Major Realities And Myths Of The Asset Management Business

ambMany wealth managers are only marginally profitable, and a lot of wealth businesses appear to make more money than they actually do. That’s because they are effectively subsidized, using the assets and infrastructures of other parts of their parent companies without paying the full cost.

Financial institutions often underperform in wealth management for five reasons. First, they don’t have a clear picture of their own economic performance and how it varies by customer segment. Because they segment their customers poorly, they fail to target those customers that genuinely fit their business models.

Second, many financial institutions’ wealth offerings are subscale and need more customers and assets to be truly profitable. Third, wealthy investors aren’t always the dream customers they might seem. They often drive a hard bargain, negotiating lower fees and demanding more services. Fourth, financial institutions today find themselves with unsustainable cost structures in their wealth businesses. Having concentrated on revenue growth during the 1990s, they ignored the costs of acquiring and serving their new customers.

Lastly, financial institutions rarely refer good wealth management prospects across their various business lines, references that ensure that promising leads from, for example, the retail bank, the brokerage or insurance business, are passed to the wealth management division.

In light of these five factors, wealth managers should examine the economics of their business to establish a true picture of performance. Of paramount importance is a clear-eyed analysis of the costs of acquiring and serving customers. Wealth managers must identify their best target customers, and focus steadily on them.

Myth One: It’s all about asset management.

The term “wealth management” is often treated as being synonymous with “asset management.”

Reality: While asset management plays an important part in wealth management, its role is often overstated. Our research shows that noncash investment holdings, including managed funds and directly held securities, account for only 41% of revenues in wealth management. The remainder consists mostly of cash deposits, debt, and insurance products. Because many managers focus too much on asset management, there is untapped demand in providing well-integrated offerings that incorporate loans and credit, insurance and retirement products.

Myth 2: Offshore banking is dying.

More regulation, the relaxation of exchange controls, the development of investment markets, and reduced political risk in some countries foster the perception that offshore banking is dying. Much wealth creation in the last decade has been public and onshore (initial public offerings and stock options), thereby negating the benefits of secrecy, a primary historical advantage of offshore banking.

Reality: While the size of the offshore banking market is likely to decrease relative to the overall wealth business, it will nonetheless remain critically important for the world’s wealthy.

For wealth managers, an offshore model provides an attractive option to extend their geographical reach. Offshore operations can be global with smaller scale and at much lower cost than a multinational onshore presence. Managers should therefore carefully examine the offshore model and how it suits their businesses and customers’ needs. It may well be the best way to build global capabilities.

Myth 3: Wealth management is only for the very rich.

Conventional wisdom sometimes holds that wealth management is all about serving the very rich.

Reality: The emerging wealthy segment is a growing part of the wealth market. Our research shows that the “emerging wealthy” — households with $250,000 to $5 million of investment assets — hold $27 trillion worldwide, or two-thirds of the assets owned by richer investors. Their revenue figures are even more attractive — an estimated $403 billion in 2000, or 79% of revenues from wealthy households. These investors have also traditionally been poorly served.

More institutions recognize the importance of the emerging wealth segment. Unfortunately, most providers do not fully understand the underlying dynamics of this segment and how to serve its complex needs economically.

Myth 4: Wealth management is all about protecting money.

Traditionally, wealth management was all about protecting clients’ wealth. In the past, wealthy investors faced a tradeoff between banking secrecy and performance, with many favoring the former.

Reality: Performance is increasingly important for investors.

As the nature of wealth creation has changed, with successful entrepreneurs stealing the limelight from inherited wealth, investment performance has become more important in selecting investment products or providers. This has significant repercussions for financial institutions. To attract new investments or merely retain existing ones, institutions require “best of breed” products, leading many to adopt an “open architecture” approach to acquiring such products.

The appeal of the wealth market is readily apparent, but misperceptions befog many competitors’ understanding of the industry. To compete more effectively in an industry that will probably experience continued rapid change and increased competition, wealth managers should understand the true economics of their businesses. In short, they should critically examine their offerings to determine the gaps in their products and service performance.

Are Wealthy Investors Really Being Served?

awirbsCORPORATE FAILURES may be increasing globally and the fortunes of dotcom entrepreneurs may be vanishing faster than it takes to utter the words “initial public offering” on Nasdaq, but neither economic recession nor the bursting of the technology bubble is going to halt the rising tide of affluent and newly wealthy individuals in Europe, the US and elsewhere, according to business forecasters. Obituaries of the so-called mass affluent are simply fanciful, along with the reported demise of the wealth management industry that is springing up to serve this expanding segment of the population.

True, the industry has seen some casualties among the specialist financial firms and bank subsidiaries that have struggled to find the right mix of services for this potentially lucrative segment. None are yet delivering a complete wealth management service that caters for all needs — that may still be five years away, says one industry specialist. But there is no shortage of firms gearing up and looking for a piece of the action.

The rise and rise of affluence

The number of people in Europe classified as either in the mass affluent group or of high net worth (even wealthier) is predicted to rise by an average of more than 5000 a day between 2000 and 2004, to reach more than 30.3m (compared with 22.8m at the turn of the millennium). Between them, they will own [euro]8,600bn in liquid assets, according to London-based data and industry analysis firm Datamonitor. Of that, some [euro]2,800bn will be held by the mass affluent, who represent roughly three-quarters of the individuals in the overall total.

For the world, the managed assets of the wealthy will rise from $27,000bn to $40,000bn in the five years to 2005, calculates Merlin Stone, the IBM professor of relationship marketing at Bristol Business School.

Definition of affluent

Precise definitions of mass affluent vary markedly. Datamonitor defines it as individuals with investable assets of between [euro]50,000 and [euro]300,000 or gross annual income of between [euro]50,000 and [euro]150,000. Others use definitions for investable assets that are nearly twice as high. Among the even wealthier group known as high net worth individuals (HNWIs), the number of dollar millionaires in the world has reached 7.2m, according to the latest world Wealth Report, produced by investment bankers Merrill Lynch and management consultants Cap Gemini Ernst & Young.

In particular, the US, Canada, the UK, Germany and France each have a class of new “money-maires”. And the assets of affluent under-35s are growing more than three times faster than those of the affluent segment overall, according to a separate study by Booz-Allen & Hamilton, a global management and technology consulting firm.

The mass affluent and HNWIs represent a large, rapidly growing and low-risk market for financial and lifestyle services. And that market is highly profitable. In a recently published paper, Wealth Management: A new Phenomenon? (prepared for Morgan Stanley Dean Witter), by Professor Stone and Tamsin Brew, a consultant in IBM’s Wealth Management Financial Services practice, the average return on equity for private banks, which have traditionally catered for the wealthy, is estimated to be around 87%. That compares with 30% for a UK retail bank, 29% for a US commercial bank and 22% for a European universal bank.

Market is highly fragmented

The mass affluent and HNWIs also represent a market that, unlike other sectors of finance, is still highly fragmented and open to capture by the big financial institutions. The top five private banks in the world hold a market share of only 5% between them, according to Prof Stone and Ms Brew.

The market is also very fluid, with private banking increasingly under scrutiny because of concern about tax evasion, fraud and money laundering. Assets that were kept offshore are increasingly coming onshore. On current trends, the proportion of assets held offshore is likely to halve in the next four years, says the Booz-Allen study. Private banking itself also appears to be suffering severe erosion of loyalty among its traditional customers. More than 60% of HNWI are planning to spread their investment portfolios across a broader range of providers.

No firm, whether traditional or new entrant, has yet found a successful formula to service the HNWI and mass affluent markets beyond relatively niche activities. Even so, it is assumed that a big part of what is provided in future will be delivered over the internet to a disproportionately web-savvy audience, helping to keep down costs.

Not least of the difficulties is that the market comprises a diverse group of often highly motivated, busy and independent-minded people with a large variety of needs. It has grown rapidly as the result of several economic and demographic factors: a long-term rise in equity values; the spread of entrepreneurship, particularly in the technology sectors; the sale of family businesses during the recent wave of mergers and acquisitions; an ageing population that is making its own provisions for retirement; and increasing inheritance, as more money and property is passed between generations. The expansion of the mass affluent and the HNWIs represents in short, a permanent and far-reaching new phenomenon that is going to have a major impact on the finance industry, and even on the conduct of economic policy in some countries.

A question of services

How should the banking and finance industry respond to what has been called the “European e-financial services holy grail”? What kind of services do the mass affluent require and what is the best way of providing them?

An attempt to answer such questions lay behind IBM’s assembly, in June, of a panel of specialists in wealth management, consumer consultancy and IT business solutions. IBM is taking a leading role in the wealth management field through its professional consultancy services division, which helps clients to identify and solve business and IT problems. What emerged most clearly from the specialist panel is a general view that a gap exists in the market between what the mass affluent want and what financial firms offer them.

Traditionally, the wealthy have been serviced by independent private banks or the private banking arms of commercial and retail banks. In addition, independent financial advisers catered for mid-level investors, More recent arrivals are the internet discount brokers, such as Charles Schwab, and other e-financial service providers that are seeking more customers for their existing range of products or to sell more products to existing customers. Yet, another recent player on the scene is Close Wealth Management, part of the Close Brothers Group, which aims to provide a high-quality but cost-effective investment service through innovative use of technology.

The list of financial firms establishing expensive new strategies to capture a slice of the wealth management continues to lengthen. Insurance company CGNU is building up norwichunion.com e-wealth management service; HSBC and Merrill Lynch have also launched an e-wealth management service; Lloyds TSB is setting up a similar service, known as Create; both Abbey National and Halifax are developing more conventional (non-internet) wealth management practices; and Lazard Asset Management is putting a new emphasis on private banking with the establishment of Lazard Wealth Management International. In some cases, the new strategies involve investments costing hundreds of millions of pounds.

So far, though, it has looked like another financial fashion, with the same old products plus a few bells and whistles. It falls well short of the kind of holistic service, based not on products but on needs, that was described at the IBM June panel session by Rohitha Perera, head of the computer firm’s Wealth Management Financial Services practice. People accumulate wealth for a lot of different reasons, perhaps to follow more interesting pursuits, to retire early, to give security to their family or to educate their children. It may give power and celebrity or it may allow great acts of charity. But catering to this group’s needs means more than just financial investment and asset accumulation. It will frequently span the life cycle and include a high lifestyle component, says Mr Perera.

Strategies look weak

On those grounds, many of the latest generation of wealth management firms look likely to fail. In the words of a recent Datamonitor study, written by senior analyst Adam Hill: “As yet, few compelling new propositions have come to market and there has been more than a hint of ‘me too’ syndrome about strategies of many latecomers.” Mr Hill concludes: “A shakeout later this year in the e-wealth management space, similar to the one seen in late 2000 and early 2001 among the standalone e-banks would, therefore, seem inevitable.”

One of the most recently launched projects in this area is the joint venture between Merrill Lynch and HSBC, which are planning to invest $1 bn in the new investment management offshoot, The venture, expected to become profitable by 2004, is aimed at a particularly internet-savvy segment of the mass affluent. Alan Southall, head of business management at the new venture, Merrill Lynch HSBC, describes this segment as “self-directed”. The potential customers targeted by this venture are in the band that is one step down from the types of wealthy people that have traditionally obtained investment advice and transaction execution from a private bank, Mr Southall said at the IBM panel discussion.

He reckons there are 4m households in the UK alone with investable assets of [pound]350,000. By 2005, the number will have grown to 5m. Although only 300,000 are internet users, he expects to see internet penetration expand substantially. “More people are getting more self-confident’ about investing online, he says. The aim is to provide them with the kind of service that might have been provided, traditionally, by the private banks, only more cheaply.

Joint venture offers privileges

The key point for clients using the Merrill Lynch HSBC service is timely access to the high quality research produced by the two partner firms. These clients will get the same privileged access as the firms offer their other customers, says Mr Southall.

By integrating banking and investment products, the joint venture allows a customer to transact a share purchase without transferring money from an external account. And a client in the UK without a dollar account who wishes to buy shares in the US quickly, can do so. The foreign exchange aspect will be handled automatically.

Collateralised loans are provided against a client’s securities. Merrill Lynch HSBC, which started operating in the UK in April 2000 and now has similar operations in Australia and Canada, also provides a telephone service through a call centre and a face-to-face service through investment centres in London and Birmingham.

Even this set of options and functions looks more like the combining of services that already exist, particularly in the US, rather than a customised approach to wealth management. Mr Southall says Merrill Lynch HSBC will be expanding its menu. “You do not eat an elephant in one meal,” he says.

Mr Perera says: “Organisations getting into [the wealth management business] can not do everything at once. They have to prioritise. He is working with five or six financial firms — insurance companies, and investment, retail and private banks — including Merrill Lynch HSBC, to help establish their wealth management strategies, design the IT architecture and assist with the technical implementation of programmes. For example, IBM hosts the websites (looking after all the heavy equipment) for Merrill Lynch HSBC and configured the software for the call centre.

One apparent weakness in the Merrill Lynch HSBC model is that, logically, the faster the turnover of clients’ portfolios, the higher is the joint venture’s revenue. Yet, as Professor Stone said during the panel discussion, the more investors trade, the more likely they are to destroy wealth. “If you believe in ‘efficient markets’ theory, the best thing you can do is to make some good long-term choices and then leave these investments alone,” he says.

Serious contradiction

Although Mr Southall insisted that his firm was offering a comprehensive and evolving range of products, such criticisms do highlight a serious potential contradiction in the approach of most firms to wealth management.

Today, however, no companies are “really doing wealth management in the clinical sense of well being”, says Professor Stone. What kind of services would be included in a more needs-based approach to wealth management? The only existing example of a business concept that brings together advice, oversight and aggregation over a full range of financial assets and liabilities is what is known as the family office. Such offices were initially set up by very wealthy families ($100m upwards) but in some cases have been extended to provide other wealthy families with legal, tax and financial advice. In a few other cases, such offices have been replicated by banks to provide exclusive and very expensive support for the super-rich. Deutsche Bank provides such services, separate from its private banking activities (because the aim is to provide advice, not sell products). A few private boutiques do something similar. The sorts of services provided through the family office range from wealth and estate transfer planning, asset allocation and trusteeship to tax planning and charitable foundation administration; and from cashflow management and insurance coverage to property management and travel planning.

Such services may only be available to a relatively small number of people today, but Mr Perera, Prof Stone and others argue that it could be replicated for a wider group.

UBS package shows the way

One big financial firm has demonstrated the value of lifestyle management to banks, as users rather than as providers. In July, UBS, the big Swiss bank, announced that it intended to offer its 6,500 staff in Britain a bespoke package of services designed by Enviego, the fastest growing lifestyle management company in Europe. Enviego will help UBS staff to deal with the stresses of everyday life, from finding a childminder at short notice to securing an emergency plumber. The bank hopes this service will help employees to cut down on the amount of time they take away from work dealing with lifestyle management issues.

So-called concierge services are said to be one of the most attractive benefits offered by top US companies in attracting professional staff. Linking such services with financial advice would seem to be the logical next step.

Many banks may have identified the mass affluent as a potentially profitable market segment. Some have realised there is a big gap in the market between what these people want and what is on offer. Which firm will be most successful in filling that gap is going to take a little longer to emerge.

Wire Fees Are Big Business

“We wanted a good, competitive offering to put in the salesperson’s bag,” says McGuire. “This levels the playing field at a reasonable cost, and allows us to compete head-on with the wirehouses.”

wfabbOther vendors, including SEI and EnvestnetPMC, offer soup-to-nuts solutions similar to FundQuest’s. The goal is to help smaller banks compete in an area that is expected to register sharp gains in both volumes and fee generation over the next few years. “We’re seeing a tremendous migration by smaller institutions into the fee-based wealth-management business,” says FundQuest CEO Bob Del Col. “But in order to be successful, they need to offer the same choices the big guys offer. We help them do that.”

Fee-based products aren’t for everyone. Many banks lack the sales culture, customer base and organizational and compensation structure to accommodate such offerings. Others may be uncomfortable sharing vital customer information with a third party. “You’re talking about giving up total control of the investment management process,” Del Col says. “Some banks have a difficult time with that idea.”

Rachel Malatesta, an analyst with Cerulli Associates, says bank efforts are hindered by a lack of commitment. Only three percent of banks offering investment products considered it “core” to their strategies, she says, while the remainder view it more as an “accommodation” to clients. This translates into sluggish sales. According to a Cerulli study, in 2000 fee-based products accounted for just three percent of total bank brokerage sales, compared to 13 percent for wirehouses.

But for growth-minded banks with existing wealth-management capabilities-and the willingness to tweak their approach to the business-tacking on fee-based products through a third party can amount to a no-brainer. By offering products and advice to jaded investors, banks can boost wallet share, attract and retain wealthier clients and add a new annuity-like revenue stream to the income statement.

“We think this is a tremendous source of fees and a great way to cement existing relationships,” says Gregory Bean, svp and executive trust officer at FirstMerit Corp., an Akron, OH bank that recently supplemented its core wealth-management lineup with fee-based products supplied by SEI.

Kevin Keefe, vp and senior consultant with Financial Research Corp., predicts that assets in mutual-fund wrap programs will grow 22 percent by 2005, while separately managed accounts (SMAs) will gain more than 30 percent. By 2011, he projects, SMAs alone will grow from today’s $417 billion to more than $3 trillion in investments. “People are lining up for these products,” he says. “If you’re in the game to grow, then you’ve got to consider offering them.”

The trick lies in managing and administering such programs effectively. In total, about 1,000 banks market fee-based products to customers, Malatesta says, with another 400 or so planning to do so. With the exception of the very biggest institutions, few banks have the resources to provide a complete menu of fee-based products, let alone the supporting technology and training. “There’s really no way to do it without a third party.”

That’s where third parties come in. Most charge a modest upfront fee plus a percentage of assets under management-usually around 80 basis points-lowering the risks and giving vendor partners a strong incentive to make bank programs successful.

Webster Trust Co. in Waterbury, CT, has outsourced its wealth-management functions to SEI, charging clients about 190 basis points for a complete package, including brokerage commissions. After SEI’s cut and other expenses, Webster comes up with annual net revenues of around 70 basis points of assets. “Clients look to us as their main provider, and then we look to SEI to provide the specific management capabilities,” says CEO Ed Fisher, whose group manages about $1.1 billion in assets. “An organization our size couldn’t do this on our own.”

Managed by professional money managers, SMAs provide investors with both asset-class diversification and control over specific stock holdings and the timing of share sales-making them a powerful tax-planning tool for high-net-worth and even some mass affluent customers. The rub is that such programs require proper asset allocations, rigorous selection and oversight of mutual fund and money managers to ensure they’re living up to expectations, as well as top-flight processing and clearing capabilities.

SEI, which has about 450 bank clients, considers the business a “natural extension” of its long-standing trust outsourcing business, says Brandon Sharrett, svp of the firm’s bank advisor network. The firm manages about $15 billion in trust and wealth-management assets for banks, and gets about $100 million in annual revenues from the segment.

For SMAs, SEI has “manager of managers” relationships with about 13 different money managers, utilizing best-of-breed providers-Alliance Capital and TransAmerica for large-cap growth, for instance, and Lazard Asset Management for international stocks-for each asset class. It conducts periodic on-site visits with managers, tracks every trade they make to protect against “style drift” and will change managers if their performance falters.

The combination gives a bank powerful capabilities, with costs that are rolled into the product fees. “But the big benefit,” Bean says, “is in higher quality products,” which allow him to compete effectively with big local banks, like KeyCorp, as well as Merrill Lynch and other wirehouses. After just nine months, FirstMerit has more than $80 million in its SMA pipeline. “We’re growing our niche aggressively,” he adds.

Using the vendors’ platforms requires a change in bank thinking. Many banks have traditionally stressed their stock-picking abilities. Sharrett argues that, in the current climate, most banks don’t have the resources to provide truly diversified stock portfolios. Investors, meanwhile, are drawn to offerings run by fund managers they’ve heard of. “Investors aren’t buying the notion that community banks are good money managers,” he says. “They want strength and diversification, and we’ve got 20 different asset classes.”

With vendors managing the products, banks must act more like consultants, and work harder to generate referrals from within the bank, especially the deposit side. According to Cerulli, about 69 percent of bank investment clients-and 80 percent of in-house referrals-emanate from the deposit base. “Success hinges on the ability of reps to generate both referrals and needs-based analysis to customers,” Malatesta says.

This can be a mindbender for reps who have been trained to focus on generating commissions. At Webster, reps now spend more time walking clients through assessments of their life situations, investment goals, tax situations and the types of stocks they do and don’t want to own. They then plug that data into SEI’s asset allocation models to come up with a recommended portfolio. “We’re spending a lot more time providing advice and holding hands,” Fisher says. “It’s different, but clients respond better to the idea that you win only when they do.”

In addition to changes in the sales approach, reps often require training in areas such as providing high-level tax advice. Once again, the vendors lend a hand. FundQuest employs a team that provides both face-to-face and online training to sales reps. The firm helps with such basics as naming the program and creating marketing brochures and presentation materials. It also regularly sends out blast emails with marketing tips and keeps reps apprised of changes in tax laws. “The support is great,” says First Tennessee’s McGuire. “They’ve got an inside sales desk we can call if a client has a question we can’t answer.”

Vendor pricing and offerings are generally competitive, and a bank’s choice often comes down to technical compatibility and other intangibles. Webster’s Fisher weighed references, infrastructure and financial stability before selecting SEI. “There are a lot of newer firms offering this that don’t have the same wherewithal,” he explains.

Bean, like other bankers who have signed on, expect to continue using vendors. “This is what the market is demanding, and there’s no other way to do it,” he says. “If you don’t offer it, you’ll lose the customer to someone else.”

Who Says BC Isn’t Rich?

Forget all those doom-and-gloom articles about BC being a have-not province. BC leads Canada in the only number that counts – we have the most millionaires per capita!

bcIt’s time to banish once and for all Toronto’s CN-tower-as-centre-of-the-financial-universe condescending image of BCers as backwater hewer-of-wood hicks and Birkenstocked green-peaced-out hippies. Wake up and smell the stock options, you Yorkdale yokels – BC’s millionaires control 30 percent more provincial wealth than Ontario’s!

And no jokes about BC’s top-rating in the bottom-line department being due entirely to our well-cached crop of BC Bud (or too much toking thereof). BC millionaires are an incredibly diverse bunch: hi-tech gameboys (Don “E=MyCash2 Arts” Mattrick), old-money sugar daddies (Stephen “Life is Sweet” Rogers), transplanted real-estate tycoons (Terry “Lil’ Ka-ching” Hui), ex-Olympian ski-hill moguls (Nancy “Gold-Grubber” Greene), media mini-magnates (David “No-Not-That” Black), conglomerated captains of industry (Jimmy “You name it, I own it” Pattison), and last but certainly not least, radically right-wing corporate-brown-nosing politicos (Gordon “Some of my best friends are millionaires” Campbell).

Some cynical smarty-pants may say that millionaires are irrelevant in today’s fast-paced world when it takes more than a billion just to get the application form for the Forbes rich list. But don’t let them rain on our greed-pride parade because, in BC, millionaires still matter. Our millionaires may not be tabloid magnets like Britain’s Royals, or White House owners like Texas Enron tycoons, or Starbucks-sippin’ stylish like Seattle’s Microsoft millionaires, but their hutzpah is more than enough to put us at the top of the heap in Canada.

BC’s millionaires are also good corporate citizens of our beautiful province. They have worked hard to make BC a better place by consistently and loudly demanding lower tax drains on high-flying wealth generators like themselves. Their tenacity and altruism has finally paid off in BC’s recent stratospheric tax cut. No doubt the stimulative effect of our millionaires’ increased spending on private jets and Whistler weekend mansions will trickle down to the rest of us very soon.

Millionaire Protection Plan

Gone are the days when BC governments ignored the plight of our long-suffering millionaires and then stiffed them with a crushing tax bill. Everyone was concerned that the jackbooted thuggish tactics of NDP regimes would drive our millionaires from their well-feathered nests and make them an endangered species in BC. Statistics Canada discovered in 1999 that millionaires made up a miserly three percent of BC’s families after a diabolical decade of NDP misrule. The need to act, and quickly, to save our vanishing rich was never greater.

What a difference an election day makes. Gordon Campbell won in a landslide because the public embraced his masterful plan to protect BC’s millionaires by enhanceing their traditional champagne culture and gated-mansion habitat. On their very first day in office, the BC Liberals showed they meant business, not just by delivering the largest tax cut in Canadian history, but, more improtantly, by targeting it specifically to benefit our oppressed millionaires.

Dispirited millionaires, who had been subjected to years of ritual financial abuse, finally woke up to the golden-fingered dawn of a new era. The timely deposit of $300-million a year by the Liberals into the nearly-empty nests of BC’s ultra-affluent will ensure they never have to go without pate fois gras or a shiny new BMW ever again.

And this is just the beginning of the Liberals’ ongoing dedication to bringing our millionaires back from the brink. Stay tuned for three more years of intensively nurturing the well-to-do until opulence flourishes once again in BC.

RELATED ARTICLE: Did you know?

Based on Statistics Canada 1999 data:

* BC has 56,218 millionaire families, or 3.3 percent of our population – the highest proportion of any province in Canada.

* The average net worth of BC millionaires is a cool $2.7 million, also the highest in Canada.

* BC’s millionaires control an awesome 35.5 percent of our province’s total wealth.

* BC’s richest 10 percent are tops in Canada with an average net worth of $1,378,534 while our poorest 10 percent had a negative net worth of minus $8,126 – only $100 better off than the welfare bums in Atlantic Canada.

* The better half of BC’s population controls 96 percent of our province’s total wealth leaving only 4 percent for the bottom feeding 50 percent.

* Between Statistics Canada’s 1984 and 1999 wealth surveys, the richest 20 percent of Canada’s families increased their wealth 39 percent while the poorest 20 percent saw theirs decrease during those 15 years.

* And all this even before the BC Liberals’ righteous tax cuts that gave the top 3 percent of our earners 30 percent of the prize, about $300 million a year!

How Port Rocked The Big Boys

When investment choices start to splinter too heavily, banks all too often take an either-or route: drop the business line altogether or move it in-house, despite the costs.

cbPort, the holding company for Cambridgeport Bank, took a different path, one that a handful of other community banks are taking. It hired its own sales team and took on a new partner, LPL Financial Services, to provide research and execute customer transactions.

The reorganization raised costs, since Port was now paying the salaries of the four customer reps it brought on, but the company spared itself the compliance and licensing expenses it would have incurred had it chosen to offer investment and brokerage on its own.

Under the new arrangement, Port’s sales representatives work with customers to develop a financial plan, using LPL, which has headquarters in Boston and San Diego, for information about investment options running the gamut from annuities to stock trades.

Once the customer’s program is done, Steve Damiani, Port’s vice president for alternative investments, reviews it and then passes it along to LPL, which as the broker-dealer executes the necessary transactions.

Bringing investment sales in-house has had a dramatic impact at Port. In 2001, its first year operating under the new plan, its wealth-management fee income rose 298%, to $816,000. That was 8% of its net income.

“The program is in the black, and it is beginning to develop into a nice service,” Ms. Lundquist said. “It really makes a difference when you have your own people working.”

Mr. Damiani said that, especially with the wealthiest customers, offering investment services “strengthens the relationship if it’s done right. It creates a stronger tie than just offering a checking account of a certificate of deposit.”

Paul Pustorino, national line-of-business leader for depository institutions at the Chicago consulting firm Grant Thornton LLP, said the hybrid setup is the only “sensible” way for community banks to offer investment services.

“If you outsource completely, there’s no ownership on the part of the branch employees, and if you do it in-house, it’s too expensive,” he said. “You need to do a huge volume to support that kind of infrastructure.”

Others using the hybrid model include $728.1 million-asset Mercantile Bank Corp. of Grand Rapids, Mich. Its Mercantile Investment Center, unveiled in December, offers investment and trust services in partnership with Raymond James Financial Services Inc. of St. Petersburg, Fla.

The model is far from universal among community banks. A recent American Bankers Association survey found that fewer than 40% of community banks sold mutual funds or brokerage services. Of those that do, many still outsource investment services. Wilton Bank in Wilton, Conn., for example, refers customers in need of investment and trust services to U.S. Bancorp.

James Norwood, vice president of LPL’s financial institution services division, said 320 financial institutions (banks and credit unions) are using LPL’s services, up from 280 at the end of 2001, making it the company’s fastest-growing component. He would not say how much revenue the financial institutions services division generates.

Jeff Nash, LPL’s assistant vice president for branch development, said it has relationships with other banks that are similar in structure to its arrangement with Port, but most of them are regional or large institutions.

Most community banks “can’t afford the structure Port put in place,” he said.

Still, Laurie Hunsicker, an analyst at Friedman, Billings, Ramsey & Co., called Port’s scheme “typical of a forward-thinking community bank.”

“The point-to-point contact is handled by a bank rep, so the customer doesn’t feel like he’s being outsourced,” Ms. Hunsicker said.

There is nothing flashy about Port, which was founded in 1853. It secures more than 95% of its $823 million-asset loan portfolio with real estate, and when it makes an investment, it tends to keep it. For example, it has held a stake in one of its neighbors, the Cambridge Trust Co., for 60 years.

The way Mr. Pustorino sees it, though, Port’s conservatism is what endears it to its customers and helps explain the success of its wealth management division in one of the most competitive brokerage markets in the country.

“Port is a trusted member of the community,” he said. “If they can invest in a mutual fund or buy a stock through Port, they’ll do it, even if it costs a little more to do it.”