Banks rethink sales structures: the hybrid approach continues to grow, but a new integrated...

The different investment needs of the upper mass market and mass affluent as well as the affluent and wealthy markets is prompting banks to better organize themselves to meet those needs. The annual Kehrer-Essex Bank Investment Program Benchmarking Study collected data on 94 measures of investment

Emergence of platform investment reps

Training and licensing branch platform staff to supplement fulltime investment counselors continues to capture the imagination of the banking industry. Over half of the consumer investment programs studied deploy such a hybrid investment sales force. In 1997, less than four of ten banks participating in our annual benchmarking study deployed a hybrid sales force [Exhibit 1].

The prevalence of what have come to be called platform investment reps is much higher among larger banks. By our count, 22 of the 25 largest banks are now selling investments through licensed platform bankers. Among participants in the study, only 31% of community banks and credit unions have licensed platform bankers to sell investments, compared with 60% of regional banks, 80% of super regionals, and 86% of money center and mega banks.

Overall, we estimate that there are now more than 38,000 platform reps in U.S. banks, compared to about 16,000 full time financial advisors.

The typical licensed banker earns 12% of the commission revenue in sales incentives, compared to 33% for a retail broker working in a bank. Because of that differential, banks that license their branch staff usually have had higher profit margins from branch staff investment sales than from traditional broker sales. Last year hybrid consumer investment programs had revenue margins from consumer investment services which were 15 percentage points higher than programs that relied exclusively on full-time brokers [Exhibit 2].

These higher profit margins have been only partly the result of lower sales compensation. These programs also have a much higher sales mix of fixed annuities, which generate 50% to 75% higher commission revenue per dollar invested than mutual fund sales. In 2003 fixed annuity sales accounted for 46% of revenue in banks that supplemented their broker sales force with platform reps, compared to only 25% in traditional broker-only consumer investment sales programs.

However, adding platform reps to a broker-only program does cannibalize some of the broker's sales. Brokers who work in banks that do not have platform investment reps produced average annual gross commission revenue of $251,138 for the consumer investment program in 2003, 14% more than brokers who worked alongside platform reps [Exhibit 3]. Nonetheless, hybrid consumer investment programs generally produce higher revenue for the size of the bank than traditional broker-only sales forces. In 2003 hybrid sales programs had average deposit revenue penetration of $1,834 per million, 4% better than banks that provided consumer investment services only through full-time brokers. So while platform reps may take some sales away from the bank's brokers, their sales are additive on a net basis [Exhibit 4].

The combination of fatter profit margins and higher revenue results in much higher profit contribution from hybrid investment sales forces, relative to the size of the bank. Last year hybrid investment programs contributed $637 in profit per million of bank retail deposits, 61% more than broker-only programs. Hybrid investment programs have had higher deposit profit penetration than traditional broker-only sales forces in every year that we have conducted our benchmarking survey [Exhibit 5].

A shift to wealth management units

As bank consumer investment sales programs have matured, the responsibility for consumer investments in many large banks has moved to the retail bank. The number of banks where the consumer investment organization was integrated into the retail bank doubled between 1995 and 2002, becoming the most common management structure. More recently, however, there has been a shift toward creating wealth management units by combining traditional trust businesses with securities brokerage, often focused around teams of wealth management professionals. In this model, consumer investments are pulled along with the wealth management advisors into this new management structure [Exhibit 6].

This is a fundamentally different model than a traditional structure with retail brokerage reporting to the trust business, because it is based on the integration of wealth management businesses, rather than merely a reporting structure. Over the past several years the number of consumer investment programs that reported to trust has fluctuated between 8% and 10%. But this year just 5% of consumer investment programs report to the head of trust, as banks that used this traditional model have converted to a wealth management organization.

The new wealth management structure is helping to resolve the traditional organizational conflict between trust and investments. When banks began offering consumer investments, the securities brokerage unit often found itself competing for some of the same customers as trust. The competition was compounded by the fact that brokerage and trust had almost antithetical business models. Not only were there important differences in their product offerings, but the two units differed in how the customer paid for financial advice and how the advisor was paid. The asset management provided by trust was largely based on proprietary common trust funds, while the brokerage unit sold mutual funds and other products managed by third party, nonbank entities. Securities brokerage customers paid for financial advice through transaction fees, while trust clients paid a fee based on assets under management. And the brokers in the bank were paid commissions, while the trust officers were primarily salaried.

Banks tried to resolve the inherent conflicts between these two ways of doing business by segmenting customers; wealthy customers (however the bank defined them) were the province of trust, while less wealthy customers were to be served by the retail investments unit. Of course, this approach did not allow customers to be served the way they wanted to be served, and it ignored the fact that many customers might want to have access to both ways of investing.

Competitive forces have worked to make the separation of investments and trust even more untenable. The success of the wire house brokerages in taking trust market share from banks has created an impetus for change. Trust has had to adopt a more open-architecture approach to its product offerings, melding investments managed by third parties with its own proprietary offerings. At the same time, the brokerage industry has embraced fee-based investment products such as separately managed accounts and mutual fund wrap programs, where the customer pays an asset-based fee for investment advice. As a result, the two models have become increasingly similar.

These developments have resulted in the development of the wealth management model, often with teams comprising a financial advisor from brokerage, an asset manager from trust, a fiduciary trust officer, a private lender, and perhaps a life insurance specialist working with the wealthy client.

The confluence of these factors appears to be having a salutary effect on the relationships between trust and retail investments. Eight out of ten executives responsible for managing consumer investments now report that working relationships with trust are satisfactory or very good, a big improvement from just a few years ago. And 80% also say that relations are improving, while only 2% say they are getting worse.

Aligning with customer segments

The emergence of the wealth management model potentially conflicts with the retail bank model, because it subordinates the retail investment business to the objective of serving the investment needs of the wealthy, however the bank defines that segment. Moreover, it results in a structure where distribution is not aligned with customer segments. This is particularly the case where a bank has developed its platform bankers into an investment sales force to serve the upper mass market and mass affluent. A few banks have resolved this potential conflict by splitting their retail securities business into two organizations--financial advisors who work in the wealth management unit and investment advisors who work in the retail bank in teams with the platform investment reps. Both sales organizations often use the same securities back office. This model holds considerable promise for finally creating a structure that is aligned with the investment needs of different customer segments.

About the study

Kenneth Kehrer Associates conducts the Kehrer-Essex Bank Investment Program Benchmarking Study in conjunction with the annual Consumer Bankers Association Consumer Investments Study. The study is sponsored by Essex Corp., a third party marketer and broker/dealer.

For this year's study, 88 banks and thrifts completed detailed questionnaires about the workings of their consumer investment programs. In addition, two third party broker/dealers provided similar information on 530 community bank and credit union programs. Thus this year's study covers 618 financial institutions.

Slightly more than one-fifth of the banks studied operate in the Midwest and a similar number in the Northeast/Mid Atlantic region. About one-fourth of the banks have a retail footprint in the South or West, and are evenly divided between these two regions.

Institution size--measured by retail deposits--breaks down as follows: One-third have less than $2 billion, 27% have between $2-7 billion, 12% have between $7-12 billion, 12% have between $12-30 billion, and 17% have more than $30 billion.

Fifty-seven percent of the consumer investment programs studied own their own broker-dealer, while the remaining have their securities business overseen by a third party broker-dealer. Most of the bank BIDs are technically "introducing broker-dealers" that pass securities transactions on to a clearing broker for execution.

Exhibit 1
Type of investment distribution

              1997   2003

Broker only    55%    42%
Banker only     6%     3%
Hybrid         39%    55%

Source: CBA Consumer Investments Study

Note: Table made from pie chart.

Exhibit 2
Revenue margin of bank investment programs

(profit contribution as a percent of total program revenue)

              1997   2002   2003

Broker-only    29%    23%    18%
Hybrid         37%    33%    33%

Source: Kehrer-Essex Bank Investment Program Benchmarking Study

Note: Table made from bar graph.

Exhibit 3
Broker productivity

Broker-only   $251,138
Hybrid        $220,018

Source: Kehrer-Essex Bank Investment Program Benchmarking Study

Note: Table made from bar graph.

Exhibit 4
Deposit revenue penetration

(investment services revenue per million in bank's retail deposits)

                1999     2002     2003

Broker-only   $1,714   $1,710   $1,757
Hybrid        $1,883   $1,993   $1,834

Source: Kehrer-Essex Bank Investment Program Benchmarking Study.

Note: Table made from bar graph.

Exhibit 5
Deposit profit penetration

(profit contribution per million in bank's retail deposits)

              1999   2002   2003

Broker-only   $388   $451   $396
Hybrid        $629   $708   $637

Source: Kehrer-Essex Bank Investment Program Benchmarking Study

Note: Table made from bar graph.

Exhibit 6
Organization responsibility for consumer investment services

               1995   2004

Retail bank     29%    39%
Trust           10%     5%
Shared          10%    12%
Wealth Mgmt.           20%
Independent            15%

Source: CBA Consumer Investment Study

Note: Table made from bar graph.

By Kenneth Kehrer and Fred Nicholas. Contributing editor Kehrer is president of the Princeton, N.J.-based consultancy Kenneth Kehrer and Associates, which provides research on banks as financial services stores. Nicholas is president of Essex Corp., a third party marketer and broker/dealer.