Diederich, Gene cropped

Gene Diederich, Principal and CEO

Moneta Group CEO, Gene Diederich, was quoted in the April 3 edition of the Wall Street Journal. If you have a subscription, click here to read the whole story, or see it pasted below:-

Strengthening the Adviser-Client Relationship via Loans

Commercial banks have tightened lending criteria, so clients need to find other sources

by Matthias Rieker

April 3, 2014 9:41 a.m. ET

When a client needed a multimillion-dollar line of credit, adviser Margaret Black-Scott found a bank to provide the loan.

“We have those connections,” says Ms. Black-Scott, chief executive of Beverly Hills Wealth Management, which manages about $500 million in assets. “We will hammer away to get you the best [interest] rate we can.”

Whether big or small, more financial advisers these days find themselves helping their clients secure loans in-house or through an outside bank.

For wire-house brokers who have access to their employer’s bank and, in many cases, get compensated for making loans, it is an easy effort. For independent advisers acting as loan brokers in finding the right bank with the lowest rate–mostly for no compensation–some extra leg work is required.

Nevertheless, the payoff is simple to understand: a tighter relationship with the client who as a result may stick with their adviser for life and perhaps bring new clients. Also, at a time when advisers are taking on bigger role in managing their client’s finances, loans can foster a deeper conversation about money and investing.

“This is a natural evolution” of the relationship between advisers and their clients that has long evolved from simply buying stocks and bonds, says Tash Elwyn, the president of Raymond James & Associates Private Client Group.

The increase in demand for loan advisers stems in part from the financial crisis. Commercial banks have tightened their lending criteria, so clients have been forced to go through other sources to find loans.

Most clients now have fatter portfolios thanks to a healthy stock market and thus a lot more collateral to offer to get in-house loans, sometimes getting personal loans instead of mortgages to bridge a house purchase.In fact, the big brokerages are handing out a lot more loans these days.

Bank of AmericaCorp. BAC +0.09% says loans made by its Merrill Lynch advisers grew almost 19% in 2013. Morgan Stanley MS +1.36% (MS) and Raymond James Financial Inc.RJF +0.42% also say loans grew by double-digits last year and both firms expect the loan demand to continue at a strong pace this year.

In contrast, many independent advisers have only just started facilitating loans for their clients, says Francisco Turner, a managing director at Banc of California Inc.,BANC -0.33% which is carving out a niche as a go-to place for advisers as a loan source.

“Many advisers we speak to don’t actually know they have access” to loans, he says.

The Irvine, Calif., regional bank has a business unit that makes loans through advisers, and has worked with 4,000 advisers so far. Mr. Turner expects to have relationships with 12,000 advisers by year’s end.Independent advisers don’t usually have formal ties with banks. Rather, they shop around for the best rate and loan terms. Even the advisers who partner with Banc of California don’t have to use the bank for all their loans, Mr. Turner says.

In many ways, independent advisers operate like a mortgage broker, checking rates and terms and looking for the kind of mortgage best suited for a customer.

“We shop around and find the best deal,” says Gene Diederich, chief executive of Moneta Group LLC, which manages $16 billion in assets. He says he helped many clients refinance their mortgage. “Being independent gives us an advantage not being tied to any particular banking institution.

“Rates and terms are important, but so is service, Mr. Diederich says: “We also like banks who make the process easy for our clients.”

Ms. Black-Scott of Beverly Hills Wealth Management says she starts her search by outlining a client’s borrowing needs to a bank to gauge interest before she even looks at rates and terms. Then she asks the client to agree to the selected bank.”We try to do ‘prematch'” between bank and the client before loan negotiations start, she says.

Margin loans have always been part of brokerage relationships. But mortgages, nonpurpose loans and lines of credit secured by investments have become increasingly common lending products. Nonpurpose loans and lines of credit usually carry lower rates than margin loans.

These nonmargin loans can be made within days and banks accept a broad set of investments as collateral–such as nonpublicly traded securities, hedge-fund investments, and even currencies, Mr. Turner of Banc of California said.

However, there are risks for both wire-house brokers and independent advisers–mainly when the underwriting becomes dicey and clients become upset.If securities pledged as collateral fall in value, banks might reduce the loan amount and require more securities as collateral, or banks can cut lines of credit a client had set up for a rainy day but doesn’t regularly use. All of this can reflect badly on the adviser.

The wire houses, of course, compensate their advisers for cross-selling banking products, including loans. Morgan Stanley, the nation’s largest brokerage by adviser head count, this year tweaked its incentive for advisers to get their clients to borrow more.Some independent firms charge an hourly fee for wealth planning–so helping with loans will yield more hours billed. Some banks, such as Banc of California, pay advisers a commission based on a borrower’s loan payment.

Even though many independent advisers don’t get any direct financial benefit from helping secure loans, they say their efforts are worthwhile.

“You accommodate something that your client needs and wants,” says Ms. Black-Scott, who doesn’t get any compensation for helping with loans. “It can be a great plus: You went out of your way to do a good job for your client.”