Banking on Brokerage

OVER THE YEARS, bank-based brokerages haven't posed much of a threat to Wall Street firms' pursuit of high-net-worth individuals. Most bank brokerages had pretty limited offerings: your basic line of annuities, life insurance and mutual funds. And they rarely ventured far from proprietary products. Let's face it: Few banks — save the most elite of private banks — were viewed as places to get sophisticated (or, in some cases, even good) investment advice.

As one bank-based broker, who asked not to be identified in print, put it: “Banks were seen as places brokers went to work after they'd failed at a ‘real’ investment firm.”

But, times are changing. Banks — all too aware of the fact that they've lost wallet share — are rallying to regain some of the billions in market share they've lost to full-service brokerage firms in recent years. According to the Spectrum Group, a Chicago-based industry consulting firm, personal trust assets held by U.S. banks have fallen 10 percent to $986.2 billion in 2005 from $1.1 trillion in 1999. (A three-year bear market likely accounts for some of the bloodletting).

“Thirty years ago, banks held the majority of assets in this country. But that's no longer the case,” says Jeffrey Korzenik, a private banking industry consultant who (until recently) served as president of Salem Five Investment Services, a subsidiary of Salem Five Savings Bank with $2.3 billion in assets, and 18 locations in Massachusetts. The virtual death of defined-benefit pension plans has helped turn America into a nation of investors, he says. “So banks are expanding their investment services, and reaching out to more demographic groups — and they're finding success.”

Though personal trust assets at banks are down, banks' brokerage business is growing. From 1996 to 2006 (the latest data available), bank brokerage commissions about doubled to $5.8 billion, according to The Bank Insurance Market Research Group in Mamaroneck, N.Y.

Factor in what Korzenik calls, “the sins of the brokerage community in the late 1990s and early 2000s, and that's cost a lot of faith in traditional providers” — giving banks a much-needed boost. A biannual Spectrum Group survey of individuals with $500,000 or more of liquid assets supports Korzenik's observation. Spectrum asked whether or not they “trusted” full service brokers: In 2002, 45 percent of those surveyed said that they did. In 2004, however, the number dropped to nearly half of that, to just 24 percent.

“Banks are where the most exciting growth in the investment industry is right now,” says Christopher L. Davis, the president of The Money Management Institute of Washington, D.C., the managed account lobby. Indeed, fee-based business at banks nearly doubled last year, according to research from consultancy Kehrer-LIMRA. Revenue from wrap and managed accounts comprised nearly 6 percent of total bank brokerage revenue in 2006, Kehrer-LIMRA says.

Everybody appears to be getting into the action, including small community banks. The PrimeVest/ING Index of Community Bank Brokerage, which measures bank brokerage revenue of community banks and credit unions (excluding trail commissions and managed money), reached a new all-time high in July 2007 (the index was created in 2002). Meanwhile, when you do include trail commissions and managed money in the equation, average gross brokerage revenue per bank financial consultant was up 33 percent in July compared to the previous month, led by an increase in sales of variable annuities, according to Kehrer-LIMRA.

Even as banks move into brokerage, some smaller RIA firms are beginning to offer banking and trust services. The top five trust departments are at JP Morgan, Bank of New York, Northern Trust, Wachovia Corp. and Mellon Corp — as you would expect. “In that list of top players, you see the traditional trust companies,” says Andrew Singer, managing director of The Bank Insurance Market Research Group. “But you now see some new firms that have emerged as wealth management specialists over the last decade, some of whom are targeting the recently wealthy as opposed to old wealth.” Two emerging players, Singer says, may be somewhat unfamiliar to some in the HNW game, but are a good example of the new financial institution. The first is Boston Private Financial, a Boston-based firm that has acquired 14 independent registered investment advisory (RIA) firms in six regions. The second, City National, is based in Beverly Hills, Calif., with 62 offices (mostly in California). Both firms have around $36 billion in assets under management, and billions in deposits and loans.

DON'T HAVE IT, OUTSOURCE IT

Though the trend is being led by some of the biggest names in banking, many banks that aren't big enough to build their own platforms are getting into the game by signing up with third-party providers. “Everybody wants to be in the trust business,” Singer says. “The trust business is much bigger than simple retail brokerage.” Besides, trust services — now labeled as wealth management — is where the money is. Most importantly, bank brokerages are moving to a fee-based advisory model.

Some important changes in the investment industry at large banks have facilitated this trend, says Korzenik, a former wirehouse advisor and branch manager who spent 15 years at Smith Barney (and its predecessor firms) before moving to the banking world four years ago. First and foremost has been the shift towards advisory business: “It isn't so capital intensive,” he says. “All those sophisticated principal trades that you used to need to do to be in this business are no longer terribly important.” That opens the door for a lot of providers to offer advisory services that put them on par with the wirehouses, he continues. “Bank-based b/ds that used to have very limited menus can outsource their advisory platforms. Even firms like Lehman Brothers outsource some of their advisory research.”

This has helped fuel the growth of RIAs, Korzenik says, as have vast advances in technology. “You can support an advisory-based business with platforms that are now available on the Internet,” he says. Through services like Bonddesk, for example, he says advisors can access the bond inventories of dozens of b/ds, rather than being held captive by proprietary inventory. Bruce Miller, national sales director at Independent Financial, says banks are offering identical tools to clients whether they have $50,000, $500,000 or $1 million. They are providing services like profiling, planning, investment research and consolidated statements, he says. “[It's] all in an effort to keep their assets under one umbrella.”

Managed account solutions, a long-standing and sophisticated line of business for Wall Street, is an area where banks are gaining expertise, says Davis. The wirehouses still dominate the industry, with nearly 80 percent of the SMA assets, according to Dover Financial Research of Westwood, Mass., which compiles the MMI's statistics. By comparison, banks have just around 8 percent of the market. But Dover says that the banks' market share is ahead of the regional and independent brokerage firms — and growing.

“The banking industry has been in need of reeducation and retraining to try and catch up with the brokerage firms,” Davis says. “They've needed to hire better advisors, compensate them better, and give them ongoing training, and now they're doing it.”

HELP WANTED

A number of banks have looked to the wirehouses to hire away leadership. Dennis J. Mooradian, executive vice president of Comerica (and previously of Wells Fargo & Co.), came from Lehman Bros. in 1996; Steve MacLellan, national manager for Private Client Services at Bank of America, came from Smith Barney in 2003; and Commerce Bank recently took Marc Sieben, from UBS, to head their wealth management business.

Wirehouse reps are also being courted by — and taking a closer look at — private banks and bank-based b/ds. At Independent Financial, Miller says financial advisors from larger brokerage firms are “in high demand” because aside from having the advisory skills and training the firm seeks, they are comfortable in a large corporate environment. “If you look at the financial recruits at our firm, 38 percent come from banks, and 32 percent come from national or regional brokerage firms,” Miller says. “Far fewer come from independent or small b/d channels.” (Independent Financial has over 1,050 securities registered individuals among its nearly 2,000 employees.)

“Most banks don't do rookie b/d training,” says Kenneth Kehrer of Kerher-LIMRA. “So, they look to hire their advisors from wirehouses.”

However for many wirehouse reps, moving to a bank — or even a private bank — is equated with less autonomy (not to mention the scary world of salary-plus-bonus compensation packages). But for others, the lure of the elite private banking brands is enough, at the very least, to convince them these firms deserve a look.

The main reason wirehouse reps consider moving to banks, says Miller, is that they have the bank network to help them prospect for new clients. “There's a greater network already in place,” he says.

“At the wirehouses, you had to fight tooth and nail just to get one account,” says one advisor who moved to a Wachovia bank branch in New York three years ago, after nearly a decade at UBS and Prudential.

Jason Peroni, a CFP with a master's in financial planning, left a successful advisory practice at Merrill Lynch in 2001. Now a financial advisor at Salem Five Investments' North Andover branch, he also hasn't looked back. The inspiration? His own personal banking experiences. “Whenever I deposited a very large check,” he recalls, “my bank — not knowing what I did for a living — asked me if I needed planning services. I saw key opportunities to grow my business. Banks see the customer first. Most people have a checking account and a mortgage long before they have a portfolio.”

Peroni credits the environment with helping him make profitable inroads with the Baby Boomer generation and their much-heralded inheritances, and growing his business quite nicely since his wirehouse days. “You can also tap into the commercial lending, mortgage and retail departments. The possibilities go on and on,” he says.

That said, not all bank brokerages are created equal. Even wirehouse reps who have made the transition over to bank brokerages say that there is a vast difference between a top-ranked bank brokerage, and a regional bank that throws in a brokerage at its branches.

“Some bank brokerage programs still really limit what you can do with the client,” says the Wachovia bank-based advisor. “You don't always have the latitude to manage the assets like you would at a UBS or a Smith Barney.”

Of course there are pros and cons to reps working for a private bank, says Danny Sarch, a recruiter with Leitner Sarch Consulting in White Plains, N.Y. You'll probably get salary and bonus instead of sky's-the-limit commission and fee compensation, but Sarch says reps can (and sometimes do) make as much money as they did at the wirehouses. There is also more of a team approach, making the environment less entrepreneurial, he says. And, it can be harder to take your business with you if decide to leave.

But, there's also more stability and less competition within the firm. “If you have the high-end skill set — asset allocation, lending and philanthropy knowledge — and you like the process of financial planning or recommending investments, the private bank may be for you,” says Sarch.

To win over wirehouse reps, bank-based b/ds have to demonstrate that the platform is good enough to support the rep's existing business, and that the bank environment will give the rep growth opportunities that he does not have at the current firm.

“Not every bank gets it, no doubt,” says Korzenik. “But some have become reasonable places for a quality advisor to build a great business.”

TOP 10 BANKS BROKERAGES

Banks as ranked by number of registered full-time reps in their branches. Reps who work in other distribution channels owned by the bank (think Smith Barney or Wachovia Securities) were excluded.