Increasing Credit Union Revenue by Increasing Member Awareness of Investments and Insurance Sales

“Plans are only good intentions unless they immediately degenerate into hard work.” — Peter Drucker

Peter Drucker, the management guru, passed away in 2005. With his passing we lost a unique individual who made a significant impact on not just the American business landscape because the impact of his knowledge of business management was felt worldwide. He was known as the “Uber Mentor”

Drucker was not a big fan of planning for planning sake. He counseled his clients to get busy and implement the plan as the lead quote above indicates. He was also an advocate for learning from mistakes. He used to tell even the largest corporate titan, “What makes you think you’re exempt from the normal bumps and bruises of life? The question isn’t, do you make mistakes? It’s, do you learn from them?”

As we approach the second half of 2009 our focus will gradually shift to looking at next year and the upcoming planning process associated with 2010. We are working hard to make 2009 a successful year but simultaneously learning from the mistakes and successes of 2009 so we can finish this year in a strong fashion while laying the groundwork for a successful 2010. I am going to focus on a key strategic concept that I believe will play a big role in the growth of our credit union partners in 2009 and beyond. This concept concerns the credit union membership participation in the investment services program.

 

One of my favorite Peter Drucker quotes is as follows, “Innovation requires us to systematically identify changes that have already occurred in a business — in demographics, in values, in technology or sciences – and then to look at them as opportunities. It also requires something that is most difficult for existing companies to do: abandon rather than defend yesterday.”

One such opportunity involves looking at how we can expand the awareness of the investment and insurance sales programs (program) within our credit unions and thereby help more of our members achieve their financial dreams. Let’s look at the membership penetration opportunity.

According to the 2007 Callahan & Associates Credit Union Retail Investment Program Benchmarking Report the average financial consultant gross commission (GDC) was $268,296. The aggregate GDC per million dollars of share deposits was $888.00. The average number of accounts per financial advisor was 760. So from an industry perspective we could use such data to gauge our progress and to forecast our expectations for next year. The danger of course is that while benchmarking data is useful an aggregate approach takes into account programs that do not look like yours and therefore tends to skew the results toward those higher performing programs. So at face value you may determine that you are either above or below the credit union averages. At least it’s a good place to start. In addition we should factor in economic data into this “top down approach”. We need to have an opinion of how the economy will impact our members’ ability to achieve their financial goals. In addition your broker dealer should factor in how the economy will impact their ability to deliver the products and services to help your financial advisors solve your credit union members’ financial problems.

One such “bottom up” approach is to set a penetration or participation target. For example, if your credit union currently has a participation rate of 2% and your membership is 40,000 then you have 800 investment accounts. Last year your program generated $365,000 in gross dealer concession (GDC). If last year your penetration was 1.5% you moved the needle from 600 to 800 net new accounts. If you have 3 advisors on your team that equates to an average of 67 net new accounts per advisor. That is a pretty good increase. We would than take a look at how we did that and hopefully repeat it next year. Or better yet, now that our team is a little more seasoned, let’s move the needle higher say to 3.0% in 2010. That will be a net increase of another 400 accounts (assuming your membership numbers are static which I hope they are not and continue to increase).

These are net numbers so I am also assuming that we are doing a great job of retaining our existing investment clients. If not, the gross number of new investment clients needed will be correspondingly higher. We can then take the expected net new member client number, in this case 400, and multiply it by the average investment account balance for our credit union. Let’s assume it is $30,000. Let’s also assume an average commission paid on an investment account is 4%. So, $30,000 times 400 = $12 million in new investment dollars. Multiplied times 4% gives us $480,000, the projected revenue from new member clients.

In addition to the new member forecasted number, let’s assume you have an existing investment book of $50 million. What can you expect to generate from that book. Well, credit union programs don’t operate like a wire-house such as Merrill Lynch where the advisors are much more transactional because of the individual equity trading so as a result they might turnover their book at a rate of 1% each year. Our members typically have mutual funds and annuities in their portfolios which are “buy and hold” investments and should not be churned unnecessarily. Nonetheless, there is still a need to meet with our members on a regular basis and adjust their portfolios based on life changes or add new assets. Many of these activities will not incur commissions but some will. So conservatively if we estimate that each of the existing members that have investment accounts were to invest an average of $10,000 additional dollars that would account for $8 million in new investment dollars from the existing book equating to $320,000 in revenue.

The turnover needle can also be moved higher as we become more proficient at managing our book of clients through regularly scheduled meetings and marketing initiatives. Does an advisor have too many clients? Is an advisor losing as many clients as he/she is bringing in the door? Are we contacting our clients often enough? With the increased effort to promote the program comes a commitment to improve the skills of your advisor team. The two efforts must go hand in hand. The last thing you want to achieve is an increase in referral activity only to have your members walk away in disappointment from their experience at the investment desk.

So our sample credit union investment team might forecast a minimum goal of $800,000 based on $480,000 in new member client revenue and $320,000 in existing client revenue. If they have 3 advisors they could divide the goal evenly or if there is a disparity in the size of the advisors book and/or experience one might carry a larger goal say $300,000 and the other two would have a goal of $250,000 each.

Such an approach to revenue forecasting is not an exact science. Factors such as the composition of the investment book, experience of financial advisors, referral program success, management support, marketing initiatives and member retention are just a few of the factors that will determine the ability to increase membership penetration and increase revenue from the existing book of business. But it is this kind of close examination of our business and partnering in the goal setting process that will afford all parties involved; the financial advisor, the credit union and the broker dealer the opportunity to achieve your goals. Ultimately it is the credit union member who wins as you increase their awareness of your ability to help them reach their financial goals. Isn’t that why our doors are open in the first place?

Financial Management and Budgeting in Business

Importance of Financial Management

Finance is a key functional area of business management. This area is commonly referred to as Financial Management. The term defines the achievement of key financial objectives by making investment and financial decisions. Essentially, it is the management of all the processes associated with the efficient acquisition and deployment of both short and long-term financial resources. Financial Management assists an organisation’s management to reach its financial objectives such as the creation of wealth, solvency, liquidity, growth and return on investment achieved through a process of financial planning, control and decision-making.

Financial Control

Financial control consists of different strategies to manage finances necessary to achieve the primary purpose of every business; which is to earn profit. Budgets are the traditional financial control method and provide a measuring basis which performance can be assessed. By engaging in a yearly budgeting process a business can make plans and forecasts for the year ahead. Control action should be taken when actual performance appears not to be matching the outline of the budget. Therefore by monthly monitoring of expenses, controlling methods can be put into place when expenses becoming higher than figures stated in budget (such as spending cut backs or extra working hours). And by determining the reasons why figures do not match the yearly budget plan, a business can therefore make necessary plans for this not to occur in the future. Monthly monitoring of expenses is another example of a financial control. Such data includes cash balance, total wages costs and hours worked key sources of income, unusual or above budget expenditures.

 

Three Main Financial Statements

The 3 main financial statements necessary to analysis and improve on finance viability:

1) Balance sheet – ‘A statement of financial position that shows the assets of a business and the claims on those assets’

2) Income Statement – ‘A financial statement (also known as profit and loss account) that measures and reports the profit (or loss) the business has generated during a period.’

3) The cash flow statement – ‘A statement that shows the sources and uses of cash for a period’

By analysing these three financial statements on a regular basis a business can proactively forecast problems or opportunities before they arise. The 3 main financial statements are also considered as financial controls as these statements are used to understand and interpret the financial conditions of a business as a means of management and control. The statements enable a business to set guidelines and policies that enable growth and business success. An annual Profit and Loss statement is considered the most important financial statement and UK businesses are legally required to lodge a Profit & Loss Account with Companies House. In regards to cash flow, cash inflows are payments for products or services and interest on savings and investments. Cash outflows are a combination of many things including purchasing stock, daily operating expenses, fixed assets and government taxes. A business is also required to produce a balance sheet annually for reporting purposes. It provides a report of assets or liabilities.

Budgeting and Budgetary Control

A budget as a qualified statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. It is a short-term plan of working towards financial objectives. There are several styles of budgeting, these styles include –

* Fixed – does not allow for variations

* Flexible – Adjusts or flexes

* Continuous or rolling – continually amended

* Zero-based – needs assessed

* Incremental – uses previous budget with increment

Budgets are necessary to provide a basis for control, helping identify short-term problems and promote forward thinking. However, there is a need for budgets to be adaptable if they become unrealistic due to sudden changes in the business environment. This is known as ‘Flexing the Budget’ (which simply means revising the budget).

A variance report is required to indicate whether performance is below or above the budgeted level. It is the difference between the budgeted level of costs and revenue and the actual levels of costs and revenues also referred to as variance analysis. Budgets can also have a behavioural effect motivating the management team and staff to achieve better performance and help promote forward thinking.

Effective Business Planning

A business plan is made up of many elements but no business plan is complete without this financial information. For business planning to be effective, the budget and the three main financial statements (Profit & Loss, Balance Sheet and the cash flow statement) must be taken into consideration. A financial statement is the core of a business plan as they are used to identify various business strategies. Financial planning is interlinked with all elements of a business plan. Five key strategic plans interlinked with a budget (plan); 1) establishing mission and objectives, 2) undertaking a position analysis, 3) identifying and assess the strategy options, 4) selecting strategic options, 5) perform, review and control. By taking all of these elements into considering, a business can create an effective business plan containing financial data and projections.