During one of the peer group discussions at our Top Director Awards, the finalists in the mega and large firm categories ruefully reported that, after a hiatus of several years, they were once again facing pushback from bankers about investment sales disintermediating deposits. A few months ago banks and credit unions were awash in deposits, but the tide has abruptly shifted.
The issue of whether investment services cannibalize deposits has a long history, and was particularly contentious in the 1980s and early 1990s when the fledgling investment sales operations in banks and credit unions were primarily focused on targeting maturing Certificates of Deposit for annuity sales. The issue ebbed and flowed depending on whether financial institutions needed deposits to fund lending operations, or were overfunded. As their investment services businesses matured to become providers of financial advice and a broader array of products, financial institutions became more comfortable with the argument that their customers were turning to other sources for investing in mutual funds, stocks and bonds, and insurance-based products, so the institution stood to benefit from customers that instead invested where they bank.
Dr. Kehrer’s research has tracked this issue for decades, publishing a landmark study of whether investment sales were disintermediating bank deposits in 1989, updating it in 1997 (in an ABA Banking Journal article), 2002, and 2007. The conclusion of this continuing research was that, taking into account money leaving anyway, referrals back to the bank, and replenishment of deposits by investment clients, in some years net disintermediation is negligible, and in other years investment sales actually intermediate deposits.
In 2019 we took a deeper dive into these issues for BISA. In Smart Investment: Evaluating the Total Return on Investment Services to the Banking Enterprise, we demonstrated that developing an investment relationship with bank customers or credit union members increases their loyalty to the institution, resulting in their use of more deposit and credit products, and a longer life for the banking relationship.
Despite this mountain of evidence, the disintermediation issue is coming around again. In what has been attributed to Yogi Berra, it’s déjà vu all over again.