Old National Bancorp in Evansville, Ind., says it has joined the trend to brokerage outsourcing as a means of cutting costs and focusing on lines of business in which it is expert.
The $8.9 billion-asset banking company has chosen Invest Financial Corp. to manage its broker-dealer operations, beginning Dec. 1. Onerous compliance requirements have led more banks to seek third-party brokerage platforms, said Karen Lance, a product manager at Old National.
"We're seeing a real trend, with banks trying to figure out ways to be more efficient while keeping their broker-dealer business private-labeled," Ms. Lance said.
Bank broker-dealer operations face more liability risks as a result of increasingly stringent securities regulation, according to a report by Kenneth Kehrer Associates, a Princeton, N.J., consulting firm. Based on recent experience, a bank operating a broker-dealer "might" face about a 10% chance of incurring a $125,000 regulatory penalty, the study said.
Invest's compliance offerings include an analysis of breakpoint transactions - mutual fund purchases at a dollar amount that entitles the customer to move into a lower fee bracket. Sales just below breakpoint amounts violate NASD rules; brokers must make positive efforts to help customers reduce their transaction's cost with a slightly larger purchase.
Regulatory requirements were a factor in Old National's decision to outsource, Ms. Lance said.
"Compliance has been a huge burden," she said. "Regulatory issues and compliance have increased so quickly."
Her company also wanted to improve its broker-dealer's efficiency with better technology, she said.
"We look at all our core businesses," Ms. Lance said, "and if there's something that's not a core competency, we might consider outsourcing. We do not have a huge technology budget."
Invest offers banks securities registration, clearing, and compliance services, said Lynn Niedermeier, president of the Tampa outsourcer. The company, which has about 650 full-time representatives and 600 platform representatives, has roughly 140 financial institution clients.
Its other bank clients include $10.3 billion-asset FirstMerit Corp. in Akron, Ohio, which agreed in June to outsource its broker-dealer business to Invest.
"We have the size and expertise to be able to interpret new rules quickly and develop new forms and processes," Ms. Niedermeier said. "Smaller broker-dealers may not have the capability … ; everyone is so stretched."
Invest's technology applications include an e-signature program that automatically inserts data on forms that brokers are required to complete when processing transactions. The program also requires brokers to enter certain information to prevent them from submitting incomplete forms.
The e-signature technology also lets all files be maintained in an electronic format, Ms. Niedermeier said.
Outsourcing can significantly increase profitability for banks with small broker-dealer operations, according to the Kehrer study. Banks with small broker-dealer businesses typically spend much higher percentages of their revenue on operating expenses than larger broker-dealers do, the study said.
Banks need $30 million of annual brokerage revenue to take full advantage of the economies of scale for operating their own broker-dealer businesses, the report estimated. It was based on data from 691 banks that collectively account for half of all bank mutual fund and annuity sales.
At $5 million of annual revenue, the broker-dealer's contribution to a bank's pretax profit is 9% of revenue, the study said. At $30 million, the profit contribution jumps to 33%.
Broker-dealers with $5 million of annual revenue typically spend more than 24% of revenue on personnel costs, the study said. But a broker-dealer with $30 million of revenue spends only 6.4% on staffing.
Small broker-dealers also must spend a higher proportion of their revenue on technology, as well as sales and program management, the Kehrer study said. Banks with $5 million to $20 million of broker-dealer revenue spend 4.4% of revenues on clearing and processing. But this expense line at broker-dealers with $30 million of revenue is 4.1%; at $50 million of revenue, processing cost is 3.4%.
The cost of managing the sales force and brokerage operations for a broker-dealer with $5 million in annual revenue is about 17% of revenue, according to the study, but 8% at banks with $30 million of revenue.
