Insights | 01.08.20
Best of Portfolio 2019
Here are the top five Portfolio articles of 2019.
by Rob Comfort
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.
By Portfolio Staff
As financial services firms help their clients prepare for retirement, they should know how today’s savers think and act with regards to their financial portfolio. BISA took an in-depth look at the 2018 research and statistics to assess Americans’ current attitudes and behaviors toward retirement planning.
The 2018 State of Retirement could impact how you communicate and help your clients plan their fiscal futures moving forward. Read the infographic below to learn more about retirement planning across a variety of age groups.
Click here to view the infographic.
By Rob Comfort
Although bank and credit union investment programs have grown modestly over the last decade in revenue and assets under management (AUM), the story is different for the percentage of clients or members who look to their financial institution for wealth management needs. Household penetration has remained stagnant at roughly 6% for banks and 2% for credit unions. Thus, bank and credit union investment programs are under-performing relative to their real potential. Here, we will explore the causes and possible solutions.
CONSUMERS TYPICALLY HAVE SIX CORE FINANCIAL NEEDS:
❯❯ Cash management (deposits)
❯❯ Credit (loans)
❯❯ Growth of assets for the future (retirement, college, etc.)
❯❯ Income generation and planning (from accumulation to distribution)
❯❯ Protection (life, longevity care, etc.)
❯❯ Leaving a legacy (to family, charity, etc.)
Why do so few financial institution clients use their bank or credit union for these crucial needs, especially when most clients say they would prefer these needs be met through their financial institution? For instance, only 2% of credit union members use their credit union for investments, yet 52% say they would prefer these needs be met by their credit union. Why the disconnect? Let’s explore.
Possible causes include:
1. Dependence on branch referrals
Historically, financial institution programs have grown primarily via traditional referrals from the branch system. This process breaks down due to:
❯❯ A lack of target marketing to the right clients
❯❯ Clients who are most likely to have been referred already have been referred
❯❯ Bank personnel often distracted with other priorities
❯❯ Little to no accountability or incentive to refer
❯❯ Regulation greatly limiting what can and can’t be said
❯❯ The most valuable prospects may not come into a branch
❯❯ Referrals are drying up as branches close and traffic declines
2. Inconsistent commitment from institution leadership
Without consistently making wealth management core to a financial institution’s services, customer penetration numbers will continue to struggle.
3. Advisor shortfall
Financial institutions lack critical mass needed to properly serve existing clients, much less to increase penetration levels. Reasons include:
❯❯ A shrinking advisor population and pool of potential new recruits
❯❯ Resistance of existing advisors to reduce territories, go second-story or build a team
❯❯ An errant view by institution leadership treating advisors under standard FTE guidelines
❯❯ Advisors’ lack of trust in institution leadership, causing turnover or recruiting headwinds
❯❯ No junior advisor training program to develop the next generation internally.
HOW SHOULD BANKS AND CREDIT UNIONS ADDRESS THESE BIG CHALLENGES THAT HOLD BACK ANY REAL PROGRESS AND GROWTH?
Potential solutions include:
1. Lead generation marketing: By harnessing the power of data and analytics, financial institutions can dive deep into the demographic makeup of their client base and markets. By applying that knowledge to a lead-generation marketing engine, financial institutions can target ideal clients for investment and wealth management services. For instance, credit unions that work with CUNA Mutual Group can analyze their member base across 600 data points and 13 segments based on financial behaviors.
Through data modeling, credit unions can design and implement focused marketing efforts illustrating an investment program’s value. This approach is far more precise and consistent than relying on traditional branch referrals.
2. Gaining leadership buy-in: Broker dealer and program leaders can earn much higher support from institution leadership by:
❯❯ Using models to demonstrate the cumulative impact investments and wealth management can have on loans, deposits, non-interest income, client loyalty, penetration — and the balance sheet.
❯❯ Challenging them to understand that without a total commitment to helping clients with all six core financial needs, the institution is not fulfilling its mission.
❯❯ Being bold in asking for things that put the achievement of investment goals on par with priority loan and deposit products, seek capital investment in the business and request adequate firm-wide incentive and accountability for the achievement of investment goals at all levels, including priority weighting on scorecards. Create a multifaceted proposal that illustrates the overall financial impact a successful wealth management program can have.
“Too often, financial institutions view the opportunity in retail investments as an incremental increase from the prior year to reach an annual growth goal, instead of assessing the business potential and building a program that enables that potential to be reached,” says Peter Bielan, principal of Kehrer Bielan.
3. Addressing the advisor shortfall: Unfortunately, there is no quick fix for the growing shortage of financial advisors in the industry. Potential new recruits must overcome barriers to entry, such as multiple licensures, bringing significant AUM, or trailing 12 GDC and starting on a full commission-incentive plan. As a result, younger people or those changing professions are not entering our industry. These barriers also block any real progress encouraging more diversity among financial advisors.
By creating a team approach where junior advisors, licensed bankers or RSMRs, various levels of sales assistants and other team roles can enter our profession and develop into that next generation of advisors, we can right-size our advisor force over time. Although some financial institutions have begun to implement this approach, to really impact the challenge, this must be a long-term investment and commitment, including job descriptions, compensation plans, ongoing training and development, and adaptable recruiting capabilities.
Without addressing these three challenges, our industry will continue to underperform relative to our potential and miss the opportunity to help more people address their six core financial needs. Our opportunity to change is now.
By Paul Conley
Millennials. Few subjects have caused as much consternation in the finance industry as the nature of today’s young adults. Odds are you’ve spent a lot of time wondering about them, what drives them and particularly about how to hire them.
According to Cherrie Wilkerson, a professor of the practice of management at Vanderbilt University, who specializes in research on millennials in the workforce, the key is to understand the effects that growing up in this era has had on young people and to see just how graciously that generation has weathered the storm.
Companies that want the members of Gen Y to adopt the attitudes and mores of baby boomers have things backward. The tactics that worked when recruiting people who came of age between the 1960s and 1980s, such as the potential for high earnings plus a clear and easily understood system for gradually moving up over the years, don’t hold much interest for millennials.
“It’s time for the industry to recast,” Wilkerson said. Or to put it another way:
It’s not the recruits that have to change; it’s the recruiters.
The Ghosts of 2008
Many in the financial industry today like to point to the 2008 financial crisis as the primary cause for their issues with hiring a younger generation of financial advisors. It’s often seen as a PR problem as there’s the perception that the financial crisis left millennials with a bad taste for the banking business. “Look, 2008 did not help,” Wilkerson said. “Greed, overzealousness and bad actors tarnished the entire industry.”
However, it seems as though that perception may not be entirely accurate today. For those who have found their way to the financial industry, the stigma has been lifted. “There is not a negative connotation with the younger group,” Amanda Vogel, an annuity national account specialist and member of the BISA Diversity Committee's Rising Star group, told attendees of a session on “Hiring and Retaining Next-Gen Talent” at BISA’s 2018 Annual Convention in early March. “But I think parents and grandparents have that connotation.”
"Next-Gen" panelist Esteban Zuno, region manager at U.S. Bancorp Investments Inc. and another member of the Rising Star Group said, “I don’t think the stigma is at the forefront for millennials.” The panel remarked how the financial crisis happened when they were in high school or college and didn’t re- ally consider the impact outside of their family’s personal finances. They weren’t really looking to attribute it to a larger group or understand the situation; they just knew that it happened and then dealt with the aftermath. For older generations in the industry, the financial crisis was a seminal event in their careers and lives, but for millennials, they weren’t even sure what they’re careers would look like when it happened and have been able to overcome some of those more negative feelings around it.
Something to Fear
Popular culture tends to portray millennials as fragile, entitled youths now turned young adults that need participation trophies for every- thing they’ve ever done. As with any stereotype, there is both truth and falsehood in the idea of the faint-hearted millennial.
Baby boomers and Gen X (the smaller generation in between boomers and Gen Y) came of age in times of relative prosperity and safety. Of course, there was the Vietnam War, but it was far away for most Americans. Then there was the Cold War, which hardly de- served to be called a “war.” There was an energy crisis and some nasty bouts with inflation, but American life from the 1950s through 2000 did, in hindsight, have fewer society-altering disruptions.
Millennials have lived in a very different time; one marked by terrorism, school shootings and, more broadly, very protective parents. With the proximity and intensity of tragedies like 9/11 and the Columbine High School Massacre — among many others — millennials were deeply and personally affected at a young age. The larger events in the world, as well as the mentality at home, conditioned them as children to feel that no place is truly safe.
You can hear this generational difference more easily than you can see it. The word that defined baby boomers’ attitude toward the world was “cool” — a perfect summation of the place where casualness and sophistication overlap. Even today, older people pepper their conversation with the word. By contrast, the word that defines millennials, the word that drifts in and out of their conversations, punctuating their belief that anything can happen to anyone, is “random.”
“The world they grew up in was far less secure than ours was,” Wilkerson said. Their families’ financial security was wiped out in 2008. The attacks of 9/11 triggered unending wars in Afghanistan and Iraq. Schools became killing zones.
Wilkerson points out how this sense of menace continues to play out among millennials. At Vanderbilt, where she teaches, there are about 300 MBA students. Those students have lost three of their fellows to terrorism — one killed in Israel, two killed in the airport in Belgium. “That’s personal,” Wilkerson said. “That’s close to home.”
Find Part Two of the "Millennial Conundrum" here.
By Portfolio Staff
For the past five years, BISA has hosted a women’s networking event during the Annual Convention. On March 6, 2019, more than 80 women in the bank insurance and securities industry got together over lunch to build new connections, catch up with colleagues and get inspired by the thoughtful words of Dorie Clark, a marketing and strategy consultant and networking expert.
BISA Platinum Leadership member company Symetra sponsored the event and brought in Clark to speak about key ways women can grow and develop their networks, although the advice is truly applicable to all career-driven individuals. The author of several books, including Reinventing You and Stand Out Networking, Clark challenged the traditional concepts of networking and encouraged attendees to consider seven smart, reasonable ways to redefine their professional potential.
7 Strategies for Better Networking
- Nail Your Opening
We all know that making the first move is hard. For some, it’s terrifying. Rise to the occasion by preparing some opening lines to get the conversation started. The best way to make a connection is to find a commonality, which is made easier when you start with open-ended questions. Clark recommended some examples to try at your next networking opportunity:
- What is the coolest thing you’re working on?
- What are you excited about?
- How do you spend most of your time?
- I don’t know anyone here. Can I talk to you?
- Become a Hub
Diversifying your connections can make you truly indispensable, and it doesn’t have to take a lot of time. Clark shared a story of a busy woman at a big company. She wanted to get to know people in other departments and decided to devote an hour a week to this effort. She invited a different person a week to an hour-long lunch, and by the end of the year, she had 52 new colleagues.
Having allies in different areas of the company gave her a better understanding of other workflows, not to mention a variety of people she could call on for help or advice. The more advocates you have, the more potent your staying power.
- Play to Your Strengths
You wouldn’t expect a vibrant speaker and master relationship-builder like Clark to be an introvert. After a hum of surprise roared throughout the room, Clark explained that she indeed was not energized by being around big groups of people, but that doesn’t mean she can’t enjoy networking. “Find what kind of networking works for you,” she said. “For me, it was small dinner gatherings where I bring together a few people I want to get to know.” As an added touch, she sends out links to everyone’s LinkedIn profiles ahead of time “so nervous people can research everyone and think of talking points.”
- Build Your Circle
Clark pointed out that although it’s smart to case a wide net of professional connections, women especially need a deep, connected circle. A small group of trusted confidants who really know and support you can make all the difference. She recommended finding a group of professionals inside and outside of your industry who you really trust. Try to meet somewhat regularly, even if it’s over video conference.
- Everyone Needs a Wingman (or Woman)
Even the most confident people can feel uncomfortable telling others about their accomplishments and good qualities. Women, in particular, often struggle to enforce their strengths at risk of sounding conceited. As it turns out, Robert Cialdini and Jeffery Pfeffer — experts in the social science of influence — found that this concern is justifiable. Their research showed that people who talk themselves up can appear “self-aggrandizing, and it can rub people the wrong way.” Thankfully, there’s a cure: Find a peer who can advocate for you, and you can do the same for them. Actively and intentionally speak to each other’s skills and achievements, so that you both reap the benefits.
- Be the Host
Have you ever attended an event alone and then realized that everyone else already knew each other? Did you return to the event in question? Even for extroverts, this can be a difficult situation to navigate. If you’re planning to host your own events, take control and prevent new guests from feeling isolated. Clark suggested that for repeating events, it’s important to break up the “regulars,” which she defined as those that have attended at least three meetings. Instead of sitting and mingling with only familiar faces, encourage regular attendees to talk to the new members for at least the first hour. This builds a strong community where all feel welcome.
- Make Croissants, Not Bagels
“Inclusion in networking can be as simple as how you stand,” noted Clark. The most common way for groups of three or more people to have conversations is in the shape of a circle. Although it logistically makes sense, standing in circle presents a challenge for anyone else who may want to join in. It’s hard to feel welcome to a group when there’s no natural way to become a part of it. Referencing the work of Robbie Samuels, Clark inspired attendees to “make croissants, not bagels,” meaning that instead of assuming a circular position, work to orient the group in a semi-circular fashion. Doing so allows for a new person to come in at any time. Should the ring close, expand again. Leaving room for others will create an inclusive environment where all can be seen and heard.
What Will You Do Differently?
Clark’s strategies, easy to remember and apply, are things anyone can do to increase their circles of influence. Following the presentation, the positive energy in the room was palpable. The women of BISA left the networking lunch with their newly signed copies of Stand Out Networking (courtesy of Symetra) ready to build new relationships through the reminder of the week and beyond.