The one-third growth in average production per bank-based financial adviser last year that was documented in a study by American Brokerage Consultants and American Banker has translated into better program profitability, though investment services still bring relatively little to the bottom line.
Overall, 94% of bank-brokerage programs were profitable in 2005, compared with 71% in 2003; 72% increased the volume of their brokerage business; and 64% had higher profitability.
As of mid-2005, when the data was aggregated, the U.S. banking industry consisted of 8,952 commercial and savings banks holding about $10.5 trillion of assets. The investment business tilted toward a minority of these banks and, within that minority, the larger institutions. About 23.5% of the banks, or 2,105 institutions, offered investment services, and they held 72% of all bank assets. The larger the bank, the more likely it was to offer investments - 62% of those with $1 billion or more of assets did so, as did 44.6% of those with $250 million to $1 billion, 19% of the banks with $50 million to $250 million, and 3.6% of those with $50 million or less.
Strong growth of commissions and assets per adviser came partly as a result of the 10.6% decline in the total of bank-employed advisers, to 12,600 last year, from 14,100 in 2003.
Average gross commissions per adviser grew 31%, to $173,800 last year, though advisers at large banks fared better, averaging $207,800. Reps at midsize banks averaged $184,400, and those at small banks averaged $131,400. Notably, the latter had the biggest increase from 2003, up 54%.
Not surprisingly, large banks had substantially more assets per adviser, $359 million. Midsize banks had $173 million per adviser; small banks, $112 million.
Banks cite several reasons for providing brokerage services. Predominantly, they want to increase profitability, though bank brokerage so far contributes relatively little profit. However, asserted Richard Ayotte, the chief executive officer of American Brokerage Consultants Inc. in St. Petersburg, Fla., this shows that bank executives have their sights set on future success.
Wealth management and wrap accounts recorded the biggest growth among investment services in 2005, but bankers saw the biggest potential in retirement planning (see chart). Banks' desire for fee-based revenue was reflected in the more than 60% of bank brokerage programs offering separately managed accounts, up from 38% in 2003. And 63% of banks offered wrap accounts, up from 37% two years earlier.
Baby boomers have driven the shift to higher-end services, Mr. Ayotte said. "The increase in these services mirrors the demographic bulge, which means things will get much bigger than they are now."
When it comes to packaged products, the story is familiar. Bank brokerage still relies heavily on fixed annuity sales, which make up 41% of the total at large banks. Variable annuities account for 27% of sales; mutual funds, 22%; and stocks and bonds, 10%.
Mutual funds fare better at midsize banks, accounting for 40% of sales. Variable annuities garner 30% of sales in this size category; fixed annuities, 13%; and stocks and bonds, 17%.
Small banks also have mutual funds as No. 1, with 39% of total sales, followed by variable annuities, 32%; stocks and bonds, 16%; and fixed annuities, 13%.
Large banks' big staffs of licensed bankers (platform reps) enable them to sell more fixed annuities because these employees are licensed only to sell annuities, simple mutual funds, and basic life insurance policies.
Bank brokerage customers are bunched in a very narrow age band. Only 4% are under 40; 23% are 40 to 49; 19% are 50 to 54; 20% are 55 to 59; 23% are 60 to 64; and 10% are 65 to 69. Only 1% of bank brokerage customers are 70 or older, according to the report.
"The numbers used to be 64% between the ages of 40 and 65," Mr. Ayotte said. "Now it's 85%, more concentrated. In addition, the 60 to 64 age group used to be 14%, and now it's 23% of brokerage clients. With the demographic bubble, though, I'd expect expansion in the 50 to 54 age group."
Overall, only about one-quarter of brokerage customers are new to the bank. However, this does not mean that brokerage accounts grow at the expense of bank deposits. Though deposits account for one-third of eventual brokerage assets, 41% comes from "outside sources," and one-quarter from other banks.
Midsize banks outdo their larger brethren in two key aspects of the brokerage business, closing sales and average account size. Advisers are able to close the deal on referred prospects about two-thirds of the time, on average, but closing rates are much higher at midsize and small banks (68% and 67%, respectively) than at large ones, whose advisers complete a sale just over half the time.
Midsize banks also have the largest average brokerage account size per customer, at $66,203. Large banks average $59,039, and small banks $52,025. But brokerage customers at large banks tend to have more overall assets at their bank, $491,442 on average. Midsize-bank clients had $460,017, and small-bank clients $332,775.
Banks use four methods to pay their reps: base salary plus incentives (33%), draw versus commissions (29%), commissions only (27%), and salary only (11%).
"The commission income drift has been happening since the beginning of the industry in 1982," Mr. Ayotte said of the trend toward an emphasis on commisions. "First, they paid salary, then it was salary plus incentives, then it was draw versus commissions, and now it's moving in line with the broader securities industry, which mostly pays on commissions."
Banks of different sizes tend to pay about the same in salary or draw - a set amount that advisers are expected to produce enough sales to cover each month - then pay commissions on anything sold above that amount. Hypothetically, advisers who do not meet their draw owe the bank the difference, though this is rarely enforced; demotion or dismissal are more likely if the problem persists. Salary or draw averages $2,013 per month, but large banks pay significantly less on average, $1,711.
The story is different for platform reps, half of whom earn base salary plus incentives, though 32% are paid salary only. Some compensation schemes mirror those of full-time financial advisers.
The few banks that have discontinued investment programs gave four main reasons - a drop in deposits, lack of customer demand, falling profitability, or fear of compliance issues.
However, the nation's largest banks are pinning hopes on the success of their brokerage divisions, and investment services look set to play a far more important role. Though the prolonged bear market took its toll on the industry, it also gave banks an opportunity to figure out what works and what doesn't and to tailor their strategies accordingly to win baby boomers' retirement assets.
As Mr. Ayotte explained it, "The demographic bubble is driving everything, affecting the services they demand and what they're getting. And they're getting what they want."
Mr. Stock is the editor of Bank Investment Consultant, a
