Investment Services Cement Member Relationships

They pave the way to increased profitability and stronger member ties.

July 13, 2011
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Retain members and assets

Consumers like the convenience of conducting their financial business at one place. And this “one-stop” approach helps credit unions retain and grow member assets, says Jake Palmer, a chartered retirement planning counselor and chief compliance officer for SWBC Investment Services. SWBC offers investment products to credit union members and institutional investment advisory and brokerage services directly to credit unions.

Research has shown that members who use credit union investment and insurance services have higher deposit balances than members who don’t, says Jim Metz, president/CEO of CUNA Brokerage Services. Credit union households have an average deposit balance of $9,571—versus $26,748 for members who use credit union investment services and $24,075 for members using both credit union insurance and investment services, according to a study by Raddon Financial Group.

Plus, these members are more likely to stay with their credit unions, especially “affluent retirees” and “upscale empty nesters,” Metz says. “Members who have both an insurance and investment relationship with credit unions are nine times more profitable to credit unions. Those with only an investment relationship are six times more profitable, and those with only an insurance relationship are four times more profitable than members without these relationships.”

Metz says there are two main types of investment programs: managed and dual. In managed programs, the financial advisor is an employee of the broker-dealer. As such, this person’s salary—typically a commission—is paid by the broker-dealer.

Most of the “risk of underperformance” then rests on the shoulders of the broker-dealer because if its commissioned adviser doesn’t produce, it loses out on income. The credit union might not make any money, but it won’t lose any either.

In a dual program, the credit union bears the risk of underperformance because of the management overhead that’s associated with the program. In this situation, an adviser might be paid a salary, but not often. If the adviser doesn’t perform, he or she wouldn’t get paid, but the credit union manager overseeing the program would still need to be paid.

Payments to the credit union vary depending on the offering, the broker-dealer, and level of service, Metz says. Managed programs, for example, typically pay 15% to 36% of the commission earned by the program. After expenses, this flows to the credit union’s bottom line.

The amount a credit union can make on retail investment services depends on the type of arrangement it has with its broker-dealer, Palmer notes. With SWBC’s program, credit unions receive a percentage of the revenue.

“While most partners prefer to let us deal with all aspects, including human resources and benefits,” he says, “our partners have the flexibility to take on more of the responsibility and get a higher percentage of the payout.”

Cultural issues

Ultimately, it’s the adviser’s success and productivity that determines how much fee income the credit union earns. This success comes from training, marketing, support, and commitment to the program by the credit union and broker-dealer.

Don’t expect an investment program to be “turnkey,” Metz warns, where the credit union sets it up and expects things to happen on their own.

That’s a lesson Workers’ Credit Union has come to understand. “Starting from scratch is a difficult task,” says Petersen. “It’s different than a deposit and loan environment. There are cultural issues to work through. When we first started doing seminars, we’d have only three or four people sign up and we’d have to cancel. In contrast, last year we delivered 20 workshops for 330 members.”

Initially, the credit union had difficulty finding investment reps who fit the credit union’s culture and desired level of expertise, he says. “Our branch staff are very member-focused. The reps had to earn the trust of the branch staff so the branch staff could refer members with confidence. It took over a year to find the right investment people.

“It’s also important to educate staff about how they’re helping members by making referrals, and to overcome the idea that the stock market is risky,” Petersen continues. “Staff had to learn that having too much in a certificate might not be helping a member, and that it all depends on the member’s profile.”

Conversely, the investment reps had to see the branch staff as part of their team, he adds. “Many of our staff members now have their own accounts with the investment reps. And now most of our seminars are sold out.”

Staff education also plays a role at Maps. “It’s difficult for other credit union employees to understand what we really do and how we fit into the big picture,” says Muller. “The problem isn’t solved yet, but we’re working on it.”

Next: Consider vendor options

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