Published Articles

What Does The Future Hold?

SuperUser Account posted on February 11, 2010

After a grueling year, 2010 promises growth for the right kinds of investment programs.

By Pamela J. Black

January 1, 2010

Having made it back from the brink, the outlook for bank brokerage in 2010 is looking up, if for no other reason than last year was so bleak. Of course, a lot depends on the market holding up reasonably well and the economy continuing to recover. So far, most economists agree that both are likely. The mega mergers of 2008 brought more wealth management assets into banks than ever before, but even if you factor out the acquisitions of Merrill, Wachovia, Washington Mutual, and Bear Stearns, pundits are bullish on 2010. BISA research from earlier last year indicates that over 60% of program managers expect to expand recruiting for their platforms and dedicated programs despite the market uncertainty. In BIC's Outlook Survey, the majority (72%) of respondents predicted that their programs would grow at least a little in 2010.

Paul Werlin, president of recruiting firm Human Capital Resources in St. Petersburg, Fla., estimates that growth will be positive, but modest. "It wouldn't shock me to see a 10% increase in production," he says. He believes advisors who stuck by their clients through the crisis will reap the rewards of that hard work this year.

Anecdotally, big regionals, like PNC, U.S. Bancorp and Huntington Bank, are all adding significantly to their programs. Third-party marketers LPL, Raymond James and Primevest report more modest growth, but claim to be adding reps. "We've seen some banks impacted by consolidation but others have picked up programs," says Dan Arnold, managing director and divisional president at LPL. "I think you'll see growth because of improved productivity of existing programs."

Consolidation will continue in 2010, but that may not be a negative. Dying banks are creating opportunities for healthier banks to expand through acquisition. And at many failing banks, investment programs were merely defensive. "Getting weeded out is the historical stuff where banks were afraid of disintermediation, so they never promoted the business," says Catherine Bonneau, CEO and president of Primevest. "We're seeing the banks that are coming online now are serious about brokerage being a value-added offering for clients."

No matter how many banks fail, the demand for investment services will remain. "The need for advisors to help clients doesn't go away just because the programs change," says BISA Managing Director Heywood Sloane. "The investment customer is still there. The program will sink or swim based on whether it serves the client well."

Indeed, the need for investing services has increased. A near financial collapse and a dramatic market rebound have made consumers more anxious for advice-especially aging boomers struggling to redefine retirement. "It's a much more complex marketplace and there's more responsibilities on individuals to achieve their financial goals," says LPL's Arnold. "Those two factors will create long-standing opportunities in investment advisory and insurance solutions."


Perhaps the biggest changes in 2010will come from expected legislation in reaction to the financial crisis. "Regulation is fundamentally altering the landscape," says Kevin Travis, a principal at New York-based consulting firm Novantas. "I think this is great news for bank brokerage." Why? Because Congress is threatening to cap such bread-and-butter bank income as fees on credit cards and account overdrafts at the same time as lending is tight. This means they need alternate sources of revenue such as brokerage. "The overdraft fee model and free checking model, where you used fees as a primary source of revenue is dead," says Travis. "In addition banks are squeezed on the lending side and probably will be for some time. They need to find ways to sell other stuff and investments is the easiest adjacency."

Another regulatory change that is expected to shake up bank brokerage is the Securities and Exchange Commission's attempt to "harmonize" regulations to create one fiduciary standard for all advisors. "The 800-pound gorilla in the room is the fiduciary standard and that might be disruptive," says Ken Kehrer, director of industry tracker Kehrer LIMRA. "Almost everybody will have to do more investment policy statements and start being honest about fees."

Depending on how sweeping such a ruling might be, banks may have to train reps differently and adopt new compliance systems. If the rules require advisors to put the interests of the client first, those who now make money from commissions on mutual funds and annuities may be compelled to recommend lower-priced alternatives. "Series 7 bank advisors are going to need to be well-versed in advisory products and more consultative than transactional," says Werlin.

A looming question is what will a new standard mean for platform reps. Since they are highly regulated already and their products, very limited, the suitability standard currently in use may be sufficient. But the effort platform reps would have to invest to find out what's in the client's best interest could make such programs uneconomical. "If the fiduciary standard is applied too broadly, I don't know how you serve smaller people," says BISA's Sloane. "Suitability makes it possible to get simple solutions to people who otherwise would never get access to an advisor. Financial planning is not appropriate for all situations."

Overall, a higher standard of care could be a boon for the industry, since clients are more skeptical and looking for signs that they can trust advisors. "If you're going to do it, you have to do it right," says Bruce Stava, senior vice president and national director of sales for the Wealth Management Group at First Bank. "As firms move into a more complex advisory world, it's going to be more incumbent on them to manage their people's activities."

Any move toward higher fiduciary requirementswill accelerate the ongoing trend toward fee-based business, where advisors earn a flat percentage of AUM. "I think the fee-based business will grow exponentially under a new fiduciary regulation," says Rob Comfort, president of Huntington Bank's investment arm. That means a greater emphasis on wrap accounts and SMAs, and other managed products. BIC's survey noted this trend: Advisors rated managed accounts higher in importance for their production in 2010 than in 2009.


Even if they aren't mandated to put the clients' interests before their own, investment programs at banks and credit unions that will do best going forward will be those that excel at customer service. This is both a differentiating factor in a commodity business and appears to be the most important factor in keeping clients happy and loyal, according to Retirement Money in Motion, a study conducted last May by FRC/Mercatus, a financial consultant based in Boston.

Client service, not performance, was the main factor in whether clients with over $600,000 stayed or left. "Those who left said they weren't getting the advice and guidance they needed, what they termed 'personal service,'" says Teresa Epperson, a partner at Mercatus. "One would expect young, less established account holders to be moving money, but 67% of those age 55 to 65 were switching providers."

Banks are best positioned to grab those retirement dollars because they are most people's first financial institution. But to capitalize on that advantage, banks will have to offer clients a range of products and services that suit his or her needs. "The client base is the competitive advantage of the banks versus brokerage firms," says Tiburon Managing Principal Chip Roame. "Almost everyone establishes a bank relationship before a brokerage relationship. So if banks can learn to cross-sell, they have first shot at all of their clients' investment businesses."

Cross-sell is the holy grail of forward- thinking bank managers. Increasingly they understand that customers are stickier if they buy more than retail bank account services. "When a client has an investment relationship, they are twice as profitable to the bank as a client who doesn't have that relationship," says Huntington's Comfort. "The deeper relationship drags in more deposits and loan business. We have data to prove this."

Cross-sell is the single most important factor for growth in the bank channel, says Mike Mortensen, president of PNC Investments. "Banks have not yet earned enough credibility so that people walk into them to buy investments. The staff has to be skilled enough to make a quality referral. Without that you don't have a program."

But cross-selling is a struggle for institutions weighed down with massive legacy silo issues. "It takes work and you can never stop working on it," says Mortensen. "You have to constantly educate the bank employees on the marketplace and how to overcome objections and be a good partner with them and take care of their clients. That's how it's done at the end of the day, and that's really the advantage banks have over other retail investment companies."

Banks can also incentivize customers to open brokerage accounts, something HSBC has done successfully in the U.S. by offering a packaged range of products at a reduced price, says Alois Pirker, research director at the Aite Group in Boston. "You need to give them relationship-level pricing. The HSBC model is that you require a minimum investment of $300,000 and then they get free credit cards and other benefits. HSBC makes an average of $2,000 on each client. That's a model you're going to see being adopted more and more."


The megabanks expanded their investment capabilities with last year's brokerage acquisitions, giving them massive clout in size, scope and economies of scale. "The technology, manpower and machinery of a broker is so much higher than most banks have," says Pirker. "It's a huge advantage for the biggest banks, and it will put a lot more pressure on the smaller banks."

The challenge in the year ahead, particularly for Bank of America and Wells Fargo, is absorbing their big brokerage guns enough to use all that firepower. "The integrations at these big firms are by no means a guaranteed success," says Pirker. "They have to pull it off on a cultural, technological and product level." Citibank never merged successfully with Smith Barney and is now basically outsourcing the business. JPMorganChase and BofA meanwhile have been long focused on raising fees on deposit accounts. "BofA hasn't traditionally focused on client relationships," says Pirker. "They're more focused on product and making fees here and there. They've lost sight of the client." Clients annoyed by getting hit with endless fees may be less inclined to turn to these banks for brokerage services.

The merger between BofA and Merrill will no doubt be the toughest. Rick Rummage, a recruiter at the Rummage Group, part of Global Recruiters in Reston, Va., says he expects to see an exodus of BofA reps in the first quarter. "Once they move into the Merrill branches, they'll be in shock," he says. Merrill brokers, known for their cocky attitude and formal dress, think bank brokers are just order-takers, he says. "My guess is the BofA guys aren't going to like the hazing." Rummage expects many of them to go independent.

Wells Fargo with Wachovia, however, is better positioned to offer client-centric service, says Pirker. "From the very beginning cross-selling and relationships were part of their business model, so the pedigree is right."

The megabanks still also suffer from bad press. Public and media concern over their ability to survive has morphed into ire at ongoing outsize compensation. They suffer from what BISA's Sloane calls the Goldman Factor. "There is a lot of animosity out there," he says. "People see Goldman turning out record profits and think the game is rigged. The larger banks can easily get tarred with that brush."


The next tier down, the big regional banks are better positioned to fly out of the gate this year. Many remained in decent financial shape and have continued to evolve and refine their capabilities. "The big banks have so many pieces to integrate; this is a great opportunity for the mid-tier regionals," says Novantas' Travis. "They run their business much more on a relationship basis. It looks like pure upside for them." Moreover they have the imprimatur of the FDIC for buying up smaller and failed banks. "Each bank that takes over another telegraphs to the market a huge amount of strength," says Sloane. "It's one of the best ads banks could have in their home market. They've been labeled strong by the government and the FDIC."

Plus regionals have more of a local connection than the megabanks, which gives them an aura of being closer to their clients. "I believe a regional can create the same level of product and service as the biggest banks and provide more of a personalized touch," says Huntington's Comfort. "I think that's an edge."

PNC is now the fourth-largest broker-dealer in the country after Wells, BofA and Chase. It's about to partner with a new clearing firm-it had three different firms through acquisitions-"and build out a truly state-of-the-art platform," says Mortensen. It plans to finish integrating NatCity by mid-year and to launch a new marketing campaign about its investment capabilities. "We're already planning to hire 200 consultants next year, so we do see 2010 as the year that we put it all together and really deliver a quality of advice and servicing experience that will be hard to match," he says.

U.S. Bancorp. is another regional that has kept some powder dry for an improving economy. "We plan to grow fairly aggressively in 2010," says Bill Benjamin, chief executive officer of U.S. Bancorp Investments and U.S. Bancorp Insurance Services. "We're going to expand all the capabilities we need to deliver a world-class experience to our clients." The bank has been adding assets and plans to add advisors, says Benjamin. "We will have a well-defined client experience, that's a way to differentiate yourself."


The Goldman Factor has largely worked in the favor of smaller banks, which can deliver a more personalized service since they are firmly rooted in their communities. This has driven clients and advisors their way in the wake of thecrisis. "Small banks know their customers. I have seen them doing well and taking share where they're healthy from some of the big banks," says Novantas' Travis.

LPL's Arnold, whose firm added more than 250 advisors to credit unions and banks last year, agrees. "We've seen a big shift in advisors and clients looking for alternatives focusing more on Main Street-on banks invested in 'the community I live in.'" And community bankers who know clients personally can fill a liquidity void, says Travis. "Community banks have an opportunity, particularly in lending that's come out of this turmoil as big banks have backed away from small businesses."

But delivering quality investments services is a prohibitive cost burden for many small banks, which lack the scope and depth of products and compliance ability ofa larger bank, says PNC's Mortensen. This should bode well for TPMs, which can offer more sophisticated programs to small institutions. Many small banks are still struggling to clean up their balance sheets and survive. "You're going to see a big shakeout because banks are getting killed on loans," says First Bank's Stava. "We will end up with fewer, but stronger, community banks."

Many smaller banks say they would like to add brokerage programs but are too busy managing the effects of the crisis that it's become a back burner issue, says Werlin. "The timing just isn't right."

This may be why some recruiters report a resounding silence from smaller banks. "We have candidates who are lower producers looking for a referral stream," says Howard Diamond, chief operating officer of Diamond Consultants in Chester, N.J. "But in the last few years smaller banks haven't been recruiting."

Community banks may become may well change as the current managers retire and new ones realize that they need to do more than take deposits, says Werlin. "They'll realize that being just a lending institution isn't in the best interest of the business because their clients own mutual funds and have 401(k)s and accounts at Schwab. As the next generation of managers take over, they will have a different view of what community bank is."