June 2013bankinvestmentconsultant.comCut Clients, BoostYour Business p.16Networking 2.0 p.28Insights and best practices for bank advisorsHow to Make aGraceful Exit p.30Hire and hireLPL’s Andy Kalbaugh, Rob Comfortand their competitors see blueskies ahead for TPMs. And they’llall need more advisors.

BrightFuture,ApplyWithinThe broker-dealers that make up thebackbone of the bank channel,inexplicably dubbed third-partymarketers, expect sunny skies and roomto grow. The one common challengethat most will fess up to: They can’t findenough good advisors.It turns out that what’s good for the goose isn’t always good for the gander—atleast not for the banks and the broker-dealers that serve them.These are challenging times for regional banks, community banks,and credit unions with their margins squeezed by historically low interestrates, a weak economy and a struggling housing market.Meanwhile, it’s good times for the third-party marketing firms thatmany of these financial institutions use to run their investment programs.That’s because while the banks are facing their challenges, the foundationsfor the advisors’ universe are more positive. Markets are surging, a largechunk of the customer base is approaching retirement and demand for investmentadvice among customers of all income levels is rising. (Banks aren’tleft out in the cold, of course, as the fee income that the TPM programsgenerate provides a stable, if small, source of revenue while lending remainsa difficult business.)by Dave Lindorff

Cover Storythird-party marketers by AUM did notchange in 2012.Kehrer Saltzman found LPL to be thelargest of the TPMs, serving 701financial institutions and reporting $70.4billion in AUM. Second isRaymond James, with 194 financialinstitutions and $33.7 billion in AUM.Third is Cetera, with 583 institutions and$29.6 billion (Cetera’s totals combinefigures for PrimeVest Financial andCetera Advisors Financial Network). Infourth place is Invest Financial with 125institutions and $27.5 billion AUM,followed by CUSO/Sorento PacificFinancial with 158 institutions and $17.1billion in AUM. The list is rounded outby CUNA, Infinex Financial, InvestmentCenters of America, IPI and EssexNational Securities.GO BIG OR GO HOMEIn today’s environment, there seemsto be consensus around the idea thatthis is becoming a scale business.“It’s becoming harder for some of thesmaller third-party providers to provideall the services and technology, and todeal with the increased regulation fromDodd-Frank,” says White. He notesthat some seven or eight TPM firmshave disappeared since 2007.The bigger TPMs, not surprisingly,agree. “It will take TPMs with veryrobust platforms and very deepoperations to grow and succeed in thisenvironment,” says LPL’s Comfort.“That means it will largely be goodfor the bigger players.” He adds, “Asfinancial institutions demand moredepth and breadth and capabilities,they will shift from current providersto a TPM that has all those things. Inthe last year a number of credit unionshave moved from their current TPMto LPL because they want to go to thenext level and wanted a TPM with theadvantages of scale.”Then, too, he says, those banksand credit unions that have theirown broker-dealers are facing “painpoints” like added regulatory burdenand compliance risk, and the need toupgrade technology in order to remaincompetitive. That and pressures onprofitability, he says, are “going to leadinstitutions that five years ago said‘we don’t need a TPM’ to say, ‘we don’tthink it makes sense to have our ownbroker-dealer anymore.’”He reports that LPL has several suchinstitutions currently talking withthe firm, some “in the final stages” ofreaching a decision to outsource theirinvestment operation to the company.‘This is a whole new area of growth andwe see it as a big opportunity,” he saysenthusiastically.Indeed, the biggest recent example isthe decision in March by Regions Bankto turn its program over to Cetera.(Cetera also picked up the programsof two other big regional banks, ZionsBank and East West Bank, last year).“We do believe that this year willsee a lot of independent banks andregional banks go to outsourcing theirinvestment programs,” says CatherineBonneau, president and CEO of CeteraFinancial Institutions. “Regions Bankwas a good example of this.”Bonneau said that Regions Bankhad once bought the investmenthouse Morgan Keegan, but sold it toRaymond James last spring. The bankinitially began to set up an in-housebroker-dealer, but then made a strategicdecision to outsource to Cetera. Shesays of that deal, “Speed to marketwas a big driver of their decision tooutsource. If they had tried to buildtheir own broker-dealer, they would notbe where they are today. Negotiatingall the technology and the financialadvisor contracts would have taken alot of time. We brought in advisors—it’s an enormous recruiting drive withclose to 80 dedicated advisors year todate—and of course the technology isgood to go. We and Regions Bank aremoving ahead of projections.”John Houston, managing directorof Raymond James and director of itsfinancial institutions division, sees thewhole field when looking for growthopportunities. “Our biggest growthover the past 12 months has been newprograms at banks that had none,” hesays. Banks with in-house programsgoing to outsourcing was second.“Currently most institutions that joinus are looking to upgrade the serviceand the breadth of their services, whichmeans they’re usually coming to usfrom a smaller TPM or an independentinvestment program.”Number of Financial Institutions (end of 2012)701446277 242194 191 164 158 12526LPLFinancialInstitutionSvcsCeteraAdvisors/PrimeVestInvestmentCenters(ICA)CUNABrokerageRaymondJamesInfinexFinancialGroupInvestmentProfessionalsCUSO/SorrentoPacificInvestFinancialEssexNationalSecuritiesSource: Kehrer Saltzman & Associates

Cover StoryFINDING YOUR NICHEWhile the TPM business may begetting more competitive and focusedon scale, some smaller players havebeen successful in carving out niches,White says.As examples of such smaller firms,he cites IPI, Securities America(owned by Ladenburg ThalmannFinancial), and Infinex Financial. BothIPI and Infinex, he notes, “tend to beoriented toward smaller communitybanks,” where the larger TPMs areless interested. Infinex in particular,a second-tier TPM with about$10.6 billion in AUM and 191 bankinginstitutions in its stable, was set upby a consortium of banks as a kind ofcollectively owned “in-house” brokerdealer.Because of its links to its hostinstitutions, it is probably less likely tobe “traded in” for a larger TPM.San Antonio–based IPI, anothersecond-tier TPM that serves 164 mostlysmall community banks and that hasabout $6.8 billion in AUM, focusesalmost exclusively on servicing theinvestment program needs of smallercommunity banks.IPI President and CEO Jay McAnellysays that his firm is likely to benefitfrom a tightening competitive positionamong TPMs, not as a potential targetfor acquisition. “I don’t see a lot of M&Aactivity in the next two to three years,”he says, “But we would love to acquireanother broker-dealer.”Kehrer suggests that there arefour basic paths for growth in theTPM industry going forward. Inaddition to taking over smaller players,and picking up the business of banksthat decide to trade in their in-housebroker-dealer and go with outsourcing,he says there is:• Going after some of the 75% ofinstitutions that do not as yet haveinvestment programs;• Trying to lure banks to switch froma competing TPM; and• Growing internally.TOUGH SELLWhen it comes to convincing bankswithout an investment program to addone, everyone agrees it’s a good idea,but the record suggests it’s no easy feat.White says that many of thesmall banks are closely held familyinstitutions and are satisfied with theirsituation. “They maybe don’t know whatservices are out there. And for manyTPMs, they may wonder whether youcan even have a meaningful programin an institution with $75 million inassets. I think, especially with the newtechnologies, that you can.”Cetera Financial’s Bonneau agrees.“Seventy-five percent of the bankuniverse has no investment program,and good data says younger peoplewould prefer to purchase theirinvestment services through theircommunity bank or credit unions.”She acknowledges that it can bea tough sell though. “If you havemanagements who have imposeda hiring freeze, you can make theargument that the financial advisorspay their own way with the fees theybring in, but then they’ll say, ‘Yeah, butthe loan officers pay their way too.’”IPI’s McAnelly says one way aroundthat is to offer banks that have a hiringfreeze in place, or that are anxiousabout the risk of hiring advisors, amanaged program, where the advisorsare working for the TPM. He says abouthalf of IPI’s advisors are dual employees,but the other half work for IPI directly.If a bank client isacquired by a bankthat uses anotherTPM, you lose.— Valorie Seyfert,CUSO/Sorrento PacificFinancial“An advantage of that is that the bankthen has no employment, benefits orclearing costs. It also reduces riskfor the financial institution, loweringthe entry barrier for setting up aninvestment program.” Most of thebanks that choose a managed option“do it for that reason,” he says.Head-to-head competition to wincontracts with banks that alreadyhave a TPM is not that common, butall the major players acknowledgethat it can happen, and say they’reready for it.Cetera’s Bonneau, noting that herfirm recently replaced LPL as theTPM for East West Bank, says, “Latelast year the bank came to us to runtheir program. It was running at$2 million in revenue for the year. Nowthey have revised their staffing plan.We helped them train and recruit moreFAs, and already as of the end of thefirst quarter, they have eclipsed theirprior 12-month revenue figure. Why?New technology, marketing, renewedenthusiasm and new talent.”She reports that about 25% of theincreased net revenue generated bythe program since Cetera replacedLPL was the result of a one-thirdincrease in staffing, with the restbeing “better performance” by the

Cover Storyexisting staff (most of the existingEast West advisors were kept on).In fact, increasing advisor staffinglevels may be where the biggest growthpotential for the industry lies this yearand going forward. That is certainlyKehrer’s view. “We did some researchfor Cetera,” he says, “and we found thatthe typical bank investment programshould increase its number of advisorsby 70%, yet every year banks fall fartherbehind instead. This is a huge missedopportunity.”Nearly all of the TPM executivesagreed with that sentiment, and evenacknowledged their own programswere missing out on growth becauseof understaffing.“I think that even mature bankprograms have branches that areunserved or underserved by advisors, sothere is absolutely room to add advisors,”says Invest’s Dowden. “There can beresistance from bank management toramping up, but more often we see themanxious to bring in advisors.”“We’re clearly in an expense-focusedenvironment right now,” says LPLJohn Houston,Raymond Jamesmanaging director for institutionalservices, Andy Kalbaugh, “and yes,clearly staffing levels at institutions arethe drivers of growth and the institutions.”In fact, Kalbaugh says, hiring moreadvisors and slicing up territorieseven more finely is often a good idea.“Historically, financial institutionshave erred on the side of givingadvisors more branches to cover,on the theory that more accountsmeans more revenue.” But they’refinding that a smaller territorydrives a better client experience, abetter, more thorough conversation,higher household penetration, andmore wallet share for the advisor,which translates to more revenue forthe institution.At the same time, he cautions,“You can’t just throw more advisorsat an institution. Finding goodadvisors is important.”EXPANDING PROGRAMSCetera’s Bonneau also sees a need formore advisors in existing bankinvestment programs. “We think ourexisting programs are under-repped by120 advisors at the moment,” she says.“We need more advisors who arealready trained.”Raymond James’ Houston says thatwhile “it has been shown that if thefinancial advisors split up their books,they do better, gaining deeperrelationships with each client,” it’s noteasy to convince many advisors to giveup accounts or territory. “Some of themare scared to do it. They have theattitude that any small account theyhave might turn out to win the lottery,so they don’t want to give up any ofthem,” he says. “But the better advisorsunderstand that to continue to growtheir revenues there are only so manyclients they can really serve.”The president and CEO of Infinex,Stephen Amarante, agrees that bankshave been slow to add advisors. But henotes that his TPM, because of itsunique structure of being owned by thebanks that use it to run their investmentprograms, may have an easier timeconvincing those banks to add staffwhen there is opportunity.The goal at Infinex is to act as an inhouseconsultant to help make thewealth management line of businessbetter integrated into the entireorganization, he says. Infinex in 2012had advisors in 242 banks and reportedAUM of $13.4 billion.CUSO’s Seyfert says the challenge isto convince bank managers, andcurrent advisors in place, thatexpanding programs will bring in moreAUM, and benefit both the banks andthe advisors in the program.“We’re in a unique time and place inthis industry,” says LPL’s Comfort.“Banks and credit unions are in a toughspot trying to grow while regulatorshave stripped away a lot of their income.That bodes well for TPMs andespecially for the big TPMs like us thathave very robust platforms.”Invest’s Dowden says he expects mostof the growth in this industry to comefrom new programs, plus organicgrowth of what’s already in place. “Thething that keeps me up at night isregulatory reform. Especially possiblechanges in the fiduciary standard thatwould make advisors fiduciaries for401(k) rollovers into IRAs. That couldreally change our business.”Houston notes that another challengewill be to keep the exuberance at arational level. “The biggest challenge willbe to keep our enthusiasm in check. Thewhole financial industry has a terriblerecord of getting too excited in the goodtimes. We need to continue to block andtackle and stick to our knitting. We haveto realize that while we are obviouslyexperiencing a good market, it’s anenvironment that can change.” ◆©2013 SourceMedia Inc and Bank Investment Consultant. All rights reserved. SourceMedia, One State Street Plaza, New York, N.Y. 10004 (800) 367-3989

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