Banks thinking about securities brokerage should consider the experience and advice of several mid-size banks already in the business

 

By Melanie Scarborough, contributing editor

With regulatory restrictions and increased compliance costs putting pressure on the top line, banks increasingly are eyeing securities brokerage as a source of revenue. Beyond that, expanded product offerings allow banks to retain clients who would go elsewhere for investment services. For customers, there is the benefit of one-stop shopping, dealing with a trusted party, as well as a rare welcome for those who have limited amounts to invest.

Sales of securities and life insurance products, in addition to fee-based advisory relationships, are “definitely growing” within the bank channel, according to PrimeVest, a Minneapolis-based broker-dealer. “A lot of our [client] institutions have put even more effort behind the investment program because it’s an excellent diversification program,” says LeAnn McCool, national sales manager.

Third-party partnerships can make securities brokerage affordable for banks operating under budget constraints. And smaller banks aren’t alone in looking to enhance revenue through securities sales.  “We’re seeing some fairly sizable institutions just start their investment programs,” says McCool. “Others had them but realized their clients have needs beyond annuities.” Wirehouses often aren’t interested in clients who don’t have six-figure sums to invest, creating a ready market for banks. 

Indeed, much of the demand for securities sales is customer-driven, according to $749 million-assets Saco & Biddeford Savings Institution, Saco, Maine, which launched its S&B Financial Services in May. “With interest rates going down, customers who have renewing CDs and savings accounts want to know what other options are available,” says Matthew Cyr, a PrimeVest adviser who manages S&B Financial Services. “Establishing a financial services program was timely because we can now offer alternatives to help them make up that gap.”

Big value in small customers
LCNB National Bank, Lebanon, Ohio, began offering brokerage transactions about six years ago after realizing there was an underserved community of customers who needed and wanted to invest. “We tried to serve customers of more modest means through our trust department, but couldn’t do that and make any money,” says senior executive vice-president Bernard Wright.

LCNB’s solution was to partner with UVEST, a third-party brokerage firm headquartered in Charlotte, N.C. The arrangement evidently serves its purpose, given that the vast majority of investment accounts have less than $50,000 in them. “If you can tie in with those ordinary folks who are working hard and have an ongoing need, that adds up,” says Wright. Nonetheless, banks considering adding a brokerage operation should take a long-term view, he advises.“There’s a tortoise-and-hare kind of strategy here for income growth,” says Wright. “Don’t expect it to be a waterfall of money overnight.” 

In Wright’s experience, two key factors contribute to success in securities sales. One is that brokers understand that their most important allies are branch personnel. “Those staff people—if they believe in that broker—will refer folks to the broker because they trust him or her,” says Wright. “Absent that, they’re back to cold-calling.” 

The other is a broker’s willingness to tend many small transactions rather than trying to land a handful of big sales. “The most successful guy I’ve got is not in it for the big transaction,” says Wright. “His bread and butter are the large number of people he has convinced should be saving for their futures by setting aside $25, $50, $75 or $100 every pay period for their investment products. He gets a commission on each of those. The revenue stream just keeps coming in.” As those regular transactions build year after year, clients gain not only confidence in the broker but a relationship with the bank.

Yet finding brokers who share that mindset is easier said than done because most have been  schooled to define success as making maximum sales.

“In the time we’ve been in this business, we’ve discovered that it’s hard to find representatives who really care about putting customers’ interest first.” He is quick to add that he does not mean to tar all brokers; certainly LCNB has found its share of good ones.  

Retaining clients and profits
Saco and Biddeford had similar concerns before opening its financial services operation. As the oldest mutual savings bank in Maine, its primary concern was to preserve the bank’s culture and philosophy. 

Like LCNB, Saco & Biddeford discovered an underserved community of potential investors, which includes small-business owners as well as established investors with accounts at bigger firms.

“My experience is that larger firms have been somewhat tarnished, so customers fall back to their local banks where they’ve had a relationship for more than 30 years,” says Matthew Cyr. “They say, ‘We trust the bank,’ so they trust the person appointed to be the financial adviser.”

Through S&B Financial Services, he can offer more profitable options such as income annuities and mutual funds, building clients’ wealth as well as the bank’s. “The bank has been able to retain a lot of the deposits they currently have because if we’re limited to selling CDs, customers are going to go where they can get solutions,” says Cyr. 

Since the program’s launch in May, revenues have been steady, and referral activity has increased. Most crucial: senior management refers the bank’s established customers.

Without that support, Cyr has seen brokerage operations struggle at other institutions. “Traditional savings banks want to hold onto deposit dollars as much as they can. Having a program like this can produce a level of concern that it will pillage deposit dollars,” he explains. “There’s no sense of that here. The bank sees that without this program in place, they’re going to lose dollars anyway because customers will go to other investment firms. Now they can retain those clients and keep those dollars.”

Next up: regulatory hurdles
Even banks that hold a long-range view and embrace their brokerage business face the challenge of imminent regulatory upheaval. United Bank of Michigan in Grand Rapids, with assets of $426 million, has for decades sold insurance and investment products to retail customers through its wholly owned subsidiaries, United Bank Investment Company and United Bank Insurance Agency. Now, the bank is waiting to see how securities sales will be affected by the Dodd-Frank Act. 

“[Securities] is a pretty solid revenue generator and we hope that will continue, but until all the rules are written, we won’t know,” says CFO Mark Wild. “Non-banking revenues—commission income—is primarily of concern to us because the legislation is so broad. We have to be prepared for just about anything.”

United Bank’s concerns are well founded, according to experts at the ABA. The Dodd-Frank Act requires the SEC to conduct a study and make recommendations by Jan. 21 on regulations that will govern investment advice given to retail clients.

The SEC is studying imposing a uniform standard of care, even though a one-size-fits-all standard for investment advice does not take into account the varying degrees of service customers need. “We agree that comparable retail customers receiving personalized investment advice are entitled to comparable protections no matter whether they receive that advice from a broker-dealer or an investment adviser,” says ABA Deputy General Counsel Carolyn Walsh. “But they should not make the standard of care a uniform fiduciary standard because that eliminates choice and creates confusion.”

For instance, a customer who merely wants to know what money market is available does not need the same degree of guidance as a trust beneficiary. “The trust fiduciary context is the gold standard of fiduciary duty,” says Walsh. “We’re concerned that customers will think they’re always going to get that very high standard of service even when they’re contracting for very limited services.”

Institutions that have trust departments already are very familiar with fiduciary standards and say they are well positioned for regulatory change. “Wirehouse brokers are in much worse shape with Dodd-Frank,” says Wright. “The fiduciary duty really plays to bank’s strengths because banks—especially with trust departments—have always understood it.”

Wright predicts that markets are going to remain unsettled a while longer, making many people reluctant to invest large sums of money. “But if you get into this business to build something of long-term benefit, that’s what the customer really needs,” says Wright. “It’s another avenue for building community.” •

 

 

How much revenue can securities produce?

Kenneth Kehrer, president of Kehrer-LIMRA, a Windsor, Conn.-based consulting firm that advises banks on establishing and marketing insurance and securities operations, provided the following data from his company’s research.

The typical bank offering securities brokerage generated $1,601 in brokerage revenue per million dollars of bank consumer deposits last year. However, one-fourth of banks offering securities brokerage had brokerage revenue greater than $2,096 per million of bank consumer deposits.

Looked at in terms of household penetration, the typical bank had $35.63 in brokerage revenue per bank customer household, but the top quartile was $44.04.

How much of that revenue went to the bottom line?

For the typical bank, brokerage revenue contributed $404 per million in consumer deposits to pre-tax income, or $9.40 per bank customer household.

The top quartile pre-tax profit contribution was $597 per million of bank consumer deposits; $10.96 per bank customer household.    — M.S.

 

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