What Advisors Need to Know About Cross Selling

Cross-selling products and services to existing clients is one of the primary methods of generating new revenue for many financial advisors. This is perhaps one of the easiest ways to grow their business, as they have already established a relationship with the client and are familiar with their needs and objectives. However, advisors need to be careful when they use this strategy - a money manager who cross-sells a mutual fund that invests in a different sector can be a good way for the client to diversify their portfolio. But an advisor who tries to sell a client a mortgage or other product that is outside the advisor’s scope of knowledge can lead to problems in many cases.

There have also been several well-publicized cases where firms and advisors engaged in cross-selling practices that were not in the best interests of their clients, and hefty fines and other disciplinary action was often the result. The Financial Industry Regulatory Authority (FINRA) has recently sent a letter to several broker-dealers in an effort to gauge the scope and incentives that are provided to advisors who cross sell products such as mortgages, credit cards and other items that can provide the firm with additional revenue. (For more, see: Top Compliance Headaches for Financial Advisors.)

It can be difficult for large firms to effectively integrate the use and sale of different types of financial products to the same client so that their needs are properly met in each area. H&R Block Inc. failed in this proposition when it acquired Olde Discount Broker in a push to offer investment services to its tax customers. The addition of a mortgage branch complicated things even further, and the company ultimately decided to jettison these two divisions and focus solely on taxes once again.

Wells Fargo & Co. was also just hit with a $185 million fine for opening bank and credit card accounts for thousands of customers without their knowledge or consent. FINRA has therefore stepped in to monitor this issue, with a spokeswoman recently making the statement that: “In light of recent issues related to cross-selling, FINRA is focused on the nature and scope of broker-dealers’ cross-selling activities and whether they are adequately supervising these activities by their registered employees to protect investors.” Firms must respond to FINRA’s inquiry by November 15 of this year. (For more, see: Wells Fargo Fined $185M Over Illegal Accounts.)

FINRA’s inquiry focuses on the following issues:

• The incentives that are paid to employees of broker-dealers for selling bank and loan products to retail customers of the broker-dealer by using referrals or a direct sale.
• The addition of features to accounts sponsored by the broker-dealer such as credit or debit cards, checking accounts or other banking products.
• The establishment of additional broker-dealer accounts for retail customers.

The inquiry also asks for information pertaining to goals that are established for cross selling, the training programs that are used to enable employees to cross sell products, the sales and other incentives or compensation that is paid to them for doing so, the standards that are used to evaluate employee success in this endeavor and the total amount of revenue that is generated from cross-selling programs. The inquiry covers 15 separate categories of information in all that span from January 1, 2011 to September 30, 2016. It also asks for the names of all employees who were either disciplined or terminated for failing to meet cross-selling production goals as well as a list of any customers who had additional products or services sold to them or new accounts opened for them without their knowledge or permission. (For more, see: Culture Questions FINRA Will Ask in Exams.)

Advisors who cross sell financial products or services need to be thoroughly familiar with the products that they are selling. A stockbroker who primarily sells mutual funds will need substantial additional training if he or she is assigned to start selling mortgages to clients. A simple referral to another department that actually sells and processes the mortgage may lead to situations where referrals are made whether they are needed or not, as the broker may not understand when the client really needs this service, but is only motivated to earn a referral fee. Advisors need to know how and when the additional product or service fits into their client’s financial picture so that they can make more effective referral and stay compliant with suitability standards. FINRA may use the information that it collects from its inquiry to develop and implement a new set of rules that govern how cross selling can be done.

Financial advisors can often earn additional revenue by cross-selling additional products and services to their existing client base. But care needs to be taken to do this correctly in order to stay clear of regulators and protect the client’s best interests. Advisors who simply make referrals in order to receive additional incentives may find themselves on the receiving end of customer complaints and disciplinary action. (For more, see: FINRA on Track for Record Year of Fines.)