The Evolving Relationship Between Financial Institutions and Third-Party Broker Dealers
As the traditional broker dealer model continues to evolve post-financial crisis, what opportunities have been created for banks and credit unions?
In this blog, we cover two topics impacting financial institutions today and how having a productive financial advice platform can be a positive influence on both.
Wall Street Views You as Competition in Banking – But Not in Financial Advice
Wall Street essentially converted to “Bank-Street” after the financial crisis, not because they wanted to be banks, but because they had to. Almost all Wall Street firms applied to be federal bank holding companies: Morgan Stanley’s application was approved in September 2008. Merrill Lynch was acquired by Bank of America in November 2008. Raymond James applied in 2008 and was approved in February 2012. Goldman Sachs’ application was approved in September 2008.
To be fair, other financial companies jumped on the bandwagon to get their money from the fed’s teat – AMEX became a federal bank holding company in November 2008 as an example. Edward Jones filed an application in July of this year to establish The Edward Jones Bank—it goes on and on.
Wall Street firms have made a conscious decision to compete, at a much higher level than before, with banks and credit unions in the commercial and retail lending space—and they are having a lot of success. This is perfectly fine, of course. In a free-market economy, firms can do whatever they want, so long as they stay in compliance. But why don’t banks and credit unions believe they can compete against the major Wall Street firms in financial planning and retirement? They absolutely can!
We know that banks and credit unions can compete in the FINANCIAL ADVICE SPACE at a very high level because we see it every day in institutions across the country. But those institutions must be committed to those programs and have a partnership with a third-party broker-dealer that lines up philosophically and culturally with their institution.
Trends in Noninterest Income
Ratio of noninterest income to operating revenue:
This is for all of my fellow economics major, number-crunching, accounting-loving, CFO friends out there…
Tied to the topic of competing in the financial advice space is creating more noninterest income for banks and credit unions. Noninterest income has been, and remains, an important source of revenue for banks and credit unions of all sizes. Credit unions, in particular, are relying more on non-interest income to grow revenue than ever before. Over the past 10 years, non-interest income as a percentage of gross income has risen from 20% to nearly 29% according to The Call Report data from the National Credit Union Administration.
One of the primary benefits of non-interest income is that it is not tied to the cyclicality of changes in the market and in interest rates. We understand that the majority of noninterest income will be through monthly service charges, credit card and account fees, or monthly services charges. But, as regulations have evolved since the financial crisis, so have banks and credit unions desire to provide a superior experience for customers and members.
Having a robust, well supported Financial Advice platform is a great way to support that superior experience for members and customers while, at the same time, increasing your noninterest income substantially.