Over the last 30 years, there have been monumental changes to the investment advisory industry in our region. Many great, locally owned firms, like Alex Brown and Mercantile Safe Deposit & Trust, are gone. Others, such as T. Rowe Price and Legg Mason, survived and thrived. Dozens of small money management firms have been created as professionals left larger organizations over the years to start their own. As a result of these movements, the local investment advisory landscape is currently dominated by brokers, Registered Investment Advisors, and banks. RIAs seem to be growing the fastest at the moment, primarily because that business model appeals the most to both clients and practitioners.

The brokerage industry has witnessed mass defections to the RIA model as brokers have struggled with the shrinking compensation levels they have been forced to endure. Most of the compensation to brokers in the past was centered on transaction-based fees and 12b-1 fees from mutual funds. As brokerage firms reduced payouts and attempted to shift clients toward an assetbased fee, many in the industry decided to start their own practice as RIAs. Entire companies were formed to provide platforms for these disenfranchised brokers to start their businesses. The best example of such a company is LPL Financial. Legg Mason saw the trend several years ago and completely exited the brokerage business by selling that division to Smith Barney. The brokerage industry’s changes have been subtle but significant, creating many new options for investors.

The banking industry has also witnessed dramatic changes over this time period. In the early 1980s, a consolidation of smaller community and medium-sized state banks spread across the nation. This consolidation occurred as regulatory statutes prohibiting cross-border banking were relaxed. Today, four huge banks (JP Morgan, Wells Fargo, Citicorp, and Bank of America) control 35% of all domestic banking assets and 37% of all US deposits. Based on the theory that banking services are largely a homogenous commodity, consolidation made sense as a way to save costs and lower fees to customers.

In the merger era of banking, many important factors were overlooked, including banks being “too big to fail,” banks cutting jobs to become leaner, and banks finding new ways to fee their customers. But one factor that is not often discussed is the effect these mergers had on the investment advisory industry. Consolidation of the trust and wealth management services of local banks was difficult. One needs look no further than Maryland to see the effect. Maryland’s five largest banks in 1980 (Maryland National Bank, First National Bank of Maryland, Equitable Trust Company, The Union Trust Company, and Mercantile Safe Deposit & Trust Company) each had established investment services that developed over time as successful banking customers sought to protect their families’ wealth as they retired and died.

Over many decades, these fortunate families turned to their local banks to oversee the orderly generational transfer of their wealth to their children and grandchildren, as well as to pursue an effort to influence and maintain control of their accumulated assets after they were gone. In Maryland, many trust departments served successfully for several generations in protecting and enhancing family fortunes. Often, close personal bonds developed between the trust companies and the many beneficiaries they served. Wealth mangers and trust officers became integral members in the functioning of many wealthy families. Indeed, these families were dependent on and influenced by the fiduciary relationship with their trust company.

But the banking consolidation changed the financial landscape and had a profound effect on these long-standing personal relationships. In the pursuit of financial efficiencies, all five of Maryland’s trust and wealth management departments were effectively scaled down and account relationships were routinely removed to distant regional central offices of the surviving megabanks. These mergers often eliminated or drastically modified personal relationships that spanned several generations. Personal contact, the essential ingredient of a successful relationship, was severely altered by many banks and many dependent beneficiaries were simply cut adrift.

The most pervasive example of this is when a client of an old trust company is transferred from their local office to the regional office that assumed their trust’s management upon the acquisition. This typically occurs when the relationship is considered “too small” or “not significant enough” to keep locally. In a form letter, a relationship of many years is reassigned to new professionals located hundreds of miles away, reachable by an 800 number. Think of a deceased testator who thought he endowed his family for several generations, only for his heirs’ accounts later to be routinely shifted between cities and shuffled among personnel who have no understanding of the specific needs of the individual beneficiary or the desires of the grantor’s generosity. As a final insult, fees for these “enhanced” services were materially increased.

Even worse were the potential or actual threats to investment performance. Many of these trusts that were managed for decades with a particular philosophy were forced into inferior investments that drove down returns. The buying entity typically begins to move the client into their proprietary mutual funds, often selling stocks that have been in the family for years. The claim is made that the benefits of greater diversification will outweigh the taxes incurred by selling the stocks. While this might be true in some cases, most of the time the recommendation is made for no other reason than to make it easier to manage the trusts. It is far easier to manage a trust invested in funds than one invested in individual securities. So, a portfolio manager can manage far more relationships than would normally be the case. Moreover, a lower-level employee can manage portfolios made up of funds, making it much more cost-effective.

The mega-bank consolidation has had a massive affect on the local landscape. Gone are all the local bank trust departments, and huge institutions reign in their place. Gone are most of the personal relationships clients had with their trust personnel. With great size comes efficiency, which generally means central decision-making on investments in far-off places, fewer local investment professionals, and the probability of poorer service. Maryland investors are faced with an evolving landscape. There is an excellent solution here for everyone, to be sure. Regardless of your preferences, the Maryland area is full of world-class investment advisory firms from small to large. As many studies show, most investors do like to deal locally. Maryland investors should look locally first.

—as published in CFA Society Baltimore’s annual Baltimore Business Review