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Financial Planning > Tax Planning

Beware the Credit Unions

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Have you noticed what your local credit unions are up to lately? They’re becoming more sophisticated by the minute, with many of them offering investment services programs that can rival the biggest banks and, maybe, even you. One such institution, Addison Avenue Federal Credit Union in Palo Alto, California, recently launched a managed accounts program and plans to offer a fee-based financial planning platform by early next year.

Addison, with $1.7 billion in assets, sits right in the heart of Silicon Valley and serves the employees of technology giants Hewlett-Packard, Agilent Technologies, and Phillips Electronics. As a result, many of the credit union’s employees are among today’s mass affluent, having more than $500,000 in net worth, excluding their homes, and annual incomes higher than $100,000. Addison has traditionally offered mutual funds and annuities to its clients, who are considered members because credit unions are not-for-profits that are owned by accountholders. But as the higher-net-worth clients’ appetites have become more sophisticated, says Scott Davis, president and CEO of Addison Avenue Financial Partners, the credit union’s SEC-registered RIA, Addison has become “more aggressive” than most credit unions in the investment services arena. Clients are “looking for alternatives for money management,” says Davis. Through its new platform, Addison plans to offer ETFs, actively managed mutual funds, and separate accounts managed by U.S. Fiduciary, Russell, Frontier Asset Management, and Standard & Poor’s.

Davis says Addison is likely one of the few credit unions out there that is offering managed accounts. Addison’s managed accounts program and its fee-based products will be delivered through Addison’s third-party broker/dealer, CUSO Financial Services.

Credit unions have traditionally been required to run their investment services divisions under a separate CUSO, or Credit Union Service Organization. But the National Credit Union Administration (NCUA), which charters and supervises federal credit unions, recently ruled that a credit union can now either run the program under a CUSO that is a registered broker/dealer, or it can move the program “into the credit union,” Davis says.

Addison Avenue Financial Partners offers a full-service investment option as well as a self-directed online service.

The fee-based managed account program will be the “third leg” of the credit union’s investment division, Davis says. Addison also plans to hire more licensed financial consultants. It now has 17 financial consultants spread throughout its 26 branches, which stretch from Vancouver, Washington, to Puerto Rico. “We added five [consultants] last year and we expect that over the next two years we’ll add another eight advisors,” Davis says, adding that Addison’s financial consultants far outpace other advisors when it comes to production. “Our average consultant generates about $44,000 in gross commissions per month,” he says. “The average in the industry for financial institutions is somewhere around $20,000.”

Moving Toward Fees

Davis says Addison and its financial consultants have been contemplating a move toward a fee-based platform for more than a year. “The consultants have been involved in the development and design of the fee-based products,” he says, which will initially include ETFs, separately managed accounts, and actively managed mutual funds. Providing a fee-based platform like this is necessary to stay competitive, Davis argues. Addison’s 125,000 members have “relationships with wirehouses or regional firms that have these types of products,” he says. “We’re trying to gain a larger share of our members’ wallets by rolling these products out.”

Mark Tibergien, partner-in-charge of the Securities and Insurance niche at Moss Adams (and an Investment Advisor columnist), says more credit unions should follow Addison’s lead in offering broader financial planning services. Credit unions “could truly add value to their members if they offered a more comprehensive financial planning solution,” since most credit unions serve middle America. Considering their saving, borrowing, and investing habits, “financial planning might be even more important than more investment choices” to this demographic, he says.

Those credit unions with a more sophisticated membership base like Addison, would do well to add more investment products like managed accounts, Tibergien says. The trick is doing so while staying true to credit unions’ reputation as low-cost providers. Since they pay no taxes, credit unions can offer members much cheaper rates on loans, investments, and other services than banks. Without providing any numbers, Davis says he’s confident that Addison has “been able to structure our managed accounts program very competitively.”

Unfair Competition?

Banks have complained for years that credit unions’ tax-free status gives them an unfair advantage, particularly since credit unions offer the same types of services as banks. The American Bankers Association (ABA) has prodded Congress for years to revoke credit unions’ tax-free status. Banks also claim that credit unions’ fields of membership aren’t as limited as they used to be. Credit unions can be chartered to serve communities, associations, places of employment, and even religious establishments. Over the years, the NCUA has allowed credit unions to broaden their charters. For instance, a credit union that was set up to serve employees of a particular company could have its charter expanded to include everybody living in a particular county. Davis concedes that credit unions’ membership rolls have been allowed to stretch, but “we are still restricted,” he says. “We don’t have the same marketing opportunities that other financial services firms do. We can’t go out and offer our services to anybody.”

Now that credit unions are starting to get serious about offering financial planning and investment services, independent advisors may want to take notice. Besides regulation, legislation, rising costs, talent shortage, and the graying of the advisor population, “strategic positioning” is one of the “big five future issues” that advisors should be thinking about, Tibergien says. Independent advisors are trying to “stake out the same territory” as banks, wirehouses, regional brokerages, and credit unions. There are so many choices, “it makes it very difficult for consumers to discern the difference” between these financial services entities. “Throw credit unions into the mix, and it further dilutes the offering.” The good news: advisors who have strategically positioned their firms and are offering stellar services will have no problems attracting the right clients.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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