How Banks Court Rich Customers By AnnaMaria Andriotis, MarketWatch
Wealthy customers offered special rates on savings and mortgages
Managing wealthy people’s cash is paying off for banks.
Wealth-management and private-banking groups delivered a much-needed boost to banks’ earnings reports this week. Bank of America’s global wealth-and investment-management group brought in record net profits of $777 million in the fourth quarter of 2013, up 35% from the same period a year ago.
Wells Fargo’s wealth, brokerage and retirement division registered net income of $491 million during the fourth quarter, up 40% from a year prior.
In some cases, these groups account for a large chunk of the banks’ overall earnings. At J.P. Morgan Chase, private banking accounted for just over half of the bank’s total net revenue for the fourth quarter.
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Meanwhile, Chase opened 931 private banking locations last year, bringing the grand total to nearly 2,150.
Large banks have been ramping up efforts to expand their wealth-management groups over the past couple of years. Aside from rolling out marketing campaigns for new clients, they’ve been combing through regular deposit accounts, brokerage accounts and outstanding loans, looking for existing customers who have enough assets to qualify for their wealth-management services.
There have been several bright spots for savers. To lure them in, banks have been offering special deals, including higher rates on deposit accounts and lower rates on loans than regular bank customers receive.
The push comes as banks continue their search for new sources of revenue. Mortgage lending is still way below the pre-bust levels: Mortgage originations for 2013 are expected to total $1.85 trillion, compared with $2.98 trillion in 2006, according to trade publication Inside Mortgage Finance.
Also hurting revenue is that interest rates on loans remain relatively low. Separately, many consumers are still reeling from the recession — about a quarter have a FICO score that’s below 600 — which makes them ineligible for most bank loans.
Wealth-management clients, in contrast, tend to be individuals who are low-risk and who emerged from the downturn relatively unscathed. It’s a low-cost, high-return model for banks: The most expensive line item in these groups is the salary for the advisers they hire, says Maryann Johnson, a senior vice president at the American Bankers Association.
Wealth-management clients offer several streams of revenues to banks, including management fees for overseeing their funds and investment transactions, as well as fees derived from mortgages and other loans they sign up for. “The profit margins are very significant,” says Johnson.
In other words, these services aren’t free for customers. They’ll also need to stash large sums of cash — hundreds of thousands of dollars, if not more — to gain access.
But once they’re in, they encounter crucial cost savings that are not available to the average Joe.
Higher payout rates on deposit accounts: Banks publish the rates they pay out on deposit accounts in a list that’s publicly available to customers. But many banks also have unpublished savings rates geared toward their wealthy clients, says Dan Geller, executive vice president at MarketRatesInsights.com, which tracks deposit accounts and other bank products.
Those rates are often a quarter to three quarters of a percentage point higher, with the highest rates reserved for those with the largest dollar amount and who are locking that cash into long-term certificates of deposit.
Banks favor CDs because they hold funds they can depend on to lend against. Cash in a five-year CD, for instance, is much less likely to be withdrawn before that period of time than money kept in a savings or checking account. Of course, savers face risks with CDs, specifically that savings rates will pick up while they’re locked into a CD with today’s rates.
Lower mortgage rates: When wealth management customers sign up for a mortgage, it’s typically a jumbo loan — one that exceeds $417,000 in most parts of the country or $625,500 in pricier markets like New York and San Francisco. For decades, these loans had higher rates than smaller loans — but that changed about six months ago.
Because most banks hold these loans on their books, they’re free to price them as they like. That involves tacking on several percentage points to the rates they’re paying out on deposit accounts.
To encourage more affluent borrowers to sign up for financing, banks have lowered rates on some jumbo mortgages — so that it is now cheaper to get an adjustable-rate jumbo mortgage than a smaller-sized ARM.
The average rate on a 5/1 jumbo (where the rate is fixed for the first five years before adjusting annually) was 3.14% for the week ended Jan. 10, according to mortgage-info website HSH.com. The nonjumbo or “conforming” 5/1 ARM had an average rate of 3.31%