Third-party broker-dealers are licking their chops. A new market is opening up for them that just a few years ago was firmly closed.

The new market is made up of banks and credit unions that still own their broker-dealer operations. Faced with mounting regulatory, compliance and technology costs, many of these institutions are throwing in the towel and deciding to let third-party marketing firms run their brokerage and wealth management units for them.

For TPMs, it’s an opportunity they’ve been eagerly awaiting.  The new market—albeit small—has huge revenue potential, widens their possibilities for new business and adds spice to their growth strategies.

“More and more banks and credit unions that have their own broker- dealer who would never have considered a TPM are looking seriously at a TPM now. That is a trend we see continuing,” says Rob Comfort, executive vice president of business consulting for institution services at LPL Financial.

LPL has added a number of bank-owned broker-dealers to its platform, the most recent being Zions Bancorp., a $57 billion bank holding company based in Salt Lake City. In March, the bank handed off its broker-dealer operations to LPL, citing its technology and advisor and operational supervision as key factors in the bank’s decision for the change.

Other bank-owned broker-dealers that recently joined LPL include Tompkins Bank and South State Bank, which outsourced their brokerage and investment management businesses in 2014, and First Merit Bank, Five Star Bank and Bank of Tampa, which outsourced late in 2013. 

First National Bank of Omaha is another bank that recently caved in to regulatory and other cost pressures, deciding to shift its retail investment business to Raymond James.   The prominent regional bank will join the TPM’s network in June, according to John Houston, managing director of Raymond James’ Financial Institutions Division.

It’s not just the larger TPMs that are getting the business.  BancorpSouth partnered with Infinex Financial Group in 2013 and CommunityAmerica Credit Union chose CUSO Financial Services as its TPM in June 2014.


CUSO offered CommunityAmerica what it calls a piggyback arrangement, allowing the institution to maintain its status as a registered broker-dealer, says Valorie Seyfert, president and CEO of CUSO.  Under a piggyback agreement, banks and credit unions can tap into high-level services, such as home-banking integration and remote delivery tools, as well as compliance, operational and trading expertise without having to give up their broker-dealer status, Seyfert explained.  (Seyfert is also CEO of sister TPM Sorrento Pacific.)

“These piggyback agreements allow them to keep their status but yet move to a level where they can act and operate just like a big broker- dealer and tap into economies of scale through us,” Seyfert says. “They don’t have to build it all themselves, which is very difficult in this day and age given the regulatory pressures and everything that’s gone on in our industry.”

CUSO is looking to work with more bank-owned and credit union-owned broker-dealers under these piggyback arrangements. The TPM rolled out a marketing campaign in the first quarter to promote this option to banks and credit unions. “We think that there is great opportunity for us to capture more of this business,” says Seyfert.


Banks and credit unions certainly have compelling reasons to outsource their broker-dealer units. Apart from rising regulatory and technology costs, bank-owned broker dealers haven’t performed as well as banks and credit unions that work with TPM firms.  For example, in 2014, TPM-affiliated institutions boosted their revenue by 11.4%, while those that owned their broker-dealer operations managed an increase of just 5.8%, according to the latest Annual TPM Report from research firm Kehrer Bielan Research & Consulting.

They also had significantly greater success in recruiting advisors, the data in the report showed. In 2014, financial advisor headcount at banks and credit unions that partnered with a TPM increased 7.2%.  Meanwhile, at bank-owned broker-dealers, advisor headcount fell by 3.2%.

Leaders of TPM firms attributed their success in recruiting to their size and resources.  “The TPMs are recruiting for lots of programs in many jurisdictions while a bank broker-dealer may be very localized and may only have a few openings,” says Seyfert.

Bank broker-dealer units that partner with TPMs are also significantly more profitable, posting average pre-tax profit margins of 29%, according to the latest data from Kehrer Bielan.  Bank-owned broker- dealers, in contrast, have an average pre-tax profit margin of 13%.


Despite their attractiveness to bank-owned broker dealers, TMPs aren’t counting exclusively on these large institutions to grow.  They’re realistic. The pool of bank-owned broker-dealers is small, with only some 40 such institutions around.  Of the 40, less than half would consider outsourcing, according to several TPM executives.

“There’s not a lot there—not compared to the overall universe of community banks,” says Raymond James’ John Houston. 

Indeed, while TPM firms view bank-owned broker dealers as an opportunity with robust revenue potential, most have focused their attention elsewhere. They’ve looked to banks and credits without broker- dealers as their primary targets of new business. 

In fact, growth in the number of financial institutions last year was driven by credit unions. According to Kehrer Bielan, TPMs netted 53 new credit unions but had 57 net fewer banks, largely as a result of bank mergers, says Tim Kehrer, senior research analyst at Kehrer Bielan.

Credit unions generally tend to have service philosophies that align well with those of TPM firms, which helps explain the strong uptick last year in the number of credit unions TPMs serve, says Catherine Bonneau, president and CEO of Cetera Financial Institutions, which last year added nine net new credit unions. “In the past, credit unions have been more interested in fostering long-term relationships with their members, and there may have been misperceptions among many credit unions in the past that financial institutions-based representatives tended to be short-term, commission or transitionally focused work,” she says.

It’s a misperception that TPMs have largely overcome, according to Bonneau.  TPMs, she says, “have proven that they can help banks and credit unions develop comprehensive wealth management programs encompassing planning advisory, insurance and brokerage services for end clients on a very cost scalable basis.”

In addition, broader industry-wide issues have driven increased interest in wealth management among credit unions than before.  “While credit unions were generally less negatively impacted by the financial crisis several years ago, they are working under very similar operating costs that can usually only be mitigated by scale,” she says.

That, coupled with sagging revenue from interest-based lending operations, make wealth management attractive to credit unions. “Increasingly, they have a greater appetite for offering this to the credit union membership,” says Bonneau.

Credit unions certainly had an appetite for CUSO, which netted the greatest number of credit union institutions last year. CUSO added a total of 22 net new institutions, nearly half of all the credit unions gained by all the TPMs. CUSO’s long tradition in serving credit unions has given the firm a broader profile in terms of its strength in the credit union industry, says Seyfert.

LPL also scored a notable number of credit unions, adding 12 such institutions to its network.  “We saw a significant uptick in credit unions coming on to LPL two years ago and that’s continued to 2014,” says Andy Kalbaugh, managing director of LPL Financial Institution Services. Like Bonneau, Kalbaugh attributed the increase to a desire among credit unions to upgrade their members’ experience by offering wealth management services.


While adding new financial institutions was important to TPM executives, it wasn’t their only growth strategy.  They were all equally—if not more—focused on driving growth organically by building out investment services programs with existing partner institutions. The firms employed different strategy “mixes”, with some placing greater emphasis on organic growth than others. For example, CUSO expected 50% of its growth to come from existing programs, while Raymond James saw organic growth accounting for 66% of its projected expansion. For Cetera, organic growth within existing programs was its “first and foremost” growth driver. 

“As programs grow, our firm grows,” says Cetera’s Bonneau. 

Cetera went on a massive hiring spree in the belief that more advisors would boost the productivity of its programs.   The TPM firm added 137 net new advisors in 2014, the most of any TPM, according to the Kehrer Bielan report.

Historically, advisors have covered too many households and need to go deeper with the households they have, particularly as programs move away from a transactional-based service model to a holistic planning model, says Bonneau.

To make advisors more productive, the firm added associates, sales assistants and other staff to existing programs. “By teaming [and] by adding associates under seniors, we are able to help people who appeared to have maxed out break through to the next level,” says Bonneau.

Raymond James also focused on organic growth, working with its financial institutions to recruit new advisors. In addition, it helped existing advisors boost their productivity by encouraging them to build their fee-based and recurring-revenue-based business. 

The support has apparently helped. The typical advisor in a Raymond James bank investment program produced an average of $452,000 in revenue, beating advisors across all investment advice channels, including wirehouses, according to data in the Kehrer Bielan TPM report.

Among the smaller TPM firms, the focus on organic growth was especially strong. Scott Davis, chairman and CEO of Essex National Securities, for example, focused exclusively on growing the firm’s 22 programs by finding creative ways to generate new referrals. The firm launched a digital marketing and email campaign that proved effective and helped the firm hit its organic growth targets. (The firm is expected to merge with Infinex Financial Group this fall.)

In their drive to boost the productivity of advisors and grow the business they currently have, TPMs doubled down on technology initiatives, rolling out a load of online portals, mobile applications and remote delivery tools (see related story). The goal was to relieve advisors of some of their paperwork and mundane tasks, so they could focus on finding new prospects and serving their existing customers better.


While TPMs varied in their growth strategies, they were all bullish on the outlook for bank wealth management businesses. Demographics, they point out, are favorable, with endless waves of retiring baby boomers expected to seek investment and financial planning advice into the foreseeable future.  In addition, investment services programs offer banks and credit unions a number of benefits. They make bank customers significantly “stickier” or more loyal and increasingly are becoming a vital source of non-interest income, a fact that is giving the programs greater prominence. 

Banks prize generators of non-interest income as low interest rates continue to dampen the performance of their lending, mortgage and other interest-based businesses, TPM executives note.

“We are very excited about the focus that a lot of our clients and prospective institutions are placing on their wealth management programs,” says Houston. “They’re viewing it not as a bolt-on product going forward but they’re now beginning to view it as a core resource.”

Even if interest rates rise, wealth management programs are unlikely to lose their status. Once a program has value, financial institutions are unlikely to withdraw it from the marketplace, notes Bonneau.

The fact remains that the low-interest-rate environment has continued much longer than anticipated, and banks that acted early in developing their investment services programs are seeing strong results to their bottom line, adds  Seyfert.

“Senior management and the boards and the executives are embracing it more as a true opportunity—not just a service they have to offer—but an actual opportunity for bottom-line results,” she says.

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