WANT MORE FEE-BASED BUSINESS?
CHANGE THE CULTURE
Feature Article
Andrew Singer

BANK-BROKERAGE programs serious about moving to a fee-based model can usually expect slower revenue growth—at least initially. That is a price, however, that more institutions seem willing to pay these days.

"There is a lot of movement toward the advisory model, even at broker/dealers," observed Pershing CEO Richard Brueckner in a keynote address at BISA's Annual Convention in March.

Challenges remain, of course. Rep compensation is one hurdle. How does one persuade a rep who can add 5 percent to his/her grid with an annuity sale to forego that for a fee-based sale that might bring only 1.5 percent in the first year?

Compensation issues, though, may not even be the largest obstacle. SunTrust Senior Vice President Peter G. Bielan suggested that culture can be more important than compensation when approaching a fee-based, advisory model.

SunTrust has about 500 financial advisors—400 working in the branches and 100 on wealth management teams or in stand-alone offices working their own book of business. Forty percent of SunTrust's broker-generated business is now fee-based (including trailers from mutual funds and annuities). That is a high percentage among bank programs—but it wasn't always thus, explained Bielan, speaking at a breakout session on 'Wealth Management: Approaching a "Fee-Based" Model' at the March convention.

Why fee-based business? 'It puts the customer and the financial advisor on the same side of the table,' says FirstMerit's Hetzel

Before that happened, "We realized we had to change the culture," says Bielan, who has headed the bank's brokerage unit, SunTrust Investment Services, and is responsible today for expanding the number of retail bank clients that utilize the bank's wealth and investment management services.

Take SunTrust's broker 'leader board.' Initially, this internal listing of the firm's top financial advisors was ordered by gross commissions generated. The bank's top fee-based revenue producer wasn't even listed on the board. That had to be revamped.

Another example is the program's trips and incentives. When the Atlanta-based institution began to get serious about fee-based business, it decreed that a certain amount of production had to be in fee-based products in order to qualify for the esteemed producer incentive trips.

When two top reps failed to reach the fee-based threshold, Bielan stated that they couldn't go on the trip—that year to Jamaica. He wasn't quite prepared for the 'push back' from the bank, however: "You have to send them!" They were among the top branch producers, after all.

What followed was one of the "most intense" meetings Bielan experienced in his time at SunTrust. Finally the company's head of Wealth & Investment Management rendered a verdict: The two advisors would not go to Jamaica.

If you don't think that sends a message about the bank's commitment to fee-based business, you would be greatly mistaken, said Bielan at the conference session. "I still have the bruises" from that encounter.

Meanwhile, SunTrust has two financial advisor 'leader' boards now: One for gross commissions, a second for fee-based production leaders.

A good hiring environment

Some banks have sought to build fee-based businesses by hiring brokers with specific experience in this area, often from wirehouses. This isn't a bad time to be doing that.

"I've been on the bank side of the business for 20 years and have never seen a better environment for banks to recruit in," Mike Mortensen, president of PNC Investments, told American Banker recently¹. "Banks promise 'trusted brands during a difficult time in the economy.' And financial advisers who have left wirehouses for banking companies or thrifts are discovering investment and insurance product arrays, technology, and advisory support that have improved vastly over the past several years, he said. 'If I'm a wirehouse adviser, I have a whole new respect for banks,'" Mortensen said.

At the BISA conference session, Mortensen amplified on this theme. "Banks have a unique opportunity," he affirmed. "People from Merrill Lynch [and other firms] are knocking on our doors."

A bank can be a great place to work for a young wirehouse rep doing between $250,000 and $500,000 in annual GDC (gross dealer concession), which is not quite up to wirehouse standards. That individual, however, could arguably develop into a $600,000 producer if working in a bank with its steady flow of referrals from loyal customers. That can be attractive at a time when many regional brokerage firms are struggling.

PNC has about 2,500 branches, 700 financial advisors (after its merger with National City) and 1,500 LBEs (licensed bank employees). Twenty-five percent of its retail investments business is now fee-based, most of it in mutual fund wrap accounts. (This does not include trail commissions from annuities and mutual funds.) All of Mortensen's reps are RIAs (registered investment advisors).

Although PNC has taken advantage of the current market to recruit wirehouse reps, it has also hired advisors from companies like Ameriprise, which is strong in financial planning. It hires, too, from within the bank. Mortensen likes salespeople with good planning skills. His reps typically have SunGard's financial planning software on their desktops. PNC conducts lots of internal rep training, too, which prepares its advisors for doing more fee-based business.

Risks in hiring wirehouse reps

Hiring seasoned, wirehouse reps might seem to offer a quick path to building a fee-based business, but one must be watchful.

"You have to be careful when hiring from wirehouses," said Mortensen. "They tend to be mavericks."

How do banks avoid hiring gun-slinging brokers? Recruiting is more art than science, admits Mortensen; there aren't any easy answers. There are some red flags, though. Look out for an unbalanced product mix, said Mortensen. You don't want too much income coming from a single product.

There are other considerations. Too much flashiness doesn't sit well in the bank environment. "You don't want to hire a rep who is going to drive a BMW up to the front door," noted Beth Hetzel, president of Ohio-based FirstMerit Investment Services.

Earlier in the decade, around the time of the dot.com meltdown, banks also tried to hire wirehouse reps. It didn't really take, though, noted consultant Kenneth Kehrer. What happened back then, he asked the panel, and why might things be any different this time?

In 2001, banks were just happy to have access to wirehouse reps for the first time. As a consequence, they weren't very selective, Mortensen answered. For decades banks had been the poor sisters in the brokerage world, relatively speaking. Upon reflection, some of their wirehouse hires in 2001 weren't so good. Today, however, banks can afford to be choosier. They've also learned a few things from their earlier experience, Mortensen suggested.

In order to build a fee-based business, 'We realized we had to change the culture,' says SunTrust's Bielan.

In any event, it isn't necessary to hire wirehouse reps in order to build a fee-based business, noted SunTrust's Bielan. SunTrust has promoted LBEs to financial advisors, and if they are really good, promoted them again to operate on the bank's wealth management teams where they often work alongside lenders and trust officers. The majority of business conducted at that level is fee-based.

Targeting the mass affluent

What sort of bank customers is a good target for fee-based products? FirstMerit Bank's fee-based product clients usually have somewhere between $100,000 and $1 million in investable assets, according to Hetzel, although the minimum for mutual fund wrap accounts can be below that range. Eleven percent of business at FirstMerit is fee-based, said Hetzel. She would like to see that share rise to 30 percent eventually.

Why does Hetzel like fee-based business? "It puts the customer and the financial advisor on that same side of the table." The average fee-based transaction at FirstMerit is $150,000, adds Hetzel, whose program has 46 financial advisors.

At PNC, the average mutual fund wrap account 'ticket' is about $110,000, says Mortensen, whose unit grew its revenues 11.5 percent in 2008. This business, too, is "extraordinarily sticky." It remains with the bank over time. PNC has a minimum of $25,000 on its mutual fund wrap account.

SunTrust's average mutual fund wrap account is about the same as PNC's. Its average fee-based account is $300,000, but that includes the business generated by SunTrust's 100 wealth management advisors. (They conduct most of SunTrust's fee-based business.)

Assets under management dropped in 2008 at SunTrust, as they did across the industry given the stock market turmoil. The bank has been 'understanding' with regard to this decline, says Bielan. "They know how it works because it [also] happens in the trust department."

SunTrust uses the AdvisorPort product platform (owned by PNC) for the bulk of its fee-based products. It has three products with AdvisorPort, and two on its internally managed platforms. PNC also uses AdvisorPort.

PNC's financial advisors do not have a dollar threshold in terms of whom they may or may not do business with. They don't have to hand off a client to the trust department when investable assets reach $1 million, say.

"They are free to do business with anyone," says Mortensen. PNC is really split more along the lines of discretionary and non-discretionary assets. If a client—even a very wealthy client—wants to do his/her own trading, that individual will work with a financial advisor. If that high net worth client wants the bank to manage his investments, he will deal typically with trust/wealth management.

Regarding compensation, always a challenge with fee-based products, PNC essentially gives away its first year's revenue, says Mortensen. That is, it adds 3 percent to the rep's grid in the first year. After that, reps receive 1.5 percent a year.

The keys

What are the keys to building a successful fee-based business? "You have to have consistent expectations at every level of the organization," says Bielan, who notes that SunTrust realized that it had to be in fee-based products to add value for the client. Otherwise, everything is just a commodity.

A rep doing $250,000 in annual GDC probably won't make the transition to fee-based—so don't plan for that, adds Bielan. Alternatively, unless a SunTrust advisor has at least $50 million in client assets, he or she will probably not be easily persuaded to move to a fee-based model.

Also, don't expect the brokerage program to go from 5 percent fee-based to 20 percent fee-based in just a few years.

'You have to be careful when hiring from wirehouses,' said PNC's Mortensen. 'They tend to be mavericks.'

It's better to tell senior management: "In the next three years our revenues may grow at a slower rate, but we will have x percent in fee-based business," says Bielan.

How does one imbue senior management with realistic expectations? "You have to continue to drip on them," says Hetzel. The message to put forth—again and again—is that "if you want to build long-term customer relationships, you need to build a fee-based business."

As PNC was building its fee-based business, senior management realized that while revenue growth in PNC Investments might be slower, the 'present value' of the assets that it was gathering were strong and growing, recalls Mortensen.

Clearly, though, the lure of constructing a solid fee-based business remains. Price/earnings ratios can be as high as 35-40 times earnings for fee-driven businesses, compared with only about nine times earnings for traditional net-interest-driven banks, noted Jordan Miller, a senior Fifth Third Bank executive, at a separate conference session. "Fee businesses are the businesses that banks want to be in in stressful times."

¹ Garmhausen, Steve, "In Turmoil, Bankers See a Chance to Woo Advisers," American Banker, February 17, 2009