Saturday, January 11, 2014

American Greed: Can being an honest broker be banks and credit unions competitive advantage?

Americans are becoming more responsible for their financial well being now and into retirement. According to a 2012 Boston College Center for Retirement Research study, 63% of American males (why only males I do not know) participated exclusively in defined contribution (DC) retirement plans in 2007, up from 47% in 1992. Those that participated in defined benefit (DB) pension plans was 16% in 2007, down from 31% in 1992. We are increasingly bearing the burden of managing our money.

Yet money management is a discipline done well by only a very few. My firm, full of banking industry consultants, just held an education session regarding our 401k plan. I would say, for me, it was interesting and educational. I will probably select the auto re balancing feature because I don't want to take the time to actively manage it. Will I take the time to do a good job researching my fund choices. Probably not.

So, if those involved in banking don't have the time or inclination to do it, how about the engineer, retail store manager, or forklift operator? I think, as a nation, we will need lots of help managing our money. Not just in retirement, because day to day money management is becoming more complex too. Gone are the days of keeping money in an envelope in the nightstand to save for a new refrigerator, or to pay the annual insurance premium.

Could this need for personal financial management prove to be a viable niche for community financial institutions? I think so. One reason is the amount of fraudsters that will emerge with messages of help and hope on an unsuspecting population, only to turn the helping hand into a backhoe to rake their customers cash into their own bank account. Don't believe me, check out a few episodes of CNBC's American Greed, a favorite show of my wife and I.

Although fraudsters don't typically use a community bank or credit union as home base for their antics, some do, such as Aubrey Lee Price who defrauded a community bank in Georgia for $21 million. Most fraudsters establish their own small financial services firm to do their work. Others use very large financial institutions that can only loosely be called banks. My point is that bad actors are not typically associated with the local bank or company credit union.

With this in mind, can the local community financial institution be viewed as the "go to" resource for those of us that are dazed and confused on how to manage our financial lives? Can we brand ourselves as the trusted advisor in our communities?

If so, we have to ask ourselves if we have the personnel, processes, and systems to execute on such a strategy. Because if we position ourselves as our customers' trusted advisor, and can't deliver, it will be difficult to overcome the negative brand perception.

Can we specialize as the trusted source for personal financial management?

~ Jeff


  1. A very useful tool I have found to mitigate banking risk from a safety and soundness standpoint is Veribanc, They have an unbiased ratings model and a transparent track record. I have met the President, Mike Heller, and he is a really great guy. When I read the title "American Greed: Can being an honest broker be banks and credit unions competitive advantage?," his name came to mind even though he isn't a broker.

  2. Veribanc focuses on the safety and soundness of the whole bank. But who verify's the moral turpitude of the banker's within their walls?

    This post was geared towards developing a competitive advantage by helping individuals and businesses navigate an increasingly complex financial landscape.

    Can community bankers do it?

    Thanks for the comment!

    ~ Jeff

  3. The challenge is infrastructure costs on setting up this type of service for a community bank. How long until the bank can build a large enough asset base to get to profitability? What is the expected returns? The good investment advisers are more likely to go out on their own and run their own management firms or go to the big firms (better incomes, etc...)

    I agree in concept, just not sure from a practical standpoint the investment will turn out.

  4. Andy,

    Third party providers (such as Raymond James or LPL) give community banks turnkey solutions for setting up such services. For their part, they take 8-12% of the revenue from the service. The other ~ 90% belongs to the bank if the investment reps are dual bank/3rd party provider. So if an investment rep gets 50 basis points on a $100MM portfolio, that's $450k to the community bank. Perhaps the payout to the rep is 35%, a typical number. That compensates the investment rep $157k, add another $30k for benefits, and another $45k for the salary/benefits of a sales assistant, the math looks like this:

    Revenue $450
    Sal/Ben 232

    Gross Profit: $218

    Add in another $50k in expenses for licensing, training, entertaining, and FF&E and the pre tax profit in this scenario is $168. That's a 60% efficiency ratio, but 100% additive to ROA and ROE, because this is an off-balance sheet activity and doesn't have an "A" or require much in an "E".

    Now repeat this several times. And you have a program. The risk is the investment rep ups and leaves, which is a risk for anybody. But build a process that the brand is front and center, and he/she will have a difficult time getting the majority of his/her book to leave your bank.

    It can be done. But requires excellent execution, in my opinion.

    Thanks for the comment!

    ~ Jeff

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