ABA Banking Journal - June 2007 - (Page 50)
INVESTMENT SALES Deposits vs. investments Time to settle this debate New study puts some numbers to the matter of disintermediation, which should help defuse a long-simmering dispute ver since banks and savings institutions began selling mutual funds and annuities in the early 1980s, there has been tension between the advocates of transforming the bank branch into a financial services store and the executives responsible for the traditional core business of banking—collecting deposits and making loans. By selling investments a bank is essentially converting some spread income from deposits into fee income. Alarmists in the traditional banking camp argue that by selling investments a bank could disintermediate itself out of existence. Advocates of the “bank as a financial services company” counter that the bank’s customers need alternative investments, and in fact will buy the investments from some other source if the bank does not offer them. Since the bank’s competitors are selling investments, by eschewing investment sales the bank is Contributing editor Dr. Kenneth Kehrer is a director of Kehrer-LIMRA, the successor company to Kenneth Kehrer Associates, the research and consulting firm he co-founded in 1985. Rod Halvorson is senior vice-president of Symetra Financial, a provider of annuities and life insurance products to banks, and the sponsor of the Kehrer-LIMRA study, The Extent to Which Investment Sales Disintermediate Deposits. 50 JUNE 2007/ABA BANKING JOURNAL ceding its customers’ investment business to another bank or securities firm that is also offering banking services like loans and federally insured deposits. By letting customers establish relationships with competitors that also provide banking services, the bank is not just at risk of losing some deposits, but is placing its whole customer relationship at risk. Also, many banks have been trying to diversify away from the spread business. By building up their fee business, banks can insulate themselves more from cyclical loan demand. Indeed, many analysts will downgrade a bank’s stock if the bank has less fee income than its peers. But the problem is that the fee income is earned in many cases by cannibalizing the bank’s own deposits. Thus, instead of a bank augmenting its spread income with some fee income, the fee income in fact is cutting into the spread income. Deposit products and investment products compete for some of the same dollars. The advocates of investment sales argue that even though some investment sales cannibalize deposits, the commissions on mutual fund and annuity sales are much larger than the spread income on deposits. But the deposit guardians point out that this spread is earned year after year. Despite this internal conflict, about half of the banks particiwww.ababj.com/subscribe.html ILLUSTRATION BY TERRY EDEN
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