By John R. Muell, Practice Quality Manager
Reprinted from Western Banking, March 2005
Trust services are once again booming. Despite ongoing competition from non-bank entities, community bank trust departments find reasonably priced systems and outsourced solutions allow them to maintain strong positions in the market. In fact, trust departments are becoming a must-have solution for full-service community banks, and these six keys can help achieve optimum performance.
Profitable departments identify key niche markets. Often, community banks find that personal wealth management is the most profitable arena, and profitable departments stay away from employee benefits and commodity services like bond administration and stock transfer. Along with wealth management comes financial planning. Community banks increasingly employ trained financial planners, maintaining wealthy customers while building other customer segments into that wealthy market. In focusing on customers developing wealth, trust departments ensure their own future profitability.
Before establishing trust services, community banks must ensure the market contains enough dollars to support them. One client in the Midwest established its trust powers, only to find that the market would not support its newly established department.
One simple step trust departments can take is to update their systems and materials to be polished and professional. To compete with brokerage and insurance firms, trust departments must communicate that they, too, are technologically and financially sophisticated.
Trust departments should also craft a marketing message that focuses on service. Customers still depend on community banks for personal, customized service. The typical marketing cycle for a trust relationship is 18 months; once established, it can last for 20 to 30 years. Contrast those numbers with the average five-year life of a loan or deposit relationship. Focus on the superior service of the community bank, and stay in front of the market. Foster a sales culture in the trust department, promoting the service, calling on prospects and maintaining relationships with profitable clients. Trust is a multi-generational business; so maintain the relationship not only with the current trustee but also with the trust’s beneficiaries.
Because not all community bank markets command the same quality and quantity of trained, experienced trust managers, outsourcing has become a critical option for many departments. Historically, trust administrators have been seen as paper pushers. Today, however, trust administrators must manage the market, finding and capitalizing on strategic opportunities to bring profitable business into the department. Remember that profitability is not determined by the size of the account alone, but by the revenue generated.
A high-performing trust department will maintain a pretax profit margin between 30 percent and 35 percent and revenue per fulltime employee of about $130,000. Manage costs by challenging the traditional ways of doing business, such as utilizing document imaging and maintaining effective and efficient policies and procedures.
Community bank trust departments manage fee structure in terms of profitability for the bank and comfort level for the customer. The trust department should not sell on price, and competitive intelligence gathered about competitors’ fees will allow all personnel to have informed conversations with customers about the reasoning behind the fee structures. Departments should target a 1 percent fee for assets under administration. Review all fees annually and adjust discounts and waivers as deemed necessary.
Finally, departments should maximize relationships with third- “Trust technology is typically simpler than main bank technology, but the trust department should still strategically manage technology for the highest possible ROI.” party providers to keep overhead low. Many providers offer reasonable solutions that allow departments to offer trust services. When using a third-party provider, however, remember to enforce service level agreements. Although trust revenue may remain a small portion of a bank’s overall gross revenue number, it can maintain its share of the wealth market by profitably managing trust services. These six critical keys can help community banks establish and manage profitable trust departments.