For a while it looked as if the brokerage arm at Fulton Financial Corp. in Lancaster, Pa., would be a short-lived success story.
Back in 2002, the strong performance of the then two-year-old brokerage unit had helped Fulton's wealth management business nab a coveted small-bank award from the Bank Insurance & Securities Association.
But four years later the luster was gone. As retail bankers started to run out of referral candidates, frustrated brokers began to head for the doors - and that made the bankers reluctant to refer the prospects they did have. With profits declining, the brokerage arm was "on a wicked little downward spiral," says Dave Hanson, chairman and chief executive of Fulton Financial Advisors, which includes the brokerage.
Not any more. The brokerage unit, which had revenue of just $7 million in 2008 after generating as much as $15 million a year in its heyday, is expected to produce revenue of $13 million this year, according to Hanson. In 2011, Hanson says he expects the unit to bring in $25 million to $30 million of revenue.
Hanson says two key decisions, both of which are becoming increasingly common at small and mid-size banks, have fueled the turnaround.
First, in mid-2008, the brokerage began to transition from a commission-based model to a more stable and lucrative one built on advice, in return for an ongoing stream of fees. Then in December, the $8.5 billion-asset Fulton hired a rainmaker - ex-Wachovia brokerage executive Frank Consalo - to lead the transition to the fee-based model. Consalo, Hanson says, "has spent his career managing the kind of business we want to be."
Industry executives say consolidation in the wealth management arena has created a fair amount of upheaval in the brokerage business, opening the door for small and mid-size banks to pluck leadership talent, with well-established books of business, away from larger organizations. Meanwhile, many smaller banks are opting for the fee-for-advice model because fees can be a steadier source of income than commissions, which are susceptible to swings in the market.
Fulton is still a leader in the investment sales business. In 2008, it sold $10.4 million of mutual funds and annuities - staple items for retail investors - ranking it 45th among 553 bank holding companies, according to Michael White Associates' Fee Income Ratings Report.
But the brokerage had lost its way in recent years, and a new approach was essential, says Hanson.
Fulton's first move in its brokerage makeover came in June 2008, when it partnered with third-party investment provider Raymond James Financial Services. The firm has one of the best fee-based platforms in the business, and that should be attractive to fee-based advisers, Hanson said.
Six months later, Fulton scored a coup by hiring Consalo, who had spent the previous nine years with Wachovia's securities business, as president of a five-state Northeastern region.
Wachovia's retail brokerage derives more than one-third of its asset management revenue from recurring fees, compared with 16 percent for the industry at large, noted Kenneth Kehrer, research director of Kehrer-LIMRA. "Consalo comes from one of the few banks that have been highly successful converting to the fee and advice model," he said.
The advantage of fee-based accounts is that they pay brokerages around 1 percent per year of their asset totals. That should provide a predictable stream of revenue, unlike the commission model, in which customers pay just once, at the time of a transaction.
Fulton's brokerage assets under management have grown approximately $600 million in 2009. Total brokerage assets are approximately $1.2 billion, of which approximately 20 percent are fee-based. Consalo says he wants to double that percentage within three years and eventually boost it to 65 percent.
One of Consalo's primary challenges at Fulton is building up the depleted corps of financial advisers; with each adviser handling more than five of the bank's 270 branches, Hanson admits the brokerage has "far fewer than we should have."
Consalo is making strong progress on that front. The new brokerage chief has boosted the unit's headcount from 32 to 52 and, tapping his web of contacts in the industry, he intends to hire more than 50 additional reps within the next two to three years.
A big benefit to hiring outside talent, of course, is that these reps often come with significant books of business. Two of Consalo's recent hires, for example, brought with them roughly $1 million of client assets each.
Still, if Fulton's brokerage unit hopes to achieve its lofty goals, it needs to start winning over more bank customers. Kehrer says relations between bankers and brokers suffered during the period of heavy broker turnover.
"There has to be a much better rapport between the bank staff and brokers so that they get more and better referrals," he says.