UHNW Institute

Commercial Banks And Wealth Management - Understanding The Dynamics

Joe Calabrese, August 22, 2019


Here is a further instalment in a series of articles from the UHNW Institute tracking industry models in wealth management.

The following article is by prominent wealth management industry figure Joe Calabrese, who is a founder and advisory board member of the UHNW Institute, an organization with which Family Wealth Report is the exclusive media partner. (There is more about the author below this article.)

For more details about the Institute, see this link. 

In our ongoing efforts to inform and educate ultra-high net worth (UHNW) and family office investors, the UHNW Institute is pleased to publish the following article as the third part of a five-part series about wealth management business models (see “The Skinny on Wealth Management Industry Models” by Jamie McLaughlin). The goal of these articles is to review the four main industry platforms through which UHNW and family office investors receive wealth management advice and services (broker-dealers, commercial banks, independent registered investment advisors (RIAs) and trust companies). We hope to help UHNW and family office investors to understand the industry better so that they can make more informed decisions about which industry platforms, firms and advisors are best suited to meet their needs. The following article reviews commercial banks, and the last two articles in the series will cover RIAs and trust companies.

Commercial banks support UHNW clients with distinctive services
There is an old adage in the family office industry: “When you have seen one family office, you have seen one family office!” The same can be said about commercial banks, which are so diverse that comparing them can be tricky. While many differences exist, three salient ones are worth highlighting: 

-- Legal structure. Banks are often organized in different legal entities to support their wealth management businesses. For example, some banks, usually larger ones, own affiliates that are broker-dealers and registered investment advisors (RIAs), while others do not;

-- Regulatory oversight. Banks are highly but unevenly regulated. Levels of oversight will vary depending on a bank’s legal structure and business activities. Agencies that regulate banks and related entities include the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corp., state banking and securities authorities, the Financial Industry Regulatory Authority, the Consumer Financial Protection Bureau and the Securities and Exchange Commission; and 

-- Strategy. Each commercial bank’s go-to-market strategy varies depending on its core competencies, scale and desired revenue mix among manufacturing, distribution and advisory services.

As has been pointed out in other articles in this series, financial service providers, banks included, can generate their revenue from three separate but related activities:

-- Manufacturing. Asset management fees derived from managing proprietary products for sale, e.g. mutual funds; 
-- Distribution. Revenue derived from selling financial products in the form of commissions, trailers, 12b-1 fees etc., and 
-- Advice. Fees may be asset-based or otherwise determined and are independent of manufacturing or selling financial products. 

Different from the aforementioned financial services providers, banks have a fourth and very significant source of revenue - providing credit. The fact that banks have balance sheets enabling them to accept deposits and extend loans offers numerous advantages to UHNW clients with borrowing needs. UHNW families needing credit to support direct investing, operating businesses or advanced planning strategies often benefit from consolidating wealth management and loan services with a single bank to negotiate preferential pricing and terms on loans and other services

While most banks will make residential mortgage loans without a strong relationship with a client, not all banks will extend custom credit to UHNW individuals who do not have a strong relationship with the organization. Custom credit structures are almost always needed when financing non-owner-occupied real estate, aircraft, yachts, and art and collectibles. Banks may be more willing to help clients work through challenging economic, business or personal situations if those clients have a strong wealth management relationship with their bank.

A bank obviously benefits as well. For example, the loan business can open the door to integrating credit with business advisory and wealth management advice. It also boosts the profitability of the relationship. One challenge to pricing based on assets under management (AuM) is posed by clients with significant wealth and complexity who also have a low ratio of liquid assets to illiquid assets, the latter typically being operating businesses or real estate. Those types of assets are not managed by the bank and generate no AuM fees. However, such clients are likely to need credit, and the profitability of their loans offsets the shortfall in AUM-based revenue. (See the discussion of pricing strategies below.)

Wealth management at commercial banks
Wealth management, historically dwarfed in importance by banks’ lending lines of business, represents an important and growing component of the banking industry’s strategic focus for several reasons:

-- Capital requirements. The wealth management business has relatively minimal capital requirements; 

-- Recurring fees. Net interest income, derived from taking deposits and making loans, represents the lion’s share of income for most banks. Wealth management, a source of non-interest-related recurring fee revenue, is very attractive to banks looking to diversify their revenue sources, especially when interest rates are low; and  

-- Deepening client relationships. The potential to deepen existing banking relationships with a full range of value-added services enhances the quality of client relationships and increases the potential to retain them.
Banks serving UHNW clients generally employ one of three business models:

1. One-size-fits-all. With this model, servicing UHNW clients is mixed in with servicing all clients. An advisor generally has a book of business composed of clients with significantly varying degrees of wealth. The primary considerations for clients are:

-- Does the advisor to whom they are assigned have the experience and competency to address their potentially complex needs?
-- Does the advisor have too many clients to handle effectively? Given the broad range of wealth such advisors are servicing, it is likely they will have larger client bases than advisors whose focus is dedicated to UHNW clients.

2. Segmented client strategy. Because of their scale, larger banks can take a client segment-driven approach. Some create differentiated models for the mass affluent, emerging affluent, affluent and UHNW markets. While back-office technology and investment resources are often shared throughout the various segments, professionals who serve those markets tend to be dedicated to a particular segment. This allows banks to calibrate the experience and competencies required across the different segments more effectively and appropriately. It also allows UHNW advisors to focus on fewer clients (and be able to provide better bespoke levels of service) and apply their relevant experience working with similar clients.

3. Segmented client strategy with multiple legal entities. With this model, banks have dedicated teams serving UHNW clients, but given the wide range of services, may have employees from different legal entities (broker-dealer, RIA, etc.) serving clients under a common trademark or brand name, e.g. Hawthorn, Ascent and Abbot Downing. This approach can work well as long as the organization has instituted the appropriate regulatory oversight, systems and processes to ensure seamless client account management. However, navigating across multiple legal entities can result in a suboptimal client experience if it is not executed properly. At the extreme, this model can lead to internal client ownership issues and accountability challenges.

Everyone in the wealth management industry talks about being relationship driven. This is not new. Nonetheless, there are significant differences among the business models designed to support this relationship focus. Generally, there are two team-based servicing models:

1. The client relationship lead is a relationship manager. With this model, clients are assigned to relationship managers who primarily oversee and coordinate all of a client’s advisory and administrative needs. The relationship manager is usually a generalist with financial planning skills and an ability to understand clients’ holistic needs and is usually supported by a team of specialists; and 

2. The client relationship lead is a specialist. The lead specialist typically is an investment, trust or tax professional assigned to a client based on a client’s primary needs. For example, a client primarily focused on investments would likely have an investment professional assigned as the lead to the relationship.

Either model can work with the right talent, client-servicing standards and execution. Whichever model clients gravitate toward, they would be well advised to understand their firm’s approach to ensure that roles and accountabilities are clearly defined.

Scale is another attribute that enables banks to offer significant benefits to clients. Scale can be an enemy in a relationship-driven business, but it can also be a strong ally. Scale allows banks to invest heavily in technology, investment research and advisory disciplines such as financial and estate planning.  

It is well understood that advice to clients should be objective and free of conflict. However, objectivity is not necessarily synonymous with quality. The quality of advice depends on the degree to which advisors know their clients. It is also materially determined by the level of human capital and other resources leveraged to deliver the advice. This is where scale comes into play. Scale doesn’t guarantee better advice, but it supports the advice by providing the ability to invest in higher quality research staff and services. The benefits and advantages that scale provide are difficult to replicate in smaller firms.

Culture, trust and fiduciary issues
A firm’s culture is a critical aspect of its success. However, culture can have potentially detrimental effects when profits are placed above values. During the past few years, we learned about many unacceptable sales practices employed by various banks, some with global reputations for having strong sales cultures. These examples highlight the pervasive effect corporate culture can have on day-to-day business practices. Clients would be well served to do whatever they can, as part of their due diligence when selecting a wealth management provider, to understand the characteristics of their advisory firm’s culture. While this is not easy, we recommend a thorough interview process with several of the firm’s key professionals as well as independently sourced, third-party referrals.

An exemplary culture will foster trusting relationships with clients. One of the simplest and clearest definitions of trust can be found in the book “The Trusted Advisor,” where one of the authors, David Maister, explains a simple formula that describes the interrelationship of four key variables for developing trust in a professional relationship:

                                                                  C + I + R



(C = credibility; I = intimacy; R = reliability; and S = self-orientation)

When it comes to trust, self-orientation destroys value because it interferes with doing what is best for a client. I would argue that any advisor working in any business model is capable of high levels of credibility, intimacy and reliability, but many advisors and firms differ in their self-orientation levels. Self-orientation can be the result of many factors, including culture, compensation and regulatory expectations. However it occurs; self-orientation makes it difficult to act in a client’s best interest. 

This is one area where a number of banks face potential challenges. Some business practices lead to perceived or actual conflicts of interest, including asset management practices that result in creating and selling proprietary funds (at the expense of recommending higher quality third-party funds), soft dollar practices and selling agreements involving ongoing 12b-1 fees, to name a few. 

It is important to note that no business with a profit motive can be completely free of conflict. The goal should be to manage conflicts to a minimum, disclose them fully and ensure that all other practices lead directionally to an absence of self-orientation by the advisors who serve clients.

While it is not a requirement, most banks, especially banks with a national charter, hold trust powers granted by the Comptroller of the Currency or state bank regulators. A bank granted trust powers is held to the same or a higher level of fiduciary responsibility as an RIA. At its core, being a fiduciary requires banks to always act in clients’ best interests. However, it is important to note that not all bank activities are subject to a fiduciary standard; examples include providing deposit or credit products, brokerage products, and custody solutions. 

Consistency and pricing
Investment advice is either advisor driven or firm driven. The difference is important. In some delivery models, most notably broker-dealers, advisors have significant autonomy regarding the type (transactional vs. fee driven) and nature of the investment advice they dispense. During the past few decades, most banks have focused on developing a more firm-centric approach to investment advice, aiming for greater consistency throughout all client accounts. This generally results in firm-level asset allocation recommendations, home-office lists of allowed and disallowed investments, and third-party-manager approved lists. Done well, this approach should lead to better outcomes because advice is not overly influenced by any particular advisor’s personal views, opinions or biases.

For the most part, banks charge fees based on assets under management (AuM), which benefit clients by generally minimizing conflicts of interest. By charging a fee based on the total value of a portfolio, investment recommendations can be made more objectively because fees are not determined by the individual components of a portfolio but rather by how the portfolio performs overall. The firm’s interests are aligned with clients because fees increase only as the total value of the portfolio increases. If the portfolio is being managed with the appropriate level of risk, clients are served well by this approach. 

Differences among firms can affect the attractiveness of the asset-based approach in a particular situation. Among them is the degree to which non-investment services, such as financial planning, tax advisory, insurance advisory, etc., are bundled into the overall AuM fee. Another consideration is the level of proprietary products, such as mutual funds generating incremental fee revenue from the portfolio. Also noteworthy are 12b-1 fees or other retrocessions from third-party product providers and whether commission charges include a soft dollar component.

Commercial banks will continue to represent a key segment of the wealth management industry serving UHNW families. Their array of services is distinctive because they can provide credit, often customized and otherwise difficult to obtain, to UHNW clients with whom they have full wealth management relationships. Banks also have the scale to develop differentiated models to serve the mass affluent, emerging affluent, affluent and UHNW markets. This scale facilitates the investment in technology, investment research and advisory disciplines allowing commercial banks the ability to provide a quality experience to meet any client’s specific needs.


Joe Calabrese, Head of Investment, Fiduciary and Banking Services at Key Private Bank, is a founder and advisory board member of the UHNW Institute, an organization with which Family Wealth Report is the exclusive media partner.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. © 2019  CFMA #190812 -638233  Investment products are: NOT FDIC INSURED* NOT BANK GUARANTEED* MAY LOSE VALUE * NOT A DEPOSIT* NOT INSURED BY ANY STATE OR FEDERAL AGENCY.

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