After 50 years in business as a community financial institution, Dallas-based Benchmark Bank is breaking into the wealth management business.
The move is symbolic of a growing trend among the nation’s banks. According to a 2014 survey by American Banker, roughly a quarter of U.S. banks are gearing up to offer wealth management services in the next two years.
The onus is a simple one. In an attempt to both grow revenue sources and lever- age the scale of existing client bases, quite naturally banks are seeking a larger slice of the wealth management pie. And that presents a golden opportunity for many advisers to bring their experience to bear and find a new place to call home.
For Benchmark Bank, it has meant forming Benchmark Private Wealth Man- agement, or BPWM for short, in April 2014. BPWM is a wholly owned subsid- iary of the bank and is regulated by the Texas State Securities Board as a registered investment adviser.
“We believe it is a superior model that brings together the reputation, culture and strength of a 50-year-old institution with the cutting-edge, open-architecture and conflict-free format enabled by being an RIA,” says Wayne McCullough, pres- ident and managing partner of BPWM.
McCullough is a sixth-generation Texan and got his start in the advisory profession with A.G. Edwards back in 2000. Over the years, he migrated to other firms, including a stint at Deutsche Bank, and today he holds a CFP designation.
He is joined at BPWM by managing partner Keith Beckman, a CFA with 15 years of experience in financial services.
Benchmark Bank, and community banks in general, put a great deal of stock in the “community” element of their name, building long-term relationships with cli- ents over many years. This familial culture is what led McCullough and Beckman to join forces.
“Our culture is very family oriented, very relationship driven, and, coming from our two backgrounds, we really wanted to have that fiduciary relationship,” says Beckman. “We believe this is the best way for our clients and our bank customers to have an alternative to the traditional brokerage relationship. We have gone to the RIA model where we are a fiduciary to those customers, and we think it is much better suited to the Benchmark Bank’s business model and culture.”
McCullough notes that the Bench- mark model differs from more traditional banking extensions into wealth manage- ment. “Other banks run it somewhat as a trust company — or they have used trust department people to run their wealth management unit, and it hasn’t necessarily translated to true wealth manage- ment,” he says. “Remember that wealth management is very relation driven. That is where we are coming from, and that is the culture of the bank. Really it created a perfect add-on to Benchmark Bank. It is essentially run like a family bank, and that is really what we believe people are turning back to right now.”
“Of anywhere I’ve ever been, this is the most familial, relationship-driven firm I’ve ever been associated with,” notes McCullough. “I’ve banked here since 2000, and it’s not a place where you just bank. I was very good friends with my banker. Clients are welcome to come in and have coffee and read the paper. You actually have a relationship. Once you bank here, you’re never going back to the bulge bracket bank. I loved everything about this place.”
That led to a discussion with Bench- mark Bank chairman and CEO Mike Barnett. One thing led to another, and McCullough was tapped to spearhead the division’s launch.
Beckman was already employed at Benchmark since 2011 and was an ideal partner for McCullough. “Wayne introduced me to Mike Barnett about three years ago, and I came on to do a variety of things for the bank on the investment and M&A side and was a general strength bench player. Then it became apparent that we wanted to offer this to our clients and customers at the bank. Everything came together near the end of 2013, and here we are.”
One of the primary issues to tackle was the potential for cross-selling Benchmark Bank products and services as part of the new wealth management division. The duo purposely structured the new entity so that there are no financial incentives to steer or cross-sell banking products. McCullough and Beckman insist their structure as an RIA prevents that from occurring.
“As a subsidiary, we are not compensated, by design, for sending money into loans into the bank while we are here,” says McCullough. “We wanted to set it up as a really independent platform. So while the bank is here to support us, we aren’t directly compensated for sending a loan over or a banking customer.”
Beckman notes that BPWM does recommend bank loan officers and the mortgage department or title company to clients as needed, “because we think they are really good and hopefully they think the same way for us, but we are not trying to ‘cross- sell’ or anything like that and definitely aren’t getting any compensation from those units for doing that.”
Instead, BPWM is compensated on a fee basis, charging a percentage of client assets under management. It does not sell insurance products, but does offer trust services as a client solution through an independent entity based in Nashville. BPWM custodians its client assets with TD Ameritrade and Schwab.
It would be easy to say that BPWM exists to serve Benchmark’s existing customers, but McCullough and Beckman have a grander plan to grow business above and beyond the bank’s clients, and it is already happening.
“Of our roughly $20 million in assets, maybe 25 percent is from the bank,” says McCullough. “A big goal is to grow this completely independent, so we are capturing brand new customers for the wealth management side. Some of that comes from past relationships. I’ve been in wealth management essentially for 14 years straight with a short stint in pri- vate equity. We are trying to grow this as organically as we can and then be here for the bank customers as well.”
Beckman expects the banking client relationships to grow naturally as BPWM ingrains itself into the culture of the bank. “Our business plan that we presented was a seven-year model, and it is all about grow- ing organically,” he says. “We are not looking to buy another wealth management group and, best of all, we have the time and resources to go do it. We achieved our goals for 2014, and we are uniquely positioned for 2015 because we have barely scratched the surface of tapping into the bank’s cus- tomers and our client base.”
To help them achieve their goals, they have a third team member, associate director and client adviser Rawles Bell, formerly with RBC. “He does everything,” says Beckman. “We are keeping him very busy right now, let’s put it that way. He is wearing about seven different hats and then we are actually in the process of hiring a fourth person, somewhat of an admin/office manager, to help with marketing. We hired a third party to handle our back office support and a third party for our compliance. That is how the world has changed, in that you don’t have to build it all in-house today, and it is probably better that you don’t in a lot of ways.”
The end game for the team is simple yet lofty: Become one of Dallas’ top advisory firms, “If you look at some of the biggest independent RIAs out there, they have some significant assets under manage- ment, and I think we want to be in that category in the Dallas/Fort Worth area and in other parts of Texas such as Austin and others,” says Beckman. “And we have barely scratched the surface.”
McCullough expounds on the local advisory market opportunity. “If you look at our top four competitors, I don’t see any reason we can’t be as large as they are. The RIA space in Texas hasn’t moved as fast as Boston, Chicago, the East Coast and some parts of the West Coast, where they control billions and billions of dollars. We think that there is a shift coming in the South that we would like to be a part of. We have seen it.”
To help achieve their growth strategy, McCullough and Beckman are not pushing cookie-cutter solutions.
“We are not building a model portfolio and then clients just invest in that and there is a performance related to that portfolio,” says Beckman. “We really are building indi- vidual, customized allocations for clients based on their risk tolerances and their investment goals.
We build an investment policy statement, have a risk tolerance questionnaire and from that — and through discussions with the client — build an allocation based on their current portfolio, where they want to get to, how long they have until retirement, and other factors.”
Actual portfolio construction involves allocations to mostly liquid assets, including mutual funds and ETFs, but Beckman says the firm is exploring ways to get into the alternative space to provide greater portfolio diversification.
The key to the process is open architecture, says McCullough. “That is the beauty of an RIA. We can invest, assuming every- body can come to an agreement, with any manager, be it a mutual fund or potentially a direct private equity investment. The beauty of the model is transparency with no conflicts. It’s open architecture. While we are keeping the portfolios pretty straightforward, mainly with mutual funds, ETFs and SMAs, you would be amazed what asset classes you can cover just with those three instruments.”
Given his ingrained entrepreneurial roots, McCullough admits he has always been enamored with alternative investments. “I like the sense of what it adds to the portfolio, and I have always looked at it for myself just because my whole life has been exposed to the equity markets in some form or fashion,” he says. “Having the ability to find something that zigs when the market zags has always interested me. Of course being in Texas, we have to always be very cognizant of what is happening in the oil space or natural resources. But from a portfolio standpoint, essentially every portfolio we look at, while it is customized to the client and their risk tolerance, we generally have some form of alternative, be that a long-short fund, but we have even at this time added real asset funds of some sort, be it precious metals exposure, be it natural resources, be it MLPs. We are defi- nitely interested in the real assets space and the alternative space. We think it plays a big role in all portfolios.”
Beckman is in alignment with the real assets theme. “While some people might be nervous about going into alternatives or those types of strategies, once you define what it is and the benefits to a diversified portfolio that they bring, they get it, and then they start clamoring for more because they understand that it does a lot of things. It may generate yield, for example, in the MLP space. The goal in the portfolio is to have some negative correlations with everything so that you are not moving in lockstep, right? Sometimes you can’t avoid it, but for the most part, if you are putting these alternatives into clients’ diversified portfolios in the long term, they are going to really benefit from that.”
There is also a recognition that real assets are becoming easier for clients to under- stand and embrace. “Real assets becomes an easier explanation than the complex deriv- atives, for example,” says Beckman. “When you describe real assets to people, they get it. Real estate is tangible, they can feel it, touch it, see it. They understand what a particular commercial or land play or whatever it may be generates in income or what it doesn’t generate in income. The same with oil or energy. While there are complexities in there, it boils down to, What are you doing? Are you exploring for things or are you actually pumping things out of the ground? Are you mining for things? I think it becomes easier to explain to peo- ple and they get it, in contrast to the highly engineered products from pre-2008.”
McCullough admits that while the term “hedge fund” is currently out of favor, some form of hedging or alternative is key to today’s client portfolios. “Some kind of alternative in a volatile market is actually really important. Most people wouldn’t think about it that way, but that is the reality.”
Beckman notes that BPWM’s trust solu- tion is also very flexible and lends itself nicely to the real asset category. “The trust company has in-house experts for direct real estate and mineral interests, for example. However, we will not hesitate to recommend even more specialized outside advisers for very complex cases.”
Beckman cites a specific recent example of a $2 million trust with nearly 400 separate mineral interests. “Our trust partner put us in contact with a large mineral manager that actually developed the software package many large bank trust departments use for mineral management,” says Beckman. “This mineral manager would be brought on to manage the direct real asset piece of the trust as well as be integrated into the overall trust management solution that included BPWM as investment manager for liquid assets and the independent trust company as trustee and trust administrator. Again, we create an open, flexible structure that provides superior service for the client’s individual needs.”
THE NEXT DOWNTURN
Education is a top priority for BPWM, as many clients learned hard lessons from the Great Recession.
“You still have a fair amount of people that are in cash or cash alternatives,” says Beckman. “I agree that there is also some short- term memory as well. You can’t just push everything into real estate and oil and gas in certain frothy environments. You need to be patient. There are good entry points and this may be a nice entry point for energy right now and a way to deploy some cash.”
The real challenge for many cash-rich clients is delivering investment returns that are greater than zero. “The bond markets are difficult, definitely with rising rates on the horizon, so we get that question all the time: ‘Where should we put it? Are alternatives the right place to be?’ I think the answer is yes, you just need to be careful about some of your entry points,” notes Beckman.
The frustration to drive returns is palpable. “You can’t really get yield anywhere,” says Beckman. “Interest rates are effectively at zero, so you would like to enter the bond market, but we all know rates will go up at some point so it is really a conundrum. I would say that we are cautiously optimistic of what is going to happen, but we are trying to build bulletproof portfolios to some extent and that is where the alternatives come into play.”