What's Wrong With Bank Brokerage?
SuperUser Account posted on September 01, 2010
While bank brokerage certainly has found a solid footing in the investment industry over the past 10 years, its advisors still lag their wirehouse cousins in production, something that shouldn't be the case, considering banks' much-touted referral stream, argues Rick Rummage, CEO of recruiting firm The Rummage Group in Reston, Va.
Rummage says wirehouse advisors produce $600,000 on average. Kehrer-LIMRA figures for the bank channel, meanwhile, put average production at a relatively skimpy $200,000, something the recruiter blames on banks for failing to run investment programs properly. "Banks have millions of dollars of potential business just begging to be won," he says. "If banks could just change a few things, they could have the happiest, most successful advisors in the industry."
Among the problems that could be fixed, says Rummage, is putting bankers in charge of a business they don't understand, tinkering with payouts (especially when banks think advisors are earning too much, effectively punishing stellar performance), changing advisors' territories and being stingy with payouts in general.
"Advisors are profit centers," Rummage says. "They should be paid fully on all products and services that they sell." Instead, many banks reduce commissions on products or don't pay advisors for transactions on smaller accounts.
While none of them want to be publicly identified, several current and former program managers agree. One who works at a "sizable regional bank" in the Northeast says, "The bank would put investment goals in place, take them away, put them back again-there wasn't much continuity."
Another, a former program manager turned independent as a result of his frustration, says he saw problems repeatedly at numerous banks when a bank manager was in charge of brokerage. "They don't understand the dynamics," he says. "Micromanagement is the mold in a bank and they do it to a broker who's already overseen by FINRA. They focus on things that don't make money by going overboard on compliance and operations." Sometimes it's more practical matters, he adds. "I don't need someone telling me I need to be somewhere at 8 a.m. for a branch meeting or that the doors will be locked at 6 p.m., so I can't use my computer or my phone after that."
Running brokerage as if it were just another bank department doesn't work in a sales operation, agrees a former Washington, D.C.-area manager, who is now independent. "They wanted to treat their brokers like employees rather than associates, so if they didn't reach their numbers, I had to yell at them. Sales managers most times are there to help people get to goals, especially in a downturn. Instead I was there to crack the whip and it was really tough."
Then there's greed. "Banks always want to make more money from the investment program, so every year grids get reduced and payouts get cut," says one Florida manager. "I'm not in the bank channel anymore because 80% or 90% of brokers won't crack $150,000, whereas in the real world they'd be earning $400,000."
Banks need to set a payout scale for everyone and then keep it like it is, unless they want to incentivize a new product, such as fees, says a Southeast corridor manager. "One bank I was at changed the scale six times while I was there. Most brokers are thinking about how to make more money today. At the top of the grid, just 1% or 2% in payout makes a difference."
Banks sometimes set unreasonable goals, which can turn into a costly mistake. "The market was down, but the bank didn't want to decrease advisors' goals," the D.C. manager says. "They should have worked with us to set realistic goals so that advisors could do the right thing instead of fearing for their jobs. This hurt the bank, so they'd just stop giving us referrals. We had a lot of turnover because reps got burnt out."
Banks also skimp on recruiting top-tier brokers, says the D.C. manager. "In a few cases, I had million-dollar producers who wanted to come work for us, but the bank didn't want to pay the recruiter's fee. It wasn't even the money, but the belief that a recruiter wasn't necessary."
"You need to use a recruiter to find top-quality brokers," says another former program manager. "We were in competition with Wachovia, which was offering upfront payments and forgivable loans. You need to spend the money to get good people."
Banks' abiding problem, the Northeast manager adds, is that they can't see the link between selling investments and growing bank revenues, although he's recently heard from former colleagues that the bank has more respect for its investment unit now that brokerage is picking up some slack from lending in the aftermath of the mortgage crisis. They often don't understand that "if you embrace investments as part of your customer's financial well-being, you'll see the long-term benefits," he notes.
To compete effectively with wirehouses and independents, banks must hire experienced brokers to run investment programs and let that person hire top talent. "Hire a broker to run the thing like a brokerage, so it's competitive inside and outside the bank," says a program manager in the Southeast.
You also need to spend money on advertising and promoting the broker-dealer in the bank, he says. "We were getting referrals, but our penetration was not on par with peer banks. The bank wanted to have a broker-dealer, but it wasn't willing to invest in it."
The Northeast manager says licensed platforms are key in brokerage. "Licensed bankers should be compensated on sales just for setting appointments with investment counselors," he says. "That synergy is powerful, the fist rather than the finger." When hiring talent, the manager says a solid platform program negates the need for an upfront bonus. The promise of a qualified referral stream is enough for many advisors.
The Southeast corridor manager agrees. "With referrals, platform bankers control the careers of brokers: They're the gateway," he says. "Platform bankers should share commission. You don't necessarily want them to sell, but if you can link their compensation, there'll be more referrals." Most important, licensing bankers to sell securities bridges the gap between the two worlds. "The investment division needs to be thought of as part of the team," the Northeast manager says. "You need licensed employees who help assimilate the two parts."
There are positives: Banks are friendlier and their customers really need advisors' help, so it's great for job satisfaction, one manager says.
The message to bank managers is: Stick to what you're good at and leave investment sales to the brokers. "I would love to see the bank brokerages become all that they should be, and, of course, a few are," Rummage says.