How Financial Advisors and Their Clients Can Profit from “Non-Bank Banking”
The proliferation of non-bank banking in the residential mortgage industry contributed to the great recession that began in 2008. Ironically, the consequences of the great recession have created the next phase of non-bank banking.
What is a non-bank bank?
So what is a non-bank bank? As defined by Wikipedia, a non-bank bank (also referred to as a non-bank financial institution (NBFI), is a financial institution that does not have a full banking license or is not supervised by a state or federal or banking regulatory agency.
A finance company that lends money for the purchase of a used car is a non-bank bank. An independent mortgage company making residential mortgages is another example. And how about online peer-to-peer lenders? Yep, that’s a non-bank bank, too – but more on that later.
Back to the Future
America’s traditional banking industry, as represented by state and federally chartered banks whose deposits are state or federally insured, has changed significantly since the great recession. Two of the primary changes impacting traditional banks stem directly from the aftermath of the great recession: 1) increased capital requirements and 2) increased regulation. More capital (and changes to the way capital is calculated) and more restrictions on lending and investing activities should, in theory, equate to stronger banks, a stronger banking system, and more financial resilience during the next economic downturn.
Only time will tell if these measures will achieve the intended goals. But one thing is for sure: largely due to these influences, banks have curtailed the breadth of customers they will lend money to. Several surveys have shown that traditional banks’ share of the lending market has decreased since the great recession. This void is now being filled by the next generation of non-bank banks.
Meet the New Non-Bank Bankers
Business Development Companies (BDCs) that lend to and invest in small and middle market companies across the country are leading the way for non-bank banks. Online lenders such as OnDeck, Kabbage, and CAN Capital provide short term advances to very small businesses across the country who, for various reasons, cannot or chose not to get a loan from a traditional bank.
These lenders recently came together to form the Innovative Lending Platform Association (ILPA). The association plans to provide small businesses with standardized pricing comparison tools and explanations prior to securing a loan as early as September 2016.
Other online lenders – such as Enova – provide a wide range of loan products to individuals who can’t get a loan from a traditional bank or who don’t want to apply. Modeled on customer service leaders like Amazon and Apple, these online lenders consistently deliver a high level of customer service that traditional banks are challenged to match.
Then there are peer-to-peer (P2P) lending networks, in which an investor lends money directly to a borrower. Individual P2P lending was pioneered by online services like Prosper and LendingClub. LendingClub was the first P2P lender to register its offerings as securities with the SEC and to offer loan trading on a secondary market, and today the companies are both big players in the peer-to-peer space.
P2P lending now extends to real estate to aircraft loans to investing equity in start-up companies and everywhere in between. What was a cottage industry five years ago has become a fully functioning marketing offering opportunity -- and risk -- for advisors and investors alike.
Even traditional banks are getting in on the act. In 2015, Prosper announced a partnership with a consortium of more than 160 community banks allowing them to source their consumer loans through Prosper’s platform. If you can’t beat ‘em, join ‘em.
Challenges and Opportunities
The opportunity for investors – and for advisors who become savvy about this evolving space – include access to investment opportunities across a wide range of asset classes formerly limited to banks, hedge funds, and high net worth individuals. This is an opportunity for advisors to differentiate themselves from the competition.
However, there are risks as well. LendingClub announced the company is cutting its workforce by 12% and ousting its CEO after experiencing major stock woes resulting from increased investor scrutiny due to a rise in loan defaults, slumping revenues, and the recent discovery of accounting anomalies. Last month, Prosper announced it was slashing its workforce by 28% in response to slowing demand.
And the small business lenders are struggling as well. OnDeck reported a loss of $18M for the second quarter of 2016 and many of the other public online lenders have stock prices that are half or less as compared to a year ago. The culprits are concerns about the quality of their loans and the fear of, you guessed it, increased regulatory scrutiny.
The US financial services landscape is constantly evolving. In addition, the providers of capital and the consumers of capital are constantly changing. They are not only switching up the products they will supply or consume, but also the ways in which they provide or consume them. Non-bank banking encompasses both and offers a unique promise that can benefit advisors and their clients.
Retirement Planning Has Its Limits: How to Prepare
Retirement planning is one of the issues that commonly leads clients to consult financial advisers. One of its essential aspects is creating a plan to save and invest in order to provide a comfortable retirement income. Ideally, this starts many years ahead of retirement, even as early as your first paycheck.
As retirement comes closer, planning for it expands to take in a host of other considerations, such as deciding when to retire, where to live, and what kind of lifestyle you hope to have. When retirement becomes a reality, the focus shifts to carrying out the plan.
All of this planning is crucial. Yet, for both financial advisers and clients, it's good to keep in mind that planning has its limits. In the post-retirement years, it may be helpful to think in terms of preparing for old age rather than planning for it.
The older we get, the more important this distinction between planning and preparing becomes. Too many life-changing things can happen without regard to our best-laid plans. Often they occur unexpectedly, resulting in emergency situations where urgent decisions have to be made. A stroke or a fall, a diagnosis of terminal illness, a broken hip that leaves someone unable to go back to independent living—and suddenly, right now, the family needs to find an assisted living facility, arrange for live-in help, or sell a home.
What are some of the ways to prepare for these contingencies?
- Explore housing options well ahead of time. Find out what assisted living, home care, and nursing home services and facilities are available where you live and whether they have waiting lists. Have family conversations about possibilities like relocating or sharing households.
- Research the financial side of these options. Investigate the cost of hiring help at home, assisted living facilities, and nursing care centers. Find out what is and is not covered by Medicare and long-term care insurance. For example, people are sometimes surprised to learn that Medicare does not pay for nursing home care other than short-term medical stays.
- Designate someone to take over decision-making, and do the paperwork. Execute documents like a living will, medical power of attorney, and contingent power of attorney. Update them as necessary, and give copies to your doctors, your financial planner, and appropriate family members.
- Start relatively early to downsize. Well before you're ready to let go of possessions or move into smaller housing, start considering what to do with your "stuff." Focus on the decisions rather than the distribution. There's no need to get rid of possessions prematurely, but decide what you want to do with them—and put in writing. Do this while it's still your choice, rather than something your family members do while you're in the hospital or nursing home
- Do your best to practice flexibility and acceptance. No matter how strongly you want to live in your own home until the end of your life, for example, it may not be possible. The physical limitations of aging can limit our choices, and even the best options available may not be what we would like them to be. It is a profound gift to yourself and your family members to accept these realities with as much grace as you can muster.
Finally, please don't underestimate the importance of planning financially for retirement. Because the bottom line is that you can't plan for all the things that might happen as you age, but you can prepare to deal with them. One of the most useful tools to cope with those contingencies is having enough money.
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