Independent advisors might find some New Year’s cheer in knowing that bank brokerages continue to lag their full-service brokerage and wirehouse competitors because of their operational and distribution inefficiencies. And the majority of banks aren’t embracing fee-based models, a service lapse that bodes well for independent planners.
A new report by Cerulli Associates, The State of the Bank Brokerage Industry, forecasts that “the window of opportunity” for bank brokerages is close to slamming shut, and that to stay in the game, banks must remedy their shortcomings posthaste.
Banks’ biggest snafus are their failure to integrate distribution structures, sales practices, systems, and operations across business lines, says Boston-based Cerulli. As the competitive landscape changes, full-service brokerage firms, insurance companies, and discount brokers are adding traditional banking services more rapidly than banks are adopting brokerage and fee-based services.
Jean Sullivan, who co-authored the report with fellow Cerulli consultant Rachael Malatesta, says that while “banks have made progress in positioning themselves more strongly within the brokerage industry,” their infrastructure woes will stymie further improvement. “Oftentimes banks have multiple distribution arms. How do they coordinate between them? How do they capture a customer’s information into a single database? How do they integrate the back office?”
The mid-tier banks, with assets from $5 billion to $70 billion, are the most threatened because they haven’t acquired broker/dealers like the Citibanks, and they lack the niche presence of the community banks. The mid-tier banks suffer “credibility issues. They haven’t been able to acquire their way into those markets because of lack of capital, and sometimes they still face a conflict internally of how they should transition into non-bank business lines,” Sullivan says.
While some of the nation’s large banks have embraced fee-based services, some of the regional banks still need to move in that direction, she says. “They have to work out all the issues relatively quickly because of the changes that have happened within the competitive landscape due to deregulation.”
Another challenge is developing competitive compensation schemes, especially with regard to the bank brokerage channel, Sullivan says, which applies mainly to brokers who are situated in the bank branches. “Brokerage firms are now offering, and have been offering, traditional banking products that will strike at the heart of the banks’ core customer constituency, which is the middle market,” Sullivan says. “Brokerage firms are implementing scalable advice models and are moving down market and offering better compensation models.” Cerulli estimates banks pay reps 32% of gross commissions, while brokerage firms pay 40%.
If you’ve followed the banks’ path to offer fee-based and brokerage services, you’ve noticed that the majority of banks have been struggling with the aforementioned conundrums for a while now. Banks move at a snail’s pace in modifying their behavior because their competitive psyche is still ruled by regulation. As Beth Morrow, senior industry analyst for financial services at Ernst & Young in New York, notes, change is slow in these “highly structured bureaucracies. Banks, and insurance companies as well, have been regulatory-focused for decades; historically, they have been run by regulation, rather than by market forces; they have not been market-focused or market-responsive,” she says. “They are becoming more market responsive, but they in no way respond to the market with the speed at which your average consumer company responds to the market. That is because competition has always been regulated in these highly structured organizations.”
Banks’ slow pace in adopting new habits, particularly their neglect of fee-based services, is a good sign for independent planners. “The RIAs have a stranglehold on the fee-based business, and are actually well-positioned in that marketplace,” Sullivan says. “We think banks have an opportunity to expand into the fee-based arena, and they haven’t done so yet.” Banks’ biggest obstacles, she says, are training their reps to understand fee-based business practices, and finding a program that best suits their customer segments.
Mike Mortensen, president and CEO of PNC Brokerage in Pittsburgh, says another mistake that banks, and other financial services companies, are making is applying financial planning to every customer. “What some financial services companies have done to themselves is say, ‘Financial planning makes a lot of sense, let’s lead with that for every customer,’ but it doesn’t really match up to what the customer wants,” he says. “Not all of [PNC's] customers need full-service financial planning. You still get folks who come in and just want to do a transaction–’I've got some GE stock I want to sell’–but for those looking for investment advice, we have investment planning software we use across the board consistently.” He says PNC strives to provide “quality financial planning that customers will appreciate and are willing to pay for.”