When I left my role as an FA at a large regional wirehouse to go to a bank, I was continually asked why. I know it’s cliché, but I answered how bank robber Willie Sutton did: “Because that’s where the money is.” Years later, at places like JPMorgan Chase, bank deposits are up, but investment management revenues are stagnating or declining. Money continuously pours out of domestic equity mutual funds each week, and, indeed, retail investors have been selling for five years. (See table, page 35.) (Investors have been favoring bond funds and, naturally, have missed the recent stock market rally that has taken stocks up 28 percent on a trailing 52-week basis.) Increasing competition from direct investors like TD Ameritrade reduces our investing herd with their lower costs and cookie-cutter models that are comparable to many advisor allocations. (See the Independent Life supplement, page s15, for more.) Is the bank/brokerage model broken?

The Lure

The appeal of the bank/brokerage sales pitch is that an incoming FA will have access to all of the bank’s clients and be able to prospect from his desk—no more cold calling, it’s all warm! No intro is needed, since customers already know the bank.

People often have deep feelings about which bank they choose to go with, as well as those they decline to do business with. Years ago, before the banking crisis, I had clients who did not come with me when I moved from a regional brokerage to a bank brokerage. I told the clients that they didn’t have to move their bank accounts, just the brokerage account. Yet they declined to make the move, because they held strong negative opinions about the bank where I was going. True, this is a possible scenario in the brokerage business, too, but banking seems to be a much more personal decision: People may change brokers multiple times, but they may change banks only in the face of a new “life event.” They are tied up in direct deposit, automatic debit for utility bills, and are comfy with  the online banking interface and the convenience of it all. Everything else being equal, some people would rather suffer than change.

Not surprisingly, banks are trying to get all the wallet share of a client, but the stark reality is much different for the FA. The branch that you may find yourself in, at one time, belonged to another FA, and for you to be assigned the branch of your choice, someone would have to be willing to give it up. The first question is: Why? Why would an FA give up a branch that is producing strong revenue? Did this branch generate all of the FA’s revenue? Would the FA be willing to share the wealth? Unlikely.

Another consideration: Is the location a burden to the current FA? Perhaps. Or does the FA want to bail because the branch didn’t generate business despite the size of the deposit base? That sounds about right. If the outgoing advisor has done his job properly, he already would have solid relationships with the largest accounts. Wouldn’t you contact your largest bank balances first? It’s not like starting at the Zs instead of the As; one simply wouldn’t start calling the negative balances first in the hopes of hitting the white whale.

 The branch’s biggest customers likely have already established a relationship with the previous advisor, or advisors, covering the branch. Guess what? The departing FA will take that client’s brokerage money with him—even when he leaves the branch behind. In short, often branches are already picked over. I remember looking over all these bank clients when I joined a branch, and thought, “Wow, this one has $1.2 million and this one was $1 million in cash on deposit!” The problem: They were already “owned” by another FA.  

Automatic Referrals?

Brokers love client referrals. Bank client referrals, for all the ease in finding them, may actually be the worst kind. Large deposit balances—a key driver for the prospecting FA—are in a bank account for a reason. This is the customer’s safe, “rainy day” money. The depositor does not want his money invested in risky assets, period. Perhaps purchasing a CD here and there is OK, but little else that limits the depositor’s access or dampens his liquidity.

If Grandma has $500,000 on deposit, is she really interested in putting it at risk? Not if she has any memory of the Depression or has picked up a newspaper lately. If the deposit isn’t rainy day money, it’s very often a customer’s working capital. Tying up cash in risky or illiquid investments defeats the purpose of depositing money in a bank account. In my experience, the big depositor has already invested the money she wants invested.

Sure, prospects are easier to find, but they are no better than the prospects generated through traditional methods (cold calling, referrals and the like), since much of these assets are not ideal for investment. The main winner is the bank, not the brokers.

It can’t be all bad news, right? Combining the two has to have some benefits. For example, you get banker’s hours, that is, from 9 a.m. to 4 p.m. (except JPMorgan Chase, which asks FAs to stay until 6 p.m. and come in on weekends). I often stayed later than 4 p.m., but closing the bank on your own with alarms and key codes can be touchy. Banks are great for developing relationships for “down-the-road” events—retirement, inheritances, etc. Establishing a relationship before those events is powerful, especially when it’s through frequent chats in the lobby. However, bagging that money requires a long sell cycle.

In response, banks are requiring incoming FAs to have higher and higher production before they will entertain bringing them on. For example, when I moved my book to a bank, the bank wanted production in the range of $400,000 to $500,000. Now that same bank seeks $750,000 in production. The banks know that if FAs rely entirely on the bank for production, they will go hungry, start to starve, and then leave—forgivable loan be damned.

And, happily, FAs get to cross-sell bank products! Got a client that you brought over with a large brokerage balance? Great! Does she need a new home loan? A refi? Checking accounts for her children? Expect pressure to come from the bankers, too. If they refer business to you, you had better refer banking business to them. The success of the referral business is keeping your partners happy. When you land a new client, you had better convert some into banking customers. 

Most brokerage models work to feed the older and more established advisors by awarding them a failed newbie’s accounts. Banks, on the other hand, are usually more equitable about it, say, redistributing the account according to client location. That is a good thing, but hardly cause for celebration.

So, what is the future going to look like? Is it the RIA model? Or is it RIAs who affiliate with self-directed brokerages, such as Schwab? Or will wirehouses return to their past glory? Perhaps the answer is more of a team focus. At this point it is anyone’s guess, although I am leaning toward the rich getting richer and the poorer getting forced out of the business. Clearly, the game has changed and investors are more skeptical than ever.      

David T. Berman, CFP, M.B.A., has more than 15 years of experience in financial services.