The third-party marketing industry is in the midst of a sea change. First there was the consolidation of the industry itself, as larger firms like Raymond James, Cetera and LPL gobbled up or grabbed business from smaller players. Then there was the competition from the banking and insurance industries, whose product lines overlap with products offered by the TPMs. And finally, there is the wave of demographic change, with 76 million baby boomers now nearing or in retirement.
Not only is this the first generation to be retiring essentially without any classic defined benefit pension, but this huge population segment is reaching retirement in the wake of the biggest market collapse since the Great Depression.
Added to this is the fact that within the banking industry, where TPMs are overwhelmingly the main providers of financial planning expertise and brokerage services, there has been an unprecedented consolidation of financial institutions.
A recently released 2012 Annual TPM Study by Kehrer Saltzman & Associates tells some of the story. Between 2010 and 2011, this report shows, the number of financial institutions that were partnered with the 12 largest TPMs fell from 2,958 to 2,760, a drop of 6.7%. Yet over that same period, the percentage of banks offering investment services through the 12 largest TPMs actually increased slightly from 24.8% to 24.9%. An explanation for this seeming anomaly, explains Ken Kehrer, a co-author of the study, is that banks were consolidating over this period, even as many were adding investment programs.
TPMs themselves have been consolidating over the years as well, and have also been paring down while upgrading their stables of financial advisors. Not surprisingly, perhaps, the number of advisors working with the dozen largest TPMs has fallen from a high of 7,825 in 2008 to 7,011 in 2009 (a drop of 10.4%). That number continued to fall to 6,336 in 2010 (down 9.6%) and to 6,234 in 2011, (a 1.6% decline).
The number of platform reps has also fallen over the period, going from 6,122 at the 12 largest TPMs in 2008 to 5,180 in 2011.
Significantly, over this same period, average gross revenue produced per advisor at those top 12 TPMs has risen even as their numbers have diminished, going from $175,568 in 2008 to $224,856 in 2011. That's a major part of the TPMs' overall success in those recent years. According to the Kehrer Saltzman report, brokerage revenue at the 12 largest firms rose from $1.12 billion in 2006 to $1.41 billion in 2011.
But as with any industry, there are concerns. "The biggest problem facing this industry is the pressure on commissions," says Kehrer. "For a long time, fixed annuities provided the bulk of broker-dealer revenue, perhaps 25% to 50%. But in this low interest-rate environment, in order to keep prices down, underwriters have had to cut back on commissions. It's usually a cyclical problem, but the bottom of this cycle has gone on so long it's been a real drag on the business and on the banks that the TPMs support. Variable annuities have picked up some of the slack, but not enough."
That has contributed to the other big shift, which is a move away from commissions and toward a fee-based business. This is still in the low double-digit range of about 10% in the bank channel, says Kehrer, compared with about 40% of income for advisors in the wirehouse firms.
But there are exceptions. Raymond James has pushed its fee-based business well into double-digit territory. "Over the past year, our fee-based business in the bank channel was up by 33%," says John Houston, managing director of the firm's financial institutions division. "And over the past five years it has grown at an average of 25% per year compounded, which is pretty strong."
Others agree. "The fee-based business is growing very fast," says Greg Gunderson, president and CEO of Investment Centers of America. "It's at about 22% now in the bank channel, up from 17% a year ago, and just 1% to 2% three years ago."
Kehrer notes: "The advantage for the investor of a fee-based advisor is that their interests are aligned. They more or less make money together, where under the old brokerage model the broker made money either way. For the broker-dealer firm, fee-based is better, too, because it accumulates-as assets under management grow, so do fees. But of course you get a lot less in fees: 1% to 1.25% of dollars invested, compared with a typical commission of 3% to 7% for a mutual fund or annuity on a commission basis." What this means, he says, is that "broker-dealers and banks, which traditionally have thought short-term, need to think longer term."
One of the big surprises in the Kehrer Saltzman study is the news that some 75% of financial institutions, most of them smaller community banks and credit unions, but including some larger banks, even of regional size, still have no investment program at all. For example, as of Dec. 31, 2010, only 17% of small banks with deposits of under $250 million were selling investment products. That figure rose to 40% for banks in the $250 to $500 million range, and to 49% in the $500 million to $1 billion range. But even at the $1 billion to $5 billion range, surprisingly just 53% were selling investment products; and for banks over $5 billion, it was still only two-thirds of institutions that had investment programs.
Even CEOs at some of the big TPMs expressed surprise at that, while maintaining all those banks without investment programs represented a market they planned to tackle.
"I saw that figure, and it's huge," says Steve Hollenbeck, senior vice president for marketing at CUSO Financial Services. "And the reality is that some of them are quite sizable, not just tiny institutions," he says. "I don't think the problem is that they're afraid we'll steal their deposits; we find that 75% to 80% of investment assets come from outside sources, not from money held in the bank." Rather, he says it's more often a matter of a bank's not wanting to add costs, "and we come to them and say we'll take care of the costs."
Others added that it's an opportunity for TPMs. "Increasingly there is interest among those banks and credit unions with no access to investments, for their customers," says Catherine Bonneau, president and CEO at PrimeVest, the bank channel division of Cetera Financial Group. "We see tremendous opportunity among those that came through the rough patch and are trying to decide what will both endear them to their shareholders and meet the needs of their customers."
Andy Kalbaugh, managing director for institutional services at LPL, says the 75% figure is indeed surprising, and adds that his company has 3,800 independent advisors, many of them working in or near more rural areas of the country. "They're active in their communities and are getting our story out there. If they see a financial institution without an investment program, they are in a position to offer to help set one up, perhaps on a part-time basis."
Bonneau, for her part, also makes the argument that PrimeVest's corporate structure-a separate unit from parent Cetera, with its own CEO/president-will help it win business. "Cetera is dedicated to supporting PrimeVest's 100% focus on banks and credit unions, and at the same time, we are able to utilize the back-office resources of the four RIAs that are part of Cetera, leveraging Cetera's scale for access to technology and to hire talent," she says.
"We're geared up for this kind of thing," says Gunderson of Investment Centers of America. "In fact we just picked up two of those banks. It's how our firm started in 1985. It was revolutionary back then: We'd get people licensed and introduce them to banks. It was like putting two consenting adults together."
There are other challenges ahead, Bonneau notes. "Our banks are experiencing reduced branch traffic because of the growing popularity of online banking, and of course we're dependent upon walk-in business for referrals. That's why there's an increasing need for outreach and technology," she says. PrimeVest has come up with a marketing system called Connect to Clients, which uses email and regular mail to provide information to clients on an ongoing basis, she says. "We need to help our advisors connect with customers if they're not coming into the bank."
On another note, Primevest has put resources into career succession planning. "It's no secret that the advisor workforce is graying," Bonneau says. "We look actively for talent within our banks, and groom and train people over time, with programs to put career training in place, including obtaining licenses."
Raymond James' Houston says that part of the challenge in reaching those banks that still don't have investment programs is cultural. "As an industry, banks tend to be myopic," he says. "Everybody gets together and speaks the same jargon. But when you get down to it, most of them aren't competing with each other. They're competing with the big banks and wirehouses, and in order to win, they need investment programs with the best financial advisors. And the best people in this industry don't come cheap; they should and can earn more than the CEO of a small community bank."
Overall, banks generated $10 billion in revenue last year through their investment business, says Kehrer. "And that's just the retail investing- not wealth management and trust divisions." He notes, "If the other 75% of banks had investment programs, it would generate another $2.5 billion."
Meanwhile, banks without investment programs are not the only place to look for growth potential. Kehrer said the big money would come from getting banks that already have investment programs to up their game to the level of the top quartile in terms of best practices (better referral programs, more advisors, and improved training and licensing of existing advisors, etc.). That process, he said, could generate another $7.5 billion in revenues.
Kevin Mummau agrees about this area of growth opportunity. Executive vice president for program development at CUSO Financial, he says, "The challenge for us is to help the executives at the banks and credit unions see how big an investment program could be for them. Most are happy with having a program that has assets under management of 10% of deposits. So a $1 billion bank is happy to have a $100 million to $200 million investment program. But in reality, the average depositor at that bank probably has five to 10 times as much money in investments as in deposits, and that's what we tell the bankers. It's a real eye-opener. Then it's: 'What can we do to get more investment money?'" He adds, "We've had programs where the ratio of investment assets to deposits is 1:1, but to get there, you have to understand where the assets are, and it's primarily in retirement funds."
WHAT EMPLOYEES AND CUSTOMERS WANT
Total assets under management at the dozen top TPMs have soared in the last few years. After hitting a high of $154.2 billion in 2008, they fell to $120.4 billion in 2009, but bounced back to $188.4 billion in 2010 and then rose to $239.6 billion last year, doubling the 2009 figure.
And in terms of product mix, mutual funds have consistently outpaced annuities at the TPMs by a wide margin. In 2006, 57% of TPM product sales in the bank channel were mutual funds, compared with 29% variable annuities and 15% fixed annuities. In 2008 and 2009, annuities gained favor, no doubt in response to the financial crisis, with mutual fund sales falling to the 42% to 44% range. But then mutual funds came back strong, rising to 50% of products sold in 2010 and 47% in 2011.
For employee satisfaction, JD Power does an annual broker-dealer survey of advisor and client satisfaction, noting that relationships are the key to success in this industry. "On the surface, you'd think compensation would be what matters for advisors, but we find that the biggest piece for advisors is efficiency handling the regulation and operational thing, to allow more client-facing time, and for clients, it's the relationship," says David Lo, director of JD Power's wealth management practice.
As Lo writes in his report: "Adhering to best practices regarding firm performance, technology, compliance and administrative support yield the highest levels of advisor satisfaction, even among advisors who receive payouts that are lower than industry average… . It's no coincidence that the firms struggling with the key best practices identified in the study are also paying the highest retention and signing bonuses to compensate for a poorer work experience."
The JD Power advisor satisfaction survey finds brokerages Edward Jones, Fidelity Investments and Schwab & Co. at the top of the list (ranked at 803, 800 and 787 respectively on a scale of 1,000). And LPL Financial and Raymond James are tied for fourth place at 786. None of the other bank channel TPMs made the top rankings. According to Lo, "One thing advisors care about is feeling good about the leadership of their broker-dealer, and firms like Raymond James are off the chart on that. Their advisors really like them." He adds, "That's where the wirehouses fall down. With an LPL or a Raymond James, you don't have some big corporate bank on top of you. There are no competing objectives being pushed… Advisors don't like to have to push mortgages or to sell clients specific products. What they want is to be able to act in the best interests of their clients."
Turning to the client satisfaction portion of the JD Power survey, Raymond James again tops the list of firms that operate at least partially in the bank channel business, ranking No. 2 at 864, after Edward Jones at 901. Northwest Mutual Investment Services and Wells Fargo Financial Network take third and fourth place at 831 and 798, followed by bank channel firms LPL and Cetera Financial (Primevest), at 786 and 780.
"For clients it's all about the relationship with the advisor," explains Lo. "And the key to that is providing the advisor with the right tools and back-office operation to be able to efficiently serve the client."
