Thursday, 18 of October of 2018

Integrating Trust & Brokerage (Part 5 ) Corporate Contribution

Song sung blue or just another love song?

In our last post, we outlined six key areas of focus for banks looking to gain competitive advantage by providing a consistently compelling, positive client experience through the integration of their wealth management business lines.

The first of those six areas is “Corporate Contribution”.

In our consulting work, we frequently interview individuals from multiple disciplines within financial institutions.  As you might expect, the wealth management business lines are key among these.

Without fail, someone within this group will sing the blues about being treated as a “red-headed stepchild “ – with verse after verse of how they don’t receive the resources and attention needed to thrive within the organization.

Ironically, we generally agree with that observation, however, typically not with the perspective from which it emanates.

Which comes first, the music or the lyrics?

We ask, because in truth, wealth management business lines (particularly in community and regional banks) seldom are core businesses when measured by their contribution to the bank’s overall bottom line.

From our experience, an enhanced understanding of how these businesses operate and their overall potential naturally leads to an increased level of interest and investment by those in the executive suite.

Yet, when key executives witness individuals in wealth management earning more income than their combined departmental contribution to the parent, it often results in disharmony within the organization.

This leaves us wondering if these solo performances are distracting from the overall composition or is this what actually draws the paying public?  While we will parse the impact of compensation in another post (as another of the key areas of focus), the cost of labor must be mentioned as a primary driver of corporate contribution since, wealth management, as a talent driven business, allocates the lion’s share of their operating expenses to compensation.

Putting compensation aside, the executives of the more traditional banking lines also question whether the diversion of resources and attention to these business lines would stand up to an objective cost/benefit analysis or is it purely whistling in the dark.

So, while the wealth management employees are singing their woes, so too are their banking counterparts, albeit from an entirely different hymnbook.  And, yes, while we all know the chorus of intangible benefits provided by being in the wealth management business; making meaningful money for the stakeholders remains a favorite request – an oldie, but goodie that never loses popularity.

So, lets take a look at this opus, note-by-note to determine where we stand today and, how we might orchestrate a more harmonious composition from a corporate contribution standpoint.

First, we need to ensure we are looking toward the future, not the past.  The music as we know it stopped, and many fine institutions either didn’t find a chair or had to have the government help them into one to stay in the game.  In three short years, banks went from revered to reviled as the public’s notion of banking and Wall Street transformed from a song of praise to dirge.

Non-performing and underperforming assets coupled with the inability to find qualified borrowers and overregulation changed the score, heightening the need to generate coveted income from other sources.  The once barely audible contribution of wealth management must now resonate on par with the other earning instruments replacing the subdued sounds of traditional banking lines muted by the turmoil of the past few years.

The good news is this is leading tone-deaf executives to hear the music, as the overall contribution from these business lines continues to grow.  As an example, before 2008, the average contribution to net profit from brokerage programs was a paltry two percent.  Since then, it has quadrupled; not due to increases in productivity or efficiency, but because the traditional businesses have taken such a hit in the wake of the aforementioned events.

Suffice it to say, if banks are looking to enhance their earnings (and when aren’t they), then the spotlight on wealth management just brightened.  This is why finding increased efficiencies and improving contribution is now more important than ever.  We strongly believe one way to accomplish this is to harness the existing power, resources and talent within your wealth management teams by reorganizing them as one group, not disparate business lines competing with each other and operating with inefficient redundancies.

We are currently working with a number of banks to accomplish this.  As an example, during our initial assessment of a $4 billion bank, we learned the combined contribution of the wealth management groups (brokerage and trust) was less than one percent of the bank’s total net income, meaning that on over $34 million dollars of net pre-tax profit, these groups added less than $300,000 to the bottom line.  While this sounds abysmal, we unfortunately see worse, with many institutions fighting to even reach profitability.

Not only was the contribution low, but the margins of each business was also two-thirds lower than their peers.

The point is not to embarrass or vilify this organization, but to recognize that to be heard above the din of the other more traditional business lines – to become a core business – to gain access to the resources and attention of the banking executives – wealth management needs to enhance their contribution to the bottom line or else relegate themselves to the role of a harmonica in the philharmonic.

It is clear something has to give – margins must improve, volume must increase or better yet, a combination of the two if the voice of these units is to be heard over the cacophony of other instruments.  And to do that, these groups must first be in harmony with each other and then, set out to seamlessly join into the melody of the organization as a whole.

We realize some may view this post short on solutions, however, you must recognize the problem before you can work on the answer.  In this case, it is clear, wealth management business lines must increase their overall contribution to the organization if they are to not only going to survive, but succeed.  The reason we led this series of posts with Corporate Contribution is that every aspect of the other five key areas of focus must each be evaluated on the merit of adding long-term profitability to the organization.

So, if you continue to hear the never-ending refrain of profit, profit, profit and want to effectively hit the high-notes, take a page from the songbooks to follow (our next posts on this topic), which clearly identify ways to do so.

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