banking on the privately-held business: a sweet spot for the economy

BANKING ON THE PRIVATELY-HELD BUSINESS:A SWEET SPOT FOR THE ECONOMY

by

Edmond M. Ianni

Introduction• As banks look to grow their business in a slowly recovering economy, opportunity awaits -- in the form of market demand. More and more family businesses throughout the United States need comprehensive wealth management services. Local banks, which typically have the primary depository relationships with family business owners, are well-positioned to meet this need. However, banks need to have the right business model – a client-centric, holistic wealth management service model. This article will look at the nature of this rising need of family (privately-held) businesses and will describe the business approach that banks need to follow (and that some already are following) to capture this market.

The Market Context• Let’s briefly look at the macroeconomics. More than 80 percent of U.S. businesses

are family firms, i.e., businesses owned or controlled by a family. Family businesses are a main driver of the U.S. economy, accounting for approximately 60 percent of the country’s employment and approximately 50 percent of U.S. GDP. More than $40 trillion of assets -- much of which are business assets -- are expected to transfer intergenerationally in the next four decades. The continued “recovery” of the U.S. economy and employment depends on the success of family businesses. And, according to a study by McKinsey & Company, “wealth management” was one of five attributes needed for family business success. However, as reported in a PricewaterhouseCoopers Private Banking and Wealth Management Survey, banks need to change their “traditional” banking approach in this space. Hence, family businesses represent an energizing sweet spot for the health of the U.S. economy and the growth of banks’ businesses.

• What has been the traditional banking approach to wealth management? And what is the approach needed today – and demanded by family business clients?

Traditional Wealth Management Banking

• Wealth management services (also called “private banking,” “private client services,” “trust and wealth management” or “family office services”) traditionally have focused on selling products -- loans, credit lines, trusts, investment securities, mutual funds, IRAs, annuities, custodial accounts, depository services and checking accounts. The banker sells a product, based on real or perceived need, to the customer (e.g., the firm’s recommended securities, trust or a mortgage) and then facilitates the execution of that transaction for the customer.

Traditional Wealth Management Banking

• This business model follows the “car dealership” model, which simply means that there are separate silos of sales and service. The person who sells you the car and the person who services the car are two different people in two separate departments of the dealership. Normally, these two individuals do not work with each other when dealing with you and your car. The same is true of the conventional wealth management business. Typically, a business development officer of the bank cultivates a prospect and sells a product, such as a trust or an investment management service, to that soon-to-be customer. The officer then hands off the customer to a trust administrator or portfolio manager to provide the applicable service. After the “account” has been established, the business development officer in this traditional structure usually has little to no further communication with that customer. This traditional banking approach is partly why PricewaterhouseCoopers’ survey reported that “[t]he industry needs to become smarter at understanding what clients really value” and that “clients tell us that they are currently underwhelmed by how they are communicated with by their wealth managers.”

The Successful Wealth Management Service Model

• As the economy slowly recovers, family business owners are demanding more. They want a more substantive and comprehensive approach -- a client-centric, holistic approach to wealth management for the family business and its owners. Some firms, including some traditional trust companies and regional banks, have already made the change.

• I first advocated this unconventional approach -- what I call the “client-axis” model -- over a decade ago. Those banks and other financial institutions that embraced this model saw success, and navigated the headwinds of the Great Recession more successfully than their peers.


• The client-axis model focuses on the client and his or her plenary, changing, business, financial and wealth planning needs. It requires a thorough, active understanding of the client’s business and wealth situation, needs and objectives and an ability to fashion, and adjust over time, appropriate wealth banking solutions in that dynamic relational context.


• This is a comprehensive approach to wealth management. It addresses, for example, the client’s overall financial, business, asset/risk management, estate and tax planning, family, philanthropic and related wealth governance issues. It is client-centric rather than transaction-oriented. It places the client’s interests first – over the desire to simply hawk product. (Recall the adage: The client doesn’t care how much you know until she knows that you care.) It views the client as a person with multi-faceted wealth planning needs rather than a consumer of product. It approaches the wealth management business as a customizable service focused on the client’s particular situation and requirements rather than an enterprise of commoditizable products and transactions.


• There are no separate silos of sales and service in the client-axis firm. Instead, the firm organizes its multidisciplinary wealth management team around the client. First, there is a lead advisor, the client’s primary contact at the beginning – and throughout the business relationship. This person has the talent and experience to serve as the client’s chief financial or wealth advisor. The lead advisor coordinates the multidisciplinary expertise within the bank to (a) understand and analyze the client’s situation, including the family business, (b) develop, recommend and implement appropriate wealth solutions, (c) properly administer and manage the client’s and family business’ accounts, (d) deliver related services and (e) actively stay abreast of changing circumstances and needs. Using this client-axis approach enables banks and other financial institutions to deliver integrated, holistic, interdisciplinary, client-focused solutions – an approach led and managed by an equally client-focused advisor who thoroughly knows the client’s and family business’ wealth management requirements and has earned the client’s trust.


• The client-axis model is intensely knowledge-based: the advisor and fellow experts must know well the client’s situation, the client’s family business and the wealth management tools and strategies that they can customize to meet the client’s needs and objectives. “Product knowledge,” usually sufficient in the traditional bank, is merely a prerequisite for the broader intellectual capital required by the client-axis wealth management firm. Truly listening to the client – rather than selling to him or her – is essential to knowing and effectively serving the client. While knowing the client is essential, thoroughly understanding the full array of available tools in the wealth management toolbox (including, for example, different trusts, asset protection vehicles, enterprise risk management strategies, investment portfolio design, restricted stock and options management, transfer techniques, ethical tax-minimization strategies, investor protective rights, exit strategies and family wealth structures) and how they may be appropriately customized for the client also is part of the DNA of the client-axis bank. (See also the accompanying table for a general comparison of traditional and client-axis wealth management banking.)

Focusing on the Family (Privately-Held) Business

• Some banks already have migrated from the traditional transaction-oriented (or car dealership) model to the client-axis, holistic model – and have weathered the recessionary storm well in the process. This is responsive to what many family businesses and their owners in the United States want. As confirmed by the VIP Forum, wealth management clients value commitment to service, quality advice and objectivity/ethics. In other words, the client views the wealth management banking advisor as much more important than the product (and the product’s performance). Providing open architecture – i.e., objective counsel and choice among proprietary and non-proprietary product – as part of its wealth management offerings can also strengthen a bank’s relationship with its client. (Establishing business alliances with outside best-in-class providers, such as investment or fund managers, may also be a cost-effective arrangement for the bank versus building its own platform – while at the same time serving the open architecture demands of the client.)

Focusing on the Family(Privately-Held) Business

• A separate McKinsey & Company study reported: “For private banks to be successful there must be fundamental change in what advice is offered and how it is delivered by frontline personnel. Put simply, banks need to fundamentally redesign how they serve clients.” This effectively recognizes that the traditional approach to wealth management banking is no longer appropriate in today’s market where family businesses and their owners expect more. Banks need to become more focused on the client and family firm, and relinquish the conventional ways of doing wealth management business, if they want to win new, and expand existing, client relationships – and become a market leader.

The table below generally compares features of the traditional wealth management banking business to those of the holistic client-axis approach. In some areas, the two business

approaches share features; the difference usually lies in emphasis or degree.

Traditional Wealth Management Banking Client-Axis Wealth Management Banking Transaction-oriented Client-focused Product commoditization Service customization Transactional relationship Collaborative, advisory relationship Product transacting Holistic wealth and family business planning Deal-making Problem-solving Product knowledge Comprehensive knowledge of client and family

business and wealth management tools Selling to customer Listening to client Proprietary Open architecture Product development Intellectual capital development Bank’s needs Client’s priorities Sales quantity Advice excellence Silos of sales and service Integrated, interdisciplinary approach

banking on the privately-held business: a sweet spot for the economy

Economy & Finance