By Mike Woelflein
Phil Jackson saw a need at Northeast Bank. Auburn-based Northeast, in business for 130 years, had all the usual offerings of a mid-sized bank, from checking accounts to trust services to loans. But Jackson, a senior vice president who had run the trust department for years, thought his higher net-worth customers needed more in the way of wealth management. At the same time, some of those customers were telling him of their unhappiness with the services provided by larger regional and national banks.
So last November, after much work by Jackson and his trust department, Northeast announced its new private banking group.
"We saw a chance to expand our customer base, and retain the customers we have, and we took it," Jackson says. "The old model, the traditional buying and selling of money, wouldn't work anymore. The competition is so keen and so great out there. It's been a complete revolution, and it makes high net-worth clients all the more important."
Not long ago, those kinds of private banking services were the exclusive domain of larger banks. Now, though, a host of smaller players like Northeast are developing such services.
Norway Savings Bank, for instance, announced the creation of Norway Savings Asset Management Group in February. Other banks have been buying or creating subsidiaries, expanding the offerings of in-house trust departments, or contracting with third-party providers. All are aiming for high net-worth clients with (often) personal and customized investment and portfolio management, financial and retirement planning, estate planning, and trust services. Generally, there's a high-level employee or officer who plans and oversees the package, available to the client at virtually anytime.
Over the last 10 years, community-based Maine banks have been targeting these customers. The trend has shifted in overdrive recently, though, because of demographics, technology, increased competition, and what smaller banks see as an opening from the big boys, who once dominated much of the high net-worth scene. Different banks are using different terminology, but many are implementing new programs, bulking up older ones, or just emphasizing the broad range of services they can now offer, all in the race for wealthy clients. Everyone wants them, and everyone wants to keep the ones they have.
"This kind of customer is often a nice stream of income for the bank," says Lisa Rideout, senior vice president of Norway Savings' Asset Management Group. "But that's just the start of it."
Relationship building
Much of any bank's profits come from loans, and that's especially true for small and mid-sized banks (those with assets below $1 billion) in Maine. Doing business with high net-worth clients, often defined as those with $250,000 or more in liquid assets, helps banks make money, and gives them the resources banks need to make all those mortgage loans.
High net-worth clients are valuable for a lot of reasons. They require a higher level of service, and are more likely than less-wealthy customers to use a wider spectrum of bank offerings, from investment services to large loans. That means two things: higher income from fees and, generally, longer relationships than your average checking-account-and-a-CD client.
Northeast doesn't charge extra for private banking services, though many of the products under the private banking heading do have fees. Other banks offer similar services under a variety of fee structures, ranging from commissions and flat fees to asset-based charges. Generally, it works out to about 1% of the customer's assets, or $2,500 a year for a $250,000 account.
Building a far-ranging relationship also allows a bank to be more familiar with the customer's financial package and circumstances, which the banks say leads to a more customized, higher level of service. And such relationships, because of their complexity and the personal connections that they build, tend to last for an average of seven years or more, according to one bank VP. "You want to get your foot in the door early," says Frank Parker, president of Bath Savings Trust, a subsidiary of Bath Savings Institution that launched its first forays into the private-banking market in 1989. "If someone has even $100,000 in the bank, that's just the tip of the iceberg for them, and you can grow into other areas of their life. And basically, that $250,000 account today is going to be $750,000 10 years from now, or maybe $1 million."
What's more, a happy, wealthy customer is a great customer to have, says Chris Pinkham, president of the Maine Association of Community Banks, because they may provide a bank with its best possible advertising. "This type of person tends to be in the community with other people in their financial circle," Pinkham says. "If they're having a positive experience, if they're satisfied with their wealth management officer, they're likely to say to somebody, 'You just moved up from Philadelphia and you used to have Mellon Bank. You should look into the local bank.'"
Not just for the big guys
Private banking was long the domain of bigger banks ˆ in Maine, that meant Fleet, KeyBank and Peoples, institutions large enough to handle the overhead involved with such services. That remains true in many cases, especially for extremely high net-worth clients, in the range of $750,000-$1 million and up. But Fleet and KeyBank have recently left a door open, and community-based banks are scrambling to get inside.
Managers of smaller banks say their larger competitors are pushing the minimums for their high-cost, personal services upward, into the range of those with assets of $750,000 or more. Several sources say Key has given all of its clients with less than $750,000 a toll-free number and is servicing those accounts out of Albany, N.Y. Said one mid-sized bank president, "We've picked up a dozen or so KeyBank clients as a result of their indiscriminate movement of accounts under $750,000 to Albany."
Key officials say that accusation is a myth. Gail Conley, senior vice president and market manager for McDonald Financial Group ˆ the Key division focused on serving the affluent ˆ says that some administrative services have been moved to Albany, where clients with "accounts under a certain size" are assigned to a specific admistrator.
"It's not a call center," Conley says. "These are qualified people. And more importantly, all of our clients still have a financial advisor in Maine, and they can speak with that person for any planning, or anytime they need a face-to-face meeting." She says that because Key recognized the risk of moving these services, Maine-based financial advisors often hold a face-to-face meeting with the client, then conference in the Albany advisor as a way of introduction.
Demographics are creating opportunity, too. Banks point to the trillions of dollars in savings about to be transferred from retiring, then dying, baby boomers. Maine's somewhat newfound popularity as a retirement destination helps, too, bringing in new, well-heeled customers from a generation that grew up on face-to-face meetings, handshakes and personal relationships with bankers.
"There are a significant number of retirement communities that have been built and opened for young, healthy seniors," says Pinkham. "There are two in Brunswick, and they're in Damariscotta, Kennebunk, Boothbay. They're not cheap. These are people coming into our towns, selling their McMansions and arriving with a bundle."
Technology helps, too. While the face-to-face meeting and personal touch is the hallmark of community-based banks, online banking allows small and mid-sized banks to spread their wings, because there's no reason a bank can't provide these types of services to clients anywhere. Larry Blaisdell, senior vice president and portfolio manager for Acadia Trust, a subsidiary of Camden National Bank, says he has clients throughout New England and other states.
But technology can be a double-edged sword in such a competitive environment. Small and mid-sized banks are competing not just with each other, but also with a variety of suitors. Brokerage houses have long battled for these customers. Credit unions are trying harder to provide fee-based services as well. Recently, insurance companies have gotten into the act. So has longtime tax-help provider H&R Block.
While offering these services is attractive for banks, setting up these operations is neither easy nor cheap, say bankers. Bath Savings Institution's Bath Savings Trust subsidiary lost money for the first two-and-a-half years of operation, according to Parker. His unit accounts for 20% of the bank's earnings, and holds about $210 million in assets, compared to the bank's $310 million. Parker says his 600 clients' average age is 60, and their average account holds $450,000.
"Our board of directors was very, very patient in accepting the time frame to reach profitability," Parker says. "We had a five-year plan to do it, and we ended up only six months off. But a lot of banks have tried trust departments and not made it, either because they didn't commit enough money to capitalize it, or because of impatience in continuing to look at red numbers."
Parker believes Bath was willing to look at the red ink because it had to. "In the long run," he says, "if you don't do it, somebody is going to take your customers away from you."
Progress report
Not surprisingly, community banks say the effort to provide private banking services is going well. At Northeast, Jackson says it's "growing very rapidly, we're pleased and very excited about the success of the program." At Norway, Rideout says, "it's going to take some time, but it's been very well-received."
Customer retention is a key to that success, and smaller banks feel they have an edge over the big guys in that arena. If a customer's been seeing Annie the teller for years, or knows an officer from the local Kiwanis, there can be a comfortable relationship for the customer.
"Norway Savings Bank has been around since 1866, just not with a lot of investment products," says Rideout. "We have customers who know us and want to do business with us, who like the personal touch. They were asking when we'd be able to do this, and now we can. It's going to work really well. They know they'll get personal service from people they know and trust."
Some bankers even hope for a day when community banks will join together to fight the bigger banks. Gary Knight, executive vice president and senior trust officer at Androscoggin Trust and Investment Services, a subsidiary of Lewiston-based Androscoggin Bank, envisions a day when Maine's community banks can level the playing field even more against the Fleets and the Keys. He's been trying to bring smaller banks together for economies of scale.
"I'd like to see us forming back-room relationships, because who's taking care of the services doesn't really matter," Knight says. "The difference is who's making the customer contact, and we're all good at that. There's been a fair amount of interest in it, and I want to keep pushing it. I see values that can come from working together, and I'm not alone."
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