include trading), generate internal, regulatory and client-facing reports and have a high degree of flexibility, all in a user-friendly environment. Take your time. Wealth management software firms make lots of promises, but client support is critical. The authors consider SaaS-based solutions to be the best.
Success cannot be achieved alone. Compliance Alliance (C/A) has developed robust resources for financial institutions and wealth management departments in this position, including its newest stand-alone Wealth Management and Trust program to assist and support wealth management departments and stand-alone money managers with their regulatory compliance needs.
C/A members also have access to the Economic Headwinds Toolkit — a curated toolkit addressing the host of ALM and other considerations banks should be considering to stave off the economic headwinds expected in 2024. Additionally, C/A members can tune in to C/A’s 39th episode of Banking Matters with Daniel Baker as Peter Madlem and Daniel discuss current market positions for banks and strategies for financial institutions to overcome rising costs and losses, including bond portfolios and reinvestments.