Trust, Securities, Insurance Pros Must Learn To Work Cheek by

By Heywood Sloane

Understanding the complexity of securities, insurance and trust professionals working together requires taking a step back as well as taking some steps forward.

We will look at this convergent process, using the banking industry as an example. Particular focus will be on how banks are integrating trust services with other financial services.

As will be seen, bringing the financial disciplines together requires teaming. This has definite benefits, but making it come about is not always easy, since people from different disciplines must now learn to work cheek by .

The onslaught of consolidation flowing from the legalization of interstate banking in the 1980s created the vacuum that enabled traditional securities and insurance professionals to enter the trust business in the 1990s and up to the present.

As banks consolidated, they necessarily took out local banks and trust companies. Trust services, specifically personal trust services, are, as one would expect, highly personal. With consolidation, banks opted for economies of scale that also created diseconomies and dislocations in local markets where personal relationships and continuity are key.

These same economies of scale enabled banks to push into non-traditional businesses to fuel continued growth and build up fee income. It is this push that is bringing the process full circle. Banks have acquired securities firms and hired seasoned investment personnel.

These same depository institutions often have insurance agencies and are well along the way to integrating banking, securities, insurance and trust in “personal banking” or “wealth management” initiatives. However, this is happening on a far different scale than what happened in the Trust Division or Private Banker initiatives of two decades ago. Smaller institutions are, understandably, developing competitive responses.

The parent firms culture–and the relationship of the trust operation to the parents objectives–is a key (if not the key) determinant of an institutions choice of business model. Consider:

In the securities world, growing wealth–as much and as fast as clients tolerance for volatility or losses will bear– is often a defining objective. For independent firms, the financial plan is often the central, differentiating factor. In the insurance industry, the focus is on finding, defining, and containing or mitigating risks.

Each orientation is strikingly different from that of trust services. Trust services are about providing an independent fiduciary to prudently invest, preserve and protect the wealth and interests of a client, and often of their family.

In our work, we have come across three basic models that institutions employ to offer these divergent financial services to their clients. These are: the Competitive Model, the Shared Resource Model and the Team Model.

This article will discuss each model in the bank context, but similar hurdles are present when trust services are integrated into non-bank firms as well.

Competitive Model. This model is simple and quick to implement. Integration occurs at the holding company level in its financials and rarely before that.

In essence, the business lines remain independent and operate in their own silos within the boundaries of the institution. They share a brand and a logo but often little else. The trust administration, legal advice, investment management, operations, sales and service all operate in a self-contained profit center with its own profit and loss measures.

In this environment, teams come together across the organization, but typically this occurs under duress. For example, the teaming occurs when one business line perceives a significant need (for referrals, operating economies, etc.). The professionals involved believe that they can demonstrate to an internal competitor that the solution is in the competitors substantial, direct and near-term interest as well.

An irony is that it is often easier to form teams with outsourced partners in this environment. This removes the political hurdle of demonstrating that the initiative “wont undercut” another internal business. Also removed, however, are potential synergies, incremental profitability and unified client support.

A management device sometimes used in this model is to draw a line based on the size of the account or investment. This often leads to undesired or unexpected results. Examples include understating or isolating assets or investments to keep the total account value under the ceiling that requires prospects to go to the trust area.

If the ceiling is set too low and if the securities and/or insurance sales team is a highly effective one, the referrals could overwhelm the trust area.

Teams that form in this model are held together by the mutual trust and communication between the individuals involved, despite the institutional structures they find themselves in.

In very small institutions, this “portfolio of internal competitors approach” may work. That is because it is easier for professionals in such institutions to get to know and trust one another.

The approach may also work in very large institutions formed by the merger of very large securities, insurance, banking and financial service firms. Here, each business line likely has its own economies of scale and would in fact suffer diseconomies of scale if it were to integrate further.

Shared Resource Model. This model represents a step up in sophistication. Here, the various interests recognize that the whole is greater than the sum of the parts. However, the organization tends to have too much embedded inertia or too many vested interests to risk fully integrating.

Those employing this model recognize that silos are no longer useful and that change entails risk. So, although the trust area retains its own P&L and management structure, allocations of revenues and/or expenses do occur between the trust area and other areas of the institution.

Often the trust area establishes working relationships with other distribution channels within the institution. There may be independent arrangements, for example, with the retail bank, the commercial bank, the banks investment program or broker-dealer, the banks insurance program or agency, and the banks proprietary mutual fund distributor.

These other channels generally are viewed as referral sources. To work effectively in an institution of size, the trust area may use internal wholesalers to make the referral and communication process an easy one.

While this model recognizes and rewards working across business lines, it does not ensure that the rewards are sufficient to attract the desired result. If the reward is insufficient, the wholesaling effort is wasted. Alternatively, the effort may be highly effective, but because the multiple distribution channels ultimately share a common customer base, there may be channel conflict–with the client often caught or confused in the middle.

The Team Model. This approach frequently requires substantial reorganization of the firm, generally around the customers interests and convenience. The P&Ls of numerous business units can change significantly.

One, but not the only model, separates the trust sales and marketing functions from the investment management, trust administration and operations functions (i.e., separates distribution from manufacturing).

Then, after separating trust into its component functions, this model integrates trust sales and marketing with related sales and client service personnel. These personnel may include experts from securities, insurance, and the retail and commercial bank. The goal is to create client-centric teams where all have a shared and vested interest in the interests, growth and retention of the client.

In this model, there is an agreed need and a methodology for teams to come together across the organization. It addresses “undercutting” and “channel conflict” but by itself is not sufficient. The process is disruptive. It entails changes in account relationships and responsibilities.

To function well, individuals across the institution have to understand their responsibilities for the redefined functions and realigned client relationships.

The task can be daunting. Consider, for example, the case of a securities salesperson who is charged with selling trust services. This rep may end up using the Trust Divisions trust administrator and drawing on the Investment Management Divisions portfolio manager, who is also managing a proprietary fund (commingled or mutual). Furthermore, the rep may also be liaising with the retail branch manager who works with the president of a company, which, in turn, has a commercial loan relationship.

The same holds true for the people involved in trust, insurance, retail and commercial sales and in the marketing aspects of the client relationship. The individual must maintain multiple communications and relationships, with each person functioning as a team player and specialist at the same time.

Successful teams in this model are motivated by adequate compensation. Further, they have managements that simplify the interactions between the various responsible parties.

One tactic some firms employ is to use a gatekeeper or quarterback to facilitate the flow of information and solutions. But even this approach has its difficulties.

For example, the presence of a gatekeeper means there may be redundancy plus additional expense associated with the extra layer of talent. Also, the organization may have difficulty finding qualified people who understand the clients needs and know what trust, securities, or insurance product or service will actually be the best fit. The span of knowledge for a quarterback in this model is considerable.

The payback of using teams can be considerable, however. It may well provide financial institutions with the road back to a “close to the client presence” that some institutions lost in the drive for economies of scale in the 1990s.

J. Heywood E. Sloane is principal of Diversified Services Group and executive director of Bank Securities Association, both of Wayne, Pa. His e-mail is: Heywoods@dsg-candr.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, May 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.