The Fight for HNW Referrals Heats Up

Where do new clients for a bank's trust services or fee-based investment management come from?

Often, from the ranks of retail banking customers referred by customer service representatives or tellers.

Financial services marketers work hard to promote the referral process. See, for example, Winning Trust, mentioned by Jim Gust in a recent post.

The bank's commissioned sales force for annuities, mutual funds and other investment products also seeks new clients, and also relies heavily on referrals.

So far, many banks have minimized conflicts by dividing referrals according to wealth level. Brokers selling on commission get the emerging affluents. Fee-based wealth managers get the customers with net worths of $1 million or more.

Under new rules relating to bank broker provisions of the Securities Exchange Act of 1934, proposed by the SEC, the fight for HNW prospects may heat up:

The Exchange Act provides that banks may pay unregistered employees “nominal” incentive compensation for making these referrals. The proposed rules would define “nominal,” “incentive compensation,” and certain other terms. To accommodate banks’ customary bonus plans, the definition of “incentive compensation” would specifically exclude qualifying discretionary compensation paid under these bonus plans. The proposal also would allow banks to pay more than nominal fees for referrals of certain institutional customers and high net worth customers to a broker or dealer, if the bank and broker-dealer satisfy conditions to protect these customers.

Investment News notes that trust departments will benefit from another provision:

The proposal, which affects thousands of banks, also ensures that banks will continue to be able to accept 12(b)-1 fees for mutual funds used in defined contribution retirement plans managed by bank trust departments.