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Bankers and brokers think differently. What makes it really interesting in the first often own the second. The characteristics that made the brokers attractive are those bankers seek to avoid.
Time for a story. Years ago, my wife and I were part of a large group of friends heading to Vermont for President’s Weekend. A group of us set off to go cross country skiing at a place that equipped you and let you loose on their trails. The trails were icy. Our small group included our mutual friend, a banker and me, the broker, a.k.a. the financial advisor.
Our friend (who knew what he was doing) looked down the track, set off, came to a stop and waved. I set off, fell face first a short distance away, got up, covered more ground and fell several more times before arriving at the foot of the hill. The banker surveyed the situation. He set off and covered about ten feet. He stopped, revaluated the situation, set off again, covered another ten feet and repeated the process. It took him forever to get down that hill, but he never fell.
Brokers are generally risk takers. Bankers are risk adverse. It’s quite a challenge blending the two cultures.
- Compensation. Brokers set incredibly lofty goals for themselves. You might want to increase business 30% year over year. If you don’t make your goal, you’ve still made a substantial gain year over year. Bankers set relatively modest goals, which is probably true of corporate life in general. The object is to consistently hit your goals.
- Job security. Brokers are on the revenue side of the equation. Clients often have strong loyalty to their advisor. Good advisors are constantly prospected to move. You might not hit your lofty goal, but once you have a few years under your belt, it’s unlikely you will be fired. This job security inspires brokers to “reach for the stars” businesswise. Bankers are measured vs. The goals set for them. If you exceed your goals, there are some rewards. If you don’t hit your goals, your job is seriously at risk.
- Risk. Brokers invest money on behalf of their clients. If the advice works out, the client makes money. If something goes wrong, the client loses money. The firm makes money from fees in the meantime. Bankers lend the bank’s money, technically the depositor’s money to make loans. If everything works out, the loan is repaid and the bank earned interest along the way. If things go wrong and the client goes bankrupt, the bank loses the principal, although there might be collateral involved. Because the risk is so great, bankers are very risk adverse.
- Cross Selling. Brokers are proprietary about their clients. When faced with new products or referral business (mortgages, for example) they weigh the additional revenue vs. The consequences of the client have a bad experience, blaming the broker and losing the account. It’s not easy go get brokers on board for cross selling. Bankers consider cross selling a major part of their culture. Bankers might be rewarded for referring business. Multiple relationships across the bank contribute to the stickiness factor.
- Net revenue gains. Traditionally brokers gain “new money” by getting the client to take it from somewhere else. they move it when a bank CD comes due. A piece of real estate is sold. The client’s 401(k) assets move into an IRA rollover. All the revenue is gravy. Banks are places where people traditionally keep their money. If a bank client moves money from a maturing CD to an investment product, the bank looks at the stream of revenue lost from the CD and sets it against the new stream of revenue from the investment product. From the bank’s point of view, the gain is the difference between the two numbers.
- Referrals. Brokers usually need to find new clients and new assets themselves. Banks have a huge base of clients they can refer for cross selling purposes. If the guy with the mortgage wants to invest in the stock market, they are sent to the wealth management arm. The best example is the relationship between the commercial bank and its private bank. The longtime bank client sells their business and pays down their loans. The commercial bank manager ‘walks’ them through the polished mahogany door of the private banking division to “put that money” to work.
Brokers are enthusiastic, self-starters reaching for the stars. Bankers are risk adverse, yet with a great cross selling culture, plenty of opportunity for internal referrals.