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.
An Advisor's Guide to Helping Women Become Savvy Investors
Today, more women than ever are involved in managing their personal and household finances. In a recent study, nearly half of the women surveyed (44%) stated that they are solely responsible for their household financial decisions, compared to 35% of men1. But the study wasn’t all good news. While women may be taking the lead when it comes to their finances, they also reported that they are not confident in doing so. In fact, in every financial category included in the survey, men reported much greater confidence than women. Where was the biggest gap? You guessed it: investing.
For advisors, this presents a challenge and an opportunity. There is a 90% likelihood that a woman will be financially self-reliant at some point in her life due to divorce, becoming a widow, or choosing to marry later in life or not at all2. By taking steps to help your female clients become confident, savvy investors, you’ll not only be more effective at serving in the best interests of these women and their families, but you’ll also be able to build much stronger, more trusted relationships to help ensure each family’s assets remain in your care for decades to come.
Follow these five steps to help your female clients invest with greater confidence:
1. Urge every woman to put her financial needs first.
Women do have a weakness when it comes to planning for the future, but it has nothing to do with a lack of knowledge, skill, or smarts. Their primary weakness is a willingness to put others’ needs first. This is a huge mistake when it comes to planning for the future. Investing for retirement simply can’t wait until the kids are grown or aging parents no longer need care. In fact, based on average life expectancies, women should plan to accumulate enough funds to last at least 20 years after retirement. The following chart illustrates the power of compounding based on an 8% rate of return to help bring that point home:
This hypothetical example assumes an annual 8% rate of return and does not take into account income taxes or investment fees and expenses. This example is for illustrative purposes only and does not represent the performance of any specific investment. An investor’s actual return is not likely to be consistent from year to year, and there is no guarantee that a specific rate of return will be achieved.
2. Educate women about the power of investing.
Security about any topic is rooted in confidence and knowledge. Educating your female clients about investment basics can help drive more confident decisions and more positive long-term outcomes. From the basics of compounding to the nuts and bolts of researching options and understanding the pros and cons of different asset classes, make it your job to help every client understand what she is buying—and why.
3. Dive into the details of asset allocation.
Asset allocation is by far the largest determinant of a portfolio’s success—even more important than the individual securities selected and timing of an investment. This is critical information for your client to understand as she pursues her financial goals.
4. Discuss how her investment strategy needs to evolve over time.
Part of every client’s financial education should be to understand how financial needs and goals change with each stage of life stage. Because a shorter investment time horizon creates greater vulnerability to market volatility, she needs to understand the impact of shifting a portion of her investment portfolio to more income-oriented investments as she moves closer to retirement. This Life Stages Guide can help you paint a clear picture of how allocation strategies need to evolve to fit her changing needs.
5. Be sure she’s covering all the financial bases.
Smart investing is vital, but missteps in other areas of financial planning can thwart even the best investment plan. Offer every client a basic planning checklist that includes these three important steps:
- Focus on the big picture. Organize your important financial papers and schedule an annual review of your investment strategy with your advisor. Regularly monitor your net worth—including your assets (all investments and savings) and liabilities (mortgage, credit cards, and other debts) to be sure you’re always moving toward your end goal of a secure retirement.
- Pay down any outstanding debt. Debt reduces your net worth, threatens your financial security today, and reduces your ability to invest for the future. Do whatever you can to minimize debt, and build an emergency fund to help pay for any unexpected expenses.
- Make estate planning a priority. Once a year, review your will and your beneficiary designations for every account to be sure they continue to reflect your wishes. If you have children under 18, work with your advisor or estate planner to establish a trust and select a trustee to ensure your assets are managed for the benefit of your children.
As a trusted advisor, make it your mission to provide your female clients with the education and guidance they need to become savvy investors and make the smart, educated financial decisions. By doing so, you can help every woman you work with not only enhance her financial security, but also gain the confidence to take greater control of every aspect of her financial life.
Click here to learn more about IndexIQ.
 Survey conducted by Regions Financial Corp. in partnership with Vanderbilt University, 2015.
 The Simple Dollar, “Guide to Financial Independence for Women,” 2014.
Disclosure: The information and opinions herein are for general information use only. The opinions reflect those of the writers but not necessarily those of New York Life Investment Management LLC (NYLIM). NYLIM does not guarantee their accuracy or completeness, nor does New York Life Investment Management LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are not intended as an offer or solicitation with respect to the purchase or sale of any security or as personalized investment advice.
- 1 of 1909