Small banks eye adviser alliances

Good things come in small packages.

At least that’s the philosophy community banks and financial planners across the country are adopting as they join forces to offer the same one-stop-shopping services as their bigger competitors.

Over the last 12 months or so, four small banks in Connecticut, New Jersey and New York have taken varying levels of equity stakes in small money management or financial adviser firms.

And more deals are inevitable in other parts of the country, if they aren’t happening already, experts say.

Advisers and banks are trying to exploit their relationships with rich investors in a given community before companies like Citigroup and Merrill Lynch & Co. Inc. get their one-stop-shopping models in full gear.

With the recent repeal of Depression-era banking laws, banks, securities firms and insurance companies can now offer each other’s services.

“The opportunity to capture wealth among small banks’ client base is huge, especially if the banks are dealing with owners of closely held businesses,” says Mark Tibergien, a principal with consultancy Moss-Adams LLP in Seattle.

“Community banks have a local orientation and a consistency in their relationships, vs. large regional and national banks where there is less of a relationship.”

The move comes as banks — large and small — seek to diversify their revenue streams and generate more predictable fee income. And for most banks, money management and advisory services represent a faster-growing, more-profitable alternative.

“Small banks with trust powers are asking how they can be like the U.S. Trusts, Bessemer Trusts and Northern Trusts,” says Andrew Advisers

Goodwin, vice chairman of Optimum Group LLC, a Chicago holding company of advisers to the wealthy.

“They don’t have the professional portfolio managers or financial planners who know how to gather assets. The reason they are interested in buying up these folks is to get the asset-gathering competency.”

For advisers, the deals are a mix of succession planning and opportunities for growth. “It boils down to collectively we can be better than we are individually,” says Michael Stewart, principal of Preferred Planning Concepts Inc., which completed its sale to Utica, N.Y., neighbor Adirondack Bank NA last month.

“It’s about getting more of the consumer’s wallet — that’s no different than Smith Barney and Citibank,” adds Mr. Stewart, whose firm oversees $50 million.

The biggest carrots for advisers: access to bank customers, operations support and working capital for funding growth.

Of course, just as it’s too soon to know whether integrated one-stop-shopping models, epitomized by Citicorp’s 1998 merger with Travelers Group, will deliver on promised benefits, smaller-scale marriages between community banks and advisers also face uncertainties.

Chief among the risks are cultural issues ranging from executive pay to how managers call on and serve clients.

“Most people in the financial planning business who have merged with banks make a whole lot more than the bank president,” says Mr. Tibergien. “The economics, rewards and objectives are different.”

Bankers and advisers are hooking up in different ways. Some banks take large stakes but keep hands off. At others, financial advisers call on commercial lending customers and refer clients to lending officers.

All-out mergers produce the greatest challenges. “These relationships have to be treated with a certain degree of sensitivity,” says David Berry, director of research at Keefe Bruyette & Woods Inc. in New York.

“If you try to make (investment) people subject to the entire management structure of a traditional bank, you’re probably not going to hang on to them,” he adds.

Some combinations have begun as investments coupled with customer referral agreements. In June, Richmond County Savings Bank Inc., a New York City thrift with $2.8 billion in assets, purchased a 47% stake in New York investment manager Peter B. Cannell & Co.

“There is no attempt to make us intertwined with their operation,” says chairman Peter Cannell, whose firm has $500 million under management. Aside from banking customer referrals, “the extent of our relationship is their Christmas party.”

One of the most ambitious efforts among small banks involves Wayne, N.J.-based Valley National Bancorp’s June purchase of New Century Asset Management LLC, a $125 million advisory firm in Cedar Knolls.

The bank plans to use New Century as a platform to acquire other fee-based advisers in New Jersey, New York, Connecticut and eastern Pennsylvania. New Century chief executive Robert Kleiber hopes to add $3 billion to $4 billion in new assets through acquisitions over the next five years.

In addition, the venture expects to attract up to $2 billion in advisory business from the bank’s 550,000 customers, says Valley National president and CEO Gerald Lipkin.

“We have a customer base that would like to avail themselves of those services,” says Mr. Lipkin. “We can now channel that interest over to the asset management department.”

To accomplish this, Mr. Kleiber is dusting off a program he oversaw at New Jersey’s Midlantic National Bank in the early 1990s, before leaving to start New Century. That effort attracted $2 billion in assets through marketing programs in which lending officers introduced the asset management group to the bank’s biggest clients.

good idea recycled

“We’re going to do the same things here through Valley National’s 45 lending officers and 120 branches,” says Mr. Kleiber.

Though Valley National and New Century have set ambitious goals, there is some early evidence that smaller bank-adviser alliances can work — under the right circumstances.

“One of the things that some banks are learning, in part to their chagrin, is they have to be judicious in how they integrate their acquisitions,” says Charles Moore, president of the Banc Funds Co., a Chicago private equity firm that holds stakes worth $700 million in 100 banks.

It’s been a year since Essex (Conn.) Savings Bank bought a 60% stake in adviser John Rafal & Associates. The firm, which supervises more than $900 million, has attracted $75 million in new business, one-third through referrals from Essex. Meanwhile, the adviser has referred $3 million in mortgages to the $140 million-asset bank.

Still, there have been bumps. When Mr. Rafal sent a client to the bank for a $600,000 vacation home mortgage, the bank took 60 days to act on the application. Loan approval decisions are now made in seven days. “We’ve done very well in our first year,” says Mr. Rafal, “but we have a long way to go.”