Bank advisors increasingly dominant

(July 5, 2004) After lagging behind the rest of the advice industry in the 1990s, Canada’s big banks are fast becoming the dominant players in the field, according to Toronto-based consultancy group, Investor Economics.

Having probed the banks’ growth in the fund industry in its May issue of Investor Economics’ Insight, the June edition looks at growth in their best sales channel: in-branch advisors.

This channel’s growth has been organic for the most part, as advisors have sought to grow “wallet share” with the client base they have already established.

“The unfolding branch advice story is not so much about ‘chasing the client you don’t have,’ but rather ‘growing with the one you’ve got,'” says Investor Economics.

As clients’ assets grew, they could be “graduated” to the next level of service, with high net worth clients eventually reaching private banking status.

“Interestingly, though, the emphasis on relationship building has worked so well that many customers are staying with their branch advisors even when their assets reach the point where they could be higher up the ‘client progression path,'” says Investor Economics.

As a result, the asset range of in-branch clients has crept up, from between $75,000 and $150,000, to between $100,000 and $300,000. This has actually benefited the banks, as compensation rates for in-branch advisors are considerably lower than for full-service brokers.

Not only are clients able to move up the service chain, but branch advisors also have the opportunity to advance their careers within the company, moving up the wealth management ladder.

Investor Economics predicts the in-branch advisory services will become more segmented, with financial generalists referring clients to in-house specialists. The ability to advance through the chain adds incentive for the branch advisor to refer clients with whom they have worked so hard to develop a relationship.

From out of nowhere

In 1997 the banks were barely represented in the advice industry, but by December 2003, there were over 10,000 advisors in the branch channel. The banks have evolved from having employees selling funds in a reactive manner to now valuing advisors with planning designations such as the PFP and CFP.

The branch channel now makes up 11% of the wealth management market and average book sizes have grown considerably over the past year, hitting $20 million, up from $18 million.

While all of the banks have poured resources into these operations, Investor Economics points out their tactics have not been so homogeneous.

The most noticeable difference between companies lies in their organizational structure. While CIBC and RBC created “separate organizations within organizations,” BMO and Scotia have relied on embedded advisors, including full-service brokers at the branch level.

Another example of divergent strategies lies in branding. The first bank “out of the gate” — CIBC — remains the only one with a brand name distinct from its parent company — Imperial Service. The other banks have opted to tie their advisory services more closely to their parent brand.

As of December of 2003, the branch advice channel managed $187 billion, up 13% from $166 billion the year earlier. Mutual funds and fund wraps made up 33% of the branch advice asset mix, up from 30% the year before. This fund growth came at the expense of fixed term deposits, which accounted for 48% in 2003, while cash holdings and direct security investments held steady at 14% and 5%, respectively.

Fixed term deposits have long been the bread and butter for the banks and deposit-takers have long held a virtual monopoly over this line of business. With nearly $90 billion in these products, they are likely to remain an important part of the banks’ business, offering clients a secure holding for their portfolio.

“Branch advice is really about positioning clients in mutual funds and fund wraps, and we expect more flexibly priced fee-based solutions to be developed as the number of higher-end customers grows,” says Investor Economics.

There appears to remain a strong bias toward proprietary products, but the banks appear to recognize the value of offering the client a broader selection. At one level of service or other, most will sell third party funds and wraps, which make up about 16% of the total fund holdings.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(07/05/04)

Steven Lamb