The bank-brokerage industry has been ramping up for what it hopes will be a good year, but there will be challenges in 2007, including a lack of referrals, uncertain market conditions, and a demographic shift that will require sophisticated models for retirement-income planning.
On the bright side, program managers apparently are blessed with high staff morale. According to a survey by Human Capital Resources in St. Petersburg, Fla., most advisers are happy in their current positions - only 11% said they were either neutral or somewhat unhappy with their jobs.
Fifty-nine percent of advisers said they probably would not move to another bank in 2007, and 21% said they definitely would not. Only 6% of advisers said they were definitely looking for a new position, and 14% said a move was somewhat likely.
"I didn't expect to see such a high degree of job satisfaction; it said an awful lot about the industry," said Paul Werlin, who wrote the survey report. "I don't know if it means banks are doing a better job of recruiting, but they can be very happy with these numbers. It means that the industry is doing a lot right."
Advisers' enthusiasm seems to have assuaged their clients' concerns. About half of advisers said their clients were positive - admittedly, only 3% of advisers said their clients were "very positive" - about the future performance of the market. However, given that the other half of clients were neutral, negative, or very negative about the prospects for favorable market performance, it's surprising how optimistic advisers were about making their 2007 sales goals.
Fully 84% of advisers said they expected to meet their sales goals in 2006, and 83% said they believed they would exceed that performance in 2007. Average gross production in 2006 was $238,000, and the highest in the sample was $700,000. Almost one-fourth of advisers were producing between $250,000 and $500,000.
Mr. Werlin didn't have comparable numbers for 2005, but Kehrer-Limra figures put average production without trails from previous years at $227,520 in 2005 and $225,684 in 2006.
This ties in with Mr. Werlin's assertion that bank brokerage has kept its momentum in the face of several serious challenges.
"Banks that have had the most difficulty are those with aggressive platform programs that have a heavy fixed-annuity bias," he said. "With interest rates where they are, it's been difficult to replace that revenue, especially with recruiting, marketing, and compliance costs going up."
The rate environment has certainly continued to take its toll on fixed-annuity sales. Variable annuities and mutual funds remain advisers' products of choice. Variable annuities, at 35% of the product mix, were the most popular vehicle last year, possibly because an overwhelming 88% of advisers said they got better support from annuity wholesalers than they did from mutual fund wholesalers.
"Mutual fund wholesaling has fallen off the charts as mutual fund companies pretty much abandoned banks," Mr. Werlin said. "Talking to mutual fund managers, they've seen so much business go to variable annuities that they only now focus on the top 50 banks."
This strategy is nothing if not counterintuitive, he said. "I can't understand, when the name of the game is market share and distribution, what you accomplish by reducing support."
In 2007, the survey found, advisers plan to sell "much more" or "more" mutual funds (72%) than any other product, followed by individual stocks and bonds (65%) and variable annuities (48%). By comparison, brokers wanted less to do with fixed annuities, bank brokerage's bread and butter. Only 23% of advisers wanted to sell "much more" or "more" fixed annuities, and 30% of advisers said they wanted to sell "fewer" or none at all.
Even less popular were controversial indexed annuities - only 19% of brokers wanted to sell more of them.
Wherever that money is going, it's not headed into fee-based accounts, according to the survey. Jeff Ellis, a senior vice president with Banco Popular's Popular Investments, said this trend is odd, considering all the industry chatter surrounding recurring fee revenue and regulatory pressure on commissions. Nonetheless, only 15% of advisers said they wanted to get more involved in fee-based accounts, managed accounts, or wrap programs.
Mr. Werlin said that, despite their optimism, brokers are feeling pressure to meet their projections, something that would discourage them from spending much time on a product group that adds little or nothing to their grids in the first year, because reps who convert from transactions to fees face an initial decline in income.
"It's difficult when referrals are down and bankers are protecting deposits," he said. "Fees represent the lowest source of commission for advisers when things are tight and business is scarce."
Managers are also noting a decline in interest in fees. "A couple of years ago, I'd get a call from one bank or another once a month asking for help designing a compensation program to encourage fee business, but I don't get those calls anymore," Mr. Werlin said. "Banks have slowed the push to force fee sales because they're more focused on meeting short-term revenue goals."
The biggest problem is that bank broker-dealers have yet to come up with a compensation plan that recognizes fees. Most banks work on a grid designed for commissions, but fees mean giving up commissions on the front end. "You've got to give up the first year of revenue if you're moving to fees," said Lou George, the chief operating officer at M&T Securities. "If you're willing to take a sag in 2007, that's one thing, but we also have to think about how we motivate employees to sell fee accounts. I don't think anyone's figured it out yet."
Another obstacle is the market itself - active management is a tough sell when fund managers' performance is less than stellar. "Let's face it, it's a difficult environment for separately managed accounts," Mr. Ellis said. "Fund managers are not looking as attractive right now as they did in the past. Clients want to know why they should pay 1.5% for mediocre performance." Though the Dow, S&P 500, and Nasdaq indexes were all up significantly in the fourth quarter, it doesn't look like they're going to break any records in 2007.
Though advisers expect to succeed, they identified specific issues they think they'll face in 2007. Poor referral programs top the list, erratic markets are a close second, followed by low interest rates, poor program management, competition from other firms, and problems with products.
Mr. Ellis blamed the rate environment for declining referrals. "The inversion of the yield curve put pressure on yield margins, so the spread on the return made deposits and loans more profitable for banks," he said. "As they protected their core deposits, investments wound up on the back burner."
As for referrals, the compression of spreads in banks has made investments seem like a threat to deposits. While that isn't necessarily so, it still means that referrals dry up. Reps are left to tough it out and seek outside money.
At Popular Investments, "65% of our assets last year came from outside the bank, and in some markets it was as high as 85%, which is hard work," Mr. Ellis said. "But you do what you have to do."
