I have written frequently about the correlation between member participation in the credit union investment and insurance sales program and increased revenue. While that may seem intuitive the question remains, “why don’t more credit unions make the effort to increase member participation in this time of increased need for revenue?”
According to the recent Ken Kehrer and Callahan Credit Union Investment Program Benchmark Reports, the average member penetration is around 5% compared to 10% for banks. According to Ken Kehrer, one of the reasons for the discrepancy between banks and credit unions could be that banks have offered investment services for about four years longer than credit unions. So they have had a head start on developing household participation in their programs. Another useful benchmark for determining how much attention management should pay to their investment programs is profitability. Many CEOs state that it doesn’t make sense to throw more resources at the Program if it isn’t profitable. My response is, “well, then let’s make it more profitable.” Before we can do that we have to gauge the profitability of the program. Let’s look at two ways to gauge profitability.
This is one of the more universal ways to gauge profitability in the brokerage business. It takes into account gross revenue minus direct and allocated expenses before corporate overhead allocation and taxes as a percent of gross revenue. This is sometimes called contribution to overhead. Since allocations for the investment program vary so much throughout the industry this measurement has become somewhat standard versus comparing income. In the recent Kehrer report the average credit union Program contributed 19% of its gross revenue to the overhead of the credit union.
Brokerage is a volume business which is another reason credit unions need to increase participation to enjoy higher revenue margins. The more the credit union can spread fixed costs over a larger sales force and revenue base the more contribution it can make to the bottom line.
This is perhaps a better way to measure the profitability of the Program. According to the Kehrer report, the average credit union Program contributed $444 of pre-tax profit per million of share deposits.
What are the key drivers that will help grow the profitability of Investment ans Insurance Sales Programs? As I have discussed in my previous articles and White Papers there are two factors, credibility and awareness. Ken Kehrer has broken those factors down into four drivers that credit unions need to constantly address to achieve and surpass the 10% member participation threshold.
Financial Advisor Coverage – this benchmark has been debated for many years. There is no one standard for every Program since geographic and socioeconomic factors of the credit union must be taken into account when determining how many advisors a Program needs to provide optimum service. The numbers range from $150 million in deposits to $350 million. The average credit union in the Kehrer study had one advisor for every $313 million in member deposits. Again, I would not recommend using that as the standard for your credit union. That figure tells me that there is room to increase coverage by adding more advisors and still increase revenue and profitability. Most advisors will resist splitting territories but the Program management has to constantly consider the question, “are our members being optimally served with the current coverage?”
Referrals– This is a good gauge for the effectiveness of the Program. If the branch teams are fully engaged in a robust referral Program then that is a sign that the Program is well integrated into the credit union; a key determinant of Program success. It is difficult to establish a benchmark for this since every Program seems to have a different definition of what counts as a referral. This has to be determined by such things as closing ratios of referrals submitted and cross-sell success i.e. is the credit union receiving referrals from the financial advisors?
Product Mix – What is the mix of products that the Program is selling to its members? Credit unions typically sell less fixed annuities, individual securities and managed money products than their bank counterparts. According to the Kehrer study the difference in fixed annuity sales can be attributed to the fact that credit unions are still struggling to embrace Platform Programs where licensed employees are trained to sell fixed annuities and mutual funds. The Platform reps tend to focus on selling fixed annuities. Financial Advisors have also been somewhat slow to the game of managed money. Historically bank and credit union advisors have been more transaction focused. This is a result of a lack of training and a lack of hiring advisors who are knowledgeable about managed money products. This is changing as members become more concerned with commissions and fees.
Sales Assistants – The proper use of sales assistants can make the Program run more efficiently and profitably. Unfortunately there has been no universal benchmark to determine when a Program needs to add an advisor. Much depends on the individual advisor’s organizational skills. I have managed programs where as soon as an advisor reaches $200,000 in GDC they request an assistant while I have had advisors doing over $500,000 in GDC without the benefit of an assistant. As with most situations there is a happy medium. According to the Kehrer study credit unions have been more generous than their bank counterparts on average using one sales assistant for every 2.6 advisors while banks have an assistant cover an average of 3.6 advisors. Again, there are differences in advisor organizational skills but Program managers should be looking to spread the cost of an assistant over as many advisors as makes sense. The process can also be used as a training opportunity. If the assistant is supporting 2 advisors then those advisors should be doing in excess of $500,000 each or you are not getting your money’s worth. Perhaps spending time to develop organizational skills may be a better investment.
Increasing awareness of the Program and establishing credibility will move the investment and insurance sales program closer to and beyond the hallowed 10% member penetration benchmark. CEOs tend to focus on the revenue number and then decide whether or not there is merit in throwing more support behind the Program. I contend more attention needs to be placed on the revenue margin and profitability potential of the Program. Sometimes this can be achieved by simply determining what meaningful revenue does the credit union need from the Program? Once that is determined then the executive team should engagee outside expertise to help determine if that goal is achievable and how. Once there is agreement of the viability of the Program then it needs to receive a seat at the management table, become a core product and receive all the support that any other core product receives. Then and only then will the Program become a significant contributor to the institution’s non- deposit income.
What percentage of your members are taking advantage of this important member service? Is it 10% or more? If not, then why not? Your members deserve to know.