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MANHATTAN BEACH, Calif. – Kinecta FCU President/CEO Tom Graham is well aware of the business paradigm that some credit unions operate their wholly-owned CUSOs under – keep the sales-oriented, for-profit CUSO separate from the service-oriented, not-for-profit credit union. That might work for come credit unions and CUSOs, but Graham doesn’t subscribe to that business model. “Too many people in credit union management see their CUSO as being separate from the credit union,” he says. “In truth, the CUSO is mainly a deliverer of products and services to members. The members don’t realize the CUSO is a credit union subsidiary doing business under another name. They see it as being one and the same.” Graham deliberately organized the management of the credit union and CUSO so the operation of the two are integrated, and it’s that business model that helped win the financial services CUSO the Best Practices Award for 2002 from NACUSO. The award was presented to Kinecta last month at the association’s 2003 Fall Leadership Conference. Kinecta Financial & Insurance Services President Nader Moghaddam, for example is also executive vice president, member services, sales & operations for Kinecta FCU. Graham, in addition to his position with the $3 billion Kinecta FCU, is also CEO of the CUSO and serves as treasurer on Kinecta Financial’s board. All of the CUSO’s remaining board members are also members of the credit union’s board. “We don’t want Kinecta’s members to see the CUSO’s financial services and insurance products as alternative products to those the credit union offers, but as complimentary products to each other,” says Graham. Kinecta Financial & Insurance Services was formed in 1986 as CU Master Insurance Services Inc., as a wholly-owned CUSO of what was then called Hughes Aircraft Employees FCU. The word `master’ in the CUSO name, explained Graham, was an attempt to play off of the image of the old Army paymaster. Hughes Aircraft Employees CU changed its name to Kinecta Federal Credit Union in July 2001 and initially didn’t change the name of the CUSO. But Graham said members got confused when they received literature from CU Master Insurance. That’s when the credit union decided to rename the CUSO to Kinecta Financial & Insurance Services, so members could easily make the connection between the two. The credit union wanted to get rid of the separation mentality, Graham says. In its next anticipated move which Graham says should be completed in 2004, Kinecta Financial & Insurance Services which is currently a C Corp, will convert to a limited liability company (LLC) status “so profits will roll tax free to the credit union,” he says. “Our model works for us,” he says, noting that it’s difficult for many CUSOs – especially multiple-owned CUSOs – to be integrated in to any one credit union. He’s sensitive to why many credit unions have deliberately set up their CUSOs to operate separately from the credit union, in some cases giving their CUSO a name not easily identifiable with the credit union. As for-profit entities, he says CUSOs were deemed to be more entrepreneurial than credit unions. So it was perceived to be a greater advantage to keeping the two separate. Now, Graham adds, CUSOs have come full circle to leveraging the strength of their credit union owners. Kinecta Financial & Insurance Services is physically located in Kinecta’s facility. The credit union has 550 employees, 30 of whom work for the CUSO. Still, says Moghaddam, “there are credit union people out there that think a financial services CUSO takes the money that members would otherwise put in to insured shared accounts, and puts it in to uninsured products. They see it as a cannibalization of members’ deposits in to the CUSO and say it’s not in the members’ best interests.” He adds that, “We believe there’s a significant value in meeting members’ needs regardless in which part of the organization the members’ money ends up in.” Integration, says Graham, is conducive to information sharing and communications “up and down the chain” and cross-selling to members back and forth between the credit union and CUSO. The CUSO person is familiar with the credit union’s products, and vice versa, he says. Graham offers that the only people who need to see the credit union and wholly-owned CUSO as two separate entities “are the attorneys and accountants.” Everyone else, he said, needs to see them as being “parts of one organization.” The integration of the boards of Kinecta FCU and Kinecta Financial & Insurance Services “is a natural alignment that deliberately leverages and overlaps the strengths of each,” says Graham. The CUSO, he explains, does its own strategic planning under the credit union umbrella. Moghaddam says the CUSO takes a conservative approach to investments. Kinecta Financial & Insurance Services doesn’t offer high risk products. Instead, he says, it offers “a selection of mutual funds that have tended to keep their value.” The CUSO also offers fixed annuities. Even though Graham hesitates from prescribing the type of business models other CUSOs should follow, he still recommends credit unions follow an integrated model like Kinecta’s and “look at their CUSO’s products from their members’ perspective, not as what’s best for the credit union.” – [email protected]

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