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Banks, Credit Unions Lose More Than $8M per Departing Rep: LPL Study

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Banks and credit unions have an advisor retention problem, and it’s costing them big time, according to a new study.

In the study, sponsored by LPL Financial, research conducted by the Kehrer Bielan consulting group finds that most banks, credit unions and other financial institutions have far fewer advisors than they need to bring in investor assets. Plus, institutions in this advisor channel are “falling further and further behind.”

However, it’s retention that appears even more vital, according to the authors of the study: “Many firms report losing an advisor for every one they recruit,” write authors Kenneth and Tim Kehrer.

Departing reps take with them potential revenue, which means banks and credit unions lose from $9 million to $12 million per lost advisor over time, the consultants explain.

“Over a 20-year career, an average advisor can be expected to produce $12 million in revenue. So when an advisor with five years of tenure — the average tenure of regretted attrition — joins another firm, the advisor is taking $10.8 million in future production away from the previous firm. Regretted attrition of an advisor with eight years of tenure — the average in bank broker/dealers — costs the firm $9.2 million in future revenue,” the Kehrers stated.

Converting this revenue stream into a present value, the future lost production of the typical advisor costs a bank or credit union $8.1 million today. “Doesn’t it make sense to spend some of that money to keep the advisors, before it walks out the door with them?” the report authors asked.

And how bad is attrition in the institutional advisor channel?

“The average firm in our survey [of 36 banks and credit unions] lost 11.2% of its advisors during the previous year, but the average advisor attrition rate” — the number of advisors who left the 36 firms during the year divided by the number of advisors in place at the start of the year in those firms — was 20.4%.

Banks with over 100 advisors lost more than 25% of their advisors in 2015 vs. less than 10% at smaller institutions, the study finds.

Furthermore, bank-owned broker-dealers may be experiencing even higher rates of advisor attrition. This is because their advisors are “particularly appealing to outside firms looking for new recruits,” according to the Kehrers.

Production Problem

“Compared to advisors in smaller firms, those in bank-owned broker-dealers have average annual production that is 59% higher, with substantially larger books of business that are weighted more heavily towards advisory business,” the Kehrers explained.

The average yearly level of fees and commissions (or production) at bank-owned BDs was close to $415,900 last year vs. about $262,000 at smaller firms.

Advisory revenue accounts for an average of over 40% of total revenue at bank BDs, while it represents less than 20% of total revenue for smaller firms. “These factors make the advisors that work in larger banks more likely to be targeted by competitor firms for recruitment. Management at these larger banks may feel like a victim of their own success,” the authors wrote.

Though they lose a large number of reps each year, the large banks are able to “add just as many, maintaining overall headcount” at their BDs, according to the report; however, about 25% of their advisors turn over every year, “which comes at a significant cost to the firm.”

Smaller banks and credit unions bring on relatively fewer new advisors each year and lose much fewer to attrition than their larger rivals. “As a result, the average institution partnering with a third-party broker-dealer is able to grow its advisor sales force year over year,” the Kehrers said.

Their conclusion?

“The impact of advisor attrition is so large as to warrant as much managerial attention as advisor recruiting,” the consultants explained.

“After all, if the average firm that grew its advisor headcount by 1.5% last year could cut its regretted attrition in half, it would nearly triple its year-over-year advisor headcount growth rate (to 4.2%), just by recruiting the same number of new advisors,’ the authors added.

If the same firm wanted to grow its headcount at that pace and also lower attrition, it would have to boost recruitment by 20%.

“Retaining advisors is key to growing the franchise in an environment where recruiting is so challenging,” they said. “The impact of the revolving door of losing as many advisors as a firm recruits [is] a substantial negative impact on revenue.”

(Banks and credit unions that participated in the Kehrer Bielan survey include BMO Harris Financial Advisors, Capital One Investing, Credit Union Financial Network, Navy Federal Financial Group,  Santander Investments, South State Bank and United Federal Credit Union.)

— Check out Lost Opportunities to Engage Employees on ThinkAdvisor.