Bankers: If We're Serious About Helping Clients, What About These Two Products?

With all of the automation of financial products, one would think managing finances would be simple. Much more so than when our grandparents saved for the coal delivery in an envelope in the night stand.

My focus today is on consumer banking. Which is becoming more challenging for the community financial institution due to heavy competition from money center and super-regional banks, credit unions, and fintech firms. Do we cede the field? Hand Wells Fargo our sword, as it were?

I don't think community financial institutions can fund themselves solely from their commercial customers. They struggle serving deposit-only or loan-lite small businesses because commercial lenders have no interest and branch skills have not been elevated to create the confidence needed to have business banking conversations. If a commercial lender has 20% in compensating balances in his/ her portfolio, that would be a win.

But what about the funding for the other 80%?

No, I think community financial institutions should develop a solid strategy for retail banking. As my industry colleague Ron Shevlin aptly pointed out in his 2015 book, Smarter Bank, money management will be more important than money movement. Actually, since it was written four years ago, I might be as bold to say that it IS more important. 

This reminds me of a scene from Date Night with Steve Carell and Tina Fey. Steve played an accountant, and informed a couple that they would be receiving a nice tax refund. To which he suggested opening a Roth IRA. Not interested. They were going on vacation. The world needs more boring advisors like Steve in Date Night. Should your institution be the bore? To help your customers make better financial decisions?

If you believe yes, how is your financial institution equipped to handle such a business model? Not just in employee capabilities, but in products?

A 2018 Harvard Business Review article emphasized a growing financial problem among our retail customers: they are not prepared for retirement. HBR proposed what to do about it. But I ask my readers, what do you intend to do about it?

As HBR puts it:

"Ultimately, the shift from defined benefit pension plans to employee-directed defined contribution 401(k)s is the major driver of the impending retirement crisis. Beginning in the 1980s, this move helped companies reduce their retirement liabilities and better meet their quarterly financial targets, but put an unmanageable burden on employees."

Helping our customers manage this burden requires a change in strategy, from one of "more products per customer", to "promoting our customers' financial well being." If your financial institution is embarking on delivering the latter strategy to your customers, I think there are product gaps. Two come to mind.

Much Maligned Products

The below products are much maligned due to high reputation risk, outsized fees, and are difficult to deliver due to high maintenance costs or regulatory/licensing requirements. But to help our retail customers navigate retirement, they are legitimate options that need a trusted person to deliver, be that an advisor or banker. 

Annuities

Many financial institutions "sell" annuities. But many advisors say this product is not worth it. Sales loads and ongoing fees are too costly compared to alternatives. And I agree. Vanguard was known as the low-fee producer, and they are transitioning account administration of their annuity products to Trans America. And I must admit, finding a legitimate website for objective comparison is difficult because annuity providers clog searches with pitches. And they sponsor websites that might appear objective.

Which screams for somebody to be on the side of the customer.

An annuity, properly constructed, can help your retail customers reduce the risk of running out of money in retirement. Much like a defined benefit plan does. A deferred annuity, or an immediate annuity, can be structured to provide fixed payments as long as the buyer lives. And to protect the buyer from pre-mature death and losing their savings, an insurance rider can be applied to reduce that risk.

It doesn't seem like this should be something that has a 2% annual expense ratio and a 6% sales load. Especially since your customers can pay no sales load and a 25 basis points fee for a robo advisor or an index fund. The costs are too great to overcome. 

This is an opportunity for a consortium of financial institutions, perhaps through their national trade associations, to develop products such as an annuity that protects community financial institution retail customers from running out of money in retirement. Without hyper-feeing the customer in the interim. 

The offloading of retirement risk from employers to employees scream for it. Why would banks sit on the sideline of such an important financial goal?

Reverse Mortgages

Or as the federal Department of Housing and Urban Development calls them, Home Equity Conversion Mortgages (HECM). There's an acronym for everything. Here's another product that requires some savvy web surfing to look up legitimate sources of information that is outside the product pushers purview. Imagine being a retired utility worker that is concerned about running out of money? No wonder they turn to Magnum P.I. and The Fonz for financial advice.

This one is close to home because I described it to my mom to alleviate her concerns about outliving her money. She owns her home outright. As many seniors or near-retirees do. A reverse mortgage is a legitimate product almost totally avoided by financial institutions due to reputation risk. Imagine the scenario, mom takes reverse mortgage but fails to tell her children. She passes and nobody keeps up with the payments. The bank forecloses. Geraldo is called in. Adult children on TV in tears. Holding grandchildren that thought the house was going to pay for school and give them a leg up on life. Sad.

This is not an unsolvable risk. It may, and likely does, require financial institutions to look beyond the mandatory disclosures. Because as I hear it, heirs not knowing about the loans are a big problem. Couldn't we solve for this and other risks and maintain our position as our retail customers' advocate?

A reverse mortgage requires little organizational effort in today's technology world. The loan origination resources wouldn't be materially different than a home equity loan. Loan maintenance would be even less. We already track that borrowers pay their real estate taxes on regular mortgages. The biggest difference will be at the end of the loan, where the full balance is due when the owner sells the house or passes away. And that effort and risk can be priced into the loan, without gouging.

But if we do have a retirement crisis, a reverse mortgage can be part of the solution.

Product Promoter or Retail Customer Advocate

Helping retail customers prepare for and navigate retirement can be a strategic objective of your institution. It is particularly important as so many Baby Boomers are taking their gold watch every day. Many if not most are ill-prepared for what is next. Becoming their advocate can be the best advertisement for attracting younger retail customers to your bank.

Because there are a lot of hucksters out there. Pushing Product.

~ Jeff

Community Banks and Our Retirement Problem

How can your financial institution stand out in a crowded marketplace? Why don't we play a critical role in solving the nation's retirement problem?

I recently read a report by the US Senate Committee on Health, Education, Labor and Pensions titled The Retirement Crisis and a Plan to Solve It, led by Senator Tom Harkin (D: Iowa). It called for the establishment of USA Retirement Funds to re-establish pension funds as part of the three-legged stool of social security, pension, and personal savings.

Although it calls for USA Retirement Funds to be private, it used the typical keywords of "transparency, accountability, etc." that reads... government controlled or heavily regulated. The current methods proposed to fix social security such as increase retirement ages, change cost of living calculations, make wealthy people subsidize it, should give us pause that putting more resources and control in the hands of government flies in the face of our unique American independent streak. But how do we overcome the retirement problem?

First, I agree we have a problem. If a 35 year old earns the average household income in the country, then they will need over $1 million in savings to maintain their standard of living for a 25 year retirement (see table). This equates to saving $17,000 per year, every year, until this family reaches 67. I think this family needs a trusted advisor to tell them this, and map their path to get to their hoped-for retirement.

So how can this family save $17,000 of a $50,000 annual income? Well, part of it can be accomplished through the now-typical employer 401(k) plan, where the employer matches some form of employee savings. 

Also, Uncle Sam picks up part of the tab. The employee can save all of the needed savings tax deferred. If the family is in the 15% marginal rate, then Uncle Sam picks up the equivalent of 15% of those contributions.

The Harkin's report identified four principles of reform:

1. The Retirement System Should Be Universal and Automatic. I agree it should be automatic. Universal sounds like Big Brother is telling you what to do. This is a continuing theme with the US Government... Americans are too stupid to care for themselves and need us (i.e. the Government). 

2. The Retirement System Should Give People Certainty. I think peace of mind would be better than certainty. Many great US companies went down the tubes as a result of defined benefit pension plans.

3. Retirement is Shared Responsibility. The US Government already shares with Social Security. The only other sharing (i.e. controlling) they should do is enforce laws against the charlatans that plague the investment community.

4. Retirement Assets Should Be Pooled and Professionally Managed. Well, we call that mutual funds, don't we? But I think Harkins' group is suggesting more centralized control in defining "professionally managed".

I don't disagree with the retirement challenge. I also think saving should be automatic. But I disagree with greater control of a national pension system in Washington. Here is where I think community banks, banded together through associations such as the ABA or ICBA, can play a critical role in solving our problem.

There are countless examples of organizations coming together for a cause. The Rotary Foundation strives to eradicate polio. Feed the Children, well, is self explanatory. Why can't community financial institutions band together to help customers prepare for retirement?

I'm not talking about our frequently half-hearted attempt at retail investment sales. I'm talking about a national program, established through our associations, that vets money managers like associations now vet "approved" vendors, and establishes low cost investment option packages that customers can select based on their risk appetite.

They can range in risk from mostly all stock funds, to mostly all bank CDs. The key will be to automatically move the money monthly from customers checking account into a tax advantaged IRA-type account. I'm not suggesting receiving no compensation for it. But keep fees low, such as 25-50 bps. Negotiations with money managers can partially offset these fees, since nationally community banks will be placing large sums of money into these funds. The money will be portable, and owned by customers, and not the federal government. I think we can establish a national program that meets the Senate committee's four principles, without it morphing into another federal bureaucracy to be tinkered with by future elected officials, as is the case with the Social Security system.

Imagine, a middle class family, through their local financial institution, putting away $250/month into such a program, in addition to their 401(k) plans at work. We can play a positive role in helping our customers enjoy their retirement years, and achieve piece of mind.

Should we band together and embrace the retirement cause?

~ Jeff