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 firstname.lastname@example.org.