One for the Little Guys

By Hannah Wallace August 31, 2004

During the stock market boom of the go-go '90s and up until about five years ago, large national banks were flush with affluent clients and went on a merger binge, buying up smaller local banks and culling smaller investors from their balance sheets.

Saying good bye to the modest investor was a business decision for the big banks. Smaller accounts, whether in a trust or in a bank's investment department, had become prohibitively expensive for larger banks, which had consolidated operations, reduced staff and centralized services in regional headquarters. With those factors in mind, Bank of America, for example, established a cutoff for full-service investment services at $100,000. Many former customers were politely told they could no longer be serviced or were assigned an 800 number out of state.

Many smaller investors, who had hoped their assets would be carefully grown for spouses, children and grandchildren, were upset by the change. Estate planners and certified public accountants were biting their nails. Where could they send people with smaller accounts? Some investors switched to brokerage houses such as those at Merrill Lynch and Raymond James, but for those who preferred the convenience and institutional support of a bank, there were few options. It didn't take long for small community and regional banks-many of which were established because of the big bank mergers-to see an opportunity in these investment cutoff limits. They started offering smaller investors the personalized money management and trust services that keep customers loyal-and the smaller banks a new profit center. They realized that someone with only $300,000 in liquid assets but his or her own growing business could one day be worth much more.

"We realized 10 years ago this nightmare was out there and we went after these small investors," says Steve Mills, senior trust officer at locally owned and operated 1st National Bank & Trust in Manatee. "They were faced with having to call an 800 number to talk to whoever was managing their money," Mills says. And it's still happening, he adds: "We had a woman [with a small portfolio] come in a few weeks ago and her bank said, 'Leave or our fee doubles.'"

Just how much does it take to be a "big" investor if you want to establish a trust, for example? (Unlike a will, a trust is a legal document that transfers assets from one person to a beneficiary prior to death. It avoids messy probate situations, provides tax planning benefits and can set up arrangements for how the money is to be used after death.) Northern Trust Bank prefers at least $1 million in liquid assets before taking on a customer's business. Bessemer Trust, the crème de la crème of the trust industry with $40 billion in assets, won't let you in the door unless you have $10 million in liquidity. In contrast, the smaller, independent 1st National has no cutoff; its average trust account is about $500,000.

Fees for managing money vary. The larger institutions typically charge 1.5 percent per year to manage a $1-million account, or $15,000. The fee drops to 1 percent for larger amounts, and goes to .6 percent as the account climbs into the seven-figure range.

Smaller banks charge considerably less; in some cases it's one-third the cost a large bank would charge. Two small trust departments, who each requested anonymity, say their minimum trust fees are $2,600 and $3,500 a year.

Mills says 1st National has taken its trust business from zero to $101 million since 1995. 1st National can make money on smaller accounts because it doesn't need the levels of management large banks have. "We're the small boat and the big bank is like a battleship," he says. "When we make a decision to turn in a particular direction, we can do it quickly. The big bank takes a long time to turn; and if management doesn't like the direction, it takes a long time to turn the other way."

Kelly Caldwell, president of Caldwell Trust Company of Sarasota, Venice and Punta Gorda started his firm with his father in 1993 as a direct response to bank mergers and the minimum investments big banks imposed. Caldwell Trust charges .75 percent annually to manage a client's money and .89 percent for a trust account (that works out to $7,500 for managing $1 million and $8,900 for managing a $1 million trust account) and still performs the personal services larger institutions are known for because it doesn't have the huge overhead of big banks. "I have picked out the color of a car for a client because she wanted me to," Caldwell says. "This is a woman who had never bought a new car because her husband did it for her when he was alive. We've taken on three cats and found them a home when there was no one else to take them. We help our clients. We want to help them."

And that kind of service has paid off. Caldwell Trust is closing in on $300 million in assets, with its average investment about $1 million.

But some legal and financial professionals say big national banks aren't necessarily being the bad guy. There's a business reason larger banks direct their customers to an 800 number-to operate efficiently for both the investor and the bank. Tami Conetta, attorney and partner with Ruden McClosky in Sarasota, counsels both beneficiaries and trustees in trust administration issues. For large banks, she says, it isn't an issue of whether they do or do not want to manage an account of less than $1 million. "It becomes inefficient for you and for them to manage your money," Conetta says. "For $1 million, 1 and 1/4 to 1 and 1/2 percent is the typical charge for managing a trust account."

From a client's perspective, it's not necessarily a bad thing to be lumped with others because you have a piece of a broader, more diverse portfolio, Conetta says. Ultimately it's a question of efficiency and whether the bank and the client can make a profit. Like any deal, an agreement between bank and customer has to be mutually beneficial.

Conetta says banks will consider a potential client's length of time with the bank and other ancillary relationships such as deposit and loan history.

"The larger your account, the more attention it will get and require," she says. "Eighty percent of the accounts make 20 percent of the money, while 20 percent make 80 percent of the money and require more attention. Every account relationship is different and requires different levels of attention."

Brett Rees, senior vice president of Northern Trust in Sarasota, says although Northern Trust established a $1-million liquidity minimum in the late 1980s, it has never ruled out providing service to accounts of less than $1 million. But a fee of 1.2 percent can reduce the income and even eat away the principal for clients with less than $1 million. "We established our $1-million minimum because we don't believe in using a lot of mutual funds for our investors," Rees says. "We did it because of our style of investing and building customized portfolios for our clients. The right way to manage money at a lower dollar amount is through mutual funds, where you can diversify through a number of different issues instead of buying individual issues such as Microsoft or IBM."

Bank of America, the largest bank in the area, typically suggests that individuals with less than $250,000 be their own trustees, opening a brokerage relationship and allowing the investment portion of the trust to be handled by a professional within the investment services portion of the bank. In many cases, larger trusts are more complex, with some involving family limited partnerships or foundations, which require a higher level of skills by trust officers and bankers.

Clearly, says John Berteau, a Florida Bar-certified attorney in wills, trusts and estates with Williams Parker Harrison Dietz & Getzen in Sarasota, small and large investors need-and receive-different levels of service. "There is a two-tier marketing system," he says. "One to high-end people and another to a broader base. It's like this: Some people drive a Chevy and some drive a Cadillac."

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