Getting Shipshape at Navy Federal Credit Union

Cover Story - Autumn 2012 | By Andrew Singer

Cutler Dawson, President/CEO Navy Federal Credit Union, and Tom Yee, President, Navy Federal Brokerage Services

Navy Federal Brokerage Services, LLC serves all the credit union’s members, not just the emerging affluent or affluent.

In the investments area alone, Navy Federal has 40 full-time financial advisors (FAs)—34 in branches and six in a call center in Pensacola, Fla. All but one have investment advisory licenses (Series 65 or Series 66) in addition to a general securities license (Series 7). All, too, hold life, health, and annuity licenses in their respective home states, and seven have earned their CFP (Certified Financial Planner) designations. (Others are working on their CFPs.)

All this is in keeping with the holistic approach that the institution takes toward its membership. “Our needs-based approach encourages them [advisors] to put on their IA [investment advisory] hats first during initial discovery sessions with potential clients,” says Tom Yee, president of the institution’s SEC-registered investment adviser (IA) firm and its broker/dealer (B/D).

The IA firm, Navy Federal Asset Management, LLC has $103 million in assets under management, and the total is growing fast. Ten thousand baby boomers are retiring every day, notes Yee, and many of those are rolling over IRAs. On the B/D side, Navy Federal Brokerage Services, LLC has $1.2 billion under administration.

Importance of trust

When it comes to members, “The trust factor cannot be overstated,” Yee tells BISM in an interview. “Navy Federal members ‘trust’ the credit union to provide excellent service and provident offerings throughout their financial life cycle.” For many members, the relationship begins early on—at military boot camp with a ‘no-fee’ checking/debit account, for instance. This may be followed later by an auto loan,“and so on through their financial life stages,” explains Yee.

This also means the brokerage unit needs sales reps who are willing to buy into the Navy Federal culture, says Yee. It helps that 20 percent of full-time advisors have served in the military (23 percent if the spouses of career veterans are included; and 25 percent if Navy Reserve candidates are included).

“Our advisors have to earn and maintain the trust of not only members but also the [credit union] branches where they’re assigned—referrals from branch employees have always been and continue to be the most productive way to generate leads,” says Yee.

These young people are a ‘neglected segment,’ in the view of Navy Federal CEO Dawson. ‘We see that young seaman growing up to be an admiral one day.’

But is it really cost effective for a financial advisor to be spending time with a 19-year-old with little money to invest? So many advisors today won’t even talk to clients with less than $25,000 or $50,000 or $100,000 in investable assets—but Navy Federal FAs are courting young enlistees with only a few thousand?

CEO Dawson views those young people as a “neglected segment” vis-à-vis financial institutions. “We see that young seaman growing up to be an admiral one day.”

Dawson should know: He is a graduate of the U.S. Naval Academy and retired from the service after 34 years as a vice admiral. He once commanded the U.S. Navy’s Second Fleet. (He also holds a master’s degree in Financial Management from the Naval Postgraduate School.)

And it is all in keeping with the credit union’s overarching vision, explains Yee: To become “the preferred source for their [members’] primary lifetime financial services.”

Navy Federal has an uncommonly youthful customer base—one of the youngest memberships “in credit unionland,” says Yee. It has a branch near the Marine Corps recruiting center in San Diego, for example, another on Parris Island, S.C., just outside the Marine Corps’ East Coast training depot. There are two branches at the Navy’s boot camp facility at Great Lakes, Ill. And so on. A significant percentage of the credit union’s ‘members’ are obviously just teenagers.

Dawson puts it another way: “Navy Federal does mortgage loans. But we never sell the serving rights to those mortgages”?although they may sell the mortgages themselves to Freddie Mac or Fannie Mae. “That’s because we want to be with that member from start to finish.”

A career Navy officer

Yee, like Dawson, is an Annapolis graduate and career Navy officer; he has been a Navy Federal ‘member’ since 1970. Near the end of his Navy career, in the late 1990s, he became a voluntary official of the credit union, and when he retired from the Navy in 1999 after 28 years of active duty, he was asked to join a new Navy Federal venture—a credit union service organization (CUSO) to provide investments to members as “an accommodation.”

This was at the time of the Gramm-Leach-Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999, which broke down the regulatory walls separating banks, stock brokerage firms, and insurance companies.

Navy Federal could read the handwriting on the wall. If the organization did not offer investments, its members would go elsewhere for those products and services; the credit union simply “didn’t want to send members elsewhere,” says Yee.

In 2000, Navy Federal established a ‘managed’investments program, working with CUNA Mutual (Madison, Wis.) as its third-party provider. Yee wrote down a list of “must haves” (or “sine qua nons”) for the new program. One was: It had to service all members—regardless of affluence. Another one: There had to be the option to form a B/D eventually (moving beyond a ‘managed’ program). And so on.

One reason to own a broker/dealer was to have “control and independence” over its operations, says Yee. To this end, Yee hired consultant Kenneth Kehrer. Did it really make sense to establish its own B/D? Yes, it did, answered Kehrer—provided it could generate $20 million in annual production (the minimum, in the consultant’s view, at that time, about seven years ago).

Mutual funds, historically strong, account for about 50 percent of annual brokerage program revenues.

Another alternative, however, was available, the consultant added: Navy Federal could form a split B/D, where the credit union, in effect, hired a third party to run its back office.

That was the route that Navy Federal selected. It contracted with San Diego-based CUSO Financial Services (CFS) to provide back-office support to Navy Federal Brokerage Services, the B/D, and Navy Federal Asset Management, LLC, the RIA. In July 2006, the broker/dealer opened its doors; the RIA followed in fall 2007.

‘You’re Next Up!’

Back in 2000, however, the program began with five advisors in a single building. There were no desks in Navy Federal branches for the reps, so they only traveled to a branch location when a prospect was there. They used what Yee calls the “next-up system”: “You’re Next UP”—meaning you will take the next customer or customer phone call that comes into the office. “I’ve got the next up”—I’ll take the next customer. And so on.

One advisor stood out by his willingness to take calls—any and all. “If anyone wants to skip his ‘up,’ I’ll take it.” He was willing to meet anyone, go anywhere, recalls Yee.

The rep also volunteered to drive from Vienna, Va., to Annapolis, Md., when that became a need, and for one-and-a-half years the rep drove an hour each way, every day. He now works at a branch closer to home, but he has always been successful, notes Yee, and remains the program’s No. 1 producer. “He adopted our philosophy,” comments Yee: “Do the right thing for our members.”

Of the original five advisors, another gained a reputation for being a “good closer.” When he went to a branch, he came back with an order 80 percent of the time. But Yee had some doubts. Was he doing the right thing for members? Maybe. Maybe not. He was cherry picking, says Yee, one of those “who typically gave up his ‘ups.’” Put another way: Would he drive 45 minutes to meet with a 19-year-old? Probably not. He eventually went to work elsewhere. A skilled salesperson, he did not, in Yee’s view, embrace the Navy Federal culture.

Yee recounts another rep with the ‘right stuff’: Navy Federal financial advisors were assigned to Hawaii where Navy Federal had a branch on the naval base at Pearl Harbor. A series of advisors stuck it out for three to six months, but each then concluded there was “no business there” and threw in the towel. But one advisor had served in the Navy, was familiar and comfortable with sailors, and knew something about how they saved and invested (if at all). He was also willing to make the 45-minute daily drive from Kahaluu, where he lived, to Pearl Harbor. This advisor viewed Hawaii as an ‘opportunity.’ He met with the young sailors, impressed on them the need to start building wealth even at a tender age, and talked about the importance of taking a disciplined approach to saving and investing. The rep succeeded in building a book of business, eventually becoming the program’s No. 2 producer.

Licensed platform personnel

Navy Federal was one of the first credit unions (if not the first) to use licensed bank employees (LBE) to sell investment products. (The terminology is a bit different in the CU world. What banks refer to as LBEs, credit unions often call registered member service representatives, or RMSRs.) Navy Federal has 31 of these, and another 17 are now studying to be RMSRs. They offer fixed annuities, mutual funds, IRAs, 529 Plans, managed accounts ($25k minimum), and life insurance, according to the credit union’s website.

[Henceforth we will refer to Navy Federal’s RMSRs as LBEs, using the commercial bank terminology.]

The credit union began with five LBEs, recruited primarily from the deposit-and-loan side of the institution. Several marketing coordinators, too, eventually became “really good advisors.” One of these was a mortgage supervisor, who later became a marketing coordinator, and then one day declared, “I’m going to be the first Navy Federal [employee] to get a [securities] license”—and she did, becoming the program’s first homegrown advisor.

On the broker/dealer side, the average account balance is $19,000; on the RIA side it is $132,000.

The LBE is seen as important because Navy Federal wants to develop homegrown advisor talent—not hiring solely from the outside. Overall, they have had “some success” promoting from within, says Yee, although former LBEs still account for substantially less than half of the program’s FA sales force.

Where do they find their full-time financial advisors? Yee makes ample use of Navy Federal Credit Union’s human resources department, which has “good recruiters.” The program’s original recruiter, in fact, now a manager, is a former LBE, and so knows “all about advisors.” HR has developed a good screening package for new reps, Yee adds.

They have recruited former USAA call center reps, especially for their Pensacola, Fla., center. One successful financial advisor there is a former Navy officer, also a useful background. “They talk to each other,” Yee says of his advisors. He has “drilled into” their heads that they need to know all about military benefits if they are to adequately advise their members, so it helps if a rep or several reps are former Navy officers knowledgeable about military benefits.

A strong mutual fund component

What manner of products and services do Yee’s reps offer? Most products are of the “plain vanilla” variety, but there is a heavy mutual funds component, and this hasn’t changed since the program’s inception. Mutual funds, in fact, account for about 50 percent of annual program revenues. American Funds and Franklin Templeton are the leading fund providers. The variable annuity component is 32 percent, higher these days because of the low interest rate environment. Fixed annuities, by contrast, are only 4 percent—lower than usual—but they have always been low at Navy Federal. In addition, about 8 percent to10 percent of annual revenues are fee-based, much from mutual fund wrap accounts.

If current trends continue, 2012 revenues should come in 10 percent higher than 2011 program revenues.

Why is the mutual funds component so high (and, conversely, the fixed annuity component so low)? Partly it is because Navy Federal has many younger members for whom equities?or at least equities as part of a ‘balanced’ mutual fund (or a variable annuity)—are a more suitable investment; it is also because the broker/dealer serves all of the credit union’s members, not just affluent or emerging affluent. Mutual funds typically offer lower investment thresholds as well as some balance among asset classes.

Many Navy Federal members already have Service Members’ Group Life Insurance (SGLI), low-cost group life insurance for service members on active duty, which is “tough to beat,” says Yee, so life insurance isn’t really viewed as a big growth area like it is at some other depository institutions. (That said, Navy Federal has $1.8 billion of insurance coverage in force.)

Navy Federal has also offered trust services since 2003-2004. The credit union uses MEMBERS Trust Company (Tampa, Fla.), a special purpose savings bank that provides trust services to credit unions. (It is managed and owned by credit unions; Yee serves on its board of directors.)

Can the Navy Federal model work in other institutions—without its tight-knit military community? ‘It’s a model that will work anywhere, not just here,’ says CEO Dawson.

Among other suppliers to the B/D and IA are OBS Financial Services (Whitehouse, Ohio), which Yee likes because of their access to Dimensional Fund Advisors, with that firm’s “three factor model,”1 based on the research of the University of Chicago’s Eugene Fama and Kenneth French. The basic idea here is that there are “three dimensions of risk,” not just one (i.e., market volatility), as is often assumed. Fama and French view small capitalization (‘small cap’) stocks and value stocks as inherently more risky than large cap stocks—representing two additional “dimensions of risk.” But they (small cap and value stocks) also outperform large cap and growth stocks over time, i.e., offering higher risk but also higher reward. The investment style, which focuses more on asset-class selection (e.g., large cap, small cap, international small cap, etc.) and less on stock-picking, is a bit like the investment style of American Funds, suggests Yee. Navy Federal also has a relationship with Envestnet (formerly FundQuest).

Average account balances are typically low—in part because of the young membership, but also because they have low thresholds. On the broker/dealer side the average account balance is $19,000; on the RIA side it is $132,000.

It’s important that advisors gain the confidence of the people who work in Navy Federal’s branches. The principal way that members learn about investments and insurance is through referrals from the saving and borrowing side of the business. Indeed, 60 percent to 70 percent of accounts “were referred [originally] from the credit union side of the house,” Yee recounts. His financial advisors must be trusted by the other employees if those referrals are going to continue.

He tells his advisors to think of a branch as “another ship” and to view the branch manager as the “skipper of this ship.” Know what you’re talking about, and prove to all members of the ship that you “will do the right thing.”

If the name of the game is now about developing long-term client relationships, then Navy Federal has certain advantages. A young recruit who has to choose between a commercial bank and a credit union branch will often pick Navy Federal, says Yee, because he or she knows there will be a Navy Federal branch at his or her next base. Drill sergeants, too, typically have “a lot of influence” over young enlistees’ decisions, and they often provide new recruits with advice about joining the credit union. (About 80 percent of recruits at the Great Lakes, Ill., Navy base, for instance, sign up with Navy Federal.)

CEO Dawson was visiting a branch recently, and he asked a new U.S. Army ‘member’ why he banked at Navy Federal. He answered that Navy Federal has branches in many locations to which he might be transferred. Did it bother the young army member that the institution was named Navy Federal? Not at all, he answered.

“We made a conscious decision not to change the name,” recalls Yee, even after the credit union changed the ‘field of membership’ in 2008 to include the entire Department of Defense—not just the Navy; civilian employees were also included. They had a good brand for nearly 80 years, why change? The credit union was founded in 1933, beginning with seven members from the U.S. Navy.

Yee was trained as an aerospace engineer, but it’s no coincidence that he ended up where he did after retiring from the Navy. When serving on Navy ships as a young lieutenant, he used to do the taxes of his fellow sailors. “I was kind of interested in it,” and later he saw it as an opportunity when he was asked to serve as a volunteer official on the investment committee of the credit union.

Overall, Yee says, the key to a successful program is “making sure you have the right people in the right jobs.” This means finding people that not only have the requisite talent, skills, and knowledge—but also “ones [imbued] with the Navy Federal culture.”

A model for others?

Is this a business model—i.e., catering to young ‘members’ without many assets but long-term potential—that can work in other institutions, ones without Navy Federal’s tightly knit military community? “It’s a model that will work anywhere, not just here,” Dawson told us, and one, in fact, used by many credit unions and community banks. He declined to criticize institutions that don’t share his view, saying only it is a “missed opportunity” on their part.

As for providing financial advisor services to 19-year-olds, Dawson recounts that over the years he has received many notes and letters from young members who told him: “You are the only people that would take the time to help me.”

Says the former admiral: “We take great pride in that.”

Andrew Singer is editor-in-chief and publisher of Bank Insurance & Securities Marketing magazine. He can be reached at asinger@bisanet.org