Trust departments playing catch-up with sophisticated clients
William C. Butcher

William C. Butcher is Senior Vice President, Wealth Solutions, IXIS Asset Management Advisors, L.P. and former Regional Managing Director for The Private Bank at Bank of Boston. Mr. Butcher can be reached at bbutcher@ixisga.com

U.S. banks hold nearly $1 trillion in personal-trust assets, down about 10 percent from a peak of $1.1 trillion in 1999, according to recent research and published reports¹. As trust customers continue to demand higher returns and greater diversification, bank trust departments will need to meet the demand for more sophisticated investment strategies or risk even more erosion in assets that once were as solid as the vaults that these banks were built around.

Twenty years ago at a large Boston-based bank, the bank trust department had a virtual lock on the trust business. Customers were loyal and relatively content with a more conservative investment strategy. It was also more difficult to alter the investment process dictated by the trust instrument, so trust departments settled into a wealth preservation approach and relied on the security selection expertise of their investment officer.

If our customers were content they were in the right hands we were likewise confident that both the clients’ assets and their business were secure.

That time now seems like a distant memory. The instruments and tools that once successfully anchored private trust dollars to a bank have lost their holding power. Today, money moves easily in and out of trusts, and beneficiaries are increasingly lured by the seductive promise of access to more investment options, potentially higher returns and more transparent information from an increasing number of non-bank trust competitors. Today, clients in need of advice spin through a revolving door that can land them in the offices of a wire house, a private bank, or a local registered investment advisor just as often as a bank trust department.

Many bank trust departments are already feeling the ill effects, as older client accounts dwindle in asset size due to principal distributions, newer client prospects opt for other advisory relationships, and existing clients demand and expect more investment choices than many banks are providing.

At stake are millions of dollars in annually recurring trust revenues and the innumerable client relationships that banks have worked hard to nurture over generations of service. So what’s a bank trust department to do?

Part of the answer lies in providing clients with more clear investment choices, addressing an area that has been a competitive weakness for many banks. This strategy can free up trust departments to exploit their true competitive advantages -- relationship management, trust administration, and superior client service — and place them on more favorable footing in the competition for new business.

To understand why, it’s helpful to know that in recent years, bank trust departments have been buffeted by a host of market trends:

• First, consumers have become significantly savvier about investments, the result of years of exposure to 401(k) plans and increased media coverage of financial matters. Their knowledge has created heightened expectations for performance and choice of investments.
• Second, the Internet has enabled consumers to bypass traditional financial service channels in favor of self-service and/or comparison of competitors, particularly when they feel their choices within traditional channels have been limited.
• Third, the lure of trillions of dollars in generational wealth transfers and Baby Boomer savings has caused many players — such as wire houses, mutual fund companies, private banks, and even small, local registered investment advisors — to either enter the trust business or step up their marketing of trust services. Wire houses in particular are looking to leverage their vast array of investment options and distribution networks, with some doing so quite successfully.

These combined forces have created an intensely competitive arena for trust business. And bank trust departments are typically at a disadvantage to respond because of two factors.

First, they traditionally have subordinated sales to service, prioritizing their fiduciary duty to the client over sales. That approach, as unassailable as it is in its good intent, nevertheless means bank trust departments with sales-neutral cultures face an uphill battle when competing against organizations with robust sales cultures and trust services.

Second, bank trust organizations typically have operated closed investment architectures which, by definition, provide a narrower range of investment choices. That approach served both banks and their clients well in past circumstances. Today, however, a closed investment architecture creates limitations that many customers are not willing to overlook.

Although some bank trust departments are attempting to address this shortcoming by expanding their own in-house money management expertise — an exceptionally costly undertaking that many management leaders disfavor — others are finding it more expedient and effective to integrate successful in-house strategies with outsourced solutions where the bank may be weak or not have a solution. A successful outsourcing arrangement enables a trust department to rapidly and smoothly transition from a closed to open investment architecture, to introduce new money management options and strategies to clients, and to focus its own efforts on added-value services that can translate into increased sales.

Now, I’m not advocating that banks totally displace their investment management team. Many have done a great job managing client portfolios. However, some may not have expertise in all the strategies that investors are demanding today to give them adequate diversification. For some banks, the right strategy is to supplement top in-house investment officers with institutional managers who offer strategies for which the bank might not have the best or most appropriate solution.

When assessing potential outsourcing arrangements with investment management providers, there are some important attributes to look for. Among the most important:

• Experience: Many investment managers are looking to expand into the bank trust segment. But only a select number have the experience and performance history that will earn banks’ confidence in them.
• Flexibility: A good outsourcing partner can customize their offering to the bank’s needs, enabling the bank to outsource all money management functions or to pick and choose the pieces of a solution that make a good fit. Whatever the need, the prospective partner should offer the flexibility to work within the kind of system that best serves the interests of the bank, regardless of size. This includes the ability to work with the bank’s operational structure, including its trust accounting system.
• A menu of solutions: The investment partner should be able to provide the broad array of products, strategies and managers that will help enable the bank to potentially satisfy virtually any client need without seeking additional partners.
• Tax-sensitive transition strategy: When the time comes to migrate existing assets from the closed platform to the new platform, the investment manager should have the capability to customize for each client a portfolio strategy designed to help minimize the tax implications of the transition while maintaining appropriate diversification.
• Overlay management: Activities of the participating investment managers, whether proprietary back offices or third-party managers, need to be coordinated and monitored by an experienced overlay manager. The overlay manager should have the ability to manage multiple investments and portfolios, rebalance them appropriately, make them work together in a tax-efficient manner, and deliver periodic comprehensive performance attribution to the client.

Finding an investment partner who can provide capabilities and expertise in each of these areas may be critical to a bank’s future success. Doing so can enable the bank to compete effectively in the new marketplace, to retain investment assets they have, and to attract the new client relationships they need.

Most importantly, establishing a successful investment management outsourcing relationship enables bank trust departments to do what they have always done — and continue to do — best: provide exceptional levels of fiduciary service and investment management to clients who depend on them for guidance not just from year to year but from generation to generation.

For bank trust departments, finding the right partner today can help secure tomorrow both for them and their clients.

¹ Spectrem Research, 2006 Update of Personal Trust Asset Trends Among U.S. Banks