Last week, the Federal Reserve Open Market Committee set a new Federal Funds target rate of 3.50%, lowering the previous rate by 75 basis points. With margins tight, financial institutions may receive some relief from this move. Even so, banks and credit unions are looking to shore up non-interest income.
Retail investment programs can impact non-interest income levels in those institutions that offer the service. By monitoring and measuring overall performance and productivity, program managers can maximize efficiency, increase member value, and help support the fiscal health of the parent credit union. Data from the 2007 Credit Union Retail Investment Services Benchmark Program, compiled by Callahan & Associates and SCS Consulting illustrates key benchmarks for programs to utilize.
For programs to be able to achieve strong financial performance, it is critical that direct, indirect, and/or allocated expenses are closely monitored and managed. How much is enough to spend to accomplish a given goal or objective? For broker-dealer programs the combined direct, indirect, and allocated operating expense categories averaged 27.0% of gross dealer concessions (GDC), while dual employee programs averaged 17.7% of GDC for their combined expenses (not including staff compensation and benefits).
The primary drivers for this variance in operating expenses can be found in the overall business modeling differences between a broker-dealer program versus a non-FINRA licensed dual employee program. Although indirect and allocated expenses averaged 3.4% of GDC, there were allocation models from the parent credit unions that were as much as 25% of GDC and as low as 1% of GDC in dual employee programs..
Credit unions have different expense allocation models for their various products and services from which they measure their overall product profitability and contributions to a credit union’s ROA. To effectively measure the financial performance of an investment services program it is essential to establish credible expense component benchmarks that can be consistently utilized by all credit unions, such as gross income and net income margins.
The level of net income as a percentage of GDC averaged 14.1% for broker-dealer programs, 17.3% for dual employee programs and 8.1% for managed programs. Given that the actual gross program revenue for broker-dealer programs is 100% of GDC, 88.3% of GDC for dual employee programs, and 30.56% of GDC, the actual net income ratios varied considerably.
The key consideration for credit unions, of course, given the increasingly competitive environment and tighter spreads, is to add operational and service support in a fiscally responsible way to ensure that the credit union's key ratios continue to improve. As credit unions continue to evolve their investment services programs, setting and tracking performance benchmarks will be key to moving to the next growth curve for the channel.