CREDIT UNIONS STILL DRAW INTEREST: SOMEONE HAS TO ADVISE ALL THOSE MEMBERS AND THEIR $308 BILLION

The U.S. Supreme Court notwithstanding, investment firms increasingly view the nation’s credit unions and their more than 70 million members as a huge untapped market.

The high court’s decision late last month barring federally chartered credit unions from expanding by adding members of unaffiliated groups could halve the industry’s growth, according to the Credit Union National Association in Washington. But that hardly matters to the handful of brokerages now scrambling to align with credit unions and offer investment advice and products to members who have some $308 billion deposited in the institutions.

There’s so much opportunity seen within the existing membership of credit unions that the ruling’s impact probably won’t be felt for years. And that’s assuming Congress doesn’t reinstate credit unions’ ability to add members from outside groups — a move recently embraced by House Speaker Newt Gingrich, R-Ga.

“There’s enough momentum to keep on going for some time,” says Julie Ruether, director of credit-union alliances for American Express Financial Advisors, one of the companies aggressively mining the credit-union channel.

Others include Torrance, Calif.-based Financial Network Investment Corp., which is owned by Aetna Inc., and Boston-based LPL Financial Services Inc. The pioneer in this effort, and still the largest investment force in credit unions, is Plan America, a broker-dealer affiliated with CUNA Mutual Group, a Madison, Wis.-based insurance firm formed by the industry’s trade association.

Of more concern to investment firms than an overall slowing of credit-union growth will be the difficulty in creating new large-scale credit unions in the wake of the court ruling. Those larger institutions — up to 1.6 million members, in the Vienna, Va.-based Navy Federal Credit Union, the nation’s largest — offer the volume and economies of scale prized by brokers.

revenge of the banks

Since 1982, credit unions have been allowed to add members of groups outside the specific
organizations — universities, corporations, military branches, local governments — they were formed to serve. So, for example, AT&T’s 163,000-member credit union, the subject of the Supreme Court case, could add employees of the American Tobacco Co., despite the fact that the two businesses had nothing to do with each other.

That regulatory change spurred credit union growth and allowed for the creation of larger institutions. But it irked banks, which long have grumbled about the more favorable interest rates on deposits and loans available from their tax-exempt competitors.

Siding with the banks, the Supreme Court in a 5-4 decision threw out the regulation, holding that Congress required credit unions to serve only members with a common occupational bond. If applied retroactively, that could threaten the membership status of about 10 million of the industry’s 72 million members, although officials at major bank associations say they won’t move to enforce the ruling against existing members.

Even without relief from Congress, however, there are ways around the ruling.

More credit unions are forming for-profit entities called credit union service organizations, which are known in the industry as CUSOs. These corporations are similar to a bank holding company, allowing affiliated credit unions, for example, to share in asset-based or commission revenues garnered by third-party reps sitting in credit-union branches and selling mutual funds, annuities, life insurance and other financial products. (By themselves, credit unions are limited to reimbursements for their direct and indirect costs only.)

CUSOs also can market services beyond the members of their affiliated credit unions. Federal regulations permit the practice, so long as a majority of revenues are derived from members — an opportunity few have seized.

“There’s little doubt in my mind (investment sales through credit unions) will continue to grow, with or without the Supreme Court decision,” says Richard Ayotte, president of Amer
ican Brokerage Consultants Inc., a St. Petersburg, Fla., market-research firm specializing in the bank securities business.

To date, that growth has been plodding. Unlike banks, which have moved aggressively into retail investment services since the early 1980s, credit unions have stepped slowly and gingerly into this field.

Observers cite three reasons: the lack of a profit motive, volunteer board members who fear being held liable in investor lawsuits, and investment-industry perception that credit-union members are less than flush.

Member attitudes about the proper role of the credit union contribute, too.

“I’m not convinced (members) think a credit union is a good place to get a real-estate loan, let alone buy mutual funds and stock,” says Robert Dorsa, president of the National Association of Credit Union Service Organizations in Newport Beach, Calif.

not much movement

Sales figures through the channel are hard to come by, but there are some revealing statistics. The total number of CUSOs — about 600 today — has barely budged from the 400 or so in existence in 1990. Those 600 CUSOs, most of which were expressly set up to allow credit unions to participate in non-banking services, are owned in total by about 2,000 of the 11,000 credit unions nationwide, Mr. Dorsa says.

The most recent member survey in 1996 by the Credit Union National Association found just 9% of credit unions offering brokerage services. But that’s misleading because more than 40% of the larger ones ($50 million or more in assets) offered brokerage, meaning that those services were available to about one-third of credit-union members nationwide.

Perhaps most revealing of credit unions’ potential: full-time reps in credit unions generated average annual gross commissions of $156,000 in 1996 compared with $144,000 and $131,000 for those in banks and thrifts, respectively, according to American Brokerage Consultants.

“The character of a credit union is different from a bank or a (savings and loan association)
,” Mr. Ayotte explains. “It’s more of a club; they have perhaps a closer rapport with their customers than banks do.”

Slowly but surely, that is leading to more investment-industry interest. American Express has 112 advisers working in alliance with 72 credit unions that have affiliations with 1.3 million members — a bigger sales force than it has in banks.

Market leader Plan America, which unveiled its own line of mutual funds earlier this year and will roll out a wrap-fee product this summer, has 300 reps serving about 450 credit unions.

And newcomer CUSO Financial Services LP has added a wrinkle. The San Diego-based brokerage, established last year as a limited partnership focused exclusively on credit unions, is offering participating credit unions equity in the business as a further inducement to sign up. So far, the firm has deals with 15 reps and two credit unions.

“Neither Plan America nor American Express offer credit unions an opportunity to own a piece of the broker-dealer and participate in the profits,” says Valorie Seyfert, president of the new firm. “I just saw a real need in the credit-union industry for a firm dedicated to them. I also saw a huge potential.”