Small banks' brokerage revenue grew during the 12 months through May, outpacing larger banks, whose revenue shrank, according to recent measurements.
Part of the reason is that, in the current market, a big-bank mainstay, fixed annuities, has been a harder sell than the variable annuities and mutual funds favored by small banks, according to Kenneth Kehrer, the president of the Kenneth Kehrer Associates consulting firm in Princeton, N.J.
Community banks' brokerage revenue was 3% higher in May than the year earlier, according to the Kehrer-Invest Community Bank Brokerage Study. The study was based on responses from 22 banks with less than $4 billion of assets.
Meanwhile, banks bigger than that reported May brokerage revenues of 9% less than in the same month a year earlier, according to the Kehrer-Axa Distributors Monthly Bank Investment Services Monitor.
Small banks are more wary than large ones of fixed annuities because they fear the product will siphon dollars from deposit accounts and thus from the pool of money that the institutions draw on to make loans, Mr. Kehrer said. So in May, the biggest share of small banks' brokerage revenue, 34%, came from sales of variable annuities; mutual fund sales accounted for 24%.
At large banks, by contrast, variables accounted for just 15% of May revenues, and fixed annuities accounted for about one-third.
"This has been the case for a couple of years," said Mr. Kehrer. "Large banks are more focused on fixed annuities, and smaller ones on variable annuities."
Large banks have much better developed platform sales forces than do their smaller counterparts, and they tend to be fixed-annuity-oriented. One reason big institutions are set up this way is that it is cost-effective: Platform salespeople earn about 12% of a sales commission, compared with 38% for a dedicated broker, according to Mr. Kehrer.
Partly as a result, banks in the $4 billion-and-up category are less focused on mutual funds: They accounted for 13% of these banks' brokerage revenues in May, compared with 24% at community banks.
Perhaps not surprisingly, big banks also sell more individual securities than do community banks. In May, stocks and bonds accounted for 18% of large banks' revenue, compared with 6% at small banks, according to the Kehrer reports.
"The resilience of fixed annuities, given the poor interest rates and so on," was the most surprising thing in the May surveys, Mr. Kehrer said. The growing popularity of index annuities, a hybrid product touted as combining the safety of fixed annuities with the potential upside of variables, may partly explain this resilience, he said.
Banks in many cases draw half their investment product income from annuities, Mr. Kehrer said, and with interest rates and regulatory scrutiny working against the traditional fixed and variable annuities, bank brokerages have been clamoring for information about the newer index product.
Working against the product is the fact that it is more complicated than its predecessors, along with banks' fears of disintermediation, he added.
Lynn Niedermeier, the president of Invest Financial Corp., the community bank study's sponsor, said she sees another factor in smaller banks' retail investment programs' gaining traction: More banks, she said, are taking the business seriously as a core competency.
"Senior management are not seeing this as a defensive move anymore," she said. A "new seriousness" seemed to set in about two years ago, with the end of the bear market, she added.
Banks are setting goals, benchmarking their results, and hiring more reps, she said.
Both small and large banks saw their sales forces' overall revenue generation drop, according to the Kehrer studies. From May 2004 through May 2005, average adviser gross commissions at large banks dropped 16%. Platform salespeople fared even worse: Their monthly gross commissions in May were 21% below the level of a year earlier.
At small institutions, financial adviser revenue production was off 19% from May 2004.
The Kehrer firm's index of community bank brokerage revenue fell 18% in May, to 116 by comparison with a 2002 base of 100. It had risen to a near-record height of 143 in April. The 116 reading was still 3% higher than in May 2004, however.
