Wealth Management for Credit Unions: What it Is & What it Could Be

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While wealth management is not often the prime topic of conversation among credit unions, it is one that warrants attention. While many credit unions are focused on attracting new members with the best rates and newest mobile banking experiences, they are missing out on an element of their business that needs the same digital update – investing.

The Boston Consulting Group estimated there is $74.3 trillion of global assets under management. While more than half of these managed assets belong to institutional investors like banks or funds, the remainder belongs to smaller organizations or individuals. Just from individuals alone, there are trillions of dollars being invested each year.

Unfortunately for credit unions, the vast majority of these trillions of dollars are not being invested through the institution. Rather, they are being managed by outside wealth management firms and, increasingly, by wealth management apps.

The Current State of Wealth Management

It makes sense that many individuals would opt to invest through wealth management firms or fintech apps. They make it easy to start investing funds and take care of so much of the hard work for you.

Big banks are also forging ahead in this area of automated investment management, hoping to bring customers back from these outside competitors. However, most credit unions have chosen to stick with the wealth management status quo – not because they have no desire to innovate, but because, when it comes to investing, many feel there is no helpful or profitable alternative.

Most community financial institutions, like credit unions, have wealth management programs run by third party broker-dealers. Working with a partner like this is the most cost-effective and compliant approach for the credit union. However, these relationships do come with limitations.

First of all, these wealth managers often come with high minimums to begin investing. A member might have to have upwards of $10,000, $20,000 or $50,000 to get started. Each manager, of course, must ensure that the relationship will be profitable and worth their time, but this often leaves many members out of one of the best ways to build long-term wealth. Some individuals might want to start exploring the world of investments but only have a few hundred or thousand dollars available to start with. Not meeting the high minimums that the credit union’s wealth management partner requires, the member is forced to go elsewhere.

Even if the member does have the right amount to get started, an advisor can only handle so many relationships at a time. Members are also at the mercy of the advisor’s workload and availability. This brings the risk of advisors getting overwhelmed and overcommitted, which might lead to some members with smaller accounts not getting the same level of attention as others with more profitable or high-touch relationships.

Looking at it from this perspective, it might seem like this wealth management model is holding credit unions back. While this approach is much easier and more cost effective than having in-house staff devoted to investing, there are other alternatives that could help credit unions broaden their investment horizons and better serve a diverse range of members.

The Future of Investing

While bringing on in-house staff is not the most efficient solution, that does not mean that credit unions cannot offer their own investment advisor. The answer lies in a robo-advisor – an automated investment manager that allows the credit union to handle all types of investments in all sizes.

A robo-advisor works through the credit union’s online and mobile banking platforms, making it easy for the member to manage all their accounts in one place. It starts by asking a few questions to learn about the member’s goals and risk tolerance, then puts together a portfolio that matches them best. The robo-advisor then continues to work on the member’s behalf, managing investments so the member does not have to.

By automating a historically manual process, robo-advisors make wealth management much more cost effective for the credit union, allowing more members to invest with lower minimums. This opens up a whole new opportunity for members who have traditionally been left out of investing because of the high barrier of entry with which it is often associated.

For the credit union, this means they are not limited in who they can serve or how many they can serve. Expanding wealth management in this way creates a significant opportunity to strengthen existing relationships or even attract new ones.

Competitive & Complementary Advantages

Attracting and retaining new members is paramount for credit unions, especially for those belonging to younger generations. The average age of many credit union members is getting older and many credit unions are working on their strategy to attract the next generation that will keep the credit union alive.

The key with these younger generations is to wire them in. So many millennials or Gen Zers may start out at a credit union, only to find they do not have access to all the tools they need, and ultimately move on to a big bank or challenger bank that has the right digital features. By offering a robo-advisor, credit unions have another digital tool in their arsenal that will help keep younger generations, along with their deposits and assets, at the credit union for years to come.

While robo-advisors help credit unions compete, it is also important to note that this solution does not have to be competitive in all areas. Robo-advisors do not have to completely replace existing broker-dealer partnerships, but instead can complement them. Having a robo-advisor helps lift some of the burden placed on these wealth management advisors. The automation and the advisor can share the workload and create an environment in which all parties are set up for success.

A robo-advisor is also a tremendous opportunity to create leads for the broker-dealer program. For example, a member may start out with a robo-advisor, investing a small amount of money. Over time, that amount grows and may become large enough to begin a relationship with the broker-dealer. Instead of leaving these members out altogether, a robo-advisor helps them get started and steadily work up to a broker-dealer relationship.

While it is easy to focus on the same few areas to keep innovating, credit unions need to step outside the box and focus on an area that has long needed a digital update. By offering a robo-advisor, credit unions can compete with the third parties that have been taking members and assets away from the institution. With a solution that is complementary to their existing wealth management programs, robo-advisors create a win-win for the member and the credit union – and it is time for credit unions to start winning.

Mark Allen

Mark Allen is SVP of New Ventures at Access Softek, a digital banking platform provider based in Berkeley, Calif.