How Financial Advisors and Their Clients Can Profit from “Non-Bank Banking”

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.

Bill Acheson
Investing in Life
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Bill Acheson is Chief Financial Officer of GWG Holdings, Inc. Bill is ideally suited to inform financial professionals and investors about specialty finance, alternative inves ... Click for full bio

When it Comes to Your Money, Does the Truth Hurt?

When it Comes to Your Money, Does the Truth Hurt?

“We’ve been arguing about this for year, and here we are in our 50’s. It’s time to stop!” Laura said empathically.


Paul’s downcast eyes and silence spoke volumes.

Laura continued, “We’ve worked with several advisors who have tried to help us invest our money in a sensible way. Then whenever the market goes down, Paul calls the advisor and tells him to sell everything! In all these years, no matter how much we work to build our financial security, we’re always playing catchup.”

Her words hung like a rain cloud about to burst when Paul began to speak. “I know, I know. I just can’t help it. I get nervous that we’re going to lose all our money. When the market goes down, I scramble—in my thoughts and in my actions. The driving force behind it is: At least if it’s in cash, the balance won’t go down.”

This is the moment where I felt I could lend my advice. First, I needed to learn about this particular couple and their values. Then, I could begin helping them take control of their finances.

“Tell me Paul,” I said. “What did you learn about money growing up? What messages did you hear as a child about money? From your father? From your mother?”

Paul’s eyes moved up and to the left, indicating his mind was reaching for memory. “My parents never talked to us kids about money, really. The one thing that stands out is my grandfather talking about The Great Depression and how it was such a tragic time. My parents both worked, but they never made a lot of money. They fought about money sometimes.”

“Any other memories about money?”


“Actually, yes. I remember when my father took me to the bank to open up a passbook savings and how exciting it was. The bank manager typed the passbook on this old manual typewriter and gave it to me. He showed me how the interest on the account added to the amount I deposited. I felt very grown up that day! But I guess that was the sum total of money training from my parents.”

“Can you help me understand how you and Laura make financial decisions?”

The question couldn’t be more impactful if a boulder had landed on his head. While Laura looked at Paul with a mildly accusatory glare, Paul searched for something to say that would keep his well-conceived protective fortress from crumbling. I interjected to ease the tension. I could feel the guilt in the air.

“Let me frame that another way, Paul and Laura. We all do the best we can as we live our lives. Let’s face it, our lives are filled with responsibilities in our families and our jobs, not to mention outside interests, health, and friends. While financial issues are important, unless you either have the knowledge and experience—or the help, most people avoid getting too deep into the confusion of managing their finances by doing the very least they can. What we don’t know scares us. So we defer, delay, make rash decisions based on our lack of time, knowledge, desire. Add a dash of fear to that equation, and you have a formula for financial problems. I want you to know, you are not alone. It’s more common than you could even imagine. The question is, do we allow the truth in so that we can move forward?”

It’s important to admit the truth behind our actions in order to rectify past and future mistakes or regrets. Living in denial only perpetuates making decisions that could potentially lead to financial disaster.

“I hate to admit it,” Paul said. “I guess in my desire to protect Laura from stress, I’ve made decisions that have hurt us, and I’m sorry. Michael, you hit the nail on the head. You defer, avoid, and allow your emotions to take over. And as a result, bad stuff happens. I think I’m ready to ask for help.”

Laura’s expression softened, and said, half-kiddingly, “You think?”

Michael Kay
Advisor
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I founded Financial Life Focus because I wanted to work with people who put your success at the forefront of everything they do; people who understand that finding balance is ... Click for full bio