Four Ideas on Bank Retail Investment Sales

Bank Investment Consultant magazine recently published the results of a bank/credit union investment sales benchmarking report from Kehrer Bielan Research and Consulting. The report, as cited in the article, (via @CUInsight) stated credit union investment revenues equated to $360 per million in share deposits, and that number was 21% greater than in banks, implying bank reps achieve $298 per million in deposits.

So if an investment rep covered $500 million in a credit union, he/she achieved $180,000 in gross production. A bank investment rep would achieve $148,750 for the same coverage. However, the article also stated that credit union reps produce less in gross production than bank reps, implying that bank reps cover more deposits. 

Bank investment sales is treated as an inconsequential line of business in most financial institutions, in my experience. My firm measures line of business and product profitability for dozens of community financial institutions, and hardly any of them make real money in retail investment sales, if they make any money at all. The most profitable program that we measure, on a pre-tax profit as percent of revenue basis, is one that is totally outsourced. The rep is a full-fledged employee of the third party broker-dealer, and the bank incurs little expense from it. It also receives little revenue. But it's profitable! Little is the operative word here.

Why does this line of business languish in our financial institutions? I think the answer comes back to attitude and execution. Because it can't be because our customers don't demand it. At the end of 2013, US registered investment companies managed $17.1 trillion in assets, while bank assets in all FDIC insured financial institutions was $14.7 trillion for the same period.

Here are a few ideas on how to turn this significant opportunity into a meaningful profit contributor to your financial institution:

Grow your own reps. So often we associate success with this LOB by plucking a higher producing rep from a brokerage firm because we want his/her book and to get profitable quickly. Why would a high producing rep join a bank that has limited products and lower payouts? Most won't although bank leads may be enticing. But, let's face it, as a brand for investment sales, most banks don't or can't achieve the panache of having Merrill Lynch on your business card. So grow your own reps. Pluck them from your ranks of junior professionals such as branch managers, credit analysts, marketing analysts, and perhaps, directly out of college.

Build a real program. A rep should be assigned a specific cluster of branches in an area that makes geographic sense. Each branch employee should be treated as a Center of Influence (COI) for that rep to source business. Each rep should develop a regimented calling program that includes internal bank customers, COI's, community outreach, and new relationship development. The Marketing Department should be tasked with assisting the rep along the way by mining data, developing mailing lists, coordinating educational events, etc. As the rep gets more experienced, he/she should expand internal COI's to include commercial lenders, who would tend to have leads to bigger fish with more sophisticated financial needs. As one senior lender once told me, "we're not going to refer our customers to some 25 year old that doesn't know squat and won't be here next year."

Customers are bank customers. Disintermediation was the dirty word that relegated bank investment sales to the bench. Better to let Charles Schwab take our customer money than to let an internal bank employee, right? Because that is what happened. And by the way, Charles Schwab has a $100 billion in assets bank. That's right, you read billion.

Another reason banks are reticent to move this LOB forward is because the business has traditionally been closely tied to the rep. If the rep leaves, then so go the customers. So build a program where multiple employees serve the customer and are part of a well-oiled system that exposes the customer to numerous employees.

Part of such a program should include Personal Financial Management (PFM) tools. I remain confounded why, in such a digital age, I must build my family's balance sheet annually in Excel. There are tools, and many banks have them, that essentially allow customers to view their entire financial picture on one platform... PFM. A successful retail investment sales program would set customers up, and train them, on using a PFM tool that allows them to view their entire financial picture. The more your customers use your PFM tool, the stickier they become to your institution.

Also, create an environment that is collegial and collaborative, making for an overall more pleasant experience for the rep as opposed to the "eat or be eaten" world of brokerage. Why would the right rep want to go to Acme Brokerage to cold call, do their own work, pay for their office, source their own leads, and have a sales manager shout expletives at him/her because he/she didn't meet their monthly production goal? But if they do choose that path, you have built the environment to make it very difficult for customers to want to leave your bank.

Build better reps. The days of graduating college and do no further learning are done. To be a licensed investment representative, you must minimally acquire your continuing education (CE) credits. That will not distinguish your reps from peers, because all must do it. There are professional certifications, such as Certified Financial Planner (CFP), that can distinguish your rep from others.

Sure, a rep can achieve the CFP certification and then bolt to a competitor. But you can protect yourself when making a large investment such as CFP by paying for it in the form of a forgivable loan. If the rep leaves before the forgivable period, then the amount expended immediately becomes a loan to that person.

And don't limit your rep development plan to financial matters. Money is very personal to people, and human skills are essential. Sometimes, the highest producing reps are so focused on driving revenue, they transform into a boiler-room broker. Remember, they are bankers. With that title comes trust, security, and integrity. Don't turn them into Gordon Gekko.

Getting back to profitability... it is reasonable to expect a retail investment sales program to generate $360,000 in revenue for every $1 billion in deposits. Further, based on our experience measuring profitability and the profitability of public retail brokerage firms, that this line of business could achieve pre-tax profit margins of 30%, dropping $108,000 in profits to your FI's bottom line. That is profit that requires little equity, and no balance sheet assets. Calculate that ROA or ROE!

What do you think is lacking in bank / credit union retail investment sales programs?

~ Jeff

Does it all have to be about the spread? My thoughts on fee income.

In a previous post I mentioned that my wife and I are refinancing our mortgage because of the extraordinarily low rates available (see link to that post below). As part of the process we received the Good Faith Estimate (“GFE”) of costs associated with obtaining a mortgage loan. A key and expensive component of the cost is title and settlement services. My lender suggested some service providers from their list, but we have a relationship with a local law firm that provides those services. This got me thinking about such services being offered by banks.

According to the GFE, title search, insurance, and settlement services will cost $2,073.75. Now, without giving you too much personal information, we do not live in a mansion. Our house is 2,000 square feet and its value is slightly greater than the average in our community. I recently heard on a personal finance show that the commissions to title agents are 70%-80%. Let’s assume they are something less for refi’s, say 50%. That would equate to over $1,000 of net revenue to the title/settlement agent for each transaction. I repeat that this is a residential real estate transaction refinancing an average home. Commercial real estate transactions and McMansions would generate greater revenue.

Given community banks’ propensity to do real estate transactions, why wouldn’t such a fee-based line of business flourish?

My company measures the profitability of products and lines of business for community financial institutions (“FIs”). Part of this service includes measuring how banks do, or don’t, make money on their fee-based products and lines of business. The chart below demonstrates the pre-tax profit margin since 2006 of all of the fee-based products for those Fis that subscribe to our service.

Community FIs, in general, are not making money with these products. Of course, there are exceptions, such as one of our clients that makes greater than a 20% pre-tax profit margin in their Trust and Retail Investments line of business. But as a general rule, community FIs have not been very successful in this arena. With the potential for diminished deposit fee income due to Reg E and the Durbin Amendment of the Dodd-Frank Act, perhaps FIs should figure out why this is so.

Retail investment services is one common service offered by community FIs and one that has confounded me as to why we can’t generate greater revenues and profits. According to a recent Wall Street Journal article (see link), the minimum commissions and fees expected of an Edward Jones broker is $30,000 per month, or $360,000 per year. Edward Jones’ business model is a main street model, having offices in small to medium sized towns across the country. One would think that a bank broker, similarly located and having the benefit of bank in-house referrals, should be able to outleg the Jones broker. However, Kehrer-LIMRA studies of bank broker productivity tend to hover around $250,000 of annual production.

As an industry, we should be successful in retail investment sales. Bankers, in spite of the recent and daily beatings we have taken in the media, remain a go-to source for trusted financial advice. As the table below indicates, publicly traded brokerage firms make a net profit margin of 17.81% at the median. I realize that the current environment has been challenging for them, but they still are generating profits as an industry. That profit margin includes taxes and all costs associated with their business, such as human resources, finance, and Charles Schwab himself. Therefore, shouldn’t we expect similar returns from our programs? Yet we settle for breakeven or worse. We should set our sights higher.

If we have a broker for every five or so branches, or covering $200 million of our deposit base, we should expect production in the Edward Jones area of $360,000, but certainly no less than $250,000. If we have four such brokers, generating $1 million in fee income, then we should expect a minimum of $200,000 pre-tax profit, fully absorbed. That means paying their share of HR, finance, etc.

Retail investments is one area where community FIs are well-positioned to succeed. But those fee-based lines of business that are consistent with your strategy should be explored, proper attention should be given, and profits should be expected. Those FIs that profitably meet the greatest amount of financial needs for customers already on their books will drive revenues and value that will be difficult to replicate. That is an enviable position indeed! What are your thoughts on complementary fee-based lines of business?

~ Jeff

Wall Street Journal article on Broker production:

http://blogs.wsj.com/financial-adviser/2010/05/20/regionals-raise-broker-production-minimums/

Blog post on mortgage refinance:
http://jeff-for-banks.blogspot.com/2010/08/mortgage-refinance-thanks-uncle-sam.html