Banks today are in double jeopardy.
If they choose to enter the relatively risky world of mutual funds, securities, and annuities, they run the long-term chance of committing institutional suicide.
If they do journey into this unfamiliar territory, but take the wrong route, they may face an economic nightmare. The right route, however, could be highly profitable.
Consider some of the issues banks face in offering these types of investment products. If they invite third-party representatives onto the premises, banks run the risk of bringing the fox into the henhouse.
Commissioned, registered representatives may be perceived as putting self-interest before the interests of customers and employers.
If the reps are poorly trained or unmotivated, they may alienate customers with inappropriate or inadequate investment advice. That could expose the bank to ill will, regulatory headaches, or even lawsuits.
For banks without a trust department, establishing one is expensive. Even with a trust department, it is difficult to make money servicing investment accounts valued at under $500,000. Yet banks know that they cannot afford to overlook this segment of bread-and-butter customers with investible assets of $100,000 to $500,000.
When banks start selling a selected group of funds over another, they can be perceived as putting the interests of the bank ahead of those of the customer.
Offering mutual funds and other investments to savers carries additional risks. Disintermediation of funds from certificates of deposit and other traditional savings vehicles, or the departure of those assets to other institutions, is a banker's nightmare.
Given the relative novelty of banks as a distribution channel, the time needed to evaluate the return on investment of launching investment services is lengthy. By the time banks can accurately determine profitability, it may be too late.
With the risks involved, banks may be reluctant to transform themselves into full-service financial institutions.
Wrap-account wholesalers may help make this transformation not only less risky, but also more profitable. A well-designed wrap account program can make it possible for banks to earn fees on managed assets without worrying about administrative costs, and can minimize time spent on managing accounts.
While the wrap-account concept of building a number of services together and coveting them with a single fee is not new, little help has been available in profitably servicing the vast middle market between $100,000 and $500,000.
Banks cannot overlook the needs of the mid-six-figure investor. Banks that choose to target this market have a golden opportunity.
The challenge for banks is to find a way to gather these assets under their own roof profitably, without entangling themselves in the complex administrative and compliance details involved in establishing a proprietary investment management capability.
Hiring qualified personnel, finding the right money managers, complying with regulatory guidelines, setting up record keeping and recording systems, and training sales representatives are extremely expensive. A wrap account wholesaler can eliminate the problem banks have in monitoring all the costs and wondering if they are actually making money.
The main advantage banks that market wrap accounts have is that they receive fees for the managed assets without having to concern themselves with operational, investment, or general administrative expenses.
With such an arrangement, banks earn a net management fee that goes immediately to the bottom line. In effect, this represents "found money" for banks searching for a way to make a profitable transition into the investment arena.
Time spent on customers' accounts is limited to an initial investor profile interview and whatever periodic communication the bank chooses to provide.
A wrap account wholesaler gives bank customers access to a broad army of investment options. Customers retain control and access to their money. If customers need cash, they direct the wrap account wholesaler to liquidate whatever amount is needed and forward a check.
Using wrap accounts can help both large an small banks enhance customer retention by providing clients with what they want. These accounts also provide banks with a way to offer money management services profitably.
