Help Members Navigate Investment Waters

Revenue from member investment programs helps CUs counteract lower interest income.

July 24, 2012

Hendrix Niemann is well-versed on consumers’ investment concerns these days. The managing director of practice and wealth management at CUNA Brokerage Services has spoken at 130 credit union member events during the past few years, visiting 34 of the 50 states.

“The emotional tone of the questions I’m asked has changed over the past four years,” he says. “In 2008, people were flat-out mad, asking what happened and who caused this mess: ‘Who do we blame?’

“Now it’s less emotional,” he continues, “and more, ‘What can we do?’ I don’t see much optimism in terms of what consumers expect—it’s more like resignation.”

The challenge for investors, Niemann says, is how to live for 30 years or more as retirees and also to address two great concerns: health-care risk and longevity risk. “What I tell members at these events is ‘get real.’ Get real about interest rates and investment returns, and about when they’ll be able to retire, their spending, and their capacity for risk.

“I tell members this is the most challenging investment environment of their lives, and there’s no place to hide,” he adds. “If they want a 4% or 5% return, they must accept some level of risk.”

That’s where credit unions can enter the picture, he says, by helping members navigate the sometimes treacherous investment waters.

Niemann believes members need credit unions’ help now more than ever. “They’re leery of big banks and investment houses, and they trust you. They crave sound advice and look to you for it.”

During tumultuous times, most people avoid risky waters and place their investment dollars in safe havens such as financial institutions and government bonds, says Kelly Tramontano, president/CEO of SWBC Investment Services. “These are what I call ‘safety investments.’ The result is a net outflow from equity investments to fixed-income assets.”

Valorie Seyfert, president of CUSO Financial Services, agrees that “in times like these, people aren’t inclined to take risk. I call it ‘flight to safety,’ where people look to more conservative investments. Two years ago we saw a lot of money going into certificates of deposit and fixed-rate annuities.”

But since interest rates have declined and stayed low, many people are moving back into the market and are willing to take some risk, she says. “Money is now flowing toward variable annuities, variable life, and stocks as the market over the past few months has had more good days than not.”

Tramontano believes that as consumer confidence rises and money naturally flows back to equity investments, credit unions should help members with the

“It’s part of a cycle,” she says. “Right now, the two main factors keeping consumer confidence low are unemployment and the poor housing market. On the positive side, people are saving more and paying down their debt, and company earnings are improving.”

All of this sets the stage for credit unions to help members to start taking rational risks.

Boost member retention

The driving force of markets tends to be emotion, Seyfert says. “That’s where financial advisers come in—people who can take a more rational and objective approach to investments.”

Tramontano says offering member investment services makes a great deal of sense, especially as credit unions’ lending declines or remains flat. “The purpose of a member investment program isn’t to convert credit union assets to investments but to give members a needed service—even if it involves helping them manage an outside asset.”

This willingness to help leads to member retention, she says, and thwarts attempts by outside financial institutions to get members to shift their accounts from the credit union.

Tramontano says the aim is to create an asset allocation program that fits members’ needs, goals, and risk tolerance. “Such a portfolio will always have a performing asset regardless of what point we are in the investment/consumer confidence cycle.”

And while it’s doubtful there will be another Great Recession during the next few years, “it is almost inevitable that retirees expecting to live another 30 years will see another recession,” Niemann says.

NEXT: Three main concerns

Three main concerns

Of course, offering investment services doesn’t come without risk. Seyfert cites three main concerns credit unions have:

1. Reputation.This is the result of bad press about investment services in general. “Credit unions should find a strong partner with a strong compliance department,” she says.

2. Financial. Will the credit union make money?

3. Disintermediation, where a credit union loses member assets to the investment program. This concern isn’t as prevalent now as in the past, she says.

“These days credit unions see member investment services as a way to manage their balance sheets—they can ‘divest’ excess deposits to balance their capital ratios, increase member satisfaction and retention, and enjoy a stream of noninterest income.”

Investment services providers lend their expertise in similar ways. CUSO Financial Services, for example, recruits licensed representatives/advisers and contracts with credit unions to provide or run a member investment services program.

Tramontano says that because the industry’s preferred approach to offering member investment services is face-to-face, SWBC offers two models: an onsite adviser who’s both a credit union employee and who works with SWBC on a contract basis, or an SWBC employee who works with credit union staff.

Credit unions generally make money on investment services from revenue sharing. “A turnkey solution where we do all the work creates a minimal return for a credit union,” says Tramontano. “If a credit union takes on more responsibilities, it gets more revenue.”

First Commonwealth Federal Credit Union, for instance, earned nearly $279,000 in net income on its member investment and insurance program from CUNA Brokerage Services, says Alan Musselman, chief financial officer for the $508 million asset credit union in Bethlehem, Pa. That’s up from $231,000 in 2010—a 21% increase.

Some credit unions are unrealistic about returns they’ll receive from a member investment program, Tramontano says. “If you focus too much on the payout and not enough on necessary roles and activities that an investment services program requires, the payout amount may be disappointing. A high rate doesn’t mean a high return unless you put the work in.”

She also cautions against focusing mostly on high-net-worth individuals. “Our belief is that everybody can be an investor and needs assistance. Middle-income people are a vast, underserved investment market.”

Marketing is another key consideration, Seyfert says. “Credit unions must constantly spread the message to all members—not just those who have the wealth to be active investors—that investment services and expert advice are available. Investment services should be—along with checking and savings accounts and consumer and business loans—a core credit union product offering.”


► CUNA Brokerage Services
► CUSO Financial Services
► SWBC Investment Services