The Impact of Bank Investment Sales on Disintermediation of Bank Deposits: Product Mix and Sales Force Productivity
Kenneth Kehrer — Order Information

Ever since banks and savings institutions began selling mutual funds and annuities in the early 1980s there has been tension between the advocates of transforming the bank branch into a financial services store and the executives responsible for the traditional core business of banking — taking in deposits and making loans. By selling investments a bank is essentially converting some spread income from deposits into fee income. Alarmists in the traditional banking camp argue that by selling investments a bank could disintermediate itself out of existence.

Advocates of the bank as financial services company counter that the bank’s customers need alternative investments, and in fact will buy the investments from some other source (a securities brokerage firm, financial planner, mutual fund, insurance company, etc.) if the bank does not sell them. Since the bank’s competitors are selling investments, by not selling investments the bank is ceding its customer’s investment business to another bank or securities firm that is also offering banking services like loans and federally insured deposits. By letting customers establish relationships with competitors that also provide banking services, the bank is not just at risk of losing some deposits, but is placing its whole relationship with the customer at risk.

Another factor is that many banks have been trying to diversify their business away from the spread business of intermediating deposits into loans. By building up their fee business, banks can insulate themselves more from the cyclical nature of load demand. Indeed, many analysts will downgrade a bank’s stock if the bank has less fee income than its peers. But the problem for banks is that the fee income is derived in many cases by cannibalizing the bank ’s own deposits. Thus instead of a bank augmenting its spread income with some fee income, the fee income in fact is cutting into the spread income. Deposit products and investment products compete for some of the same dollars.

Recently we updated our earlier studies of the extent to which investment sales cannibalize deposits. Some of our findings throw cold water on banker arguments against letting a fox in the henhouse.

Sales Force Productivity. In the early days of marketing investments through banks, when the tension between high investment sales and retaining deposits was stronger than today, some bank executives favored a somewhat passive investment sales force. These executives were concerned that a pro active investment sales force would result in more deposit cannibalization than a sales force that essentially took orders for investments, only if the customer asked for a mutual fund or annuity. Over the years some semblance of this preference continues to exist, manifested by suspicions that a highly productive investment sales force would generate high levels of disintermediation.

We examined this possibility, using data from the Kehrer-Essex Benchmarking Study. First we identified banks where the bank’s stockbroker sales force was in the top quartile of broker productivity among all the banks in the study. Then we compared gross disintermediation rates in these banks with the most highly productive sales forces with the other banks in the study. The gross disintermediation rate is the percent of investment sales that were funded by transfers from the bank’s own deposits.

The banks with the most highly productive brokers actually had somewhat lower gross disintermediation rates than banks with less productive brokerage sales forces; gross disintermediation rates in banks in the top 25 percent of broker productivity had an average gross disintermediation rate of 37 percent, 3 percentage points less than other banks.

While that is a small difference, the more productive brokers were more than twice as effective as less productive brokers in identifying money leaving anyway. Seventy percent of the domestic deposits converted to investment sales in the banks with the most productive broker sales forces were leaving anyway to buy investments, compared to just 31 percent in banks with less productive brokers. Thus better reps appear to be better at intercepting money leaving anyway.

But part of the observed superiority in interception rates might be due to differences in characteristics of the bank or the bank’s customer base. For example, a bank with highly productive brokers is likely to have more customers who are investing anyway. That may be why the reps are more productive, or why the bank was able to attract better reps.

Largely due to the wide superiority in interception rates, banks with the most productive broker sales forces have only 30 percent of the net disintermediation rates of banks with less productive brokers. The average disintermediation rate net of money leaving anyway of banks in the top quartile of broker productivity is only 9 percent. Thus this evidence argues that banks concerned about deposit disintermediation need not be wary of the most productive brokers.

We performed the same kind of analysis on licensed platform banker sales forces, first identifying the banks in the top quartile in licensed banker productivity and then comparing disintermediation between banks with top producing licensed bankers and the banks with less productive licensed banker sales forces. Contrary to our findings for bank stockbrokers, we found that the banks in the top quartile of licensed banker productivity had gross disintermediation rates that were 6 percentage points higher than banks with less productive licensed bankers.

Not only are banks with less productive licensed sales forces less likely to convert a deposit to alternative investments, but they are also better at intercepting money leaving anyway, again contrary to our findings for bank stock brokers. In the banks with less productive licensed banker sales forces, 35 percent of the banks’own deposits used to purchase investments were leaving anyway, 3.5 times the interception rate in banks with the most productive licensed bankers. Apparently, the less productive banker sales forces are similar to the passive order takers envisaged by the bankers who prefer investment sales to be just a defensive measure — selling investments primarily to customers who are about to take their money out of the bank to invest anyway.

Both because they have higher gross disintermediation rates and much lower interception rates, the most productive licensed bankers have net disintermediation rates that are 52 percent higher than less productive bankers. Thus while bankers concerned about the disintermediating effects of investment sales should not shun the most productive bank stockbrokers, they have reason to be wary of the most productive licensed bankers. The most productive licensed bankers are probably those most adept at identifying customers with low yielding deposits and converting those deposits to alternative investments.

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