Big Bank Wealth Management vs. Smaller Focused Firms: How To Evaluate What's Best For You

Like many banking sectors, wealth management has been in a battle between the big banks and the boutique firms. But rising interest rates have slowed the market down, and big banks are feeling the crunch. As trust and exclusivity become more important measures for customers, smaller firms are finally having their moment in the sun.

Historically, the practice of wealth management has been lucrative for banks who have depended on the steady income it provides through its traditionally fee-based structure. Banks brought in over $31 billion from fiduciary activities in the first part of 2021, an increase over both 2020 and 2019. At the same time, big banks have expanded their reach, pouring millions into expanding their practices. Major deals have been closed for technology-first firms like E-Trade, as banks try to reach these new investors in more accessible and creative ways. 

For banks, size begets size. Already the custodians of wealthy individuals’ assets, they’ve been able to segue their relationships into lucrative wealth management deals. As the owner of a boutique firm myself, I can tell you first-hand  that they’ve been remarkably successful in keeping customers in-house. Their size, technology stacks, and resilience have slowly edged many smaller players out of the market. 

Until recently. 

Between the high interest rates, inflation, and general tenor of economic uncertainty today, banks’ growth in wealth management has slowed. At the same time, we’re seeing the average wealth management customer profile change. They’re trending younger, more diverse, and more female than they were in years prior, and what they’re looking for in a wealth manager has changed as well. 

What exactly are these new clients looking for? I’ll make an argument that prospective client aspirations  are blowing the winds of change in the direction of boutique-oriented practices. 

Trust

In times of uncertainty, the first thing clients want is to be able to trust the person managing their assets. Everybody has an opinion on how to assess an advisor, but trust is almost always at the top of your list. 

At big banks, more often than not,  clients are handled by fresh-out-of-training advisors looking to grow their networks and profile. The larger banks tend to have advisor turnover rates, making it difficult to build lasting relationships. 

Comparatively, small firms live and die on their reputation. Generally, the number one reason prospective clients are checking our firm out is because we’ve been recommended by someone in their network. We rely on relationships and reputation – things that are hard to get through M&A deals and that can only truly be built through time and experience. 

Personalization

In an era where even our dog food is personalized, clients want to know that their investing portfolio is tailored specifically to their goals. Certainly, any advisor worth their salt is going to ensure that their customers are invested appropriately, but oftentimes there are limitations for advisors at bigger banks. 

Opportunities to invest in alternatives, for instance, like investments in private companies or  fundless sponsor private equity opportunities, can require an enormous amount of due diligence, and the liabilities for the deals can be significant. At bank-owned wealth management firms, getting involved in private deals is practically impossible. Their risk management policies are one size fits all and private deals just don’t fit.

By contrast, smaller firms are often the best positioned to ensure their clients’ access to such deals. As the wealth management space has become more crowded and competitive, the ability to offer these opportunities has become a key differentiator, and is possible because smaller  firms have to know and trust both their clients and bankers. 

The personalization extends into expertise as well. Fundamentally, all worthwhile advisors are going to follow the same basic investing trends; a robo advisor platform is going to be following the same trends that the human advisors are following, both at big and small firms. 

That means advisors who can offer more specific and differentiated recommendations can win new clients. Smaller firms who have developed expertise into more alternative investment types, like collectibles, crypto (not offered by our firm), private deals, real estate, etc. can do things bank-owned firms can’t. 

Value

With volatile markets, fee compression and competition increasing across the industry, wealth managers are being asked to prove their value. 

Most smaller firms have seen this wave coming. Those that didn’t sell out to banks or consolidators spent the last decade investing in and building capabilities to drive client value and competitive capabilities. Smaller firms have beefed up such areas as alternative investments, charitable giving planning, retirement advising, and even loan services as a result. Smaller wealth managers have, out of necessity, morphed into all-encompassing financial problem solvers for their clients.  

That’s an area where bigger banks will struggle to compete. Complex individual interactions and requirements are not “scale-friendly.” 

Obviously this moment isn’t all roses for smaller firms. The huge spikes in the cost of capital mean it’s harder for smaller firms to make new investments in additional capabilities, and firms like ours will also have to battle to stay relevant and competitive for the “digital native” generations coming at us. 

But the trust and personalization offered by smaller investment firms are well-suited for the current client moment and mindset. After years of working to carve a niche in the market, this may be the era when smaller firms finally see the payoff. 

Tom Ruggie is the Founder & CEO of Destiny Family Office, a Florida-based wealth management firm.

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.