The Great Labor Challenge Facing Banks

The biggest long-term challenges for banks won’t be low interest rates or inflation.

A transforming workforce and the long-term trend of slowed population growth are likely to pose the greatest threats to many financial organizations. Banks do have some ways to counter this great labor challenge, but a lack of action may create compounding negative effects in the future.

RSM Chief Economist Joe Brusuelas writes that five factors will likely lead to a lasting transformation of the U.S. workforce:

Baby Boomers Retiring: The pandemic disproportionately affected the health of older Americans. Combine that fact with increasing demand for new technological skills, and it’s no wonder baby boomers are leaving the labor force at an unprecedented rate. With such retirements, significant institutional knowledge also goes out the door.

Working Women: Women of prime working age — 25 to 54 — have borne the brunt of caring for children during each wave of the pandemic and the resulting impact on schools and day care. This has prevented many in this demographic from returning to work. While we expect this group of women to eventually return to the workforce, it is too early to assess this factor’s impact in the long run.

Ghosting The Labor Force: More workers are simply walking away from their jobs without giving notice. For a variety of reasons, the overall workforce participation rate — most notably in the prime working-age demographic — has declined significantly since the onset of the pandemic. The consequences of this shift will arguably last well beyond the pandemic.

Intergenerational Wealth Transfers: A little-discussed impact of the more than 888,000 U.S. deaths caused by coronavirus, as of early February, is the transfer of wealth to younger workers from relatives who have died. Such transfers may allow some workers to walk away from employment.

“You Only Live Once” Mentality: The extended shock of the pandemic is eliciting behavior change among younger workers, who are reassessing their lives and career arcs. Many may ultimately decide that what they were doing before or during the pandemic is no longer suitable, or does not align with their personal priorities.

On top of all these factors, data compiled by the U.S. Bureau of Labor Statistics shows a clear decline in the U.S. population growth rate since 1980, except for a short period in the 2000s. The BLS projects the growth rate over the next decade will be the slowest of any other 10-year period in the past 50 years.

These workforce and population shifts will have a long-lasting impact on financial institutions that do not act. While one solution to mitigate these trends may be to increase wages or salaries and improve benefits, focusing solely on compensation is akin to only performing physical therapy for a hip ailment, when a hip replacement would be far better in the long run. To address these changes on a holistic level, your institution should consider these actions:

Adopt Flexible, Hybrid Work Arrangements: While banking in the past was built entirely around having branches full of employees, the people who comprise the largest percentage of the workforce are starting to expect a flexible or hybrid work environment. Attracting and retaining a younger workforce may become increasingly difficult without such an environment.

Enhance Corporate Culture, Benefits: Actively engaging the workforce can help leadership teams understand how to continually improve not only the working environment but also employees’ work-life balance. Other enhancements could include better leave policies, providing more sick days or family sick days to care for a sick family member, or educational benefits such as student loan forgiveness.

Hire Diverse Talent: BLS data shows that racial minorities lag the broader workforce in terms of labor participation. This creates an opportunity for financial institutions to access a greater pool of available labor, and build and foster a more diverse working environment, which benefits the workplace itself as well as the organization’s bottom line.

Invest In Technology: Technology is not only the key to unlocking long-term profitability for banks; it is the catalyst to empowering the workforce to do more. Harnessing the power of data, process automation and productivity-enhancing technologies will provide the biggest return on every invested dollar. Along with improving workforce efficiency, such investments can help foster a more dynamic, exciting company culture.

To be sure, enhancing current working conditions, company culture and workforce recruitment, coupled with strategic technology investments, represent the best way for banks to address the great labor challenge.

How Will New Fiduciary Rules Impact the Bank?

fiduciary-rules-4-13-16.pngThe new fiduciary rules from the Department of Labor stand to impact a huge number of banks, as more employees will fall under “fiduciary” standards that will change the way they do business. Boards should be asking questions now about how the revised rules will affect their banks, especially if they have wealth management or trust departments or subsidiaries, which are likely to see the greatest impact.

The Department of Labor, which has rule-making authority for ERISA, the Employee Retirement Income Security Act of 1974, last week expanded the definition of fiduciary to include a wider variety of people who give advice on retirement accounts. The rules don’t apply to non-retirement accounts. Although some employees may already be fiduciaries and familiar with the rules, others may be encountering them for the first time. There also could be an impact on certain fee-generating products such as the sale of proprietary funds and variable annuities, and boards should ask questions of the bank’s senior management to assess the effect on their bank. “Over the next several months, we will find out what the impact is,” says Andrew Strimaitis, a partner at the law firm Barack Ferrazzano in Chicago.

The rules go into effect a year from now, April 2017, with some requirements delayed until January, 2018.

Saying outdated rules didn’t protect Americans as their retirement savings increasingly move away from employer-provided pensions and into self-directed individual retirement accounts (IRAs) and 401(k)s, the labor department said Americans were too often exposed to conflicted advice that moves them into high-fee products that benefit advisors more than clients. The labor department estimated Americans would save $40 billion over 10 years under the new rules. “While many investment advisers acted in their customers’ best interest, not everyone was legally obligated to do so,’’ the labor department said. “Instead, the broken regulatory system had allowed misaligned incentives to steer customers into investments that have higher fees or lower returns—costing some middle-class families tens of thousands of dollars of their retirement savings.”

What’s Changed?
Any investment advisor who handles retirement accounts becomes a fiduciary and has to comply with ERISA standards, which means providing impartial advice and not accepting payments that represent a conflict of interest, according to the department of labor. The industry has been concerned that the new rules would eliminate the possibility of brokers making commissions on trades or fees for selling insurance, or prohibit certain products such as a bank’s proprietary funds, or even variable rate annuities. But none of those products were ruled out, and neither are commissions. Instead, there is a “best interest contract exemption” that allows brokers and other advisors to continue their compensation practices and to sell products such as proprietary funds as long as they promise to put their clients’ best interest first, pay “reasonable” compensation to advisors and disclose all conflicts and fees.

What’s the Impact?
There will be new compliance costs associated with the rule. Analysts at the investment bank Keefe, Bruyette & Woods estimated that Morgan Stanley, as an example, could face a two-year implementation cost of $2,500 per financial advisor, plus about $600 yearly per advisor after that for on-going compliance, based on calculations from the trade group SIFMA, the Securities Industry and Financial Markets Association. The costs could potentially push some banks with marginally profitable asset managers to sell or outsource their compliance, and many of them already do the latter. Some think the rule could have far-reaching effects in terms of changing the types of products advisors are willing to sell, because of the uncertain liability. “It is fundamentally changing the way a bank will interact with the typical IRA client,’’ says Richard Arenburg, a partner at the law firm Bryan Cave LLP in Atlanta. Customers can sue advisors who don’t represent their best interests. Recommending products that benefit the advisor when lower-cost or more appropriate products are available could be a bad idea. “To continue to recommend funds where it is questionable whether they are in the best interest of consumers, you will have a tougher road to hoe to avoid liability,’’ Arenburg says. Some banks may react by limiting the number of advisors who handle retirement accounts such as IRAs. “I think you’re going to see consolidation definitely,’’ says Strimaitis. “People are going to have larger operations to make the compliance costs worth it.”

Boards should review the impact on the bank periodically, says Nancy Reich, an executive director with accounting and advisory firm Ernst & Young LLP. What’s the impact on the business model? What changes to its policies and procedures is the firm considering to address the impact?