Understanding the Value of Your Deposits

Your business and personal deposits have substantial value; do not give them away before monetizing their full value with the appropriate RIA lender.

Small business owners need to see their bank relationship as a two-way street. RIA lenders are not particularly fond of being treated like an ATM where you only make withdrawals. Rather, RIA lenders want to develop a “relationship” with their clients on both sides of their balance sheet. Recognizing what RIA lenders (currently, community and regional banks) need will help deliver what you want - wealth management lending.

The next time you make a deposit at one of the largest banks in the country, ask yourself a simple question: What am I getting in return? Commonly, the interest rate offered at big banks falls below industry averages, yet more importantly, is that bank funding RIA acquisition financing? If the answer is no, you need to consider making a change. Several RIA lenders who regularly fund RIA loans have emerged over the last five years.

Financial advisors may be best served by banking with a regional or community bank that seeks a banking relationship that benefits both the bank and the small business owner. Before opening an account at your local community bank, it’s important to understand the value of your deposits and know which banks make RIA loans and are active in the business of RIA acquisition financing.

Recent consolidation by large banks and attractive returns in equity markets have left many community and regional banks starved for deposits. As a result, banks are forced to increase their depository base through “brokered deposits” obtained from other institutions that are expensive and have regulatory limitations. Examples of brokered deposits include prepaid cards and brokerage house money market accounts that sweep into a bank.

In 1989, Congress created regulations that limited banks’ exposure to brokered deposits after finding a causal connection between bank failures and disproportionate levels of brokered deposits. Recent remarks by the FDIC Chairman - Jelena McWilliams - indicate that the FDIC may be re-examining their treatment of brokered deposits, yet banks are hampered for the foreseeable future.

Small business owners’ operating accounts and personal checking and savings accounts are considered “core deposits” that have a far higher value to banks. Core deposits do not present the same regulatory challenges and limitations relative to brokered deposits.

In this hyper-competitive market, you have assets that banks desire: your business and personal depository accounts. Developing a personal and business banking relationship with one bank will enable you to monetize your deposits with greater access to financing from a community or regional bank, often at far more competitive rates, terms, and conditions.

Existing bank clients are viewed far differently than a new applicant off the street looking for a loan. Banks commonly question why an applicant who is not a depository client has to come to them for a loan. They may speculate by asking, “Is there something wrong with the applicant that caused their current bank to deny financing?” Given the minimal number of RIA lenders funding RIA loans, it is less likely that an RIA seeking financing will garner this view. It is important that you ask a prospective bank some key questions about their alignment with your goals:

• Are you an RIA lender?
• Have you financed RIA acquisition loans or just RIA commercial real estate loans?
• What is your familiarity with wealth management lending?
• Has your bank approved an RIA lending credit policy and procedure?

Stopping at the nearest community or regional bank, opening an account, and expecting financing may not serve your interests. Banks typically have expertise in specific industries where they are comfortable extending credit. You will find many options for commercial real estate and agriculture. Still, in other industries, especially those that commonly lack tangible assets to collateralize, you will need to spend additional time finding a bank that is comfortable financing businesses in your industry.

For example, specific community and regional banks have expertise in dental, veterinarian, medical, insurance agencies, etc. This enables them to extend credit to borrowers that lack tangible assets that banks revere. SkyView can help you identify which RIA lender would best suit your RIA acquisition lending aspirations.

Once you find an RIA lender that finances investment advisor loans, some additional questions still need to be addressed—for example, what percent of wealth management loans are financed via an SBA loan vs. a conventional loan, and whether the lender will provide financing outside of their depository footprint.

Banks are discouraged from utilizing SBA obligations when credit is available to qualified borrowers via conventional commercial loans. SBA loans offer a government guarantee to the RIA lender but come with advantages (longer terms) and disadvantages (lien on personal residence) for borrowers. Make sure you inquire about the composition of their existing RIA loan portfolio.

Although a bank specializing in your wealth management lending will gladly take your deposits across the country, they may not lend outside of their depository footprint (radius around their existing branch locations). This mindset is directly related to banks' need to develop a "relationship" with their borrowers and historically felt that capturing their deposits was only possible if they had a branch in that market.

Substantial bank consolidation over the last 20+ years has left small businesses with far fewer options for financing and community and regional banks constrained by available deposits. Recognizing the value of your deposits and finding the right bank that actively funds RIA loans will help perpetuate the success of your small business.