Trust profits squeezed: Consider these steps to boost the profitability of your trust service

The last few years have been difficult for the investment community, with financial assets plunging in value, bringing down with them the income earned in managing those investments. Indeed, many marginally profitable trust departments have moved into the red, while profitable trust departments have

There are several key actions to managing a profitable trust department. While not all of these actions will apply to your financial institution, many are considered the basic building blocks of a successful and profitable trust operation.

Know what your profit target is. A study completed several years ago indicated that banks look for trust departments to provide a pre-tax profit margin between 30 percent and 40 percent. Starting out with this sort of goal gives you the necessary discipline to manage in a profitable manner. You also need to understand the components that make up your target and manage those.

Identify your fixed costs and make certain these are being met. There are certain overhead costs that need to be understood in order to know your true profit picture. Occupancy, corporate overhead, core systems, regulatory and risk management are a few of the fixed costs that need to be managed in an effective manner. Remember, just because they are considered to be fixed costs doesn't mean they can't be reduced. Numerous times we have worked with bankers who consider their data processing costs to be fixed only to discover that when they perform a vendor selection these supposedly fixed costs were suddenly reduced - sometimes by as much as 40 percent! By the way, if there is no chance of your covering your fixed costs, you should definitely consider outsourcing as much of the function as you can and unwind your bank from the rest. In short, it's time to exit the business.

Manage your variable costs by evaluating expenses and improving productivity. The brokerage and mortgage businesses are very comfortable with a "feast or famine" staffing scenario. In good times you staff up and in tough times you staff down. This may seem like a hard prescription but in order to remain profitable and therefore viable these are the actions you may need to take. We have worked with many financial institutions that have automated or outsourced certain functions and yet never changed their staffing model to reflect these improvements. Now is the time to reduce your variable costs.

Review your fee structure. Your customers are with you because of who you are and where you are located and not solely because of your prices. It's time to conduct a broad competitive survey and ensure your prices are in the upper quartile as opposed to the lower quartile. It often strikes us as contradictory when trust managers tell us they sell on knowledge and service and yet we see them focus on price. Make certain you explore your fee waivers also.

Understand your niche(s) and explore new ones. One bank we know of has established a profitable asset management service managing farmland for absentee owners. They have de-emphasized the financial asset side of the business to focus on other managed assets. This has given this bank a consistent cash flow mitigating market volatility. Another bank recognized that a major competitor was abandoning the low end of the business and created a low-cost product. Assets for this bank have grown as people who want to work with a trust department have moved their accounts to this bank. The key to this service is knowing what the profit point of the customer is and making this point the hurdle amount.

Make capital investments. This is the time to improve productivity and move toward a paperless office. Additionally, it's time to give Internet access to people to view and even manage their own funds.

Outsource intelligently. External partners, as we all know, are a way of life in the trust and asset management business. There are some new forms of delivery called Application Service Providers. These ASPs will often provide "per unit" service and are especially good for low-volume activities. Also, don't forget to establish service level agreements with all of your providers.

These points, when utilized as part of a plan, will lead you to the right decisions for your area. There are hard choices to be made but these hard choices are the ones that will lead you toward long-term viability. And isn't long-term viability what trust is all about?