Senior relationship manager,
Cater Allen Bank
Money Marketing's series on Surviving Stakeholder has, in the past 12
months or so, given IFAs many good ideas on marketing techniques and ways
of diversifying their business. Here is another – using banking services as
a financial planning tool.
The number of IFAs recommending bank accounts proactively to their clients
has increased substantially in the past few years and many have integrated
banking into their fact-finding process. However, for many IFAs,
recommending banking services is still not accepted as general practice.
There are a number of compelling arguments for IFAs getting more closely
involved in analysing their clients' banking arrangements. Among these are:
Protecting your client base from cross-selling -ringfencing.
Enhanced range of client services.
Identification of further sales opportunities.
As we move into the 1 per cent commission environment, the income
generated from banking services becomes invaluable and, for most IFAs,
maximising available income streams is essentialto their long-term future.
Certain banks and building societies will pay monthly or quarterly
commission on balances introduced at rates of between 0.0625 per cent and
0.5 per cent a year.
Ongoing commission from clients' banking balances can be a tremendous
source of added income to cover regular overheads and to even out months
where commission on investment or insurance products could be down.
For many IFAs, the bancassurers represent an increasingly competitive
threat to their relationships with clients. At a time when retaining
existing clients is vital, bancassurers work hard to offer as many services
as they can through branch networks, internet and mailshot programmes, so
it is important that IFAs explore the options available in protecting
clients from being poached by competitors.
It must be to the advantage of every IFA to know their clients bank with
an institution which respects the relationship between adviser and client
and one which gives an undertaking not to sell insurance and investment
products to IFA clients.
There are a small number of banks which will give such a “no cross-selling
guarantee” and every adviser should make it their business to know who
these are, since it gives them the opportunity to take positive steps
towards protecting their business from the competition.
Enhanced range of services
Recommending clients to deposit their cash with an IFA-friendly bank
pending their investment recommendations has many advantages.
It generates commission for IFAs, reduces the risk of crossselling from
bancassurers and gives peace of mind during the recommendation process.
It also increases IFA control of clients cash deposits, enhances client
loyalty and provides an opportunity for corporate branded literature from
Identifying further sales opportunities
During the last few months, many IFAs will have been working closely with
new and existing corporate clients. These discussions have no doubt
involved the subject of stakeholder and the implications for the company.
Although currently there is no obligation for employer contributions to a
stakeholder scheme, it may be that some businesses would like to contribute
if they could afford it. But how often does a client say they cannot
afford to fund this pension or pay for this life cover? Would it help by
asking: If I could show you a way of generating income to pay for your
pension (or stakeholder) contribution, would you be interested? I am sure
many business clients would say yes and I am sure many IFAs already ask
questions in a similar manner. But how do IFAs generate this income? Let us
look at a case study involving an IFA who provided a banking audit service
to his business clients.
Company X, an air conditioning company, has a debit turnover of £8.3m
a year. It has a current bank account with a high-street bank which charges
0.2 per cent a year on turnover and the company also has a business reserve
account with a balance of £300,000 paying 4.3 per cent a year.
The net position of the business comprises bank charges on turnover of
£16,600, interest on the reserve account of £12,900 and a net
charge of £3,700.
It opens an account such as a Cater Allen cash management account and
transfers its business reserve balance of £300,000 and, as a result,
is able to take advantage of free banking and redirect all high-value
transactions, reducing its high-street bank turnover to £1.9m and
swelling the average balance on its reserve account to £500,000. At
the time, the rate on the cash management account was 7 per cent.
So, the company's new position means its bank charges are £3,800, the
interest on the cash management account is £35,000 and the net gain to
business is £31,200.
Immediately, there is a saving from a reduction in bank charges
added to significant additional earned interest for this client.
Notice how it has not been necessary to remove the cli-ent's existing bank
connection completely. The use of alternative banking services has complemented their existing arrangement and presented a sizeable injection of capi
tal into the business.
Of course, this is not the end of the matter. From an IFA's perspective,
an additional £34,900 has become available for pension provision,
investment, protection, etc.
If we now take this example a little further, let us assume that the
business is happy for £17,500 to be used for financial planning while
the remainder is ploughed back into the firm. What uses could you suggest
for this £17,500 of capital? Remember that this £17,500 will be
an annual saving, not just a one-off.
An interesting exercise would be for IFAs to look at the commission
generated from some typical portfolio planning based around this
£17,500 of capital generated.
Assume the owner of the business has 15 years to retirement and it is
recommended that he invests part of this capital in a pension.
In this case, £10,000 invested in a pension is equal to a
contribution of £16,667 for a higher-rate taxpayer. Over 15 years,
this translates into a pension fund of £412,000 at 7 per cent return,
equivalent to £34,000 of level pension.
Initial and renewal commission for the adviser over the 15-year period
Do not forget the commission payable for recommending alternative banking
services in the first place. On an average balance of £500,000,
commission of up to £2,500 a year would be due to the IFA.
This commission is ongoing for the life of the bank account and
illustrates the huge benefits available from adopting the discipline of
providing banking audits and recommending banking services to your clients.
Over this same 15-year period, the bank account would generate £37,500
in commission based on an average balance of £500,000.
If I had asked readers at the start which of these products would generate
most commission, the pension, the protection or the bank account, which
would they have chosen? It is surprising to many IFAs that banking can play
such an important part in building income streams.
Banking can also be particularly powerful for advisers who operate on a
fee basis or who would like to move more clients over to fees. The added
value provided by offering a banking audit and recommending banking
services adds to the product offering and the fee charged to clients.