In the past few years most banks have been moving from a commission-based investment sales model.
But the investment sales program at Lake City Bank in Warsaw, Ind., is fighting that trend.
"I've been in this business for 25 years, and I've heard this drumbeat" — about the desirability of the fee-and-advice approach — "for 25 years," said Dennis Reeve, PrimeVest Financial Services Inc.'s program manager at Lake City. "If all of that were true, I don't know why we don't have more fee-based business than we have."
Income at Lake City Investments, the bank's retail brokerage arm, rose 25% in 2008 and rose 23% in the first five months of this year from a year earlier, Reeve said.
The gains are striking considering the economic climate over the past 12 months. Reeve said he does not plan to change his business approach. In fact, a year ago Lake City Investments stepped up its commitment to the conventional sales commission approach. At the beginning of 2008, the business, which has about $150 million of assets under management, stopped paying its four reps base salaries. They now "live and die with what they produce," Reeve said.
A base salary lowers a rep's motivation to sell investments, Reeve said. And Lake City Bank, which has assets of $2.2 billion, didn't feel the typical system of annual performance reviews and salary increases, which are typically 3% to 5% annually, was well suited for its investment sales force, he said.
Unlike Lake City Bank, institutions that have embraced investment advisory models have been hard-pressed over the past 18 months to show growth from their wealth management businesses, according to analysts.
They said that the advisory model only brings increasing revenues when the total assets invested increase, and that most investments have lost a third or more of their market value over the past 12 months.
But the migration toward the advisory approach is likely to continue, said Kenneth Kehrer, director of the research firm Kehrer-Limra in Princeton, N.J. He said there is ongoing interest to develop fee-based businesses because they provide a stream of recurring revenue.
What's more, investment clients who pay fees rather than commissions may be less inclined to leave their investment professionals, Kehrer said. "Anecdotally, banks said that those customers were stickier," he said. "Banks have tended to lose the transaction customers rather than the advice customers, which is important given the difficulty of getting new customers."
But Reeve said he believes the opposite is true. From what he's heard, he said, fee-based customers whose accounts have lost a big chunk of their value are likely to decide they have been paying advisory fees — typically of 1% or 1.5% of assets annually — for nothing.
He said Lake City Investments' clients rarely ask about fees.
Advisers are more likely to cultivate new business if their salary depends on it, Reeve said. A fee-based adviser with a decent book of business can collect as much as $50,000 a year without developing new business, he said.
"My reps would much rather live and die by their own capabilities to sell products than have no control over what the market does to [their accounts'] valuations," he said.