The investment services unit in the typical bank or credit union contributes about 20% of revenue to the institution after operating expenses. Net income contribution margin tends to be lower in broker dealers owned by financial institutions. Kehrer Group found that the average profit margin in bank-based firms that own their own broker dealer was 17%, seven percentage points less than in firms that outsource the broker dealer function. That equates to a 41% gain in profit contribution.
This was one of the findings in a recent Kehrer Group study, Margin Mismatch: Why Financial Institutions Should Stop Managing Investment Services Business on Profit Margin. The study was sponsored by Cetera Investment Services.
When an institution outsources the functions of the broker dealer to a third party, it eliminates some middle and back-office staffing expenses. But is the expense reduction large enough to create such a large difference in profit margins? After all, there are many other potential differences between firms that could create differences in profit contribution. The Kehrer Group study explored several of them.
Institutions that own their own BD tend to be larger, on average, than institutions that outsource brokerage operations, although recently we have seen some large banks outsource. The study found, however, that there is no significant variation in profit margin for the investment services business based upon the amount of retail customer deposit in the institution.
In many businesses, profit margin improves with scale. But scale in the investment services business, as measured by the number of financial advisors working in the institution, is not correlated with wider profit margin.
Nor is profit margin correlated with a firm’s investment assets under administration, although there is some evidence that profit shrinks as AUM grows, but then increases once AUM reaches $50 million.
As part of the Cetera Financial Institutions sponsored study, Kehrer Group analyzed the experience of 196 banks and credit unions from 2019 to 2022, and determined how their profit margins and advisor headcount impacted their total revenue, revenue growth, total profit contribution, and advisor productivity. The study is available for complimentary download here.
About Cetera Investment Services
For nearly 40 years, Cetera Investment Services, part of Cetera Financial Group, has empowered financial institutions to deepen client connections and expand their services with customized support that helps financial professionals meet their clients’ full lifecycle needs. Learn more about Cetera’s resources and support for financial institutions.
About Cetera Financial Group®
Cetera Financial Group (Cetera) is the premier financial advisor Wealth Hub where financial advisors and institutions optimize their control and value creation. Breaking away from a commoditized and homogenous IBD model, Cetera offers financial professionals and institutions the latest solutions, support, and services to grow, scale, or transition with a merger, sale, investment, or succession plan. Cetera proudly serves independent financial advisors, tax professionals, licensed administrators, large enterprises, as well as institutions, such as banks and credit unions, providing an established and repeatable blueprint for scalable growth.
Home to more than 8,000 financial professionals and their teams, Cetera oversees approximately $341 billion in assets under administration and $121 billion in assets under management, as of June 30, 2023. In a recent advisor satisfaction survey of more than 21,000 reviews, Cetera’s Voice of Customer (VoC) program vigorously measures advisor experience and satisfaction 24/7. Currently, it’s ranked 4.8 out of 5 stars.
“Cetera Financial Group” refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), and Cetera Financial Specialists LLC. All firms are FINRA/SIPC members. Located at: 655 W. Broadway, 11th Floor, San Diego, CA 92101.
Individuals affiliated with Cetera firms are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services.