Community banks are no longer the only financial firms looking to outsource broker-dealer services, as more midsize banks are considering vendors.
Midsize banks are vetting such services for different reasons than those of small banks, which have been intent on mining for revenue. For bigger banks, the rationale centers on cutting operations and compliance costs.
The number of firms has fallen by 13% since 2007, according to October data from the
Expense control is a big factor.
"We looked at the time and capital it would take" to build a broker-dealer unit compared to outsourcing, says
Regions was looking to expand its investment services operations after selling its broker-dealer,
Like Regions, a growing number of midsize banks are seeking out vendors to obtain the scale in information technology and compliance to support hiring more advisors. That could mean more competition, particularly for the community banks that are already outsourcing those functions.
A bank's "IT staff has other demands on their time and resources," says
Zions signed with PrimeVest in June to support the
Banks with existing programs are looking at "how to mitigate the risk and are engaging third-party providers as opposed to carrying that in a Camels rating," Bonneau says.
Outsourcing trend has long been en vogue among community banks, many of which found it impossible to develop fee-generating businesses in-house. While heightened regulation on investment services is increasing a reliance on outsourcing, leaders at community banks say they are concerned that such a shift will lead regulators to focus even more on the ins and outs of vendor relationships.
Outsourcing will keep rising "because people won't have the institutional knowledge to comply" with added regulation, says
Regulators have been cautioning banks about third-party relationships. Representatives from the
"Outsourcing arrangement make a lot of sense but the bank should be mindful that there's rising regulatory scrutiny of it," says
PrimeVest has witnessed firsthand that regulators are scrutinizing their relationships, leading potential clients to spend three to six months to vet potential vendors, Bonneau says.
PrimeVest, which will be rebranded as Cetera Financial Institutions next month, has become more selective about its clients. The company has been weeding out the banks that signed on in an effort to find quick-hit fee income to pad lackluster earnings.
"It does not warrant the exposure of risk of maintaining a program that is totally reactive," Bonneau says. Still, she says that increased regulatory scrutiny has helped both clients and vendors become more prepared.
"Because we service so many different financial institutions from so many different regions of the country, we get a very good cross section of what the regulatory landscape is at any point in time," Bonneau says. PrimeVest treats requests from individual clients as though each could become a broader petition from more clients, she says.
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