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Wealth manager defections sting small and midsize banks

Employee defections can leave a sting that lasts a long time.

Washington Trust Bancorp in Westerly, Rhode Island, knows this all too well after losing two senior wealth management advisers in June to what Chairman and CEO Ned Handy would only describe as "a large wirehouse" firm. Since then, the $5.2 billion-asset company has lost more than $550 million in client assets, which it estimates could cost it $3 million in annual revenue.

While departures are a common occurrence in banking, Washington Trust's disclosures highlight the financial impact in a way outsiders rarely see. Such hits to fee income could take on greater importance as banks struggle to make more money off loans due to lower interest rates and tighter margins.

Washington Trust isn't alone.

First Republic Bank in San Francisco also disclosed in June that it lost a 50-person team with $17 billion of client assets under management. The team left to start their own firm.

A team in Texas left Morgan Stanley in April to found Americana Partners in Houston. A month later, four UBS Financial Services advisers departed to form Great Diamond Partners in Portland, Maine.

“There seems to be more of this churn now than there was in the last five years,” said Mark Gim, Washington Trust's president and chief operating officer.

A desire by many advisors to provide independent advice lies at the core of the fluidity within wealth management, said Nalika Nanayakkara, U.S. advisory leader for wealth and asset management at EY.

“There’s been significant movement to independent advisors the past few years,” Nanayakkara said. “If you have your own shingle, you’re the boss. A lot of the people attracted to the wealth management industry tend to be entrepreneurial.”

In the past, banks active in wealth management had some insulation from the back-and-forth movement of advisors and clients, largely because of their ability to supplement money-management offerings with commercial loans, mortgages and deposit products.

But nonbanks have been chipping away at that advantage.

The protective layer appears to be fraying further, as wealth accumulates and competition for clients and advisers becomes increasingly fierce. Nearly a third of wealth management clients that participated in a recent EY survey said they plan to switch providers in the next three years, with many pointing to the fees they pay.

Independent advisers are free to determine their fee structures, along with how they manage clients.

“The move to the independent space has been happening for all the right reasons,” Nanayakkara said.

The continuing accumulation of wealth during the recent economic expansion, combined with the return of lower rates, has spurred more interest in wealth management, Gim said.

“The economy has been growing for the past 10 to 15 years,” Gim said. “We appear to be coming to the high point of a long recovery. Wealth management has become more attractive to banks and nonbanks.”

Even insurers are showing an interest, Nanayakkara said.

Despite the defections, Washington Trust still has $6.1 billion in assets under management. And it remains fully committed to the business.

The company will look to expand "at a deliberate pace" through organic growth or acquisitions, Gim said.

Washington Trust is pressing ahead with a private client initiative it launched in January. Indeed, in July it expanded its private client team, hiring veteran adviser Alexander Olson from M&T Bank’s Wilmington Trust unit. The team’s mission is to make sure clients receive holistic service from the bank.

Clients can no longer receive tax-free mass transit passes and parking allowances through their employers under the new law.

“Banks should hold a lot of cards when serving clients,” Gim said. “We think there’s value in being a provider with depth.”

Despite the shift to independent advisers, there’s still plenty of room for regional institutions, and even small community banks, to leverage the trust and respect they’ve developed in local communities to capture wealth management market share — if they're willing to look a beyond the mass-affluent and high-net-worth clients, Nanayakkara said.

"The unadvised population in the U.S. is pretty high," she said.

Jeremy Callais, president and CEO at the $305 million-asset MC Bank & Trust in Morgan City, Louisiana, said he is starting to see Nanayakkara's view play out.

“As the baby boomers are retiring, their children are coming into a fair amount of money,” Callais said.

“What their parents did and the structure of that is not really appealing to them,” Callais added. “Wealth management is something we’re actively looking at. We’re seeing a need for it in all of our markets.”

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