The Ten Struggles of Bank Wealth Management Divisions

With 10,000 Baby Boomers retiring daily through roughly 2030¹, bank wealth management divisions are struggling to, not only capture these Boomers as new clients and harvest their retirement assets, but to keep the clients they already have. This struggle is very real.

Markets have witnessed banks consolidate wealth management servicing out of the state, raise investment management “minimums” to unrealistic levels for local markets and have even seen banks exit the wealth management business in its entirety. What has been the catalyst for this struggle? The conglomeration of ten long-time behaviors/practices whose devastating repercussions have finally come to fruition.

Segmentation Grades

Imagine upon entering a restaurant, the host/hostess asks how much you plan to spend during your visit. Subsequently, based upon the amount, you are segregated and assigned to a “likeamount” group and provided menu selections, dining accommodations and service levels based upon the dollars spent. The higher amount spent earns you expanded menus, better seating and faster/better service. Unfair? Strange?

Unfortunately, segmentation grades used by banks cause unmet client needs, service delivery deficiencies and client experience inconsistencies. The grades also cause incomplete client profiles which subsequently lead to a newly assigned officer to not know the client.

True, segmentation grades are used in many industries. However, banking is unlike the widget industry in which the more you buy, the less the cost and the more attention you get. You entrust the bank to manage your investments. You give them your assets with the expectation of being treated equally and fairly, right?

Banks attempt to do it right – they attempt to not identify the client as an account number. Sadly, they do, however identify the client by Segmentation Grade.

External Auditors Give Advance Notice of Audit and Advance List of Accounts to be Audited

If a prison adopted the external audit structure maintained by the FDIC with bank wealth management divisions, it would go like this…. The warden would tell the prisoners when their cells would be inspected for contraband.

The warden would give this notice one to three weeks before the inspections began. So…what would the prisoners do? Right! The prisoners would remove all contraband so as to ensure staying in-line with prison policies.

This procedure/protocol creates an environment conducive for the cover-up of purposeful wrong-doings (i.e. over-billing, self-dealing, forgeries, etc.) and of shortcomings in maintaining a Fiduciary Standard. Correspondence files can be reviewed prior to the audit so as to ensure any inappropriate and/or self-incriminating communications are removed. Employees are trained by management as to how to interact with the auditor(s), what and what not to say, etc. The FDIC can be, quite frankly, duped.

High Fees

Currently, a fee war is raging among mutual fund companies as companies like Vanguard and BlackRock Funds continue to lower mutual fund fees, causing other firms to follow suit. Yet, in the bank wealth management world, fees continue to rise. Why?

Most banks will contest the costs of technology, talent and legal defense have dramatically increased over the years, thus causing their cost of doing business to go up, thus causing the bank to “pass along” this costs to clients.

But wait…technology should create efficiencies that lower costs, right? As for talent, since there is no licensing or specific certifications one must have to be a trust officer or investment officer, then the labor pool should be vast, right? As for legal defense, if the firm practices in a fiduciary manner (always putting the clients’ needs first) and institutes well-defined procedures and transparent behaviors for both the client and the auditor, legal defense should be manageable right?

Clients should certainly review the list of services included in the investment management fees. Does the management fee include financial planning, insurance review, bill pay services, etc. etc.? What other fees are there (see the next section below)? Shouldn’t those be calculated into the investment proposal? What will be the true value for the fee dollars paid?

Hidden Fees and Self-Dealing

Separate from high fees are hidden fees. 12b-1 fees are defined by Investopedia as: “an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund’s total expense ratio. It is generally between 0.25% and 1.00% (the maximum allowed” of a fund’s net assets.”

What? Another 0.25% to 1.00% on top of the separate, but additionally charged mutual fund fee on top of the separate, but additionally charged bank investment management fee?? In today’s electronic world, what is the actual cost of marketing or distributing the fund? Why do most mutual funds not have such a fee and only few do?

It is important to note that bank wealth management divisions are not allowed to collect this fee on “qualified” accounts but certainly can collect it on “non-qualified” accounts. Why should there be a difference?

A client should demand a complete fee summary from the firm which includes full calculations of mutual fund management fees, any 12b-1 fees charged by mutual funds and subsequently collected by the bank (after all, this is an expense you pay that is taken off the top) and any bank management fees. The 12b-1 fee creates a third layer of fee – which further diminishes overall performance returns.

A word about self-dealing is important. As we have seen, 12b-1 fees range from 0.25% to 1.00% and can create a very large additional source of revenue for the bank. This enticement may lead to self-dealing in which the bank favors average to below-average 12b-1 fee mutual funds over better performing non-12b-1 fee mutual funds. This bias can be financially damaging to the client as it puts the bank’s interests ahead of those of the client, potential conflicting with the bank’s fiduciary obligations and reducing the client’s overall rates of returns.

A client should request the provider to provide a report to show which mutual funds have 12b-1 fees that are charged and collected by the bank. If a majority of funds used by the bank wealth management division has these fees that are being paid back to the bank, then bias and selfdealing could certainly be occurring.

Compliance Officer Positioned Within Division

A common structure in the 1980s and 1990s was to have the Compliance Officer of a bank wealth management division stationed within the division. Surprisingly, this practice still exists today.

One could think…it does make sense to have this officer embedded within the division so as to ensure employees comply with all internal and external procedures, policies and laws. However, keep in mind, a compliance officer does not have to have any particular licensing or certifications to serve in this capacity. Further, a compliance officer does not have a separate, external thirdparty to whom he/she answers.

The combination of being embedded within the unit, not having licensing or specific certifications and not having a separate, external third-party authority to whom to answer creates an environment conducive for coercion. Pressure from executive management to “look the other way” could cause the compliance officer to have to decide to keep his/her job and do the wrong thing OR “blow the whistle” on inappropriate behavior that financially impacts the client and negatively impacts the client experience.

A client should ask the structure of the compliance staff within the wealth management division and within the bank. If the compliance staff of the wealth management division is stationed within the division, further consideration by the client is merited as to whether or not his/her best interests and protections will always be first in position.

Lack of Licensing/Certifications Necessary for Wealth Management Officers

Many bank clients may do business with the bank because “it is a bank.” The bank must act within federal and state guidelines and regulations and, since the bank is “hired” to safeguard the assets of the client and manage such appropriately, the client should be quite comfortable with the qualifications of the wealth management division officers. Right?

Let me make it clear…. In my career, I have worked with many, many very well-qualified, highly credentialed trust and investment management professionals. For that, I am ever grateful.

Having said such, there is no licensing or certifications necessary for an individual to become a trust officer or investment officer. While banks have “preferred” educational levels and qualifications, exemptions are constantly made so as to “fill the chairs” in attempts to keep the client experience fluid and to hope for the successful on-boarding of an employee who can learn enough, quick enough to make a contribution to the firm.

With the uptick in wealth management litigation and the constant officer turnover, we can see that the results of not having required licensing and/or certifications to participate in the bank wealth management environment is clearly evident.

Unfortunately, the screening of qualified officers/advisors is really now in the hands of the client as the client cannot “assume” the officer is qualified. His or her professional biography can be requested along with a review of social media sites such as “LinkedIn” to verify employment history. Certifications held by the officer/advisor can be researched along with the requesting of client referrals – the client should always know the officer/advisor will only provide the testimony of a client who is 100% favorable, which is, in-coincidentally biased.

Lack of Disclosure of Legal Actions Involving Officers

As discussed, there are no licensing or certification requirements for bank wealth management officers. This lack of a body governing the individual officers creates an environment in which only the bank has knowledge and access to any legal actions against the officer and/or any ethical transgressions committed by the officer. Unless, of course, the legal actions are of public record and can be easily researched at the local courthouse or done by legal counsel.

A client can check FINRA (Financial Industry Regulatory Authority) for any previous disciplinary issues (only useful if the officer/advisor holds or has held certain licenses) as well as check governing bodies of certain certifications as the Chartered Financial Analyst designation to review any complaints. Research and knowledge are powerful.

Very High Officer Turnover

“The people at the banks are always changing,” is a common statement made by bank wealth management firm clients. Seemingly, the words “money management” or “wealth management” create this illusion of stability and tranquility in the client’s eyes. After all, consistency in the client experience is vital to keeping the client relationship over the longerterm for banks, correct? Hmmmm….

As with most bank units, performance of the officers/advisors has become primarily judged upon the receipt/selling of new business, not necessarily the maintaining of current business. While study after study suggests it is much cheaper for a bank to keep its current clients versus attaining new clients, banks base the majority of officer/advisor performance reviews on the attainment of new clients. This, in turn, creates a high-pressure environment fraught with backstabbing, internal competition and high stress. All of such leads employees to seek higher grounds.

Of course, there are many other factors to officer turnover. Some banks do not want clients to get too attached to a certain advisor because of the fear of losing those clients if that particular advisor left the firm. Thus, the bank will, from time to time, “adjust workloads” and shift clients over to new officers/advisors.

Also, disagreements with management, constant changes in strategic direction and reduced benefits cause employee attrition as well. All interrupt the client experience and weaken trust.

A client can ask for a roster of the firm five years ago as well as one from today and compare the two to review the volume of staff changes. Many banks will say they don’t maintain this record but such is kept at the human resource level since the human resource department oversees the job postings and the subsequent transitions of employees in and out of the division. If there are a lot of “comings and goings,” then the client’s likelihood of experiencing such will be very high.

Excessive Account Loads

It is important to know the account loads, especially that of the investment officer/advisor of a bank wealth management division. Let’s do some math…. There are 52 weeks per year multiplied by 5 days per week, totaling 260 days. Let’s back out 8 paid holidays, 15 days of vacation and 5 sick days. This nets out a volume of work days to 232 days.

Further, let’s consider the effects of internal meetings. We can add in a very conservative 30 hours a month for team meetings, investment meetings, sales meetings, general bank meetings, client preparation time, etc. This equates to another 45 days per year, further netting out the total volume of work days to 187.

With account loads ranging from 150 to 350 per investment officer/advisor, this drops the time allotted each year to a range of 4.2 hours to 9.9 hours per account per year. How effective is it for an account to be potentially given only 4.2 hours of attention each year? How is this fair to the client?

These excessive account loads equate to unrealistic expectations which equate to employee attrition.

Outdated and/or Confusing Relationship Management Structures

In serving hundreds of families during my career, two regular quotes I have heard are, “they had so many people in the room, I was not sure what any of them did,” and, “they had just two officers there but one never said anything.”

Banks have long struggled with the most appropriate, efficient and effective relationship management structure. The problem is simple: the bank wants each and every client relationship to fit into the bank’s established team structure all the while knowing every client relationship involves a variance in sophistication, need and expectations. The lack of flexibility in the bank’s structure and willingness to adopt to each client relationship, individually, creates client and officer/advisor confusion.

This dynamic causes inefficiencies and forces the costs to the client to escalate because the client is paying a management fee that covers unnecessary bank labor. The foundation of the client-bank relationship slowly weakens and the client shops around for a simpler, less expensive alternative.

Summary

In summary, once sterling and proud banking divisions have become adrift in self-created unsettled oceans. Just when will bank wealth management units use propellers that go in a direction other than a circle? Perhaps before the waters have dried up although one must acknowledge that the waters have already gotten much shallower.

¹Social Security Administration Report 2014

The information contained in this article is not intended to be tax, investment or legal advice and it may not be relied upon for the purpose of avoiding any tax penalties. T.K.M. Financial Services, LLC. does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. ©Todd K. Meador. All rights reserved. Reproduction, reprinting or use of this information in a plagiaristic manner is strictly prohibited and enforceable by law.

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