THE DOWNTURN PROMPTS
BANK BROKERAGES TO EXPERIMENT
Feature Article
Andrew Singer

ECONOMIC DOWNTURNS are often times of robust business innovation: from the telephone that emerged from depressions of the late 1800s to the personal computer that proliferated after the recession of the early 1980s. It shouldn't be surprising, then, that experimentation continues apace in bank brokerage programs.

BBVA Compass (Birmingham, AL) embarked on a program earlier this year to issue equity-linked certificates of deposit (sometimes called structured CDs) to bank customers through its retail brokerage unit, Compass Brokerage, Inc. Structured CDs (or their Continental equivalent) have long been popular in Europe but are relatively new to the United States.

Active in the 'structured note arena'

Spain-based BBVA, the bank's parent, has been active in the "structured note arena" in Europe for some time, confirmed John Sawyer, chief investment officer, BBVA Compass, in an interview. But the regulatory environment in the United States is different from Europe, and it took some work to structure a similar product within an FDIC-insured CD. BBVA Compass rolled out its equity-linked CD, called the Power CD, in March 2009. The bank worked with a third-party firm, CD Funding Group, LLC, on the project.

At that time, the stock market had fallen to its low point within the current economic cycle. Many investors were gun-shy about investing in equities. A product that offered "upside exposure"—the CD's rate of return at maturity is linked to the performance of the S&P 500—with a guaranteed return of principal "resonated" with many bank clients, recalls Sawyer.

It also offered the bank another way to boost its deposit-gathering efforts. Banks have been desperate to increase low-cost deposits. "Everyone is trying to manage liquidity," comments Sawyer.

As noted, the product was placed in the hands of BBVA Compass' retail brokerage unit under Noah Zecher. When the bank rolled out the product in March, it reportedly sold $22.3 million and opened 700 new accounts in the first week alone, according to brokerage chief Zecher.¹

The bank set "aggressive goals" for the product in 2009, according to Sawyer, yet they reached those targets early—in September. They are establishing more ambitious goals for 2010. (He declined to say what they were.)

Obviously, this involved a coordinated effort between BBVA Compass' brokerage and retail branch groups. The latter provides referrals. Because this CD product is not a registered security, platform bankers can distribute it. But at Compass, BBVA Series 7-licensed brokers actually sell the Power CD, says Sawyer, who helped facilitate interaction between the groups developing the Power CD, according to adelante, the bank's internal publication. That is because the brokers are best equipped to properly present and describe the product. They bring a certain amount of investment expertise to the table. (There was a training period before the rollout, and there is also on-going training on the product.)

This brings up a potentially touchy subject: broker compensation. If the broker/dealer (B/D) earns a 5 percent commission with an annuity sale, with the Power CD they might earn only 2.5 percent, according to Lewis B. Carlisle, managing director, CD Funding Group, LLC (Cincinnati). Brokers earn considerably less selling a $100,000 equity-linked CD than they do selling a $100,000 fixed annuity.

Moreover, there is evidence that equity-linked CDs eat into annuity sales within a given institution. CD Funding Group views the product as an alternative to annuities, and robust sales of the Power CD may be one reason that Compass' annuity revenues declined in the first quarter of 2009 compared with annuity product sales at other banks, Carlisle suggests. Annuity production typically declines some in banks where the Power CD is sold.

The CD's rate of return at maturity is linked to the performance of the S&P 500 with a guaranteed return of principal — something that 'resonated with many bank clients.

—John Sawyer, BBVA Compass

Asked about broker compensation at BBVA Compass, Sawyer told us, "I wouldn't say it is on par" with an equivalent annuity sale, although the overall structure is similar. But because the product has been effective in meeting clients' needs, it should be good for the bank and ultimately good for the brokers, he adds.

"The potential market is larger" for the Power CD, adds Carlisle, and because it carries FDIC insurance, the product is seen by clients as a bank product, a big plus in his view. The volume and breadth of the product is greater. The cut in broker compensation rate has been a "discussion point," says Carlisle, but it is "not an issue" convincing reps to sell the product.

Carlisle has seen a 94 percent increase in volume in the Power CD product in the past year through his client firms. CD Funding is in 15 to 20 banks with it, and bank use is growing. "It's more popular across the board, but particularly in banks with European parents," he says.

Who is the typical client? One client is the "traditional CD buyer who is not enthusiastic about current interest rates and is willing to take the opportunity to increase return," says Sawyer. The second is the more traditional equities investor who "got really nervous" during the economic downturn and wants a guarantee of principal on his or her investment.

The guarantee of principal gives both types of client a "lot of comfort," notes Sawyer, as does the FDIC insurance. The CDs typically have a three- to five-year maturity, he says.

What about the brokers—have they balked? Sawyer has seen "no resistance to the product" on the part of brokers. Moreover, it "fits nicely between the two groups," i.e., brokerage unit and retail branch bankers.

Sawyer was asked if the product would still be popular during potential stock market declines. "It is very viable over the long term," said Sawyer. He sees the product evolving. He can envision future equity-linked CDs tied to baskets of individual securities, for instance.

There are always clients seeking a balance between risk and return, Carlisle adds. "Even those who purchased the product at the height of the market are pleased—at least they haven't lost money." If bank clients want to make their investment goals, they need to get higher returns than from the standard CD, says Carlisle.

The product has been useful in breaking down product silos within the bank, reportedly. According to Scott Beshany, project manager of the Power CD at BBVA Compass, it has been "a great tool for deepening relationships with customers who traditionally have been served only by retail."

With the group annuity, "Business will be delivered to advisors that they would never see otherwise."

—Steve Reyerson, UNFCU Financial Advisors

Adds brokerage chief Zecher, "We got to know people who previously we'd seen only on the trading floor or nodded to on the elevator."²

***

Others are seeking alternatives to traditional bank-sold fixed annuities, including Steve Ryerson, vice president financial services, United Nations Federal Credit Union, and president, UNFCU Financial Advisors, LLC (Long Island City, NY).

There's a "tremendous void" when it come to providing guaranteed income streams for retirees, says Reyerson. "Not enough is being done." His answer: "Group-priced, immediate-income annuities for those who don't have a fixed benefit plan."

If retail annuities provide a 4- to 5-percent commission, group annuities pay 2.5 percent, or thereabouts. Reyerson's program, called IncomeSolutions, is offered by UNFCU Financial Advisors in conjunction with the Hueler Companies, Inc.

Reyerson is an aggregator. He works with smaller credit unions, some with only 4,500 or 5,000 members that would not ordinarily be worth a large carrier's attention. The IncomeSolutions program draws on eight carriers, including MetLife, Prudential, Principal, and John Hancock.

The group annuity program debuted over the summer in Excel Federal Credit Union (Atlanta). In late autumn, it will be in the Department of Labor Federal Credit Union.

Admittedly, a low-commission group annuity sounds like a good deal for bank customers, but what about bank-based brokers and bank investment programs: Won't their income decline?,/p>

"Business will be delivered to advisors that they would never see otherwise," says Reyerson. (This sounds much like the argument for the Power CD.) "The program will drive people to you."

Moreover, in taking this "holistic" approach, the bank is announcing: "We are the place to come" for retirement solutions. It should also draw many more deposits, including those from "sticky" IRA rollovers.

Why aren't others doing this, then—selling group annuities? "They believe that the lower commissions will hurt their business," concedes Ryerson. They'd be sacrificing a 4 percent to 5 percent commission for a 2.5 percent commissioned product. "I don't think we're sacrificing. We will gather more assets, and the institution will attract large, sticky deposits."

While credit unions (CUs) enjoy high levels of trust among their members, relatively few customers believe that CUs are the place to go for retirement planning, Reyerson notes. CUs have only a 1 percent share of the RIA (registered investment advisory) market, according to some studies, he says. "Credit unions are not a factor in this market."

The same probably applies to banks, says Ryerson. But that can change. There's an opportunity here for institutions to help members or customers who don't have defined benefit plans, and even those with such plans may want more options.

In recent years, an 'arms race' has broken out among variable annuity suppliers.

—Kevin Crowe, MetLife Invetors

It's a "logical progression" to offer this kind of solution, says Ryerson, who says to the banks: "If you don't adopt these solutions, someone else will."

***

Some rethinking of variable annuities (VAs) is also in the offing. In recent years, an "arms race" has broken out among variable annuity suppliers, according to Kevin E. Crowe, managing director-bank channel, MetLife Investors Distribution Co. (New York), as they compete over "whose riders are better."

The result: Variable annuities have become too complicated for the investors who buy them and too complex for the bank reps who sell them.

MetLife's answer is the Simple Solution Variable Annuity which was designed for (among others) the thousands of Series 6 reps who do not sell VAs or aren't allowed to sell them because the product is just too complex.

MetLife conducted a focus group in Dallas last June in which they invited a dozen bank program managers. They asked the managers: What are you missing? What don't you have?

Simplicity was a big demand. The average bank-sold variable annuity has something like 54 sub-accounts from 17 managers, notes Crowe. A Series 6 rep trying to deal with all those options is like the proverbial deer in the headlights—frozen. Where do you even begin?

The MetLife product was developed to pare down those options. "You can't invest in Zambian gold mines," says Crowe.

Some other key elements built into the product: There are no optional riders. There is a two-page application—not eight or nine pages—and a single signature page. The lifetime income withdrawal rider is built into the product; again, it is not an option.

MetLife partnered with American Funds, and the three investment portfolio options are: 1) 65 percent equities, 2) 50 percent equities, and 3) 35 percent equities. There's also a money market option for people looking to get out of the market for a while.

MetLife developed a brochure to help guide the reps through the sales process. It includes an investor questionnaire for reps to go through with the client. It has seven risk tolerance questions to determine which of the three equity options is best suited for that client.

This VA has lower expenses, Crowe says. The M&E risk charge (mortality and expense) is about 1 percent. The income-for-life rider is roughly 1 percent. There are annual step-ups for inflation. The funds add another 1 percent, approximately. Overall, expenses are roughly 3 percent, below the 4 percent to 4.5 percent that is seen with many VAs, says Crowe.

MetLife is in a couple of banks with the product now. In September, KeyBank started offering it in some of its states (Ohio and Michigan) but not in others where insurance approval was still pending. BBVA Compass in Alabama began with the product in September, too.

Reaction from the banks? Many Series 6 reps "seem very eager to get it," says Crowe. He has dealt with situations where the response it: "Our Series 6 reps are not allowed to sell VAs, but they can refer." One large bank will begin with the product in November, but they'll start with Series 6 reps only referring the VA. The Series 6 reps will get some credit to their grid for a successful referral. That's okay, too, says Crowe.

Targeting large platform programs

Crowe is mostly targeting banks with large platform programs, however, where the idea is for the Series 6 reps to actually sell the product. He has commitments with another 10 banks, he says, adding that the product is not intended to replace other MetLife products. It's for a bank customer who wants income now or very soon—not for a client who is only 55 years old, say. It's aimed at that 65-year-old customer who wants to begin his or her 5 percent income for life immediately. Typical sales would be in the $50,000 to $250,000 range, says Crowe.

What about the economy—is that a hindrance to the rollout? "If I'm going to buy a VA with annual step-ups, I want to buy it when the market is growing." A lot of investors have their money in cash now. They're earning 2 percent on CDs. They now have the opportunity to get 5 percent guaranteed for life. In that sense, "the timing is perfect."

¹Miller, Amy, 'We got to know people we only nodded to in the elevators,' adelante, Spring 2009, p. 32-3.
²Ibid.