Planning for Growth

By Elizabeth Judd

Acquiring financial planning firms can help banks sell more investment and insurance products, as long as the customer comes first.

If an organization has only a handful of key employees, a strictly local reputation and no proprietary offerings, how much can it help a bank to sell more investment and insurance products?

The answer is "a lot," if that enterprise consists of financial planners who work with affluent clients.

Institutions such as Wells Fargo & Co. and Synovus Financial Corp. are among the major institutions that have recently purchased planning firms within their geographical footprints. For these players and others, the attraction stems from the fact that planners provide a key link to high-net-worth customers. "It's a great means for building customer relationships," says Allan Morehead, president of LoBue Associates, a Northbrook, Ill.-based consulting firm.

The acquisitions appear well-timed, coinciding as they do with a worsening economic environment that underscores the dangers of a do-it-yourself investment strategy. In the wake of the stock market's nearly two-year decline, people with substantial assets at risk are more inclined than ever to seek professional advice.

Banks, meanwhile, are bumping up against the limitations of a strictly
in-house distribution strategy. After buying up mutual fund and brokerage companies during the '90s, they hired in-house planners and launched ambitious certification programs to train their branch personnel to sell investment products. This strategy, however, works better with mass-market customers than the affluent, who have historically turned to brokers rather than banks for investment advice.

It makes eminent strategic sense, then, for banks to buy financial advisory firms. But the risks from faulty execution are substantial. While a bank may expect its new crew of financial planners to recommend its proprietary products, doing so too aggressively or too blatantly will turn off customers.

Nor is it simple to combine the divergent cultures of these two types of organizations. Most financial planners are self-starters who cherish their autonomy and enjoy working with a few like-minded colleagues; maintaining that entrepreneurial energy while slotting them into a more conventional organizational structure requires some finesse.

Experts recommend a variety of tactics to overcome these problems. To fly the flag of objectivity and credibility, acquirers are allowing planning firms to retain their former names as they become subsidiaries of the bank. The planners then recommend bank products where appropriate, but retain their overall focus on providing high-quality, objective expertise.

To improve cross-sales, a referral system can be established whereby bank employees are incented to send their customers to the planners, and vice versa, even if it means paying commissions to both for the same customer's business. Banks can also use marketing techniques such as estate planning seminars and investment-oriented newsletters to increase the flow of traffic to the advisors.

Finally, banks must include the financial planners within a comprehensive wealth-management strategy. Most institutions that purchase these firms are trying to provide their customers with a full range of banking, trust, investment and insurance products — otherwise known as the "one-stop shop," or "financial supermarket," approach. "You can't just buy the planning firm and hope for the best. There has to be some vision behind it," says Mark Tibergien, partner at Moss Adams LLP, an accounting and financial services consulting firm in Seattle.

Affluent Connection

Despite the popularity of online trading and the plethora of financial/ investing information available from many sources, the wealthy still depend upon advisors.

Spectrem Group earlier this year found that 31% of affluent individuals make most financial decisions after consulting with an advisor, and 21% let the advisor make all the decisions. For the purposes of the Spectrem study, "affluent" was defined as households with annual incomes upward of $100,000 or a minimum net worth of $500,000, not including the value of their primary residence. Another 20% of this group make their own decisions but consult an advisor for specialized needs. Only 22% describe themselves as self-directed.

Spectrem, a Chicago-based research firm, also found affluent investors relying more heavily on outside advice: 67% of affluent households used professional advisors in 2000, up from 56% in 1998. This is almost certainly related to the stock market declines that commenced in March 2000 and accelerated this year. "In the wake of recent disappointments in market performance, people are realizing they're not as smart and self-sufficient in managing their investments as they viewed themselves a year ago," Morehead says. "The timing is right for banks to increase their financial-planning capabilities."

And they have. Institutions of all sizes are getting in the act. For example, First Leesport Bancorp, Wyomissing, Penn., and Valley National Bank in Wayne, N.J., purchased advisory firms in 1999. More recent acquirers include Synovus, Wells Fargo, and Texas United Bancshares, La Grange, Tex.

The appeal of these acquisitions is two-fold. First, there's the wealthy client base. Financial institutions are well aware that affluent customers provide the most lucrative market for investment, trust and insurance sales. The planning firms themselves are often quite profitable in their own right, and their earnings aren't susceptible to cyclical interest rates. Tibergien estimates that a well-run advisory firm can achieve a return on equity exceeding 20%, compared with between 15% and 18% for the typical bank.

For their part, the financial planners are attracted by the banks' financial strength. An acquisition offer can be a godsend to a small firm that's struggling to deal with its personnel, rent and marketing expenses. With banks active in the market, acquisition prices are rising. Acquirers are paying between 1.3 and 2 times the planning firms' revenues, which Tibergien considers excessive in many cases, especially when the advisor is not particularly profitable.

No matter how the prices are calculated, the deals are likely to continue, since financial planners help banks realize their dream of creating one-stop shopping for financial services. "We wanted to round out our product offerings so we'd have just about everything under one roof," says First Leesport chief executive Raymond Melcher, Jr.

And for First Leesport, which has nearly $400 million in assets, the strategy seems to have worked so far. Since the bank purchased the 10-person Johnson Financial Group in late 1999, revenues at the advisory firm have nearly doubled, according to Melcher.

Distribution Strategy

When considering whether to buy a financial planning firm, banks must first appreciate the unevenness of this industry. Anyone can hang out a financial-planning shingle, and the range of services offered varies widely.

Heather Almand, public relations manager for the Atlanta-based Financial Planning Association, estimates there are between 150,000 and 300,000 "true" financial planners in the U.S., by which she means professionals who map out a plan to meet their clients' financial goals. Some offer fee-based financial planning, with clients paying from $500 to $3,500 for a detailed financial plan. In cases where the financial planner also manages client assets, fees usually range from 0.5% to 1.5% of assets annually.

The "gold standard" in this business is provided by the "CFP" (Certified Financial Planner) designation, which signifies that an individual has met the professional standards of the Denver-based Certified Financial Planner Board of Standards. At the end of September, there were 38,188 CFPs in the U.S., 3% of whom say they're employed in banking.

Tax preparers can also count as financial advisors, at least in the view of Wells Fargo. In July, the San Francisco-based bank purchased H. D. Vest of Irving, Tex., which manages 6,000 independent tax preparers spread across all 50 states. Dennis Mooradian, president of Wells Fargo's private client services division, says his company sees these tax advisors as a complement to its existing cadre of in-house financial planners, certified public accountants, and attorneys, all of whom offer fee-based, wealth-planning services to clients. "In short, it's a distribution strategy," Mooradian says.

Some geographic areas provide more fertile ground for financial planners than others. In general, the greater the concentration of high-net-worth individuals within a bank's footprint, the more valuable a financial planning acquisition.

"If you're a community bank and you have only a half-dozen folks with $1 million in investable assets, there's not much of a market," says Synovus vice chairman Walter "Sonny" Deriso. Synovus, which operates 39 community banks in four southeastern states, purchased Atlanta-based Creative Financial Group Ltd. in March. At the time, Creative had $950 million of assets under management and 38 employees — CPAs, CFPs, and attorneys among them.

Other factors to consider, says consultant Tibergien, are the cash flow of the advisory firm, the growth potential in its existing client base, the potential synergies in joining with a bank and the commitment of its principals to the deal. A small firm can become virtually worthless if its chief rainmakers depart or become listless.

When making its two small acquisitions, which employed five planners between them, Valley National made an initial down payment and then agreed to pay regular sums based on the operating earnings generated over the next three to five years. "You have to craft a financial package that will enable the advisors to make more money than they made before," says Robert J. Mulligan, a first senior vice president at Valley National. "And you have to encourage them to keep their entrepreneurial spirit."

Since the planning firms are usually small, personalities matter. Synovus was thinking of a partnership when it first approached Creative Financial. Deriso says the discussions evolved into a buyout when he and other Synovus executives quickly established a rapport with their Creative Financial counterparts.

Tightrope Walk

After the courtship is over and the agreement signed, the most difficult task begins. Integrating the financial planners into the bank's wealth management operation can create synergy or confusion depending on how it's handled. The primary issue has to do with how these planners will interact with their customers now that they're no longer going it alone.

The Spectrem study underscored that affluent individuals prize independence in an advisor. For this reason, more than one-third of them turn to a certified financial planner or investment advisor — not a product-pushing broker — when making investment decisions. "Smart banks recognize that stipulating which products the financial planner sells is bad business," Tibergien says.

In an effort to retain an objective image for their planners, most banks keep the planning firm's original name. Behind the scenes, however, the advisors walk a tightrope. On the one hand, they wish to continue offering their clients top-flight advice, suggesting proprietary products only when appropriate. On the other hand, as employees of a bank subsidiary, they almost inevitably feel pressure to push product. The manner in which institutions balance these concerns will heavily influence how successful they are in working with the financial planners they've acquired.

Most bankers agree that respecting the autonomy and objective judgment of the planners within their fold is absolutely critical. "Creative Financial made it clear that they're going to recommend what's best for the client," Deriso says. "They're not going to recommend Synovus just because we provide a service. It's also going to have to be something that the client truly needs. I respect that kind of integrity."

To extract some synergy from the deal, banks also need to establish an effective referral system. Bank employees typically feel they "own" those affluent customers who'd benefit most from visiting a financial planner. They don't necessarily want to jeopardize their own commissions by referring those customers to the advisory firm.

Morehead advocates increasing the incentives for both sides —even, if necessary, paying commissions to both the banker and the financial planner for the same customer's business. Although short-term margins may suffer, he says, "the faster you can get everyone to change their behavior and start cooperating, the sooner the bank is going to leverage its franchise."

It also helps if the bank employs some innovative marketing techniques to drive business to the financial planners. First Leesport markets its financial planning services through customer newsletters, statement stuffers, and seminars on topics such as estate planning and IRA laws. Deriso has asked Creative Financial to prepare financial plans for each of the senior officers at Synovus' 39 banks. His expectation is that these executives will become more enthusiastic about referring business to the planners if they personally undergo the financial-planning process and get to know some of the personnel at the advisory firm.

Ms. Judd is a freelance writer based in Washington, D.C.

Copyright © 2003 by Banking Strategies, published by BAI.

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