According to Ed Chess, vice president of
Brentwood Advisors LLC, banks are
on a mission “to make investment and advisory services more relevant, accessible
and convenient for those who have been
underserved by traditional offerings.” This
includes a whole new generation of up-and-coming business owner-operators, entrepreneur investors and emerging affluents.
With all the mutual funds, brokerage
accounts and managed investment accounts
available to choose from, what more can a
bank’s advisory service bring to the table?
Smart Business spoke with Chess about
banking’s unique value proposition.
What are the trends you’re seeing in bank
advisory services today?
Managed investment accounts seem to be
where the industry’s going. Previously, the
individual investment adviser would — and
still can, for that matter — put together a balanced mutual fund or stock portfolio. Now,
the adviser can match the client’s need to a
professionally managed investment account
that rebalances automatically, minimizes any
tax implications and looks out for opportunities to harvest gains. Best of all, through a
bank’s advisory service, the investor can gain
access to a caliber of money manager that, in
most cases, simply would not be otherwise
available to someone with less than, say, a
million dollars to invest. There are literally
thousands of these managed funds — every
broker-dealer that I know of maintains some
assortment of proprietary and/or packaged
managed investment accounts, which are
made available for its bank advisory service
affiliates to offer at a more accessible cost.
What exactly are broker-dealers?
The typical bank’s advisory arm is set up
through and affiliated with what’s called a
broker-dealer, such as Financial Networks,
IVest, InVest, UVEST or Wachovia. These
entities ensure regulatory compliance and,
essentially, allow the bank’s advisory arm to
clear their transactions through the broker-dealer. More importantly, this arrangement
gives a bank’s advisory service the ability to
concentrate on what’s most appropriate for
the client and relationship without having to realize the expense and overhead required to
maintain its own team of compliance
experts, fixed income specialists, traders, etc.
— costs which otherwise have to be
absorbed or passed on to the client. The net
advantage is that it provides back-office functions, specialized investment management
and trading expertise, and economies of
scale that benefit the bank and the client.
Are there limitations to the broker-dealer
arrangement?
Perhaps it’s not so much a limitation as a
matter of how involved the needs of the
client are and how much specialization and
product diversity may be required as a result.
As a general rule, most investment clients
will find the selection of proprietary or packaged funds and managed investment
accounts offered by any given broker-dealer
to be more than adequate for their needs.
But when the client’s goals, time line, risk
tolerance, investment horizon, tax situation,
ability to realize gains (or need to offset
gains), or other special circumstances dictate, it may become necessary to look elsewhere to help the client find even more highly specialized types of managed investment
accounts. The square peg — the client’s very unique or unusual need — simply may not fit
into the round hole (i.e. the packaged broker-dealer offering) as well as it could.
For these clients, there is a way for the advisory service that maintains a broker-dealer
relationship to offer even more product
diversity, but it assumes far greater administrative responsibility on the part of the bank’s
advisory service. This involves maintaining a
concurrent Investment Advisors registration,
which allows the adviser to provide both the
broker-dealer offering and products or services from outside it, when it’s deemed to be in
the best interest of the client to do so.
In those select few instances where an advisory service maintains both a broker-dealer
registration and a concurrent Investment
Advisors registration, the client ends up with
the best of both worlds. But it’s not a common arrangement — you’re going to have to
look around and shop specifically for this
capability to find a bank that offers it.
For the prospective investor, what are advantages to operating within a bank setting?
First, banks offer a ‘one-stop shopping’
model with both non-FDIC insured and FDIC
insured product availability — as well as
loan, deposit and even realty services —
within easy reach. This is ideal for business
owners, for instance, since they suffer from
extreme time poverty and potentially benefit
the most from an offering that’s built around
either an already existing, multifaceted financial relationship or the potential for one.
Second, whereas the average investment
house may accept losing clients as a ‘given,’ a
bank’s advisory service has even more at
stake because it means potentially risking the
bank’s client, not just the adviser’s investment client. So, maintaining the bank’s relationship, or potential relationship, provides
more incentive for a bank’s advisory service
to take the total customer financial view and
deliver at an even more exceptional level.
Third, because the bank’s advisory service
isn’t burdened by the need to carry the bulk
of the back-office overhead, it is essentially
freed up to focus on what matters most —
finding the right investment vehicles to help
achieve the individual investor’s goals.
ED CHESS is vice president of Brentwood Advisors LLC. Reach him at (412) 308-2095 or [email protected].