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Mature TPM Industry Looks For Organic Growth

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The rankings of third-party marketers didn’t change much from last year. Rather, the big story was that this industry, which has seen so much change over the last decade or so, appears to be reaching maturity (or at least late adolescence.)

And that has major implications on future growth. Instead of finding dozens or hundreds of new banks to sign up, most new growth will come from existing programs simply hiring more advisors, or prospecting for more assets to manage from existing clients, says Ken Kehrer, founder and principal at research firm Kehrer Saltzman & Associates.

The good news is that the demand is there. Indeed, Kehrer says that banks and TPMs alike are now “getting the message” that they don’t have nearly enough advisors.

To be sure, only about a quarter of the nation’s 7,000 or so banks have investment programs. And for credit unions, it’s just 13%. But it’s mostly the smaller institutions—often in remote areas and with assets of $100 million or less—that are without a program, and many of those don’t have sufficient assets and deposits to support a program, he says.

On the other end of the spectrum, there are the biggest banks that have their own in-house broker-dealers, of course.

So with the upper-end set, the lower end just too small and the middle tier already saturated with investment programs, the growth for TPMs will come mostly from within. That is, when the existing bank programs hire more advisors.

Increasing the size of existing investment programs will indeed be the main driver of growth for Raymond James, says John Houston, managing director of the financial institutions division. “We’ve gotten our fair share of the banks that had independent broker-dealer businesses, but then decided to outsource,” he says. “But there’s not a whole lot of them left.”

As for picking up smaller institutions that don’t have investment programs, he says most are fairly small. “Our sweet spot is institutions with $1.5 billion to $5 billion in assets,” he says. And while there are still some of those around to sign up as new clients, he’s more excited about the growth potential of existing clients.

Houston says Raymond James growth has evolved to be 90% internal, or “same-store” growth. “I see no reason why it won’t be like that for the next five years,” he says.

Indeed, Raymond James has been practically flat on adding new financial institution clients (it increased less than one percentage point, according to Kehrer’s statistics, from 7.2% to 7.4%).

Houston says that Raymond James won’t be the best option for every bank. His team isn’t interested in working with institutions that are just “giving lip service to having an investment program.” Rather, they are looking for those banks that are truly committed to the idea.

Indeed, over the last year, they have rejected about 15 possible deals, he says, which either were not a good fit or didn’t have the commitment to a program. “We’re looking for the high end,” he says.

Cetera, one of the other big TPMs, also sees organic growth as the next big opportunity in the channel. “I agree that organic growth for the broker-dealer industry in the bank channel is critical,” says Catherine Bonneau, president and CEO of Cetera Financial Institutions.

But she’s no hardliner on the topic, and pays less heed to the unofficial barriers others see on the top and bottom end of the industry. “I think there is also a lot of opportunity still with start-ups at institutions that are without an investment program, and we also believe that some of those banks with in-house broker-dealers may also decide to go with a TPM.”

She said that Cetera is currently “in discussions” with two banks that have in-house broker-dealer operations. “Compliance costs are climbing to 25% of operating costs at some of these places, which is quite a burden.”


LPL’s managing director for institution services Andy Kalbaugh says his firm also is looking to organic growth as a major opportunity this year. “One of the best growth opportunities, we believe, is adding advisors to existing programs, and we’ve been pretty successful with that.”

To be sure, one part of the industry where new clients are a strong possibility is the credit union space, Kalbaugh says. He says there is no specific campaign at LPL to pursue credit union business, but the firm was able to add 63 of them last year as those institutions look to add investments to their array of services for their members.

Arthur Osman, senior vice president, business consulting, for LPL Institutional Services, also credits the firm’s new Program Growth Model for its success at growing existing programs.

He says the model is “designed to deepen penetration of client assets, to demonstrate the wallet share that a program has captured to date, and to show how to grow that down to the
client level.”

Further, Osman says, the model makes it easy to show institutions that they have underestimated the need for financial advisors, and to illustrate how they can capture more client assets if they add advisors.

“We rolled out the model at 72 of our institutions in 2013,” he says, “and those 72 institutions added 63 advisor positions, filling 52 of them so far.”

He points to the overwhelming number of accounts that most bank advisors are serving now as one indication that institutions need to hire more.

“The average advisor has some 2,000 accounts, which is a staggering number that still speaks to the largely transactional nature of the advisory business. We think, though, that after about 800 to 850 accounts per advisor, you have reached the point of diminishing returns, and we’ve statistically validated that.”

Kalbaugh sees big things ahead for LPL, saying the company thinks it has a “game changer” in a launch this year of a platform for the “wealth and trust space,” based on the company’s earlier acquisition of Fortigent and Concord, two trust and wealth management companies.

Saying that the company now has what he calls a unique platform that offers an “integrated” solution for wealth management, discount brokerage and trust services, it hopes to begin offering it broadly to client financial institutions next year after a pilot program with eight or nine institutions this year.


At CUSO, capturing a bigger piece of customers’ finances is the name of the game, says chief executive Valorie Seyfert. “We know that the amount of money that clients hold in investment accounts is seven to 10 times more than what is held in deposits. And if a credit union typically has only a third of a client’s cash on deposit, that means that you’re missing up to 30 times the assets that are on deposit in the institution... The opportunity is enormous,”  she says, adding that “the question is how to get at those assets.”

She cites one CUSO institution, Legacy Credit Union in North Carolina, which has vastly outperformed other banks and credit unions by having an investment program with $1 billion in assets under management, a figure roughly equivalent to the institution’s $1 billion in deposits. “We have some others that have assets under management equal to about 50% of deposits,” but not 100% like Legacy, Seyfert says.

But even at that impressive level, even Legacy is just scratching the surface in capturing more of the assets that their members have, she says.

Echoing others in the industry, she says that one way to get more assets is simply to hire more advisors. “I think most programs have fewer than a third of the advisors they need,” she says. “But given the talent pool of advisors, it’s hard to get them.”

Seyfert also notes that she doesn’t see increasing same-store sales as the only growth plan in town. “There is also a lot of opportunity for us to win business away from other TPMs and to get the business of big financial firms that still don’t have investment programs.”

Last year, she notes, CUSO added 32 new credit unions on a base of 220—an increase of 14.5%. That is after adding 33 new institutions the year before.

In both years, some were takeovers from other TPMs, and some were institutions adding investment programs for the first time.

Seyfert says half of CUSO’s growth lately has been from adding new business, with the rest from expanding existing programs.

Last year, for example, CUSO added 180 new advisors to its roster.


Jackson National has two TPMs: Invest Financial, which primarily provides investment programs for medium-size and regional banks, and Investment Centers of America, which caters to smaller community banks.

The two have different growth strategies. Both Steve Dowden, CEO and president of Invest; and Greg Gunderson, CEO and president of ICA, agree that internal, “organic” growth is the big driver. But they differ on the importance of adding new institutions.

“We grew 29% last year, the third fastest in the industry,” says Gunderson. “More than half of that growth was from internal growth in existing programs. But [a sizable minority portion] was from new business, either startups or taking over existing programs.” Gunderson acknowledges that such transitions from one TPM to another “are getting harder and harder to do,” because of the retraining required for advisors and back-office staff, and the costs of new software.

But, Gunderson continues, “when the pain threshold of the existing platform gets higher than the pain of transitioning, you can do it. Sometimes I’ll have a bank send a particular client’s case to us—names and identities removed— and I’ll show them what we can do with it, and that sells them on switching to us.”

Invest Financial’s Dowden is more adamant on the importance of organic growth in today’s industry.

“We don’t do startups,” Dowden says. “We don’t see a lot of growth coming from new banks. Our growth comes mostly from our existing programs,” adding that, “we did a study that found that the best approach is to have advisors split up their areas and to add new advisors.”

Also, Dowden says that Invest is recommending that senior advisors move out of the bank lobby and just manage their books and basically deepen their relationship with existing clients, with new junior advisors working in the lobby with new clients.”

That said, he does agree that there are growth opportunities among the remaining bigger banks that have in-house broker-dealers.

“We actually brought on three of those institutions in the last two years,” he says, “mostly because of the increased costs of regulatory

He adds, “Going forward, we see that as a good opportunity for us. It’s a niche we’ve gotten fairly skilled at dealing with.”

To be sure, not everyone agrees with the importance of internal growth. Take Jay McAnelly, CEO of Investment Professionals. “I believe there are a lot of banks among the [thousands] out there that don’t have investment programs and that are going to decide to add them.”

McAnelly acknowledges, however, that for the very smallest of banks, it may not make sense. But where that dividing line is drawn is the crux of the situation and he feels there is still room for new programs in the industry. “Our view is that if a financial institution has over $100 million in deposits, it should have an investment program,” he says.

McAnelly emphasizes that internal growth does not come primarily as a result of advisors deepening their relationships with existing clients, or even from trying to gather in more clients from among an institution’s depositors and loan customers, though he agrees both are good sources of increased revenues. The real coup comes from advisors who are able to bring in new clients who are not already customers of the bank.

“A successful investment program only derives a third of its customer base from the bank’s clients,” he says. “Another third should be people that the advisor brings along to the job. But the sign of a healthy investment program is one where the other third of the advisors’ clients are people brought in from the outside community—people who were not customers of the bank.”

Virtually all the executives contacted for this article agreed that a major challenge for the industry going forward is recruiting advisors.

“It’s the same challenge for the industry as a whole and for Raymond James,” says Houston. “We’ve got the baby boomers retiring, and there’s this large percentage of advisors who are over 50, with not that many young people coming into the profession.”

He says Raymond James is attacking that problem in a three-pronged way, by: 1) recruiting younger advisors, including from other firms; 2) helping banks come up with a senior/junior team advisor approach, where the junior advisor can be put on a career development path; and 3) a training program.

Raymond James, he says, has a two-year program that provides people with a mentor where they work, as well as several weeks at the Raymond James home office for advanced

“It’s a bull market for advisors,” says LPL’s Kalbaugh, noting that in such an environment, it’s hard to recruit. Still, with LPL’s 11-person team that works on creating new financial advisor positions, he says they are having “pretty good success.”

Says Cetera’s Bonneau, “The market for financial advisors is very competitive. Right now we have openings for 120 advisors, and that number keeps climbing.”

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