Investment Advisors and Insurance Agencies
Introduction
Many financial institutions across the nation struggle to maintain their historical standards of financial performance with traditional, interest margin-based banking products in an increasingly competitive environment. By adding products and services that provide non-interest or fee-based revenues, the progressive banker can alleviate the growing pressure on his earnings. Acquiring or starting fee-based businesses can be an ideal way to become less interest margin-dependent and furthermore provide an vital referral source of new banking customers.
There are generally two types of fee-based businesses: those whose revenues are based on transactions and those whose revenues are not. Fee-based businesses based on transactions (securities brokerage, for example) can provide new revenues but that revenue is typically unevenly distributed throughout the year. Fee-based businesses that provide a consistent, annuity-type revenue stream can be ideal additions for banks. Two such businesses that banks may wish to consider are insurance brokerage and wealth management firms. Both have historically high client retention rates (above 90%) and consistent revenue streams throughout the year. And, considering that the top producers at these types of firms are restricted by non-compete and/or non-solicitation agreements, the logical way for banks to enter either line of business is through an acquisition. However, to be successful, these transactions must be properly priced and carefully structured.
Carson Medlin Expertise in Fee-Based Businesses
The firm advises banks that wish to acquire these non-traditional businesses for the first time or add to those they may already have. Alternatively, the firm may advise those fee-based firms on their options for realizing the value of their investment, including merging with a bank or another type of acquiror. Carson Medlin has experience in advising in either circumstance and the in-depth knowledge to accomplish successful transactions involving banks and fee-based firms.
Dan Bass, the Managing Director of our Houston, Texas office, leads the firm’s assignments in this area. Prior to joining Carson Medlin, Mr. Bass was in charge of mergers and acquisitions at Compass Bancshares, a $30 billion regional bank. He spearheaded Compass’s acquisition of insurance agencies, which added $50 million of revenue over four years, and wealth management firms, which now total close to $1 billion in assets under management. Mr. Bass has established contacts with hundreds of insurance agencies and wealth management firms throughout the nation. Mr. Bass has prepared the following summary of some of the important considerations for banks considering adding fee-based businesses to their traditional product line and for those firms who may be considering joining forces with a bank.
Considerations for Banks Adding Fee-Based Businesses
I. Cross-Selling and Building Better Banking Relationships
A bank buying an insurance agency or wealth management firm immediately acquires new customers. In addition, the bank brings another product set to its existing clients and further cements those relationships. It has been established that, the more products the bank sells to a customer, (a) the longer that customer will be retained and (b) the more profitable the relationship becomes. The dogfight for market share is really all about customer retention and profitability. In effect, cross-selling is both a defensive strategy (retain revenues) and an offensive one (grow revenues). Successful large banking institutions have learned that they cannot afford to spend all their resources getting new customers in the front door, only to have them leave through the back door. The average Wells Fargo customer, for example, purchases five products there; the company’s stated goal is eight.
II. Banks Diversifying Revenues: Evidence from Industry Data
We looked behind the anecdotal evidence that nontraditional businesses add to bank profitability. We analyzed the approximately 700 bank holding companies with assets between $500 million and $5 billion. About three-quarters of these holding companies are active in insurance brokerage (IB) and/or wealth management (WM), and the remainder are not. Our analysis, summarized below, indicates a material positive impact from operating these businesses.
Active Inactive
Medians IB or WM IB or WM
Noninterest income/assets 0.97% 0.58%
Noninterest income/revenue 21.6% 12.4%
III. Executing the Acquisition Strategy
The acquiring bank must identify and address a full range of issues in developing a strategy to successfully acquire insurance agencies or wealth management firms. Key issues include:
Profile and characteristics of potential affiliates
- Geographic considerations
- Size
- Revenue mix
- Organizational and reporting structures
- Referrals between the bank and the affiliate
- Deal structure
- Upfront vs. earn-out
- Currency
- Employment contracts
- Compensation structures
- Performance targets
- Synergies
- Regulatory approvals
- Post-acquisition integration
Though smaller in size than the typical acquisition of a bank, non-bank transactions take as much if not more time and expertise to complete. For example, the upfront time needed to pre-screen potential partners can be quite lengthy. Unlike banks, insurance agencies and wealth management firms are much less regulated and are almost entirely small, closely-held firms. Thus there are no databases on potential affiliates with detailed financial reports to help weed out undesirable candidates.
IV. Conclusions
Because they frequently lack experience in acquiring non-bank businesses, buying banks in general have a reputation for overpaying for these types of firms, for poorly structuring the transaction or for not having adequate post-acquisition integration plans in place. This is not an area where the uninitiated acquiror should go it alone.
On the other hand, insurance agencies and wealth management firms have the potential to boost non-interest revenues materially, and well chosen, well located partners can be a great source of cross referral business for the bank. For a more in depth discussion of acquiring or starting fee-based businesses for your bank, please contact Dan Bass in the firm's Houston office.