Why Banks and Brokerages Don’t Mix

Imagine your mom baking a warm apple pie but then she decides to add ground beef to it to ‘enhance the flavor’. Or, imagine visiting your favorite Irish pub and asking the bartender for a pint of Guinness, yet the bartender puts a shot of Red Bull in it to enhance the taste. Better yet, imagine you find the love of your life but discover he/she is a diehard Yankees fan and you grew up a Red Sox fan.

Just as these examples aren’t acceptable in our culture, neither are merged banks and brokerage cultures. For years banks have been drawn to owning brokerage firms. Their thirst for greater revenue streams, high net worth clients, and the appeal of owning a financial powerhouse has drawn commercial banks toward traditional brokerages even before November 12, 1999.

On that November day, the Glass-Steagall Act was altered to allow bank holding companies the opportunity to own other financial institutions. Beforehand, banks were to be banks, insurance companies were to be insurance companies, and brokerage firms were to be … Well, you get the picture. Although the Act was repealed, allowing these firms to merge together, their cultures and egos have never allowed them to create those ‘superpower’ institutions; and until these cultures learn to embrace each other’s strengths, then they will never reach their full potential.

Numerous historians believe banking began around 400 B.C. when customers deposited grain, corn and other non-financial items. Over time, banks have evolved and now offer greater services for clients – from lending money to managing investments, insurance, and trusts, as well as many other important financial services. However, most bankers believe lending money is the key to a bank’s success. Borrowing money from the Government or customers, and then lending that money to others at a higher rate, gives the banker the best possibility of increasing profits.

Although companies, such as GE and Berkshire Hathaway, were able to become more profitable by diversifying their core holdings, banks believed they were placed at a disadvantage because of the Glass-Steagall Act. Accordingly, bankers lobbied Congress to change the Act, and allow them to own other types of financial institutions and, hopefully, increase their profits. Thus, with a new law in hand, the bids for brokerages started as quickly as horses leaving the gates at the Kentucky Derby.

Soon after the digestion of these mergers, banks discovered how the brokerage culture operated. Bankers witnessed financial advisors come and go as they pleased, essentially creating their own hours. Additionally, advisors were able to pick and choose what clients they wanted to conduct business with. If an advisor didn’t want to work with a certain client anymore, they ‘fired’ them. Furthermore, some advisors made more money than the bank presidents, which infuriated these ‘higher ranking’ executives. Thus, according to Darrell Miller, a former bank president for over 20 years, many banks tried to put an end to this culture. “Bank presidents hated the fact Why Banks and Brokerages Don’t Mix – Continued advisors were able to make so much money and do so on their own terms. Most presidents resented the advisors for that and tried to change their compensation and working culture.” Miller goes on to add, “In order to achieve this, banks instituted such policies as designated work hours and client satisfaction reports, which forced the advisor to assist all bank clients no matter how much money the client had.” Per Miller, these types of policies created a rift between brokers and bankers, and that rift still exists today.

Another item that bank presidents disliked was how many advisors were able to ‘live’ off their book of business without having to grow it. These advisors would receive a perpetual income stream from their book for consistently growing their client’s assets, and if the advisor’s book was large enough they wouldn’t have to acquire new clients. Bank presidents sought to change this by instituting a monthly goal policy. If the advisor wanted to receive compensation from his book, he would have to generate a certain amount of new client income that month. By hitting this higher goal, the bank would make more money from the new revenue. Consequently, without hitting this new goal, the advisor wouldn’t earn anything that month, and the bank wouldn’t have to recompense the advisor. This new compensation policy added to the broker’s frustration.

Additionally, current brokers are increasingly upset about banks continual compensation changes. Michael, an advisor for a regional bank in the Southeast said, “Banks are always changing the way we hit our bogies. We’ll be midstream into the month and I’m 90% from hitting my goal, then the bankers will change our structure in order to save money. This is just one of the reasons as to why we have a high turnover rate, not only at this bank, but many others.” Michael is not alone. After speaking to dozens of other bank brokers, most said the same thing.

Not only are advisors upset with the habitual compensation changes, but many are upset with how banks force advisors to work with all banking customers. Jason V., an advisor for a large banking company adds, “Banks lure advisors over here by telling them about all these referrals they will get from other banking partners. But they fail to let you know those few referrals you do get are so minute and time-consuming that you’ll never hit your goals.” Jason further adds, “Who wants to spend hours opening an IRA or 529 Plan when you won’t get $30 on your pay grid?” He continues, “The hypocrisy of it all is, even the City Presidents of the bank won’t invest with us. Most of them have money at big brokerages and they’ll tell you they do that so no one at the bank knows their worth. Yet, the ones who are honest tell me they like the wirehouse (brokerages) because it has less turnover and greater capabilities.”

Even those who thrive in the banking environment have issues which hinder their long-term success. David P., a former Merrill Lynch advisor now working at a large bank, says, “I can work my tail off for years and every month it is always the same…at the beginning of the month I start back at zero. No matter how many millions of dollars I have brought into this company I never get to reach a point where I just work with my existing clients. I always have to grow the business and now I’m reaching a point where I can’t sustain those levels.” David goes on to talk about the key difference for advisors who grow their business at a brokerage firm compared to those at banks: “At a brokerage firm I would be able to team up with someone else to help me manage this book, but not at the bank. To them it is always about getting more from you and not having to pay for extra bodies to help “I’m really fed up with it.” says David.

Although David’s irritation appears to be about the incapacity to partner with others to help manage his book, he is also upset about the inability to receive income trails from his existing book, while at the same time, having to work with every banking client. This was an item Darrell discussed earlier, an item which banking presidents wanted to thwart to make advisors continually work at higher producing levels. David continues, “When I worked at the brokerage firm I was able to go after the kind of clients I wanted to do business with – no one could tell me otherwise since it was my business. At the bank I have to help every client, even clients who are transferring $250 XXXXX from another bank and expect me to call them and let them know when their investment is down and why it is down.” David adds, “I don’t have the time or the desire for that client but I can’t just say go to Scottrade or Fidelity and do business with them. The branch manager would have a cow. Even if the branch manager understood the amount of time for the money that it would take to do this “ they still want us to accommodate those clients. At the bank, they just think about capturing all assets “not necessarily productive assets, just all assets.”

It may appear that working at a bank is becoming more and more difficult for advisors, but not everyone shares this same opinion. Jim, who used to be a Smith Barney branch manager, is now managing advisors at a large bank in the Atlantic region says, “Banks aren’t as bad as most working in the industry think. For managers it is easier from a compliance standpoint because of the things we can’t offer to clients. I’m not drowning in ticket trades and commodities trades all day like I was at the brokerage firm. I don’t have to deal with advisors” egos either. At the banks, advisors know they don’t have a lot of power. They view themselves as employees and not independent contractors, such as advisors at wirehouses (brokerage firms).” According to Jim, management does face some issues.

Albeit, Jim does not come close to making the money that he did as a brokerage manager, he understands that he doesn’t have to put in the hours that he once did, either. Jim does talk about the difficulty of keeping advisors at banks due to the change in culture. “The one item that is difficult to manage is the high amount of turnover. When I was at Smith Barney, I was recruiting but I didn’t have to focus this much time trying to find people to fill spots.” Jim continues, “Constant turnover kills our relationship with clients and the branches. The branches don’t want to refer business to my advisors because of the turnover, and how clients might perceive them the next time they recommend someone.” Jim goes on to add, “Consequently, clients don’t want a new face every time they call in. They want someone who understands their goals, needs and wants, and they aren’t looking to spend time trying to reinvent the relationship with someone new every six months. . . . This is why the bigger clients tend to stick with the brokerages and the smaller dollar clients are at the bank because the brokerages don’t want to mess with them.”

By 2001, banks started to understand the difficulties that increased turnover placed on their larger clients. In an attempt to satisfy these high-net worth? clients, numerous banks created Private Client Servicing Groups. These offices usually have a primary advisor, who maintains the largest part of the client relationship; a portfolio manager, who manages the day-to-day investments; trust officers; insurance specialists; and, possibly other specialists, depending on the size and location of the bank office. The goal was to help give the large client some stability with an advisory team and enhance that relationship with a group of employees versus one advisor. The odds were if the client had a meaningful relationship with more than one person, then the client would stay even if an advisory group member left.

When talking with Darrell Miller about his experiences with private client groups, he confirmed my findings: “Client service studies, along with a report by Ernst & Young, showed that when the client had a relationship with more people at the bank, the client tended to stay even when one or two advisors left. So when we started our private client group we tried to build a client-centered team that would work two-fold. First, the client would feel as if he was special because he would have a team of professionals on his side. Secondly, we would build the multi office relationship with the client in order to keep them as long as possible – even as employees left.” After asking if this new structure was successful for most banks, Darrell had an interesting response: “The jury is still out on that one. I noticed we still had turnover but not as high as we did beforehand.”

Darrell did say his banks changed the pay structure for advisors in the private client groups. Advisors were given base salaries and, after acquiring some level of revenue, usually their salary plus benefits, the advisor would begin to receive a commission payout. He also mentioned that giving an advisor a base pay lowered the turnover rate, but when asked if that compensation structure allowed the advisor to be comparable to brokerage firms, Darrell had some strong feelings about not allowing that to occur: “This is a bank. If people don’t like the pay outcome, they can work somewhere else. Our goal is to our shareholders, and advisors never understand that. We have a team goal at the bank, not an individual goal. Advisors think they ‘hung the moon’ and without them the bank would falter. Yet, those advisors are dead wrong. We paid folks accordingly and they made great money, but just because they didn’t make more than others at a different firm they want to complain.”

While researching these cultural differences, I began to understand why the two cultures don’t mesh. Working for a brokerage firm is not easy. The old brokerage adage was to hire whoever could breathe, then throw them in the water and see who could swim. In the 80’s, the average working span of a broker was less than four months. People entered the business just as quickly as they left, but so many people were drawn to this industry – and, apparently — for various reasons. One reason, and key distinction, is brokerage firms are built on meritocracy – “you eat what you kill”. Another is the flexibility of work time. Advisors set their own hours, take lunch whenever they like, and take vacations whenever they want. Additionally, brokers are entrepreneurs. They use their persuasive skills, knowledge, expertise and networking connections to build their ‘book of business’. Brokers can ‘hang their shingle’ at one firm one day and go to another the next, but in the long run, what they build is theirs. The only caveat to this is that they must produce revenue. Advisors must bring in assets if they are new to the business, and they must retain assets if they are experienced in the business.

In the brokerage world they say, “If you work as hard as you can for the first five years, you’ll live like a king the rest of your life.” To the contrary, most bankers are not entrepreneurs. They have the adage, “If you build it, they will come”. Banks provide a financial service to people. Since people can’t borrow money directly from the U.S. Treasury, they have to use a banking institution to finance their goals and dreams. When you walk into a bank, you normally don’t rely on the same person to help you. The reason is banks created a service model which allows the customer to come into the bank and be waited on by a teller, or financial specialist. Therefore, the odds of establishing long-term relationships are diminished compared to the brokerage landscape where you have one person who handles everything financial for you.

Sid Moss, a former commercial banker for over 35 years says, “Bankers know how to lend money and manage a loan portfolio. Normally, they are great at that. What bankers don’t understand is how to manage human capital.” Sid elaborated, “When banks acquire other entities they believe the new entity should conform to the acquiring firm’s model. But what happens is employees leave because they were good in their former working model and the new entity doesn’t fit their style or expertise. When this happens, you lose valuable human capital and that has to be 70% of the reason you bought the entity to begin with.” Sid continues with, “The ideal way to do things would be like the old Romans did “when you took over a new culture they just left the culture alone. Let them be who they were and thrive.” Sid’s concept isn’t new by any means; there have been a number of companies which have taken that type of action but few in the financial landscape.

Todd O., a financial planning specialist in the Midwest, who has worked in both the brokerage and banking industries, talks about one banking company that took Sid’s approach. “The brokerage model in the banks can work if they treat them like an independent portion of the bank. If you look how Wachovia treated their securities division differently “more hands off, then the bank will reap the benefits of that division without having to deal with losing brokers.” Todd also gives an example of what can go wrong when things are changed: “Contrary to Wachovia, look at what happened when Citi made Smith Barney lower the compensation plan of their brokers there was a mass exodus of talented brokers.” Todd continues with, “Brokers are a different culture. They came to this business to build things their way. They are like script writers for a movie. They understand they need to be flexible on some things but if you change the script without their consent, then the deal is off.”

Most of the bankers and brokers I spoke to agreed with Todd’s and Sid’s perspectives. Yet, they know that what may look great on paper becomes a different reality in person. At the end of the day, merging two different cultures, and sometimes even larger egos, will not work without both parties agreeing to the overall plan. Without that buy-in, we’ll continue to see brokers and bankers fight for control, and all the while, the client loses in the end. Few people like ground beef added to their apple pie –This is why most banks and brokerages just don’t mix.

Chris Neudecker

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