Q&A: Investment advisory and brokerage

Banker Q&A
Photo by Kerkez/Getty Images

Many community banks don’t offer their customers investment advice or brokerage services but contracting with a third party could bring opportunities to deepen relationships with existing customers.

By Cheryl Winokur Munk

Providing investment advice and brokerage services can help community banks generate fee revenue, boost customer retention and cultivate new business. Yet, many community banks don’t offer these services to their customers.

There are several reasons for this. Community banks may be wary of this type of service since it represents a departure from their core business model. Other banks, especially those that already provide some of these services through their trust department, may not see the potential benefits of expanding beyond that realm. Some banks may not know how to begin.

For community banks that are interested in launching an investment and brokerage service program, here are answers to some common questions.
Q: Should I start my own program or go with a third-party arrangement?

A: While some community banks have bought or affiliated with a registered investment advisor (RIA) to offer fee-based services, it’s more common for them to partner with third-party providers to provide both advisory and brokerage services. This is because many community banks want to offer the broadest range of products and services possible.

There’s a shortlist of providers that work with community banks to provide all the registrations, compliance and back-office support necessary to run a comprehensive program. Financial advisors are sometimes dual employees, but banks can opt for a fully outsourced broker dealer. Done right, a third-party model allows a community bank to bring in a sizable amount of fee income and be a net positive, even after expenses, community bankers say.
Q: What if my community bank already has a trust department?

A: The services can be complementary. Trust departments tend to service higher-end customers, whereas the brokerage and RIA can service high-net-worth clients and may cater to those with lower asset minimums.

While many community banks offer wealth management services through their trust departments, having a brokerage services and an RIA allows a bank to provide customers with a greater number of products they might want, including life insurance and annuities. That’s according to Allen Smith, executive vice president at First Bank, an RIA and a unit of $7.7 billion-asset First Bancorp in Southern Pines, N.C., which offers full-service brokerage services through Infinex Financial Group in Meriden, Conn.
Q: How do I know if my community bank’s customers want these services?

A: Community bank customers today have many complex wealth management and investment needs—and many options for servicing them. If they aren’t getting investment advice and brokerage services from a community bank, it’s a sure bet that they’re going somewhere else, whether that’s with a digital company or a brokerage down the street.

“If they go to another institution for their investments, how long will it be before their checking follows, and other future business?” says Cydney Shapleigh, executive vice president and chief wealth management officer at $2.2 billion-asset Bank of New Hampshire in Laconia, N.H., which uses a third-party firm, Cetera Investment Service of St. Cloud, Minn., for investment and brokerage services.
Q: What questions should I ask a prospective third-party provider?

A: Initial questions should include how the provider will compensate the bank, details about the fee structure and discussions about what the bank’s portion will be, says Don Frost, executive vice president of consumer banking for $2 billion-asset Avidia Bank in Hudson, Mass., which has had a long relationship with San Diego-based LPL Financial to offer brokerage and advisory services.

It’s also important to gauge how dedicated the provider is to helping the community bank grow the business, as well as its willingness to provide ongoing support.

Frost recommends community banks ask whether the provider has a dedicated representative to answer questions and whether the provider helps recruit financial advisors. Community banks should ask how many programs the provider has built from scratch and with what size community banks, he adds.

Third-party arrangements should be revisited periodically, especially at contract renewal time, to make sure the bank’s needs are met, Frost says.
Q: Should the program focus on advisory only or include commission-based products?

A: There’s ongoing debate whether fee-only or a combination of fee- and commission-based business makes sense. Some banks feel strongly that commissions are bad, says Kenneth Kehrer, principal at Kehrer Bielan Research & Consulting of Chapel Hill, N.C. Others, however, choose to offer both options to provide an array of services, including insurance, annuities and advisor-sold 529 plans.

“If you start out large with a lot of overhead, it will take a long time to break even, but if you grow with the business, then you should always be ahead of the game.”
—Cydney Shapleigh, Bank of New Hampshire

Q: What will it cost? How much money can I make?

A: There are many factors that determine the economics, and it depends largely on the program. It makes sense to start with two or three investment representatives and grow from there. There will be upfront costs, but banks can manage these by starting out small and tailoring the size of the department to their needs, Shapleigh says. “If you start out large with a lot of overhead, it will take a long time to break even,” she adds, “but if you grow with the business, then you should always be ahead of the game.”

Cheryl Winokur Munk is a writer in New Jersey.