Not long ago, executives at PNC Financial Services gave a heads-up to the bank's advertising firm, Deutsch: Start brainstorming for a new campaign that focuses on investment services. Those advertising gurus have their work cut out for them: PNC's investment arm, which has long been considered a respectable but unspectacular regional player, is undergoing dramatic change and expects dramatic results. "We're taking our investment business to the next level," says Mike Mortensen, president of PNC Investments, the bank's brokerage arm.
That's not just talk. PNC has committed tens of millions of dollars for two years' worth of initiatives, including a new call center, advisor training and hiring, and a self-directed web service. And there will be more investment after that, says Mortensen. The Pittsburgh-based bank anticipates that its investment will spur a jump from $250 million in annual revenue to $1 billion within 10 years or less.
"The commitment to the investing business at PNC is significant," says Mortensen. "It's really important to the future of the company, and we couldn't be more excited about it."
Moving PNC to the next level will be challenging, especially when it comes to making its investment business more visible. After all, "PNC Investments" doesn't have the ring of "Merrill Lynch." It faces a further challenge in making sure that brokerage-trust turf wars don't undermine its growth as it adds many more advisors, and puts the finishing touches on a massive clearing platform consolidation.
But the bank has already distinguished itself. Because banks are making fewer loans, and because regulatory reform is forcing them to limit fees on things like debit cards and checking accounts, they are under pressure to produce new revenue sources. As a result, many are leaning on their investment divisions to produce more income. Few, however, are actually making the kind of investment that's necessary to get results, says Ken Kehrer, director of research firm Kehrer-LIMRA. "Lots of banks are talking that talk," he says, "but PNC is really walking it."
Mortensen brushes away suggestions that PNC may be positioning itself to challenge bank-brokerage heavyweights such as Wells Fargo and Bank of America's Merrill Lynch. "We just want to do a better job than all of them," he says with a chuckle.
And while PNC is planning on significant expansion of its advisor corps, its troops will remain vastly outnumbered by its larger rivals. Wells Fargo and Merrill Lynch, each of which touts 15,000-plus advisors, are each about 20 times bigger than PNC's 750 advisory unit. PNC's plans call for growing its broker headcount to 1,400 within a few years—closer to one-tenth the size of its biggest rivals.
Yet PNC's operation, as measured by sales of two brokerage staples—mutual funds and annuities—is already growing larger in the rearview mirrors of the big operations. Halfway through 2010, it ranked fifth among banks, with $120 million of mutual fund and annuity income, according to data compiled by Michael White Associates (MWA), in Radnor, Pa. (The leader of the pack was Wells Fargo, with nearly $2.4 billion.) That's up from seventh place at year-end 2009: Powered by the acquisition of National City Bank, PNC has leapfrogged U.S. Bancorp and Citigroup, according to MWA's data.
PNC's forward leap was catalyzed by the financial crisis. The bank had relatively little subprime loan exposure, which meant it weathered the storm in strong enough shape to acquire National City. That deal came about in part because of an inducement by the federal government: The bank got a $7.7 billion capital investment from the Treasury Dept. to help it buy the troubled bank.
The acquisition brought with it National City's substantial retail brokerage business, including 150 financial advisors to augment PNC's 400 advisors, and 900 licensed bankers to go with PNC's 400 platform reps.
At the same time, the crisis strained the reputations of many PNC rivals. "We feel like a lot of our competitors have been damaged," says Mortensen. "And we believe we've got a trusted brand that we can leverage to make hay in the investment and retirement space."
Mortensen says he and his team reached that conclusion at the same time as the bank's top executives: He had to do very little persuading. While the financial crisis provided impetus, PNC Investments, which has a client sweet spot of $100,000 to $5 million, had already been evolving before 2008. The program started laying the groundwork to become a stronger business three years ago, with a shift away from a transaction focus and toward advice.
That involved putting SunGard planning stations on all advisors' desktops, and putting coaches in the field to help brokers shift to advice. It included arranging training and back-office help with tasks such as preparing financial plans and a new requirement that all advisors are fully licensed.
As part of the transformation, PNC's advisors have moved much of their assets to managed accounts and mutual fund wrap products. The result is that 30% of PNC Investments' revenue now comes in the form of recurring fee income, up from 2% four years ago.
Now For the Hard Part
Of course, many banks have had success shifting to a fee-for-advice model. Quadrupling revenues is another matter. But Mortensen has plenty of help. In addition to outside consultants, whom he declines to identify, Frank Dilenschneider, head of the bank's project management office, is a key partner. And the heads of PNC's retail bank and its marketing, technology and wealth management businesses are all contributing ideas and manpower.
The key to boosting PNC Investment's revenues is winning more business from customers of the bank, says Mortensen. There is plenty of opportunity to do that: Since the acquisition of National City, only 8% of PNC's bank customers are investment clients as well. Mortensen wants at least 50% of PNC's customer base to consider PNC Investments the place to go for retirement and investment advice. Winning just half of that group as clients would be enough to triple revenue, he says.
That's easier said than done, of course. Winning 20% to 25% of PNC's customer base will require something even more basic than a strong investment business. "We still have to build awareness that we are even in this business," Mortensen says.
That's where the advertising push comes in. While PNC has earmarked "a hunk of money" for the effort, the plan is in its infancy and details are few. But Mortensen indicates that the strategy is to "really make an effort to extend the PNC brand to include investments and retirement." The marketing campaign is slated for 2012.
PNC's marketing plan is viewed with skepticism by Robert Ellis, principal of Fast Track Advisors, a consulting firm based in upstate New York. To increase penetration, a bank like PNC has to overcome several prejudices on the part of its wealthy clients, he says. A big one is that there's no way a bank can be a great bank as well as a great wealth manager: Many will prefer a firm that specializes in wealth management, says Ellis. "They start with a prejudice against your capabilities on day one."
The quality of in-bank referrals will be pivotal in getting customers to take PNC seriously as a wealth manager, adds Sophie Schmitt, senior analyst at Aite Group in Boston. "Too many people have gone into bank branches and gotten blank stares after asking for investment solutions," she says.
One exception is small-business customers, who tend to be more open to deeper relationships with their banks, she says. This could be one of PNC's big challenges. Mortensen acknowledges that PNC hasn't focused as much as it could on referrals from the business bankers, but he calls it a "longer-term objective."
Another stumbling block t may be the "hunter-killer" approach that can result when brokerage and trust businesses are siloed, as they are at PNC, Whoever gets to a client first serves the client, whether or not it's the right department. The mismatches that result can cost an institution the confidence of its customers, Ellis says. "In the banking world, you need to have control over every aspect of the wealth management segmentation model. Otherwise you get [brokerage and trust] competing against each other."
Mortensen retorts that competition between the two groups is minimal. "We have great synergies with the wealth management folks," he says. PNC's advisors serve clients in the branches, and call in wealth management counterparts for services they can't provide, such as discretionary asset management. The advisor and wealth manager get paid separately for the respective services they provide. When brokers refer clients to trust and don't remain in the relationship, the first year's fees are credited to the brokers' compensation grids.
Brokerage Boot Camp
PNC will need lots of bodies to handle all of its new business, of course. Within the next few years, it intends to nearly double its corps of 750 advisors, to 1,400, independent of any acquisitions. That would mean about one advisor for every two of PNC's 2,500 branches.
PNC has already hired more than 200 advisors since late 2008 in an effort to staff up National City's program, which relied more on licensed bankers than does PNC. None of National City's licensed platform staff have been eliminated, says Mortensen.
PNC is hiring some new advisors away from rivals. But last April, it launched an academy to train promising advisor candidates in-house. The initiative stands out at a time when many big firms have cut back on their training amid cost pressures. "God bless 'em for doing it, because all the wirehouses have shut down their training," says Ellis. "I admire them doing this because it's not something that develops an immediate return."
Mortensen believes that it's hard to find good reps to accommodate the demand for advice, especially as baby boomers look to retire. Luring proven talent away from rival companies costs a lot and often recruits bring outdated approaches with them, says Schmitt. By training its own recruits, PNC can work from a clean slate-instilling its own way of doing things from the start. Particularly for the mass affluent, advisors need to pay less attention to picking stocks and more to understanding clients' broad needs and earning their trust, says Schmitt. "We've heard this for years, but now it's even more important. There is a lot of skepticism among clients, and their current needs are very different from their needs of five years ago."
PNC plans to train as many as four groups of 50 advisors a year, says Mortensen. The training's components include classes on investment and preparing for licenses: series 7, 63, 65 or 66 and state insurance licenses. Another course teaches trainees about how to create planning solutions.
Trainees are rotated through PNC Investments' back-office areas: They spend time in its operations, marketing, compliance and call center businesses, watching and learning, and then jumping in to do some of the work. The rotations help future advisors learn what happens after they submit paperwork, and it helps them develop relationships with back-office colleagues, explains Mortensen.
After participants are licensed, they will return to the geography in which they were hired and will be partnered with veteran advisors who will mentor them. When they're ready, they will be assigned their own branches, and some may even choose to work in the call center channel.
The recruits are expected to have some professional experience, and while PNC is looking for advisors as old as their late forties, most of the trainees are in their mid-to-late twenties, says Mortensen. It's difficult for fresh college graduates to gain the trust of clients, just because of their young appearance, he explains. "Investors want somebody with some seasoning. We want people who have perhaps tried a few other things and are excited about financial services and investing."
Training hundreds of advisors is not cheap, of course, and PNC could come to regret its boot camp if rivals successfully poach its trainees. "It is really difficult to fully recapture the return on that investment, because people can leave," says Kehrer. For his part, Ellis says it would be wise to identify the best reps, approach them with perks and noncompete agreements, and let the others wash out or be poached.
But Mortensen insists that PNC's advisor support will help keep them loyal to the company. However, he would not rule out employment contracts and a policy of having training graduates compensate the company if they leave in short order. "We'd prefer not to," he says. "Our philosophy is that we want people to stay because they want to."
PNC is betting that advisors will want to stay, in part, because of the brokerage's high levels of support and focus on quality. "We're setting the standard for the highest-quality service in the retirement and investment space," says Mortensen. "We want to have the highest-caliber financial advisors and support staff."
To achieve that, PNC plans to invest in additional training. The company has hired Gallup to measure customer commitment and engagement, a program which is to start in the third quarter of 2011 and continue indefinitely.
Based on the results of that study, the division will create staff development programs, says Mortensen. "Our goal is to really understand our customers, what they want, how to serve them better, how to fix problems," he says. "We want to focus on acquiring and keeping customers, and growing our assets with those customers."
Dialing for Dollars
Some of PNC Investments' easiest pickings could come from its new call centers, which will be located in Pittsburgh and Cleveland, and should go on line in 2011. Mortensen insists that the call-center strategy is not meant as a cheap way to service less-profitable customers. That approach is used most notably at Merrill Lynch, and has resulted in criticism, notes Ellis. "The problem is that Merrill Lynch used it as a segmentation device, and people felt put out and insulted."
The main role of PNC's call center operation will be to attempt to revitalize dormant accounts and give clients another way to communicate with investment advisors, says Mortensen. "We want our customers to be served the way they want to be served," he says. "There is no minimum asset threshold below which customers would be kicked to the call center," says Mortensen. At PNC, any customer with a minimum of $50,000 can have a relationship with an advisor.
But many advisors have inactive often inherited customers, C- and D-level clients with small accounts who they've never actually met. Using a call center to contact these customers on a regular basis can eliminate some regulatory risk and may also tap into a fresh source of income. "There are a lot of onetime-only annuity buyers, for instance, and the question is, do we have all their money?" asks Mortensen. We think there is a lot of revenue opportunity in some of those accounts." It's not yet clear how much the call center will cost. Job descriptions are still being written, and PNC has not yet decided how the staff will be paid.
The call center can be used in other ways as well. When an advisor leaves the company, its personnel can service the orphaned accounts until he or she is replaced. And marketing campaigns can direct prospects to the call center, which can triage them, then serve some and refer others to dedicated reps. "It gives us a lot more flexibility to serve more customers and deliver the high-quality advice and service experience we aspire to," says Mortensen.
PNC has also been planning changes behind-the-scenes. The investment business has followed the bank's structural change of shifting the distribution system from a national sales manager model to three territories overseen by three different managers.
And the program is creating a new role of director of client services for someone who will focus on client research, client engagement and problem resolution. The yet-to-be-named director will oversee certain companywide functions—working with the territorial sales executives, for instance, to ensure client experience, marketing and grassroots sales support are in sync. The director will report directly to Mortensen and will likely not have direct responsibility for the sales organization.
PNC has significantly expanded its staff in areas, including training, technology, compliance, sales management and sales support. It is centralizing its trade approval process in order to make it more efficient and is taking other steps to reorganize and improve its compliance and supervisory structure. "We see the regulatory environment getting tighter," says Mortensen, "We think it's real important that we continue to do the best job we possibly can in areas like supervision, product selection and marketing."
One of the most important developments at PNC Investments is replacing three disparate custody and clearing platforms with one. Last fall, PNC converted the first of its three different clearing platforms—National City's legacy platform—to Fidelity Investments' National Financial. It still must convert the legacy platforms for PNC Investments and Mercantile Bank, which PNC acquired in 2007. The entire job is to be completed in June 2011.
Using three clearing platforms has meant that advisors and their customers had different web and statement interfaces as well as different products and pricing models. Converting to National Financial has been an enormous task involving moving mountains of client data to the new system, informing hundreds of thousands of clients why and sometimes requiring them to fill out new paperwork. In addition, PNC advisors and other employees must be trained to use the new system. "It's probably the most difficult thing any brokerage firm can go through," says Mortensen. "And we're doing three of them in eight months."
According to Kehrer, moving PNC Investments from its legacy platform, Hilliard Lyons, will remove a "shackle" from the business. PNC bought Hilliard Lyons, a Louisville-based brokerage, in 1998, and eventually moved its bank-based brokerage program onto its clearing platform. The Hilliard Lyons platform is not designed for the packaged products in which retail brokerages specialize, and involved unnecessary expense, says Kehrer. "The companies that clear for more retail organizations, like Pershing and National Financial, are more geared for a PNC-type bank." Mortensen disputes that Hilliard Lyons' platform was an awkward fit, praising features like its managed account suite of solutions and its advisor support. But he admits that PNC Investments is now so large that it's "better served by a traditional, large firm that's focused on clearing."
Another ongoing challenge is combining National City's platform-focused program with PNC's advisor-centric one. Prior to the PNC acquisition, National City's advisors functioned largely as managers of the licensed bankers; they are now being asked to serve as conventional advisors. Licensed bankers, meanwhile, have been limited to serving mass-market clients with only fixed annuities, asset-allocation mutual funds and 529 plans.
To curb competition between licensed bankers and advisors, PNC has them share revenue. Bankers must refer clients with sophisticated needs or more than $100,000 in investable assets to dedicated advisors. The bankers' pay is the same whether they sell to clients or refer them to advisors. "It did prove to be harder than we expected to do all those things," says Mortensen. "And it took most of 2010, longer than we expected, to get to a place where we feel good about the model and the prospects for the upcoming year."
PNC Investments also has several possible new products on the drawing board such as an exchange-traded fund wrap product. A guiding principle in product development will be "keeping costs down," says Mortensen. "We need to stay on top of the product continuum. There are innovative things we're looking to do."
PNC also has plans for an upgraded website with self-directed trading, investment research, retirement and college calculators and financial planning tools. Mortensen suggests that clients may soon be able to access their investment accounts through PNC's Virtual Wallet as well. The two-year-old money management platform combines checking and savings accounts with the ability to digitally oversee various bank accounts, schedule payments, track spending, hit savings targets and so on. "The Virtual Wallet account made PNC's name," says Mortensen. "We think there's opportunity for innovation there too."
Mortensen has been handed an envious opportunity: A mandate to remake the business, and a huge budget with which to do it. With a single clearing platform in place, an advisor school in operation and a call center moving forward, he's accomplished a lot—but has miles to go. "This business today looks almost nothing like it did in the late 90s," says Mortensen. And the changes taking shape now mean that PNC Investments might again be hard to recognize in five or 10 years.