Bank Investment Consultant
It’s hard to quantify the precise impact a CEO’s action has on his or her bank, but there does seem to be a causal connection between a CEO’s proactive interest in brokerage and the subsequent success of the program.
Kehrer-LIMRA’s quarterly benchmarking study asked program managers about the stature their brokerage held within the bank, and by extension, with the CEO. Half of the program managers who responded “we’re viewed as a major profit contributor to the bank,” ran best-practice programs. These programs bring in the most revenue and are in the top quintile of program profitability. Just 17% of program managers who answered, “we are considered a strategic partner for the future,” and 8% of managers who said their programs were “somewhat important” ran best-practice programs. None of the managers that said the bank didn’t view brokerage as a core business had best-practices programs.
Bank brokerage contributes a relatively tiny amount to the bottom line-normally only 1% to 2% of revenue. (Last year, brokerage contributed an unprecedented 8.2% of average revenue because banks’ normal profit centers were shot to hell.) For now the main business of banking-loans and deposits-remains far more profitable. Even so, savvy CEOs are throwing their full support into growing investment programs because they can see that brokerage contributes to a more productive corporate culture. Where CEOs get it, employees think of themselves as more than mere order-takers, but as important players in their clients’ financial lives.
Program managers can use the bank’s data to show CEOs that brokerage drives deposits-gathering. Tom Howe, president of Webster Bank’s investment unit, says that most banks have a customer data group, so it’s easy to examine how people who purchased investment products changed their deposit levels in the next one and two years. Mostly likely the data will show what Howe uncovered: Webster’s investment program increased wallet share materially because its clients tended to have multiple product relationships with the bank. “You’re twice as likely to grow deposits and one-third as likely to see some attrition,” Howe says. “So the investment program definitely adds material value.”
With this information, Howe successfully argued to top management that referrals to investment advisors are consistent with shareholder value. “Management has to believe the program isn’t raping and pillaging the bank’s low-cost deposit lifeblood,” he says.
How does brokerage feed deposits? For one, advisors are much better than bankers at doing discovery and finding opportunities to provide client services. “Advisors find out where everything is,” says Howe. “If your goal is just to open CDs, you don’t have the need or the wherewithal to gather much data.”
Outside statistics back up Howe’s argument. According to Kehrer-LIMRA, best-practices brokerage programs contribute an average of $49.45 in revenue and $13.62 in profit per customer household, compared with $35.29 in revenue and $10.08 in profit for average programs.
With big names placing huge bets on major investment businesses-Bank of America buying Merrill and Wells Fargo snatching Wachovia from Citigroup-certain bank CEOs “see wealth management as extremely important to their businesses,” says Alistair Jessiman, managing director of Novantas, a consulting firm in New York City. “It’s hard to point a finger at a CEO who doesn’t want this business.”
The problem is CEOs are juggling many balls right now-especially in a difficult economy. Jessiman wonders whether Bank of America CEO Ken Lewis has the time to integrate Merrill Lynch, and Wells Fargo CEO John Stumpf has to combine two massive banks. At smaller banks, immediate economic concerns are shelving the expansion of investment programs.
Still, the subprime mortgage fiasco has left many wirehouses in a shambles, and banks must take advantage of that before it’s too late. “If bank CEOs don’t seize this opportunity in the next 12 to 18 months, someone else will,” says Jessiman. “In the past, Charles Schwab emerged from disarray, and five years later it was a huge firm. So banks don’t have a free pass forever.”
Hub and Spoke
Traditional bank services are just part of the puzzle at TowneBank in Portsmouth, Va. CEO Bob Aston wants customers to see the bank as the source of everything related to their financial lives. “Our strategy is centered on multilateral financial and real estate services in order to grow wallet share, and investment services fit snugly into that,” he explains. “We focus on the bank side on private and small-business banking, two areas where there’s a high degree of cross-pollination.”
The $3.5 billion, 17-branch bank is also a big player in group health insurance for commercial clients, which opens the door for investment services related to retirement and 401(k) plans. “We’re looking at hub and spoke, with the bank at the center of the universe,” Aston says. “One benefit is that we become the resting place for our clients’ assets, which means we have fewer competitors nipping at our heels.”
Non-licensed bankers can’t be paid for referrals above the nominal $20, but to win entrance to the bank’s Chairman’s Club, they must generate a certain number of leads. How many depends on the banker’s role: Aston expects more investment referrals from private bankers than retail bankers, for example. “We’ve got six different business categories of referrals, from mortgages to investments to real estate,” Aston explains. A bank employee has to refer a certain amount of business to at least four of the bank’s six main business units that are most appropriate.
It’s taken a decade for Aston to develop this system because it’s taken time to establish a referral stream for each new line of business. “It takes a while to change the habits of loan officers, if they’re not accustomed to thinking about investments,” he says. “With most ancillary businesses it takes three years to hit stride.” Aston oversees the process through regular cross-category meetings. “If a referral didn’t go as well as it should, we talk about it in these meetings and make sure it doesn’t happen that way again,” he says.
Referrals from bankers trained to uncover outside assets work best. Retail bankers do a preliminary, but fairly detailed, discovery, called a financial profile snapshot. “If a customer has a Schwab account, that tells me something; if the client has assets in a money management fund, it tells me another,” Aston says.
Private bankers who talk to clients about loans uncover an extraordinary amount of information about the client’s financial life. “We train bankers to do this, and we have a pretty seasoned team; they know how to conduct themselves,” Aston says. “To get to the Chairman’s Club in all categories they have to talk to clients about one thing and then bounce the ball to another court,” frequently brokerage. “We have an army of bankers on the streets every day opening doors for advisors they otherwise couldn’t open.”
Aston wants each group to hit a home run. Each unit, including the Raymond James brokerage program, is part of the whole, he says. “We make lots more money on the commercial side than on the investment side, but it fits hand in glove in terms of the total client relationship.” Some 75% to 80% of TowneBank’s revenue comes from core banking business, while 20% comes from a range of nontraditional services, including investments. “We’re always trying to make it a little more, but it’s hard for something like investments to keep pace especially when the market loses value and it charges fees,” Aston says. “It’s more important to look at it strategically. We’re never going to be a Merrill Lynch, but we don’t need to be. We’re just giving our clients what they need.”
First Financial Bank in Abilene, Texas, had a strong trust unit with $1.8 billion assets, so why add brokerage? “Because it plays a very important role,”says CEO Scott Dueser. “The two units don’t compete-if clients want their assets managed, they go to trust; if they want direction, they go to brokerage. Our aim is to be a financial supermarket.”
Advisory and trust refer prospects to each other. “We don’t pay them for referrals, but they understand that it trades back and forth, and that they have to take care of the lenders who send them business,” Dueser says. “It’s something we fostered a long time ago. I’ve never put up with dissension in the ranks, and everyone here understands the philosophy of customer service first. If we can’t find a client the rate he or she wants, we can walk the client down to brokerage. We have options.”
Dueser includes the Primevest program in every presentation. “We also expect our advisors to work the crowd in the lobby, shaking customers’ hands, and we reward private bankers and tellers for referring business, via a bonus program,” he says. The bank has plenty of deposits, and brokerage has helped keep it that way as CD rates have declined and those savers look for growth elsewhere. “If we don’t provide it, customers will go somewhere else,” he says. “There was some disintermediation with CDs, but the business comes back to us through brokerage. And we’ve never had any problems with compliance. Primevest handles that. I worry more about compliance on the bank side!”
The bank’s holding company is aggressively hiring reps now because it has only three advisors covering 10 chartered banks in 48 locations. “We want to hire at least four or five other reps soon,” Dueser says. “Now is the best time because there are a lot of dissatisfied brokers. We make it clear they will get referrals, they will be considered part of the bank and that the bank will promote their business.”
Dueser puts his money where his mouth is: He invests his own money with the bank’s senior rep, Phil Hettich, a CFP who also handles his estate planning. And Dueser regularly talks to the bank’s brokerage about market trends to glean information that helps him run the bank better as well as provide clients with the market insight they would otherwise seek elsewhere. “There’s no question that banks that don’t have brokerage are losing market share,” Dueser says. “Every bank should be in this business.”
Bigger Wallet Share
American Bank Center (ABC) in Bismarck, N.D., has one of the oldest brokerages in the business. Started 25 years ago, it was the first one provided by broker-dealer Investment Centers of America (ICA). Even back then the idea was to turn the bank into a one-stop shop for financial services. So far it’s worked. Many clients attracted by the brokerage side ended up bringing in their deposits from other banks and when they borrowed money, they borrowed from ABC. “We really have not seen a drain on deposits. In fact, we’re ending up with a larger wallet share,” says Greg Vetter, who became president of the bank in 2007. “I ask friends in the industry, ‘What do you intend to do with clients who no longer require the credit they once did, but who still need planning? Are you going to send them to Wells Fargo or are you going to help clients you’ve had for many years?”
ABC has seven advisors, including three CFPs, who are managed by Tom Gunderson, son of the bank’s founder and a senior ICA advisor since 1985. He gives an example of how the one-stop shop works. A modest couple in their sixties walked into the Bismarck branch with a check for $300,000 they earned in oil royalties from an inherited ranch atop the Bakken Play oilfield. They would receive a similar monthly payment until the oil runs dry. The teller, who is also an investment client of Gunderson’s, told the couple that she would like to introduce them to the bank president. Vetter promptly called Gunderson and representatives from trust and insurance to meet with the couple so they wouldn’t have to keep repeating their story. The couple subsequently bought insurance and investment products and will at some point become trust clients. Without all these experts working in concert, or if the teller just banked the check, the couple would have been hammered by tax bills and would have soon moved their deposits elsewhere. “But now that those clients are truly taken care of, they’ll be with us for years to come,” Gunderson says.
Vetter views the investment center as a core part of the bank. “We try to include advisors as much as we can,” he says. “We have to be careful about all the privacy issues, but I meet with reps once per quarter to talk about what’s working and what’s not. We also do client seminars together as well as other events, such as golf tournaments and wine tastings. Advisors attend all employee meetings and I’m always talking to commercial bankers about the importance of referring business to the investment center.”
Advisors support the bank’s commercial operations, and Vetter encourages commercial bankers to ask clients about their companies’ investment needs. He also encourages joint client lunches, as long as the client agrees, and tries to foster personal relationships between advisors and lenders. “We’ll give them tickets to basketball games and hockey, that sort of thing,” Vetter says. He and several other directors invest with the bank’s advisors, who also counsel bank employees about their 401(k) allocations twice a year. “I can only imagine IRAs get opened through those meetings,” Vetter says.
ABC’s investment program has grown at a steady pace for five years. At 1% of adjusted revenue, the brokerage accounts for some $400,000 a year-40% of which is fee-based. Vetter wants the brokerage to grow to 2% of the bottom line, with revenues of $800,000 to $1 million. “I’d be delighted with that,” he says. “I’m not disappointed with where we are today, but I’d consider the program as performing quite well if it gets to that level.”
Why does Doug Cruickshanks, CEO of FirstBank, a $2.2 billion bank in Lexington, Tenn., like bank brokerage? It gives clients a reason to want to go to their bank, rather than making the trip because they have to. Bankers are in the grudge service business-people want a new house, not a mortgage,” he says. By contrast, “bankers can get excited about the goals of investment services such as a client’s retirement dreams or a child’s education; brokerage is an important tool for planning for life events, and clients get excited watching their investments grow.”
FirstBank has a major presence in Nashville, Knoxville, Chattanooga and Memphis with 47 branches and 52,000 client households. Cruickshanks joined as CEO seven years ago when the brokerage was only three years old. Since then it has grown from two reps to seven. The Invest unit is key to the bank’s strategy. “It’s a very small part of revenue, but I don’t think the relative profitability of investment services tells the whole story,” Cruikshank says. “It’s an important component in the overall relationship a client has with the bank. For that reason alone it’s an important part of the revenue stream.”
FB Advisors reports up to the bank’s COO, Wib Evans, who oversees all client-facing operations. “Mortgages, brokerage, retail branches, that’s all under that one person, so we can take an integrated view,” Cruickshanks says. “What’s best for customers is what’s best for the bank in the long run.”
To position FirstBank as a diverse financial services company, FB Advisors is mentioned in most marketing materials and Cruickshanks does his part internally. “There’s seldom an employee gathering where I don’t mention FB Advisors,” he says. “We have had a very significant push for core deposits and some CEOs would downplay the need for referrals during this market for fear of interfering with that. But I see the two as being tied together. People have cores of money-some for spending, some for saving for the short-term and some for long-term investment. If you ignore that last part, you won’t get money flowing into those first two buckets.”
Naturally, all department heads compete for Cruickshank’s attention, but he tries not to pick favorites. “Every manager thinks his area is the most important,” he says. “I tell them that if we don’t have the most vibrant mortgage division it hurts brokerage. By the same token, if we don’t have the most vibrant brokerage division, that means there will be fewer opportunities for mortgages. It’s important for all our divisions to be vibrant.”
Mark Shobe, president and CEO of DFCU in Dearborn, Mich., has the distinction of also being a licensed broker, with firsthand knowledge of how different banking and securities cultures can be. He maintains his Series 7, 24 and 63 licenses, “so I still have the predisposition to respect each unit’s point of view,” he says. Shobe was determined to start a brokerage division at the $2.5 billion, 21-branch credit union when he joined nine years ago. “Without wealth management, you open up your client base tocompetitors,” he says. “It took a few years, but the program now represents 20% of our assets. We never saw it as an expense, only as an investment.”
The brokerage, a CUSO Financial Services program, manages $500 million. Its six advisors produced a total $4.5 million in 2008. Last year the program contributed $1 million of the credit union’s $32 million profit. That may not be much compared with the program’s intangible benefits. “We get the business we would literally have no chance of receiving otherwise,” Shobe says. “Plus we get a fee-based recurring revenue stream, so from a corporate perspective it’s a nice addition to our business mix.”
Despite his experience with a regional brokerage, Shobe takes a backseat to program manager Jim Badge. “My role is to be out with employees and clients making sure everyone understands the connectivity between the products and services we offer,” he says. Shobe pushes cross-sell by creating sales goals on both sides. “I’ve seen channel conflict before when goals are designed around a particular business unit,” he says. “But we’ve integrated team goals and if we don’t hit those goals, no one gets the benefit.”
But Badge says everything Shobe does seems to help. For example, last October, Shobe went above and beyond what any program manager could expect of a CEO. Badge had scheduled a meeting with his advisors to brainstorm ways to survive the meltdown. Shobe was supposed to attend, but an immediate family member died. Nonetheless, “he still put on his shirt and tie and showed up for the meeting,” Badge says.
For John Buran, president and CEO of Flushing Savings Bank in Flushing, N.Y., brokerage service is a no-brainer. “We try to develop our services based on customer needs,” he says. “And investment and insurance are both customer needs.”
Flushing’s Essex National program, which mostly sells annuities, started in 1998. Three years ago, program manager Leann Tannuzzo came on board and made the brokerage really part of the fabric of the company, says Buran, who joined the bank in 2001. “In the past, the industry was more order-takers than order-makers,” he says. “But investment is a needs-based sale beyond today’s rate, so it sets the stage for a more robust conversation with clients, resulting in deeper client penetration with typically more products and services per household.”
Buran, too, has a background in brokerage. He was at Citibank when it launched its brokerage platform and he ran its New York region for a while. There he became convinced that having advisors outside the bank and platform reps inside the branches was the best possible model. But Flushing’s platform reps aren’t run of the mill-all 35 licensed bankers hold Series 6, 7 and 63 licenses. Flushing’s four financial advisors primarily work their books; the platform reps rely on referrals from non-licensed bankers.
Buran keeps a tighter rein on brokerage than most top executives. He’s in regular contact with Tannuzzo and he knows everyone in the department by name. He’s also instrumental in hiring new reps. “At Citi we measured everything, something the retail bank is noted for, daily and weekly reports,” Buran says. But while Buran likes to keep tabs on everything, he doesn’t micromanage. “I give people who are goal-oriented a wide enough berth to do their business,” he says.
Buran tries to keep work fun. Flushing holds “financial checkup” events at which the platform reps wear scrubs and try to examine the finances of any willing foot traffic. To thank them for their work, Buran accompanies Tannuzzo on motivational outings, such as a trip to Belmont Racetrack, where the bank pays to name a race after the top-producing platform rep. Often a simple thank-you note suffices, though: “They like emails from me saying they did well,” he says.
Tannuzzo says Buran’s involvement is refreshing after her last brokerage program, which was ignored. “Management was worried about disintermediation and compliance risk, and that hurt our growth potential,” she says.
According to Buran, deposits grew 21% last year, in part from new customers referred by the investment side, which brought in $1 million in revenue, its best year ever. (It manages a total $105 million in assets.) “If you have a business that’s functioning well, you never need to worry about disintermediation because you have plenty of business on both sides,” says Buran. “As a bank, if you can’t manage your depository business you should worry about disintermediation because you’ve got big problems!”
For Buran, like the others, the investment program is about a lot more than money. “Investment services changed the sales culture to a needs-based focus,” he says. “Even if the program just broke even, I’d still want it just for that.”