As we all know, community banks face many challenges when competing with mega-banks, but they must and do find ways to not just level the playing field but define it and win. One major challenge has been to find a professional yet cost-effective way to serve the needs of the high net worth client, which every community bank has. The fact that a bank may be relatively small or located in a small community has no bearing on the trust or investment needs of its best and highest net worth customers.
Historically, many community banks have met this challenge by going through the relatively simple process of applying for trust powers from their regulatory body and then developing from whole cloth an in-house trust and investment department. This process is somewhat akin to the ease with which a rodeo bull rider can mount a bull in the pen; the real challenge only fully presents itself when the gate opens.
For most of these banks the decision to enter the arena in this way had no more to do with making a profit than did maintaining safety deposit boxes. Bankers just provided the service and let other areas of the bank offset this “profit” center. The problem that these banks confronted was the significant liability that they were exposed to, which was always great but has exponentially escalated in recent years due to the complexity of the financial markets, the tax code and the discretion necessary to administer complex estate plans. All of which is encapsulated in the requirement of the bank to act as a fiduciary, a term that Justice Benjamin Cardozo described as one embodying, “not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”
To prudently establish a trust department, which may now euphemistically be referred to as a wealth management center, requires certain basic components. A bank must be willing to hire or train personnel who have knowledge and expertise in trust operations, investments and administration as well as trust, estate and investment planning.
The trust operations staff must be familiar with the custody and transfer of securities, capital changes and have a detailed understanding of fiduciary accounting and income taxation. Administrators must be able to interpret sophisticated estate planning documents and use discretion in administering them on behalf of all current and remainder beneficiaries all the while carrying out the original intent of the person who established the trust, the grantor, many times without the benefit of having ever known or even met them.
Investment officers must have in-depth knowledge of the Prudent Investor Act, as well as real world knowledge of the financial markets and global economy — factors that impact every decision they make for beneficiaries regardless of where they live. Trust and investment planning officers must be able to not just generate new business, but have enough of an overview of the entire process to be able to discern what particular plan would be most beneficial to the client and also be capable of implementation by their staff.
Like officers in other areas of the bank, those who carry out the trust and investment functions must also work within the strict regulatory and legal environment that surrounds them. They must know not just the Prudent Investor Act, but also Uniform Trust Code and the Principal and Income Act, and have a working knowledge of the state and federal income and estate tax laws as well.
When confronted with these challenges, it is difficult for any individual community bank to effectively compete, while at the same time provide the level of sophistication that their best customers need and rely on to be provided in-house. This has led some banks to simply refer all of these high net worth customers to their competitors or let the customers make the selection of a fiduciary or investment manager on their own. Neither option is good for the community bank or its best customers. Competitor banks and other providers rarely stop at the door of providing trust and investment services but quickly want the entire banking relationship of these most desirable customers.
One solution is to partner with an independent trust company, which by definition has the necessary fiduciary authority to act in the best interests of the bank’s customers, but will not compete with the referring bank for the loans and deposits of these customers because it is not a depository like a commercial bank with general banking powers.
One such provider is Trust Company of the Ozarks in Springfield, Mo. This company was established in 1998 by a group of experienced trust and investment professionals who partnered with 20 community banks and local investors to capitalize an independent trust company. Today, Trust Company of the Ozarks manages more than $600 million of assets and works with approximately 50 community banks throughout the state of Missouri to provide trust and investment management services to those banks’ best customers. In essence, it acts as the “trust department” of these community banks.
This partnership with community banks allows them to offer the same level of sophisticated trust and investment management services as their mega-bank counterparts without incurring the cost or liability of providing these same services in house. All the bankers have to do is focus on the best interests of those customers who need this level of service and make a referral to their “trust department,” in this case Trust Company of the Ozarks. Once the referral is made a trust and investment planning officer meets with the customer and together they determine what course of action is in that customer’s best interest.
If a trust or investment management relationship makes sense, then the client is introduced to the administrative officer and investment officer who, working as a team, will be responsible for carrying out that client’s estate, investment plan or both. A portion of the fees collected by Trust Company of the Ozarks is shared by written agreement with the referring community bank as an incentive for future referrals as well as in recognition of the time and effort the bank has expended in developing the long-term relationship with that customer.
By using their entrepreneurial ability and intelligently partnering with some of their like-minded competitors, community banks can capitalize on the trust that they have built up over the years with their best customers and deliver a solution to those customers’ legitimate concerns over the long-term investment, management and distribution of their wealth.
Jay D. Burchfield is chairman of the board and Dwight E. Rahmeyer is CEO and senior trust counsel of Trust Company of the Ozarks, Springfield, Mo.
Copyright © March 2011 BankNews Media