Insights | 04.02.19
Assessing the Value of our Business
*Republished from the 2018 Portfolio Print Publication
Banks became serious about investment services during the late 1980s and early 1990s. It seems credit unions have lagged a bit behind, bringing greater focus to that aspect of their business in the early 2000s. However, one consistency across all financial institutions has been a constant fight for shelf space for investment services. Leaders often face an uphill battle in trying to convince executive leadership to offer proper support to their investment businesses. The mere fact that only 6 percent of bank clients and 2 percent of credit union members have an investment relationship with their financial institution indicates shelf space is still a big challenge.
There are several reasons for this issue, but I do believe that we, as leaders in the bank and credit union space, have not properly articulated the true value our investment businesses can bring to our institutions. When sharing the value of our businesses, we often focus on the level of net-fee income we generate. Although this number is important, it will never be large enough to truly excite executive leadership. Some have emphasized principles such as higher levels of loyalty or helping clients achieve important financial goals, but when loan sales need to increase, that higher mission often gives way to immediate business needs. And before we know it, the investment business loses shelf space once again.
The core financial needs every bank customer and credit union member has and how they can only be met through a dynamic investment services business that is purpose and mission-driven. The question becomes: How can we properly, and compellingly, show our institutions the true value our businesses offer? To do this, I would suggest we categorize each area of value into the following:
- The impact to deposits, loans, cross-selling and loyalty when a customer or member has an investment relationship with their financial institution
- The true profitability of a bank broker/dealer or retail investment business, taking into account all factors including minimal use of capital and impact to the balance sheet and market valuation
- Evaluating a program’s true potential versus judging it only on today’s level of revenue, considering the lifetime value of a client
- The cultural impact of truly fulfilling our institutions’ mission statements instead of only partially fulfilling them
Each of these components helps us articulate the true value our services bring to the larger institution. Several industry leaders will help us walk through the various components and how they build on one another to truly show the impact our services bring to banks and credit unions.
The Core Financial Needs of Every Client
There are six core components financial advisors need to understand about each of their clients to get an accurate picture of each client’s overall wealth-management portfolio:
- Cash management – Deposits
- Credit – Loans
- Growth assets – Retail investments
- Income generation – Retail investments
- Protection – Retail investments and insurance
- Legacy – Retail investments and insurance
As you can see, a bank or credit union can meet the first two, but they would need an investment business with capable financial advisors to meet the next four. The first two are product and rate driven, while the next four are advice driven and met through multiple solutions and products.
When banks or credit unions are not meeting these four additional needs, there are two possible outcomes: The customer or member is having these needs met elsewhere or not having them met at all. Neither is a good outcome for our institutions.
This discussion keeps the focus on serving the needs of our customers and members, and without proper shelf space, the institution is saying they really don’t care as much about these needs as loans and deposits — or the majority of their customer’s financial needs for that matter. Yes this is a mission or purpose-driven discussion, but executive leadership needs to be constantly challenged to consider their commitment from this perspective. This is not an easy decision because the earnings from each of these six areas are different in terms of magnitude, costs and margin for the financial institution, but if the firm is truly client and member-centric and acting in a their best interest, those business variables will not prevent a financial institution from providing best-in-class service that meets all six core financial needs.
Some institutions have done a nice job showing the impact an investment relationship has on deposits, loans, cross-selling and loyalty. Although these studies have shown a very positive correlation between an investment relationship and these areas, an extensive study by Kehrer Bielan shows that, compared to members without an investment relationship, when credit union members have an investment relationship with their primary credit union, they:
- Are 42 percent more likely to say they would not consider switching to another depository institution
- Keep a 2.5x greater share of their assets at the credit union
- Use 20 percent fewer total depository institutions, so more of their financial business gets done at the credit union
At CUNA Brokerage Services, we have validated this study analyzing several of the largest credit unions we support. We can even show a credit union the impact to their balance sheet if member investment penetration increases by certain amounts. It’s also logical that the more needs we help customers meet, cross-selling and loyalty both skyrocket. Institutions should rethink how they quantify cross-selling, and instead measure it first by needs met, then by products sold. If they took this approach, they could see cross-selling absolutely explode as it would take many products and solutions to meet all of the six core financial needs.
As an example, Suncoast Federal Credit Union (FCU) not only measures average balances of deposits and loans for members who have a wealth-management relationship compared to members who do not, but also how many unique products each group has with the credit union. To define unique products, any deposit type would be one unique product, and multiple CDs, for instance, still only count as one unique product. Members who have a wealth-management account own 3.32 unique products compared to members who don’t. Non-wealth-management members own 2.4 unique products on average. According to Roy Echols and Melva McKay of Suncoast Credit Union, members who have an investment relationship are 24 percent more likely to have a checking account, 100 percent higher loan balances, 180 percent higher deposit balances and have 36 percent higher online banking usage. This, once again, validates the planning and relational impact a wealth-management business has on overall product sales. By making investments a core offering of the credit union, it has greatly improved the overall organization. “The entire Suncoast team gets it and the results are evident” McKay said.
According to Rhomes Aur, president of First Tennessee Investments, as an institution, First Tennessee believes that offering objective advice through their wealth-management business is the most endearing way to drive client loyalty, which, in turn, naturally drives higher loan and deposit sales.
Minimal Capital, High Growth
What if, when calculating the true profitability of our programs, in addition to taking revenue less direct expenses, allocations and taxes, we added in factors showing that this revenue requires no capital and can have significant impact on growth, without having to buy another business?
“Say your retail investment business has $5 million in revenue and earns $1 million,” said Peter Bielan of Kehrer Bielan. “If someone were to come to you with a business opportunity to replicate that revenue and earnings without having to buy a business, would you take it? Everyone would. How many of those opportunities are available to you? Rarely does someone have a proposal to add in a business like that, so then why not double the number of advisors in your existing business and achieve that opportunity?”
Jon Gabriel of Kehrer Bielan looks at the impact of an investment services business on the bank’s valuation. “The markets tend to give a higher price-earnings ratio to institutions that have above-average fee income, including investment services income, in part because those sources of revenue do not require capital and in part because they are counter cyclical to loan demand,” he said. “On a stand-alone basis, the market values an investment business up to two times revenue, depending on how much of the assets are in advisory business.”
Focus on the Potential
So often in our discussions with institution executives, we focus on the level of fee income we generate today versus what the true potential of the business really is. For example, an investment business may be generating $10 million in revenue, but when we plug in industry metrics for median and top quartile performance, the opportunity might be $30 million. That means $20 million in potential is being left on the table because the investment business is not core to the institution. It’s important to use metrics such as deposit revenue penetration, household revenue penetration, wallet share capture, advisor book, territory optimization and others to evaluate the true potential of the business. Keeping the conversation focused on the bigger, long-term picture can usually widen that shelf space.
Accurately Fulfilling the Mission
All of our institutions have mission statements, and all of them have something to do with helping people achieve their financial goals, hopes and dreams. By helping customers and members manage their cash and by providing credit, institutions have some impact on their clients’ lives, but by ignoring the other four core financial needs, true fulfillment of the mission never occurs, and employees realize the mission really isn’t genuine.
To the extent that our institutions take meeting all six core financial needs seriously, employees will become energized and inspired that the work they are doing really does have an impact on the people they serve. Although it’s hard to put a dollar figure on the exact impact, study after study shows that an aligned, engaged, genuine culture has ongoing positive effects on overall financial results. When executives are asked what makes their organization stand out, the answer is usually their people. Gaining this level of employee engagement will not only make for a better answer, but it will also deliver on executive management beliefs. “People want to be part of a mission and not just a job,” said Tim Kight of Focus 3 Consulting. “Elite companies that are purpose-driven are also more profitable.” But to achieve that level of profitability, that feeling has to be at the heart of the business, according to Kight.
In other words, if a company’s mission or values are just a poster on the wall, employees will see through that. That’s why making wealth-management core, or at the heart of a bank or credit union’s focus, can be transformative to culture.
By combining all five of these areas of value, bank and credit union investment business leaders should be much more successful in persuading executive leadership to provide the support and offer the shelf space our investment businesses deserve. “In this day and age, it’s table stakes for financial institutions to feature a complete set of services to help their clients achieve their financial goals,” said Sam Guerrieri of Canandaigua National Bank. Our customers and members need us, and our banks and credit unions can’t do it without us. By taking this approach to showing the true value of our services, we can win the shelf space discussion once and for all.
Rob Comfort is president of CUNA Brokerage Services, Inc. (CBSI) and leads the business development, sales and growth strategies for the broker/dealer. He is also responsible for overseeing the recruitment of CBSI’s financial advisors and ensuring they are equipped with the technology, training and resources to break down barriers and help credit union members achieve financial security. Comfort has over 25 years of experience in leadership, client acquisition and retention and organizational development within the financial services industry