Taking brokerage to a higher level

If imitation is the sincerest form of flattery, brokerage firms are getting a compliment from banks these days. After four years of offering mostly select mutual funds and annuities to their customers, many banks are entering a new phase, full-service brokerage, in which they sell every product a consumer might see in a wire house.

"True brokerage doesn't just focus on mutual funds and annuities, it takes more of a stock and bond orientation to the sales program," says Jeb Britton, senior consultant at the Spectrem Group, Virginia Beach. "A lot of us believe that's the next evolution."

The spectacular performance of the stock market last year and the increasing interest of investors, particularly baby boomers, in stocks and bonds, are forcing banks to broaden their product mix to satisfy younger, more risk tolerant customers.

Less-than perfect alliances

A logical way to become more like a broker is to team up with one. In the past, some of banks' efforts to ally themselves with brokerage firms have been well-publicized fiascoes, including the NationsBank/Dean Witter joint venture, the Chemical Bank/Liberty Financial joint venture, and the First Bank/IDS agreement (IDS is a financial planning firm).

"NationsBank said they got out of the joint venture what they wanted and Dean Witter said they got out of it what they wanted," comments Britton at Spectrem. "That sounds like my first marriage--we both went away happy, but was it the going away that made us happy or what?"

In each of these arrangements, representatives of the brokerage or financial planning firm set up shop in the bank's lobby and both sides were to share in the profits.

"A lot of times there's a great difficulty when you try to marry the culture of a brokerage firm and the culture of a bank," says Ellen Landry, consultant with Cerulli Associates, Boston. "Particularly in the joint ventures that dissolved, where they put brokers in bank sales environments, the disparate culture contributed to the unwinding of these alliances."

We may never see a NationsBank/Dean Witter style alliance again, she believes. "A lot of the larger banks have grown in confidence and think they can do it themselves, or if they feel the technology and expertise are too expensive, they cut a deal more like the Banc One [Dean Witter] deal."

Both brokerage firms and banks are still trying to figure out the best way to work together, says Ruchi Madan, senior regional bank analyst at Prudential Securities, New York. "NationsBank tried one thing with Dean Witter, Banc One seems to be trying something else. Everyone's still struggling to find the best strategy."

Banc One in February announced that it had formed an alliance with Dean Witter. At first glance, this was astonishing considering that NationsBank is still settling lawsuits from brokerage customers and former Dean Witter brokers from its joint venture with the firm. At second glance, it made sense because Dean Witter reps will not work out of bank branches. The New York brokerage firm will be paid to train Banc One investment reps and provide technical support, much like a typical third-party marketer agreement.

"The Dean Witter/Banc One alliance has more promise than the alliances of the past," says Landry at Cerulli Associates. "They learned the lessons from some of these more painful first stabs at joint ventures earlier on. The alliance is not trying to impose a brokerage culture on the bank or vice versa and the lines are very clearly delineated, whereas before there was too much blurring going on."

Multiple growth strategies

Forming a joint venture with a broker isn't the only way to take an investment sales program from packaged products to full-service. A few banks have bought a brokerage firm--National City Corp. in Cleveland bought Raffensperger, Hughes & Co. and Mid Am Inc., Bowling Green, Ohio bought MFI Investments Corp., for example. Other banks, including First Union, Wells Fargo, and Summit Trust Co., Summit, N.J., are expanding their own brokerage units, often with the help of a clearing broker such as BHC Financial, Philadelphia, or Stephens Inc., Little Rock.

Summit used to work with Essex Corp., the third-party marketing firm based in New York. "Essex was a fine company and we needed Essex to get our program going," says Jack D. Cussen, senior vice-president at Summit. "At a certain point we don't need all the services that a third-party marketing firm wants to offer us and we can then go to a company like BHC, which gives us an opportunity to reduce costs and to spend money on training and marketing support."

BHC provides access to a 401(k) product, a client/server brokerage platform, and some training as well as clearing services for Summit. Last year Summit sold $209 million worth of mutual funds, annuities, and securities to consumers and in the first six months of this year $127 million through its 50 reps (it plans to have about 70 reps by the end of the year). The bank had contemplated asking Dean Witter to process its trades, but had decided it needed more hands-on help than the brokerage firm was offering.

TPMs vs. brokers

Though Summit isn't using one now, Jack Cussen says third-party marketers bring to the table "an understanding of the marketplace, access to the players in the marketplace, development of products and services, training, marketing, and administration. It's a very needed service at a certain level."

Robert C. Leonard, CEO of Bankmark, a third-party marketer based in Morris Plains, N.J. that has 50 bank clients, says firms like his can offer several things that a bank might not get on its own or working with a brokerage firm: insurance products, a common database that includes all the customer's relationships with the bank, compliance support, and possibly lower costs. "Our organization would work with a potential bank to fix those costs rather than have a program that falls short of their expectations," he says.

Brokerage firms, others say, offer strengths in certain areas, such as experience, technology, deeper pockets, and name recognition.

"A large part of the third-party industry is not technologically equal to Dean Witter, Schwab, and some of these other big guys who have been around for a long time," says Richard A. Ayotte, president, American Brokerage Consultants, Inc., St. Petersburg, Fla. "There are a few third-party marketers that have very good technology, such as Invest. But for the most part technology is expensive and takes a long time to put together, and much of the third party industry has lagged behind its traditional brokerage competitors. If a bank places a high degree of its selection criteria on technology, it wouldn't surprise me that it would look to the Dean Witters of the world to find it."

Bill Martina, senior vice-president of Marketing One, a third-party marketing firm based on Portland, Ore., counters that his firm can offer technology equal to a brokerage firm. "We think that not only is it comparable, but it goes a step further in that we've been able to consolidate individual security transactions with packaged product transactions, so customers will be able to see all the investments they make at the bank in a consolidated statement."

Sales savvy is another strength brokerage firms tend to have. "A broker/dealer brings a very strict brokerage sales culture to an alliance with a bank," says Britton at Spectrem. "One of the biggest hurdles the third-party marketing firms have had is trying to get banks to buy into such a pure sales-driven culture. I've been a community bank president and I've also been a stock broker, and there's a world of difference between the way a regional brokerage firm or wire house goes about sales than the way the traditional bank culture has been."

Brokers rather than bankers

Centura Banks, Rocky Mount, N.C., used to work with a third-party marketer. In June 1994 it began handling brokerage in-house and clearing and getting other services from Stephens. "We felt if we were going to be in the brokerage business, we should be in the brokerage business," says Ed Hipp, president and CEO of Centura Securities. "We think of ourselves as a brokerage firm, not a bank brokerage firm."

Stephens provides the $5 billion bank with individual stock and bond research, an inventory of bonds, and a quote system, as well as clearing. "High net worth people are interested in buying individual equities and bonds, they don't necessarily want to buy a packaged product," Hipp points out.

The brokerage firm also helped Centura develop a Money Manager Account that imitates Merrill Lynch's Cash Management Account. Centura's account lets customers sweep their investment balances into a money market fund or an FDIC-insured account. It comes with a credit card and a consolidated statement, and account holders can take out loans against the balance. About 450 customers have this account.

Last year, Centura sold $5.7 million of investment products and this year Hipp expects the group to sell $7.5 to $8 million. At present, Centura Securities has 30 brokers, 60 Series 6-licensed platform people, and eight trust sales specialists.

When The Bank of Nashville decided to offer investment products, it chose Legg Mason's subsidiary BFP, and a Legg Mason-trained broker began selling out of the bank's lobby in November 1994. The first year, the brokerage relationship brought the $147 million-assets bank over $50,000 in rent and commissions. This year it should exceed $100,000. This does not take into account expenses, which are a telephone line and half-time secretarial support provided by an existing employee of the bank.

The bank wasn't specifically looking for a brokerage firm, and the service Legg Mason provides is essentially the same as that provided by Invest, Essex, and other third-party marketers. "We talked to several third-party marketers before we made the decision. We liked the proposal and the people we met through BFP and made the decision to go with them," says Mack Linebaugh, Jr., president.

One benefit of bringing a broker from a brokerage firm into a bank is that he or she often brings along a book of business. During the first year, 75-80% of the sales the BFP broker made was business he brought to the bank.

Discount brokerage support

At Admiralty Bank, Juno Beach, Fla. ($31 million in assets), allying with a discount brokerage firm, Quick & Reilly, seems to be the best brokerage solution.

"Everybody was saying brokerage would bring a whole bunch of liability, so I said, 'let's go for discount brokerage,'" says Paul Donohue, vice-president of the bank. "With discount brokerage, the customer doesn't get sold because the broker doesn't make anything off the trade. He's going to get paid anyway. I've been doing this for five years, I've finally found out how to do it correctly."

Before, "third party marketers or brokerage firms would come in and they'd want to sell, sell, sell," he says. The Quick & Reilly broker, Bruce Blatman, "just helps the customer and gives information." Quick & Reilly compensates its brokers strictly by salary. It pays the bank over $100 a square foot in rent and commissions.

This is the first time a Quick & Reilly broker has worked out of a bank; a spokesman says the company has no current plans to operate out of any other banks besides two other Admiralty branches.

Over the past year, Blatman did about $21 million in trades; sometimes the Quick & Reilly office is busier than the bank lobby. "They brought business to us and we brought business to them," says Donohue. "It's like a perfect marriage."

Unusual broker alliances

Along with these traditional types of contracts, banks have been working with brokers in other ways. PNC Financial, for example, recently announced that it would sell its mutual funds through several brokerage firms.

Comerica and PaineWebber began an alliance late last year under which PaineWebber representatives recommend Comerica trust accounts to their clients. Comerica gets new relationships and trust fees and PaineWebber retains custody of assets and customers that otherwise might go to a firm with trust powers. So far the alliance has been working in Michigan and Florida and it has brought 50 new trust accounts to Comerica, as well as other banking business from these new customers.

"It's exceeding our original expectations," says Rod Wood, first vice-president, private banking at Comerica (trust falls under his department). "The business normally has a fairly long sales cycle." Later this summer the alliance will spread into Texas and California, and eventually across the country.

One brokerage firm that's talking to banks--but has no plans to put reps in bank lobbies--is Charles Schwab & Co. The San Francisco company wants banks to distribute the OneSource funds--the group of about 530 no-load funds that Schwab offers to consumers with no transaction fee. (The mutual fund companies pay Schwab 25 to 35 cents for every $100 in new assets that come in through OneSource.) The funds sold through the OneSource marketplace have gathered $33 billion in assets in the four years it's existed.

"Offering a large marketplace of no-transaction-fee funds, doing the marketing and fund relations, and developing systems to run it efficiently, is very costly," says spokesman Tom Taggart. "Hooking up with Schwab would be much more cost-effective. Banks could offer the OneSource funds and charge whatever they want on the front end. There's considerable interest in that."

Consultants agree that more banks will team up with brokerage firms one way or another. "These alliances are likely to become more and more common," says Ayotte of American Brokerage Consultants. "I think the brokerage community has come to understand that banks are in the securities business for real and forever, and they might as well find ways to do business with them."