Monday, June 27, 2005

Zions' Bold New Mission: The bank puts its reps on salary, offers products with lower fees, and launches aggressive online services.

Bank Investment Consultant - June 2005 v13 i6 p26

By Stock, Howard J.

At the beginning of this year, Zions Bancorp adopted a strategy that may send shivers down the spines of the industry's commissioned brokers-the successful ones, at least: The bank dropped commissions for its financial consultants in favor of a salary-plus-bonus combination.

But for executives in the bank's boardroom, the move made perfect sense. Regulators have long complained that complicated commission structures can make some products more lucrative for brokers to sell than others. Legislators fear that this puts clients at risk, so they're targeting financial institutions that have failed to police their commissioned salespeople. This is leading to costly settlements and fines for errant financial services firms-and worse, it's causing consumers to question their brokers' motives.

Anticipating such problems, Salt lake City-based Zions switched its brokers to salaries based on past production combined with a quarterly bonus. It also has shifted its product offerings and launched an aggressive new online initiative.

"Basically, we wanted to make sure that we had the controls in place so clients were sold the right products," says James Cooper, the bank's chief operating officer. "We figured this was one step to ensure this happens. A lot of the problems the industry is facing are related to suitability, and commissions can be a factor in advisers selling one product over another."

Cooper concedes that the move has not been popular, initially at least, with many of the bank's commission-based brokers. More than 10 brokers left, reducing the number of advisers in Zions' brokerage operation to around 30. "At first it was hard, but now the financial consultants are starting to understand our goals," Cooper says. "Taking our consultants from commission to salary-plus-bonus is new to the industry as a whole, and it took some by surprise."

The bank's new financial planning platform will help make fee accounts a reality. "We're trying to move toward financial planning," says David Hemingway, the bank's executive vice president and senior investment officer. "Customers are much better off with fees. They could pay 250 basis points for a variable annuity, or 90 basis points for the S&P 500 index. For a $100,000 account, that's the difference between paying $2,500 or $90 per year. We don't want conflicts-we want people in branches to get the best advice possible."

Currently, only about 7.5% of the bank's brokerage business is in fee-based accounts, but Cooper says he expects that share to grow as the bank begins to shift its biggest accounts toward financial planning. "We're working with the branches more closely to get them more focused on high-net-worth opportunities," he says. Brokerage accounts, including annuities and mutual funds, amount to over $2 billion in assets under management.

The bank is also positioning more-efficient, lower-cost products for all of its clients, according to Hemingway: "Most of them don't do a lot of trading and they tend to be conservative in their outlook." Zions has dropped variable annuities and (except for specific situations) fixed annuities, shifting instead to products with lower fees. It has adopted Vanguard funds, which are known for low management fees, as its preferred mutual fund provider, will soon introduce exchange-traded funds, and will continue its long-standing focus on bonds.

Moving THE MASSES Online

The bank has also launched a new Web site to handle less-lucrative accounts and self-directed investors. Following the example of many wirehouse giants, Zions has moved its smaller clients either online or to a call center, freeing up its full-service reps to work solely with clients who have assets of $50,000 and up.

"The concept is that the larger accounts stay with reps in our branches," Hemingway says. "Our wealth management arm attracts a different type of rep-an investment adviser, not a broker. Merrill Lynch drew the line at $100,000 and transferred anything less than that to a call center, focusing on people who can afford to pay for advice. So this model requires fewer reps in the branch system." With fewer customers qualifying for face time, the bank doesn't actually need as many financial consultants as it once had.

The move makes financial sense. Eighty percent of the bank's accounts make up only 17% of its assets, says Hemingway. "This is an efficient program to maintain relationships from an economic standpoint; it would be more difficult to attain profitability if lower-net-worth investors all had face time with financial consultants," says David Warne, vice president and manager of Zions Direct, the bank's revamped online trading platform.

"Before, financial consultants were opening accounts for as little as $2,000, and spending too much time with smaller clients. Now, they can refer them to us," Warne says. "We have a pretty good relationship with our financial consultants. I'm in direct daily contact with them, and we've received both support and referrals from them."

So far, clients who have shifted to the Web site and call center have been pleased. "We called individually the 80% who moved to Zions Direct and explained the benefits, particularly lower commissions, and we got a very good response," Hemingway says. "Due to the sizes of their accounts, they didn't get much coverage anyway, so they're probably getting more now from the call center."

A search tool on the Web site enables clients to sort through the universe of available mutual funds using their own criteria, such as performance, investment objective, expense ratio, and load type. Self-directed investors tend to search for no-load funds, of which Warne estimates there are 1,000 on the shelf. "Self-directed investors don't normally buy load funds, so we charge $17.95 per transaction," he explains. "The fee for load funds is dictated by the mutual fund company." Fees for customers dealing with reps at the call center are a little higher, but they are still lower than the bank would charge if the customers dealt directly with branch-based brokers.


The Web site also makes sense for affluent, buy-and-hold investors shopping for bonds. After the site was revamped last October, its "Bonds for Less" program officially launched in January. It offers an inventory of 10,000 bonds at $10.95 per transaction, no matter how many bonds clients buy, Warne says. "Traditionally, these have only been available to institutional investors," he adds. "Now they're available to individuals, which is quite compelling."

With the bond service in particular, the bank is successfully attracting investors even from outside its footprint at an average account size of $100,000, who will hopefully become clients. "We built a $2 million bond ladder through Zions Direct for one client who has subsequently brought in a $78 million relationship," Warne says.

The site doesn't require a password for those wishing to browse, which Warne says makes it more likely to attract visitors. Zions also made it easier for customers to open accounts online and to transfer funds from competing institutions. While the site offers a full range of investment products, bonds are its core competency.

"We're interested in bringing in new clients' bond portfolios and cash balances," Warne says. "The money we make off this is in deposit dollars-not in the transaction but on the balances. The transaction is a loss leader-the more relationships our clients have, the more likely it is that they will continue to do business with us. Plus, Internet-banking clients are the most profitable, and we're now able to serve new folks with outside accounts by allowing them to self-direct, which is a market we haven't exploited in the past."

Since this activity has a tendency to translate into more business down the line, Zions is pushing its Web presence pretty hard. Its online advertising budget is $100,000 per month, and its goal is to double assets under management within a year. It primarily advertises on two Web sites-Google and BankRate-and also uses Overture's search marketing services. "We bought key words on Google associated with fixed income," he says. "We've had a pretty good success rate already."

Clients below the $50,000 threshold who lack access to the Internet-or simply prefer dealing with a human being-use Zions' call center, which is manned by 15 Series 7 and insurance-licensed reps, who, like the reps in branches, are salaried. The call center also acts as a referral source for higher-net-worth business. It supports trading, backup, and compliance for the financial consultants in branches who are therefore in frequent contact with the call center as well. Plus, using a combination of Web site and call center enables the bank's brokerage operation to reach customers located too far from Zions' home cities to fall into its reps' territories.

"We don't have consultants at every branch-we have around 30 FCs across our 400-branch footprint, so it's a matter of coverage," Warne says. "So Zions Direct provides a brokerage alternative to branches in our network. They can call the 800 number, or if they're better suited to work with a consultant, we can direct them there. But it has opened up brokerage opportunities in rural areas where we don't have brokerage coverage."

Of course, clients transitioned to Zions Direct can elect to return to full-service brokerage when their assets reach an appropriate level. In fact, the system is engineered to alert Zions when a client crosses the threshold. "While we segment our clients, it needs to be fluid," Warne says. "A $50,000 client may start with $25,000, and then our referral program transitions them. Referrals are key to the bank-brokerage market. Financial consultants then ascertain whether the client needs them, or whether the client would be better served online." Branch personnel who refer business to either Zions Direct or the full-service brokerage receive a nominal one-time payment of $25.


Zions Bancorp's strongest operations are in Utah, Idaho, and California, but the company also operates several locally managed banking subsidiaries across its footprint, which extends to Arizona, Colorado, Nevada, New Mexico, and Washington.

Zions Bancorp generated 38% of its total $1.59 billion in 2004 revenues in its home states of Utah and Idaho via Zions First National Bank; another 31% comes from its California Bank and Trust subsidiary. Zions' other banking subsidiaries include National Bank of Arizona, Nevada State Bank, The Commerce Bank of Washington, and Vectra Bank Colorado.

Zions intends to roll out a training program throughout its footprint to get all of its brokers up to speed with their new role as salaried financial planners, Cooper says. "We're training our financial consultants right now, working with Pershing. We sell Lockwood products on an RIA platform, and then there's a fee-based platform called Gold Advisor, so we're making sure our reps and their clients fully understand their options. We're also putting together seminars for outlying cities to explain what we're doing."

While it's too early to say whether this strategy will pay off for the bank's reps, its switch to low-fee financial planning is sure to be a hit with customers. Positive feedback is already coming in from Web-site and call-center clients and the bank is also attracting big bond business from outside its geographical footprint. Time will tell whether this will represent a major new step for bank brokerages in general. But in an increasingly regulated environment, the switch to salaried reps and fee-based business certainly makes sense now.

(c) 2005 Bank Investment Consultant and SourceMedia, Inc. All Rights Reserved.


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