With a field of membership steeped deeply in the heart of Silicon Valley, Stanford Federal Credit Union knew that it was sitting on a bevy of untapped opportunities to provide more investment services.
It was one of the strategies on the front burner at the $1.4 billion credit union in Palo Alto, Calif., when President/CEO Joan Opp took the helm two years ago, said Trent McIlhaney, chief financial officer.
“She recognized there was an unmet need within the membership. We needed wealth management,” recalled McIlhaney, who was hired in August 2011 and made the launch of a financial planning program one of his highest priorities.
Founded in 1959 by a group of Stanford University employees, the credit union today continues to count nearly 50,000 members, which includes faculty, staff, students, alumni and volunteers of the college and its related entities, among its core base.
Stanford Federal Credit Union also serves more than 100 local companies including Google and Facebook and is looking to expand even more through new relationships with other select employee groups.
By late fall 2011, McIlhaney had set up a meeting with the Credit Union Financial Network LLC, a Peoria, Ariz.-based CUSO that offers investment, customized financial plan programs, insurance, business and trust services. He was familiar with the CUSO and after talking with CUFN President/CEO Michael Prior, they both agreed that one of the difficulties that a credit union reaching a certain size may run into is having difficulty managing a financial planning program if a full-time person is not hired to do so.
“It’s a pretty neat story,” Prior said. “They kind of had a program, but the credit union wasn’t getting paid on anything and it wasn’t integrated.”
Owned by 11 credit unions and serving four nonowner credit unions, CUFN’s member management team consists of compliance, sales and operational support serving as an outsourced financial planning department, Prior said.
In the first quarter, Stanford Federal Credit Union inked a deal with CUFN to create a financial planning program. An adviser is currently assisting members with plans to save for retirement, college as well as offer stocks, bonds and insurance.
“They’re the same type of services offered if you sat down with Charles Schwab and Merrill Lynch. We compete toe to toe with them,” McIlhaney said.
Even though the plan was to break even, by the third month of operation, the credit union had turned a profit, McIlhaney said. Prior said plans are in place to hire a second adviser. By October, the program’s sixth month running, the program had $7 million in assets under management. To gauge how it stacked up, in talking with a colleague overseeing a similar program, McIlhaney learned that in a really strong year, their advisers did about $11 million.
McIlhaney said there were some early discussions about requiring members to have a minimum number of assets to use the financial planning program, but that idea was shot down because the credit union wanted to make the service more accessible for everyone.
“If a college student comes in with $1,000 to invest, we will work with them,” McIlhaney said. “People need to get back into the market. When the market went down 50%, people took money out, which was absolutely the wrong thing to do. You have to have money in the market if you want to have a good retirement. What we’re saying is let’s get that money out of that savings or checking account.”
While McIlhaney did not provide details on how much the credit union paid to launch the program, he did say it wasn’t a significant investment and all told, startup costs can range around the mid to low five figures.
CUFN works with LPL Financial, the independent broker-dealer giant with more than 4,500 financial advisers and offices in Boston, Charlotte, N.C., and San Diego. McIlhaney said he likes that the CUSO can negotiate better rates with LPL than what he could on his own. That, coupled with CUFN’s program management, helps to ensure that members are not just getting ladled with unneeded products and services just so advisers can get the commissions.
While CUFN pre-screened the advisers for Stanford Federal Credit Union’s financial planning program and did the training, McIlhaney said he is not completely hands off. He meets once a month with Prior and his team to check in on member service. However, to ensure that the program is meeting all of the necessary compliance requirements, CUFN takes charge in that area.
Looking ahead, McIlhaney said he is on mission to break through the industry’s traditionally low level of member penetration when it comes to investment services. According to estimates, the figures tend to be in the single to low double digits. With $1.2 billion in deposits, Stanford Federal Credit Union certainly has ample room to work with, he suggested.
“We think we need to set the bar higher. There’s no reason why we can’t have as much money on the balance sheets as off,” McIlhaney offered. “There isn’t a reason why credit unions can’t grab a fair share of the funds.”
For more than seven years, CUFN has set out to make that happen. In January 2005, it partnered with its first four credit unions to create a collaborative CUSO and has since grown to help its partners to generate more than $50 million in annual sales while maintaining control of their member relationships.
The CEOs of the credit unions owned by CUFN serve on the CUSO’s board, Prior said. While its roots are in Arizona, the board decided a regional footprint to expand throughout the Southwest made sense given at some point, CUFN would exhaust the number of credit unions it could serve in the state. The plan is now to grow in California, Colorado, Nevada, New Mexico, Texas and Utah.
“This has been a team effort between the CUFN management team and the board of directors,” Prior said. “As CEO, sometimes I get a lot of the credit for building and expanding CUFN, but we would not be where we are without input from the team and from the board.”
The collaboration has led to helping credit unions put together income solutions and identifying the risk and rewards of different products, Prior said. The latter has become a growing concern within the financial services industry. A lot of independent advisers have supervision coming from their broker-dealer’s home office with one person easily doing compliance for 100 advisers. CUFN’s ratio is 30 to one, he noted. Without the right compliance model, boomers and other members end up chasing yield, Prior said.
“Advisers might sell products offering higher yields without explaining the consequences. Some of these products are high commission products,” Prior said. “If you don’t have the right compliance people overseeing this, it can really hurt the members. LPL Financial does a good job of screening but so do we.”
McIlhaney said protecting members is critical.