Blog: Bearmoor Notes

Thursday, August 19, 2010

2011 Planning and Budgeting Opportunities

As the summer vacation season winds down and the “the back to school” ritual commences, your opportunity during the 2011 planning and budgeting process is just around the corner. The components of non-interest income will continue to take center stage as the lending activities and net interest margins continue to be volatile. It appears as though one of the major contributors to non-interest income, overdraft fees, has taken yet another hit. The August 12, 2010 issue of the American Banker highlighted this in one of their articles:

Beyond Opt-In: Fresh Attacks on Overdraft FeesOutdoing Fed, FDIC Targets Checks, ACH Overdrafts: The Federal Deposit Insurance Corp. ramped up pressure Wednesday on the banking industry to curb overdraft fees, releasing proposed guidelines that would go beyond recent Federal Reserve Board rules.

Outlined below is a graph showing the non-interest income component (year-end 2001 thru year-end 2009) for all institutions reporting fiduciary income on either the Call Report or the Thrift Financial Report (TFR). You can clearly see the sharp decline over the past few years.

Now, more than ever the Wealth Management arena, specifically income from fiduciary activities will be viewed as an area where optimum risk-adjusted revenue will need to be achieved. Bearmoor has assisted several organizations realize increased revenue lifts from their asset management and fiduciary operations. As you prepare for 2011 perhaps exploring the benefits of a Bearmoor Profit Enhancement process is in order.

No Good Revenue Opportunity Goes Unpunished - SEC Proposal

On July 21, 2010 the Securities and Exchange Commission voted unanimously to propose measures aimed to improve the regulation of mutual fund distribution fees and provide better disclosure for investors. The marketing and selling costs involved with running a mutual fund are commonly referred to as a fund's distribution costs. To cover these costs, the companies that run mutual funds are permitted to charge fees known as 12b-1 fees. These fees are deducted from a mutual fund to compensate securities professionals for sales efforts and services provided to the fund's investors. 12b-1 fees were developed in the late 1970s when funds were losing investor assets faster than they were attracting new assets, and self-distributed funds were emerging in search of ways to pay for necessary marketing expenses. These fees amounted to an aggregate of just a few million dollars in 1980 when they were first permitted, but that total has ballooned as the use of 12b-1 fees has evolved. These fees amounted to $9.5 billion in 2009.

The SEC's proposal would:

  • Protect Investors by Limiting Fund Sales Charges
  • Improve Transparency of Fees for Investors
  • Encourage Retail Price Competition
  • Revise Fund Directors Oversight Rules

The SEC proposal will provide a transition period for the new rules.

With Additional Regulation Comes Increased Enforcement Actions

One of the results of the global financial crisis has been an increase in both new regulation as well as a closer look at existing regulation. The compliance and risk management functions of financial institutions are operating at full throttle in an effort to address the additional interest being shown by all regulatory agencies. While the efforts of these risk mitigation divisions within the financial institutions is to be commended, the volume of regulation and the interest of the regulatory agencies requires a greater effort to ensure that both the spirit and intent of the regulation is being complied with.

Based upon the number of public enforcement actions issued by federal regulators since the start of 2008; it appears as though additional attention is needed in the area of compliance and risk management. Nearly 1,200 banks have been hit with an enforcement action, and that number is expected to climb at an accelerated rate. Enforcement actions are on pace to increase 64% this year, making bankers increasingly wary of further obstacles to their recovery.

One of the many challenges in developing a strong risk mitigation program is finding qualified and experienced individuals. The current situation provides for a “free agency” environment among the compliance and risk management profession. Some organizations have the ability to attract and retain qualified individuals, while others struggle to maintain the necessary talent. The use of third party providers is no longer scene as a luxury, it is almost a necessity.

The “up and to the right” trend in enforcement actions is a trend you should make every effort to avoid. Enforcement actions can limit an institutions ability to succeed and achieve both quantitative and qualitative goals.