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Wealth Management in the Pandemic Can Create Strong Profit Center

October 8, 2020
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The pandemic has not been friendly to financial institutions’ bottom lines, and while some sectors of the economy show improvement, a possible second wave of the virus in the cooler months could worsen financial positions.

But the picture is not entirely bleak. COVID-19 has created an opportunity for banks and credit unions to build a part of their business that may have been something of an afterthought until now: wealth management.

Two-Pronged Danger

Setting aside credit risk for now, financial institutions have seen two large issues of late. According to the Raddon Performance Analytics program, our client institutions saw their deposits increase by an annualized 21 percent from December to June. At the same time, falling rates meant that margins have been falling in tandem as institutions have struggled to cut rates to match the market. Our average transfer-priced deposit margin fell from 1.44 percent in December to 0.93 percent in June.

Simultaneously, non-interest income, fueled by overdraft and interchange income, has seen a strong decline, as well. The average institution has seen its fees from checking fall by $10 per household.

As a result, deposit profitability has fallen dramatically, from an average of $4 million net profit in December to a $1.7 million loss in June. 

This two-pronged attack on institutions’ profitability has reduced the average ROA from 0.86 percent to 0.48 percent and the average household profit from $153 to $96, a 37 percent decline.

An Avenue to Improvement

Wealth management may serve as a possible source of relief. By moving deposit dollars off the balance sheet, institutions can reduce expense and improve ROA. In addition, the non-interest income generated by wealth management services represents a welcome source of revenue.

Many community-based banks and credit unions struggle with investment and wealth management services. The average financial institution using Performance Analytics from Raddon has wealth management in only 2.3 percent of its households.

In my past life, I was senior vice president of Marketing and Member Experience for a $1 billion credit union. Our wealth management users made up 4 percent of our membership base, nearly double the average. For the average financial institution using Performance Analytics, doubling its wealth management program would mean nearly $200 million moving off the balance sheet and an increase of nearly half a million in net revenue.

An Example in Action

I recently had a conversation with an investment services manager at a financial institution who has seen a 25 percent increase in assets under management so far in 2020. Some of the things he  found successful included:

  • Pandemic communication changes – The pandemic forced advisors to meet virtually or in the branch by appointment only. Using a web conferencing service, the institution found those virtual conversations quite valuable. Through September, advisors had already closed three or four deals using this technology. In addition to one-on-one conversations, they hold ongoing webinars on Social Security and Medicare and are planning to add some additional topics this year. They offer these webinars at different times over a three-day period with total attendance around 150 people
  • Not limiting the pool of possible clients – With an uptick in traffic from 401(k) accounts, the institution has been reaching out to a broader demographic. One new client from a low-income neighborhood brought $2 million from his 401(k). In addition, advisors have conversations with clients about saving for college for their kids and grandkids – encouraging them to start saving now
  • Employee referrals – With branch traffic down due to the pandemic, the institution is focusing on higher quality referrals. Staff are trained to listen for keywords – like “layoffs,” “new job” and “death” – and advisors meet with staff and build trust with them. The goal is for staff to be familiar with and able to talk about investment services with all accountholders, not simply the affluent

Of course, in conversations I’ve had with executives, many raise concerns. Moving assets off the balance sheet is great now that the loan-to-deposit ratio is falling, but what happens during the recovery? Many worry that wealth management will dilute their deposit base just when they need it.

Back when I worked at the credit union, we found that, adjusting for demographics, wealth management clients had double the deposits of those who did not use us. In addition, they were more likely to have active checking and lending relationships, especially our signature credit card.

I like to think of investment services as being part of an affluent product segment along with real estate lending and small business services. In each case, you learn so much about that consumer’s or business owner’s assets and liabilities – what is held where. Financial institutions should share that information, where feasible, across all three business lines as referral opportunities.

Wealth management remains a powerful tool for institutions to deepen customer or member relationships while helping to improve financial viability. With more than a quarter of consumers saying they would use their primary financial institution for investment services, only having 2.3 percent penetration suggests a strong opportunity.