By Edmond M. Ianni

1. BANKING ON THE PRIVATELY-HELD
BUSINESS:
A SWEET SPOT FOR THE ECONOMY
by
Edmond M. Ianni

2. Introduction
• As banks look to grow their business in a slowly recovering
economy, opportunity awaits -- in the form of market
demand. More and more family businesses throughout the
United States need comprehensive wealth management
services. Local banks, which typically have the primary
depository relationships with family business owners, are
well-positioned to meet this need. However, banks need
to have the right business model – a client-centric, holistic
wealth management service model. This article will look at
the nature of this rising need of family (privately-held)
businesses and will describe the business approach that
banks need to follow (and that some already are following)
to capture this market.

3. The Market Context
• Let’s briefly look at the macroeconomics. More than 80 percent of U.S. businesses
are family firms, i.e., businesses owned or controlled by a family. Family
businesses are a main driver of the U.S. economy, accounting for approximately 60
percent of the country’s employment and approximately 50 percent of U.S. GDP.
More than $40 trillion of assets -- much of which are business assets -- are
expected to transfer intergenerationally in the next four decades. The continued
“recovery” of the U.S. economy and employment depends on the success of family
businesses. And, according to a study by McKinsey & Company, “wealth
management” was one of five attributes needed for family business success.
However, as reported in a PricewaterhouseCoopers Private Banking and Wealth
Management Survey, banks need to change their “traditional” banking approach in
this space. Hence, family businesses represent an energizing sweet spot for the
health of the U.S. economy and the growth of banks’ businesses.
• What has been the traditional banking approach to wealth management? And
what is the approach needed today – and demanded by family business clients?

4. Traditional Wealth Management
Banking
• Wealth management services (also called “private
banking,” “private client services,” “trust and
wealth management” or “family office services”)
traditionally have focused on selling products --
loans, credit lines, trusts, investment securities,
mutual funds, IRAs, annuities, custodial accounts,
depository services and checking accounts. The
banker sells a product, based on real or perceived
need, to the customer (e.g., the firm’s
recommended securities, trust or a mortgage)
and then facilitates the execution of that
transaction for the customer.

5. Traditional Wealth Management
Banking
• This business model follows the “car dealership” model, which simply
means that there are separate silos of sales and service. The person who
sells you the car and the person who services the car are two different
people in two separate departments of the dealership. Normally, these
two individuals do not work with each other when dealing with you and
your car. The same is true of the conventional wealth management
business. Typically, a business development officer of the bank cultivates
a prospect and sells a product, such as a trust or an investment
management service, to that soon-to-be customer. The officer then hands
off the customer to a trust administrator or portfolio manager to provide
the applicable service. After the “account” has been established, the
business development officer in this traditional structure usually has little
to no further communication with that customer. This traditional banking
approach is partly why PricewaterhouseCoopers’ survey reported that
“[t]he industry needs to become smarter at understanding what clients
really value” and that “clients tell us that they are currently
underwhelmed by how they are communicated with by their wealth
managers.”

6. The Successful Wealth Management
Service Model
• As the economy slowly recovers, family business
owners are demanding more. They want a more
substantive and comprehensive approach -- a client-
centric, holistic approach to wealth management for
the family business and its owners. Some firms,
including some traditional trust companies and
regional banks, have already made the change.
• I first advocated this unconventional approach -- what I
call the “client-axis” model -- over a decade ago. Those
banks and other financial institutions that embraced
this model saw success, and navigated the headwinds
of the Great Recession more successfully than their
peers.

7. The Successful Wealth Management
Service Model
• The client-axis model focuses on the client
and his or her plenary, changing, business,
financial and wealth planning needs. It
requires a thorough, active understanding of
the client’s business and wealth situation,
needs and objectives and an ability to fashion,
and adjust over time, appropriate wealth
banking solutions in that dynamic relational
context.

8. The Successful Wealth Management
Service Model
• This is a comprehensive approach to wealth management.
It addresses, for example, the client’s overall financial,
business, asset/risk management, estate and tax planning,
family, philanthropic and related wealth governance issues.
It is client-centric rather than transaction-oriented. It
places the client’s interests first – over the desire to simply
hawk product. (Recall the adage: The client doesn’t care
how much you know until she knows that you care.) It
views the client as a person with multi-faceted wealth
planning needs rather than a consumer of product. It
approaches the wealth management business as a
customizable service focused on the client’s particular
situation and requirements rather than an enterprise of
commoditizable products and transactions.

9. The Successful Wealth Management
Service Model
• There are no separate silos of sales and service in the client-axis firm.
Instead, the firm organizes its multidisciplinary wealth management team
around the client. First, there is a lead advisor, the client’s primary contact
at the beginning – and throughout the business relationship. This person
has the talent and experience to serve as the client’s chief financial or
wealth advisor. The lead advisor coordinates the multidisciplinary
expertise within the bank to (a) understand and analyze the client’s
situation, including the family business, (b) develop, recommend and
implement appropriate wealth solutions, (c) properly administer and
manage the client’s and family business’ accounts, (d) deliver related
services and (e) actively stay abreast of changing circumstances and
needs. Using this client-axis approach enables banks and other financial
institutions to deliver integrated, holistic, interdisciplinary, client-focused
solutions – an approach led and managed by an equally client-focused
advisor who thoroughly knows the client’s and family business’ wealth
management requirements and has earned the client’s trust.

10. The Successful Wealth Management
Service Model
• The client-axis model is intensely knowledge-based: the advisor and fellow
experts must know well the client’s situation, the client’s family business
and the wealth management tools and strategies that they can customize
to meet the client’s needs and objectives. “Product knowledge,” usually
sufficient in the traditional bank, is merely a prerequisite for the broader
intellectual capital required by the client-axis wealth management firm.
Truly listening to the client – rather than selling to him or her – is essential
to knowing and effectively serving the client. While knowing the client is
essential, thoroughly understanding the full array of available tools in the
wealth management toolbox (including, for example, different trusts,
asset protection vehicles, enterprise risk management strategies,
investment portfolio design, restricted stock and options management,
transfer techniques, ethical tax-minimization strategies, investor
protective rights, exit strategies and family wealth structures) and how
they may be appropriately customized for the client also is part of the DNA
of the client-axis bank. (See also the accompanying table for a general
comparison of traditional and client-axis wealth management banking.)

11. Focusing on the Family
(Privately-Held) Business
• Some banks already have migrated from the traditional transaction-
oriented (or car dealership) model to the client-axis, holistic model – and
have weathered the recessionary storm well in the process. This is
responsive to what many family businesses and their owners in the United
States want. As confirmed by the VIP Forum, wealth management clients
value commitment to service, quality advice and objectivity/ethics. In
other words, the client views the wealth management banking advisor as
much more important than the product (and the product’s performance).
Providing open architecture – i.e., objective counsel and choice among
proprietary and non-proprietary product – as part of its wealth
management offerings can also strengthen a bank’s relationship with its
client. (Establishing business alliances with outside best-in-class
providers, such as investment or fund managers, may also be a cost-
effective arrangement for the bank versus building its own platform –
while at the same time serving the open architecture demands of the
client.)

12. Focusing on the Family
(Privately-Held) Business
• A separate McKinsey & Company study reported: “For
private banks to be successful there must be fundamental
change in what advice is offered and how it is delivered by
frontline personnel. Put simply, banks need to
fundamentally redesign how they serve clients.” This
effectively recognizes that the traditional approach to
wealth management banking is no longer appropriate in
today’s market where family businesses and their owners
expect more. Banks need to become more focused on the
client and family firm, and relinquish the conventional ways
of doing wealth management business, if they want to win
new, and expand existing, client relationships – and
become a market leader.

13. The table below generally compares features of the traditional wealth management banking
business to those of the holistic client-axis approach. In some areas, the two business
approaches share features; the difference usually lies in emphasis or degree.
Traditional Wealth Management Banking Client-Axis Wealth Management Banking
Transaction-oriented Client-focused
Product commoditization Service customization
Transactional relationship Collaborative, advisory relationship
Product transacting Holistic wealth and family business planning
Deal-making Problem-solving
Product knowledge Comprehensive knowledge of client and family
business and wealth management tools
Selling to customer Listening to client
Proprietary Open architecture
Product development Intellectual capital development
Bank’s needs Client’s priorities
Sales quantity Advice excellence
Silos of sales and service Integrated, interdisciplinary approach