Banks, credit unions could start buying advisory practices

LPL among the firms to benefit from the expanded distribution of financial advice

In September, when Salem Five Bank acquired Stumm Financial Services, it set in motion a financial advice model that could become a blueprint for other banks and credit unions, and also represents new distribution for platforms like LPL Financial.
Hans Stumm, 66, wasn’t ready to retire but he needed a succession plan that made sense for himself and his long-time clients. He had spent 40 years in the financial advice business, including the last 13 as an independent producer at LPL.
Enter, Sean Tesoro, president of Salem Five Financial, who was looking for ways to grow the $4 billion community bank’s $766 million financial advice footprint.
The strategy, which borrows pages from various breakaway, succession-planning, and bank distribution models, essentially involved acquiring and rebranding Stumm Financial as a non-bank-branch financial planning office operating under the Salem Five Financial banner.
For Mr. Stumm, who works with more than 100 clients and advises on more than $180 million, the transition from the high payout as an independent LPL producer meant taking a payout more in line with the 50% range earned by wirehouse reps.
But the payout reduction also came with the benefits of being a bank-employed adviser, meaning access to a host of bank products and services, a built-in succession plan, and handing over technology and office expense responsibilities to the bank.
“I wouldn’t have done this if I thought it was revenue negative,” Mr. Stumm said. “I felt like I owed it to my clients to have a succession plan in place. I might work until I’m 80, but now I’ve got more than 20 individuals behind me” to help provide a smooth succession.
It isn’t completely unheard of for banks and credit unions to provide financial advice from non-bank branches, but it is unique for a community bank to acquire books of business to build out their network.
Allegacy Federal Credit Union in Winston-Salem, N.C., started moving in-house financial advisers out to branded planning offices in 2007, and has since moved five of its 10 advisers outside the credit union’s branches.
“We’re now serving consumers and credit union members from several different channels,” said Steven Franke, Allegacy Federal’s program manager.
Unlike Salem Five in Salem, Mass., Allegacy is not buying advisory businesses to occupy the non-branch offices, but it is difficult to argue against the success of the expanded distribution model.
Since Allegacy Federal started launching non-branch advisory offices, the credit union’s assets under management has nearly tripled to $1.1 billion, from $433 million in 2007.
That kind of success is what motivates Mr. Tesoro at Salem Five, which includes 30 branches and a history dating back to before the U.S. Civil War.
“All banks are trying to figure out how to get more consistent non-interest income,” he said. “We’re expanding the financial advice business into a category that doesn’t require you to have a bank branch in order to grow.”
In order for the model to work, the bank has to be ready to spend money to acquire advisory practices, and Mr. Tesoro said Salem Five Bank is on board.
The Stumm Financial acquisition was actually Salem Five’s second deal. The first deal involved a smaller $20 million adviser who was getting out of the business.
That non-bank branch was filled with an existing bank-based adviser.
While the acquisition of the advisory practice might be the most unique part of the strategy, the other components likely to appeal to reps include the hybrid model that doesn’t come with a quota to sell bank products, and then there’s the built-in succession plan.
“When you’re ready to step away, you have a ready-made buyer,” Mr. Tesoro said. “We would find a match, in fact, we already did that with the $20 million deal.”
LPL, which has a market-leading 40% share of the bank investment platform business, also stands to benefit from any trend toward greater distribution of investment products and services.
“We see non-branch-based financial advisers as a strategy to drive growth and a graduation model for branch-based advisers, as well as a way for institutions to grow through an acquisition strategy, as an institution’s brand and locations solve some growth challenges for advisers,” said LPL executive vice president, institution services Arthur Osman, in an emailed statement.
Kenneth Kehrer, principal at the research and consulting firm Kehrer Bielan, sees non-bank advisory branches as a vehicle for moving seasoned advisers beyond the limits of the branch customers and bank referral programs.
“About 2,700 banks and credit unions have advisers in the branches, and that has been largely the business model and they have been constrained by not marketing to investors at large,” Mr. Kehrer said. “This is a way of taking a top producer and setting them up in an office, and then take a new rep and put them in the branches.”
The industry term for advisers based outside of bank branch offices is “second-story advisers,” Mr. Kehrer said. “In a lot of bank branches there’s not enough space on the floor for the advisers, but the idea is that it is widening the bank’s brand.”
Beyond the Salem Five model of acquiring advisory practices to build a non-branch network of financial planning outlets, Mr. Kehrer challenges the logic of why more banks aren’t already locating advisers outside the branches.
“The main reason is the banks understand that they haven’t fully tapped the potential of their own customers” he said. “The typical bank has only captured about 5% of their customers’ investable assets. Plus, it’s more expensive to take advisers outside.”
Naysayers notwithstanding, Mr. Tesoro of Salem Five is ramped up and ready to start buying practices and building an advice network across New England.
And Mr. Franke of Allegacy Federal is also weighing possibilities.
“We haven’t bought any yet, but we’ve been looking at practices to buy, and we’re looking pretty hard,” he said. “Especially with the DOL rule, we think there will be more advisers looking to get out of the business, and there will be a lot of opportunities to buy books of business.”