Digital Wealth Management Is a Golden Opportunity for Growth

Written by

Wealth management is quickly becoming the largest opportunity for banks to both grow and retain customers — an imperative in the face of continued economic uncertainty.

Financial organizations represent trillions of dollars in deposits, but without a dedicated enterprise-level digital wealth platform, they are seeing a flow of dollars to digital-first investment platforms. Community banks face incredible pressure to retain deposits, increase fee-based revenue and stem deposit outflows to investment solutions that invariably try to upsell banking services to these new investors. But using the following key methods can give banks a way to implement investment services themselves — a move that could be a game changer for customer engagement and their bottom line.

Offering a thoughtfully crafted wealth strategy provides banks with myriad benefits — specifically a digital wealth and financial inclusion offering. Traditionally, wealth management services have been geared toward high net worth clients, creating a sizable gap in bank services. A digital wealth solution allows banks to effectively service wealth accounts as low as $500, enabling better service and soliciting more engagement from their broad customer base. Dramatically lowering the entry point to wealth management services gives banks an avenue to share greater access to financial services to their customers than they have been able to historically.

Implementing a digital investment offering means customers don’t have to seek a new relationship outside of the bank; instead, they can deepen their relationship with their current bank through additional lending and savings products. This is crucial in an operating environment where customer retention is paramount.

And the digital approach to investment services allows digitally native customers to use the investment platforms on their own terms. Investing in digital tools and channels also broaden a financial institution’s reach beyond the traditional branch model and hours of operation. Our banking clients report that about 25% of their digital wealth traffic occurs during nights and weekends — times their branch teams are not typically available to provide service.

The increasing focus on noninterest income, coupled with the retained deposit revenue, are the two primary drivers we see increasing interest from banks that want to build a wealth practice. Noninterest income is increasingly important to community banks; wealth management services are one of the best ways to increase this differentiated revenue stream.

So, where should banks even begin when it comes to providing wealth services? There are actually a number of ways to do it. The first option is to create a registered investment adviser, or RIA. Traditionally larger banks have built out this function in-house, using their size and scale to support the increased regulatory burden, compliance costs and additional operational requirements. Banks that choose this route maintain complete control over the client experience while the RIA provides trusted, timely advice to clients. But the start-up costs for building an RIA are quite high, so we often see institutions step into the wealth journey through other partnership or outsourcing models.

Another option is for financial institutions to hire an adviser led third party marketing, or TPM, provider to offer investment services. This alternative typically applies to mid-sized financial organizations looking for an advisory relationship, where the TPM provider handles the compliance and risk issues that may arise. This is an interesting opportunity, albeit one that is almost exclusively focused on the human adviser with minimal digital offerings. Working with advisers forces institutions to focus on their high net-worth customers, leaving a gap in the service model for customers who can’t reach certain account thresholds.

Lastly, financial institutions may choose to leverage a digital platform that offers wealth management as a service or platform. This option, which takes a page from the software as a service model, best works for banks that don’t have an existing wealth management offering or where there is a gap in the existing wealth offering depending on account sizes. Organizations often find this option promotes financial inclusion because it appeals to their entire customer base and enables them to retain client relationships as their business grows. In addition, embedded wealth management platforms typically have a faster implementation period and lower operating costs compared to hiring full-time staff into new roles. By outsourcing the wealth practice, financial institutions enjoy minimal operational or technical requirements with the benefits of a wealth solution.

When considering growth opportunities, financial institutions should consider digital investment services as a top option for speed of deployment and an efficient use of capital. Improving existing client satisfaction with a wider variety of services, appealing to a younger customer base through technology options, retaining client assets and increasing fee-based revenue are some of the significant benefits that digital wealth management brings to banks.

Surf’s Up on RIA Acquisitions — Are Banks Missing the Wave?

Written by

Last year’s record number of registered investment advisor, or RIA, transactions has already been eclipsed part way through 2021.

These acquisitions are at an all-time high, with the most diverse buyer universe to date; however, most banks are sitting on the beach, just watching. Since 2019, the percentage of bank buyers has dwindled by more than half, from 23% to 10% this year. Unlike the bank space, which is dominated by a handful of money center banks, the RIA universe is highly fragmented with no dominant leader for now. I predict at every spectrum of wealth management — mass affluent, high and ultra-high-net-worth — there will be an oligopoly of players could become ascendent. Could your bank wealth management platform be one of them?

The RIA industry is ripe for consolidation with 14,000 U.S. players and approximately 250 transactions per year, or about 2% of the space. Additional factors include the accelerating the pace of M&A, including a flood of sponsor capital, an aging bull market, increased costs of doing business, a lack of succession planning and increasing valuations. Banks have consistently worried about the increasing valuations and the fear of buying at the peak. But those that understand wealth management have remained active because when markets fall, the bank’s core deposit business grows as clients de-risk.

Whether it is a dollar deposited in the bank or in the stock market, sophisticated banks want to be the trusted advisor in the center of that decision. Banks succeeding in wealth management have boards and executives that are fluent in wealth, constantly reviewing their client offering to see how an acquisition might be complimentary. A few examples include Providence, Rhode Island-based Citizens Financial Group, which built an ultra-high-net-worth solution via the Clarfeld Financial Advisors acquisition; Chicago-based First Midwest Bancorp entering a new state via the Northern Oak Wealth Management acquisition in Wisconsin; and Goldman Sachs Group going downstream towards a more mass-affluent client base with the United Capital acquisition. Banks oriented toward the longer term are leaning in and continuing to build their wealth platforms, and will dollar-cost average rather than trying to time the markets.

Banks have experienced varying degrees of success in RIA acquisitions for a number of reasons. Those that are less successful view wealth management as an off-the-shelf product or more fee income to pad margins. Banks that overpromise and under-deliver on distribution or cross-pollination opportunities create poor long-term outcomes. Some banks fail to properly integrate an RIA and assume that changing the name is vital. However, separate brands are okay — and likely preferable — so as long internal organizational alignment exists. Cheaper valuations should not drive acquisition interest and could indicate a-more troubled RIA; banks may find it preferable to pay a premium for quality and growth. Banks should also leverage thoughtful deal structures that align the RIA’s interests with the institution and drive advisor and client retention; this can be a more effective approach than simply relying on restrictive non-competes or other legalese.

Many banks have several advantages over other strategic acquirers. First, they already have customers that trust the bank with their core business and could extend that to their deposits and wealth, compared to their local RIA. Second, banks tend to have stronger brand recognition and overall presence; there is minimal brand recognition even amongst the largest wealth managers and no appreciation of the vast service differential among the thousands of RIAs. Last and most important, banks have money. On the top of every RIA’s wish list is access to funding as long-term, patient capital.

Do’s of RIA M&A

  • Listen intently to RIA needs and pay attention to their pain points.
  • Educate your board well in advance on the M&A landscape; playing catch-up with an opportunity on your doorstep seldom works.
  • Be flexible and open with deal structures and compensation schemes; bank M&A and RIA M&A don’t directly translate.
  • Move thoughtfully yet expeditiously through an M&A process: this will differentiate you outside of price.
  • Look for and engage sound financial and legal advisors.

Don’ts of RIA M&A

  • Overpromise what your bank can deliver to an RIA.
  • Buy a troubled firm.
  • Leave an RIA on an island and not integrate it internally.
  • View wealth management as an isolated product — it’s a relationship.

Wealth management acquisitions are not for every bank. However, if they’re properly prepared and educated, all bank constituents — shareholders, customers and employees — can achieve success. Don’t be afraid to paddle out and try to find the perfect partner to ride the wealth management wave.

Contributions by: Ralph Puthota, Vice President, Raymond James Investment Banking