It turns out that what's good for the goose isn't always good for the gander-at least not for the banks and the broker-dealers that serve them.

These are challenging times for regional banks, community banks, and credit unions with their margins squeezed by historically low interest rates, a weak economy and a struggling housing market.

Meanwhile, it's good times for the third-party marketing firms that many of these financial institutions use to run their investment programs. That's because while the banks are facing their challenges, the foundations for the advisors' universe are more positive. Markets are surging, a large chunk of the customer base is approaching retirement and demand for investment advice among customers of all income levels is rising. (Banks aren't left out in the cold, of course, as the fee income that the TPM programs generate provides a stable, if small, source of revenue while lending remains a difficult business.)

Still, even in these heady times, bank programs aren't without challenges of their own. While the revenue generated by bank programs increased in 2012, particularly advisory fees, the number of bank advisors declined.

Those are two of the findings from the latest annual survey conducted by the research firm Kehrer Saltzman & Associates.

Indeed, TPM revenue for the 12 largest players in the industry grew by 9% to $1.5 billion in 2012, according to the survey. By far the biggest share of that growth was in advising fees, which were up by 19% to $196 million, representing 14% of the total.

The other main finding, which might seem counterintuitive given the gains in advisory fees, was that the number of advisors in the TPM business declined by 3%, continuing the trend of the past several years.

One contributing factor to the decline in advisors in the bank channel, according to Kehrer, is the difficulty and the costs involved in recruiting new people.

The average age of financial advisors is 53, and not many new young advisors are coming into the business. Moreover, the tough backdrop of the banking industry is causing hiring freezes and cost cutting.

TPM executives acknowledge the challenges. "I know we have dozens and dozens of positions open for financial advisors," says Invest Financial CEO Steve Dowden. "We're constantly in hiring mode." He says it's not exactly a shortage of talent, but rather a result of being several years removed from the financial crisis. Many advisors are content to stay put if their programs are not actively crumbling around them, he says. "Their books are back, and their clients are happy, so the financial advisors are generally happy." At the same time, he adds, "There's no training ground for champions like there was a few years ago."

Rob Comfort, executive vice president, business consulting at LPL Institution Services, agrees. "There are not as many advisors coming into the profession as are retiring. There is a growing shortage of financial advisors and if institutions don't grow new ones from within, there will be a problem eventually."

Another overarching issue in the industry is the stagnant number of programs overall.

The number of financial institutions being served by TPMs continued to shrink, dropping by 4%. "We think that decline is because of continuing bank consolidation," says Ken Kehrer, principal of Kehrer Saltzman.

Michael White, president of Michael White Associates takes the long-term view but it's still not a positive one. "The percentage of financial institutions with investment programs has remained stuck at 20% to 25% since 1994," he says.

He also notes that participation rates in investment programs fall off dramatically at banks with lower assets and revenues. "It's smaller banks that are the holdouts," he explains.

Valorie Seyfert, president, CEO and co-founder of CUSO/Sorrento Pacific Financial, agreed. While she says there has been no decline in her TPM's credit union count, there has been some drop in the banks served by its SPF unit. "Some of the decline is small banks with very small, underperforming investment programs, where the banks just decided to eliminate the marketing and technology costs and just shut them down," she says. "But some are because of the ongoing reorganizations. If a bank is absorbed by another bank, and the one being absorbed is using your services for its investment program, you lose."

She says Sorrento has had a few such cases in the past year.

Indeed, while the largest TPMs all saw healthy gains in AUM, most saw the number of banks they served fall from 2011, sometimes significantly. CUNA Brokerage, for example, went from 283 institutions in 2011 to 242 a year later. Cetera dropped from 620 institutions in 2011 to 583. LPL was the big gainer, going from 668 institutions in 2011 to 701 in 2012. The only other gainers in number of banks served were IPI and ICA.

The overall rankings of the 10 largest third-party marketers by AUM did not change in 2012.

Kehrer Saltzman found LPL to be the largest of the TPMs, serving 701 financial institutions and reporting $70.4 billion in AUM. Second is Raymond James, with 194 financial institutions and $33.7 billion in AUM. Third is Cetera, with 583 institutions and $29.6 billion (Cetera's totals combine figures for Cetera Financial Institutions, formerly PrimeVest, as well as Cetera Advisor Networks). In fourth place is Invest Financial with 125 institutions and $27.5 billion AUM, followed by CUSO/Sorento Pacific Financial with 185 institutions and $17.1 billion in AUM. The list is rounded out by CUNA, Infinex Financial, Investment Centers of America, IPI and Essex National Securities.

In today's environment, there seems to be consensus around the idea that this is becoming a scale business.

"It's becoming harder for some of the smaller third-party providers to provide all the services and technology, and to deal with the increased regulation from Dodd-Frank," says White. He notes that some seven or eight TPM firms have disappeared since 2007.

The bigger TPMs, not surprisingly, agree. "It will take TPMs with very robust platforms and very deep operations to grow and succeed in this environment," says LPL's Comfort. "That means it will largely be good for the bigger players." He adds, "As financial institutions demand more depth and breadth and capabilities, they will shift from current providers to a TPM that has all those things. In the last year a number of credit unions have moved from their current TPM to LPL because they want to go to the next level and wanted a TPM with the advantages of scale."

Then, too, he says, those banks and credit unions that have their own broker-dealers are facing "pain points" like added regulatory burden and compliance risk, and the need to upgrade technology in order to remain competitive. That and pressures on profitability, he says, are "going to lead institutions that five years ago said 'we don't need a TPM' to say, 'we don't think it makes sense to have our own broker-dealer anymore.'"

He reports that LPL has several such institutions currently talking with the firm, some "in the final stages" of reaching a decision to outsource their investment operation to the company. 'This is a whole new area of growth and we see it as a big opportunity," he says enthusiastically.

Indeed, the biggest recent example is the decision in March by Regions Bank to turn its program over to Cetera. (Cetera also picked up the programs of two other big regional banks, Zions Bank and East West Bank, last year).

"We do believe that this year will see a lot of independent banks and regional banks go to outsourcing their investment programs," says Catherine Bonneau, president and CEO of Cetera Financial Institutions. "Regions Bank was a good example of this."

Bonneau said that Regions Bank had once bought the investment house Morgan Keegan, but sold it to Raymond James last spring. The bank initially began to set up an in-house broker-dealer, but then made a strategic decision to outsource to Cetera. She says of that deal, "Speed to market was a big driver of their decision to outsource. If they had tried to build their own broker-dealer, they would not be where they are today. Negotiating all the technology and the financial advisor contracts would have taken a lot of time. We brought in advisors-it's an enormous recruiting drive with close to 80 dedicated advisors year to date-and of course the technology is good to go. We and Regions Bank are moving ahead of projections."

John Houston, managing director of Raymond James and director of its financial institutions division, sees the whole field when looking for growth opportunities. "Our biggest growth over the past 12 months has been new programs at banks that had none," he says. Banks with in-house programs going to outsourcing was second. "Currently most institutions that join us are looking to upgrade the service and the breadth of their services, which means they're usually coming to us from a smaller TPM or an independent investment program."

While the TPM business may be getting more competitive and focused on scale, some smaller players have been successful in carving out niches, White says.

As examples of such smaller firms, he cites IPI, Securities America (owned by Ladenburg Thalmann Financial), and Infinex Financial. Both IPI and Infinex, he notes, "tend to be oriented toward smaller community banks," where the larger TPMs are less interested. Infinex in particular, a second-tier TPM with about $10.6 billion in AUM and 191 banking institutions in its stable, was set up by a consortium of banks as a kind of collectively owned "in-house" broker-dealer. Because of its links to its host institutions, it is probably less likely to be "traded in" for a larger TPM.

San Antonio-based IPI, another second-tier TPM that serves 164 mostly small community banks and that has about $6.8 billion in AUM, focuses almost exclusively on servicing the investment program needs of smaller community banks.

IPI President and CEO Jay McAnelly says that his firm is likely to benefit from a tightening competitive position among TPMs, not as a potential target for acquisition. "I don't see a lot of M&A activity in the next two to three years," he says, "But we would love to acquire another broker-dealer."

Kehrer suggests that there are four basic paths for growth in the TPM industry going forward. In addition to taking over smaller players, and picking up the business of banks that decide to trade in their in-house broker-dealer and go with outsourcing, he says there is:

• Going after some of the 75% of institutions that do not as yet have investment programs;

• Trying to lure banks to switch from a competing TPM; and

• Growing internally.

When it comes to convincing banks without an investment program to add one, everyone agrees it's a good idea, but the record suggests it's no easy feat.

White says that many of the small banks are closely held family institutions and are satisfied with their situation. "They maybe don't know what services are out there. And for many TPMs, they may wonder whether you can even have a meaningful program in an institution with $75 million in assets. I think, especially with the new technologies, that you can."

Cetera Financial's Bonneau agrees. "Seventy-five percent of the bank universe has no investment program, and good data says younger people would prefer to purchase their investment services through their community bank or credit unions."

She acknowledges that it can be a tough sell though. "If you have managements who have imposed a hiring freeze, you can make the argument that the financial advisors pay their own way with the fees they bring in, but then they'll say, 'Yeah, but the loan officers pay their way too.'"

IPI's McAnelly says one way around that is to offer banks that have a hiring freeze in place, or that are anxious about the risk of hiring advisors, a managed program, where the advisors are working for the TPM. He says about half of IPI's advisors are dual employees, but the other half work for IPI directly. "An advantage of that is that the bank then has no employment, benefits or clearing costs. It also reduces risk for the financial institution, lowering the entry barrier for setting up an investment program." Most of the banks that choose a managed option "do it for that reason," he says.

Head-to-head competition to win contracts with banks that already have a TPM is not that common, but all the major players acknowledge that it can happen, and say they're ready for it.

Cetera's Bonneau, noting that her firm recently replaced LPL as the TPM for East West Bank, says, "Late last year the bank came to us to run their program. It was running at $2 million in revenue for the year. Now they have revised their staffing plan. We helped them train and recruit more FAs, and already as of the end of the first quarter, they have eclipsed their prior 12-month revenue figure. Why? New technology, marketing, renewed enthusiasm and new talent."

She reports that about 25% of the increased net revenue generated by the program since Cetera replaced LPL was the result of a one-third increase in staffing, with the rest being "better performance" by the existing staff (most of the existing East West advisors were kept on).

In fact, increasing advisor staffing levels may be where the biggest growth potential for the industry lies this year and going forward. That is certainly Kehrer's view. "We did some research for Cetera," he says, "and we found that the typical bank investment program should increase its number of advisors by 70%, yet every year banks fall farther behind instead. This is a huge missed opportunity."

Nearly all of the TPM executives agreed with that sentiment, and even acknowledged their own programs were missing out on growth because of understaffing.

"I think that even mature bank programs have branches that are unserved or underserved by advisors, so there is absolutely room to add advisors," says Invest's Dowden. "There can be resistance from bank management to ramping up, but more often we see them anxious to bring in advisors."

"We're clearly in an expense-focused environment right now," says LPL managing director for institutional services, Andy Kalbaugh, "and yes, clearly staffing levels at institutions are the drivers of growth and the institutions."

In fact, Kalbaugh says, hiring more advisors and slicing up territories even more finely is often a good idea. "Historically, financial institutions have erred on the side of giving advisors more branches to cover, on the theory that more accounts means more revenue." But they're finding that a smaller territory drives a better client experience, a better, more thorough conversation, higher household penetration, and more wallet share for the advisor, which translates to more revenue for the institution.

At the same time, he cautions, "You can't just throw more advisors at an institution. Finding good advisors is important."

Cetera's Bonneau also sees a need for more advisors in existing bank investment programs. "We think our existing programs are under-repped by 120 advisors at the moment," she says. "We need more advisors who are already trained."

Raymond James' Houston says that while "it has been shown that if the financial advisors split up their books, they do better, gaining deeper relationships with each client," it's not easy to convince many advisors to give up accounts or territory. "Some of them are scared to do it. They have the attitude that any small account they have might turn out to win the lottery, so they don't want to give up any of them," he says. "But the better advisors understand that to continue to grow their revenues there are only so many clients they can really serve."

The president and CEO of Infinex, Stephen Amarante, agrees that banks have been slow to add advisors. But he notes that his TPM, because of its unique structure of being owned by the banks that use it to run their investment programs, may have an easier time convincing those banks to add staff when there is opportunity.

The goal at Infinex is to act as an in-house consultant to help make the wealth management line of business better integrated into the entire organization, he says. Infinex in 2012 had advisors in 242 banks and reported AUM of $13.4 billion.

CUSO's Seyfert says the challenge is to convince bank managers, and current advisors in place, that expanding programs will bring in more AUM, and benefit both the banks and the advisors in the program.

"We're in a unique time and place in this industry," says LPL's Comfort. "Banks and credit unions are in a tough spot trying to grow while regulators have stripped away a lot of their income. That bodes well for TPMs and especially for the big TPMs like us that have very robust platforms."

Invest's Dowden says he expects most of the growth in this industry to come from new programs, plus organic growth of what's already in place. "The thing that keeps me up at night is regulatory reform. Especially possible changes in the fiduciary standard that would make advisors fiduciaries for 401(k) rollovers into IRAs. That could really change our business."

Houston notes that another challenge will be to keep the exuberance at a rational level. "The biggest challenge will be to keep our enthusiasm in check. The whole financial industry has a terrible record of getting too excited in the good times. We need to continue to block and tackle and stick to our knitting. We have to realize that while we are obviously experiencing a good market, it's an environment that can change."

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