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Bringing Investment Services to Banks and Credit Unions: the Haves and Have-Nots

How to Engage Banks and Credit Unions

25 Jul 2017
How to Engage Banks and Credit Unions

While it would be easy to overcomplicate this topic, it boils down to some key points and a basic understanding of the financial institution’s world.

  • Banks and credit unions are really good at “banking” – lending money and collateralizing loans. By their very business and nature, they are generally risk adverse.

  • The biggest fear banks and credit unions have in considering an investment program for the clients/members is “brand” risk. What if the advisor runs off with someone’s money and they get blamed?

  • Banks have clients or customers and credit unions have members.

So how would you approach them and share the benefits of adding an investment advisor program for them?

First, the lingo.

While there isn’t a need to learn all about the banking world, focus on a couple of terms, and you should be able to get their attention: Non-interest income or fee income. Generally interchangeable, both mean the source of the revenue is not linked to a loan. With low interest rates, financial institutions are all looking for revenue not tied to loans.

Next, regulatory questions.

Is it okay to share commissions? Yes. It is legal for broker-dealers to share commissions with banks and credit unions once a networking agreement is in place.

  • Regulatory authorization comes for banks through the “FDIC – Interagency Statement on Retail Sales of Non-deposit Investment Products.”

  • For credit unions, the authorization comes through “Letter 10 for Credit Unions.”

  • Does the financial institution have to have a staff member who is licensed? Not for most products. Some exceptions exist, especially with insurance sales.

So how do I get a Networking Agreement and how does it work?

The networking agreement is between the broker-dealer and the financial institution. Someone at the broker-dealer can provide a copy of the agreement and will usually have the conversation with the financial institution to work through the agreement review on your behalf. This agreement generally contains three things:

  1. The responsibilities of the financial institution

  2. The responsibilities of the broker-dealer

  3. Who gets paid what and who covers the fees

How much do I have to share with the financial institution?

It depends on the arrangements you make with the financial institution. A good rule of thumb in this space as an independent advisor, not a financial institution employee, would be for the financial institution to receive 20 percent of the GDC for giving the advisors the opportunity to work with their clients/members.

The approach.

Revenue Generation: Most financial institution executives understand the need to generate non-interest or fee income. Adding an investment advisory program that will generate income for them is often a good place to start. Ask them if they have explored adding a program to generate non-interest income.

Offensive Positioning in the Market: If the financial institution doesn’t have a program and neither does their competition, adding an investment program might be a good way to differentiate their offering. The proverbial one-stop-shop.

Defensive Positioning in the Market: One Securities America advisor, who has started working with a bank in Texas, started the conversation with the banker at church. He asked the banker if he ever thought about adding a program. The response was, “Yes, I have. I’m tired of seeing checks go out the door for $50,000 to the advisor across the street. I have to find a way to stop the flow of money out the front door.”

Loyalty: Another way to address it is customer loyalty. Financial institutions are in competition with other financial institutions, advisors, the super banks, the insurance agents and at this point Apple and PayPal. So how do they keep customers closer to home? By working with them on their investments as well as their banking needs.

A study by Kehrer-Bielan reported households that invest with their financial institution have 38 percent higher checking account balances and 140 percent higher savings account balances. Additionally, over 50 percent of the households that invest with their financial institution say they would not switch to another financial institution regardless of the offer. In comparison, only 25 percent of households not investing with their financial advisor said they would consider switching if presented with a compelling offer.

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