Rogue RMs: Straw Men or Legitimate Concern for Commercial Banks?

In this episode of the Purposeful Banker, we discuss the concept of the "rogue RM." Should bank execs be concerned? Or is the danger overblown?

And what's the right balance for banks to strike? On the one hand, they want to ensure their their RMs follow guidelines. But on the other, they must make sure their RMs don't feel overly monitored and restricted.

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Transcript:

Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by Precision Lender, where we discuss the big topics on the mind of today's best bankers. I'm your host, Jim Young, Director of Content, Precision Lender. I'm joined again today by Dallas Wells, our EVP of strategy.
 
Today's topic is rogue RMs. And it's an outgrowth of a conversation Dallas and I actually had a couple of podcasts ago about banks' desires to have command and control when it comes to commercial lending in this current environment.
 
And it also is something that some of our people in Europe had come up in conversations quite a bit with banks over there, where they say, "Well, this is great, but how do I basically keep, for lack of a better term, a rogue RM from taking things off the rails."
 
Dallas, let's just start off there. Are we talking out of both sides of our mouth, playing both sides, whatever you want to call it, because we basically were talking about, "Hey, command and control is a risky thing and that's probably not the way to go." But then we're saying, "Hey, we're hearing from banks that are really concerned about the ability to make sure that their RMs are following their policies." Which side do we land on here?
 
Dallas Wells: I think what you just described is exactly why banks do this command and control thing. It's that there's human beings involved here. And humans are messy and it's hard to get everybody to row the same direction and comply in a way that is more necessary in these riskier times. So what we talked about last time that we had this discussion is really that the banks have maybe over-corrected to that command and control.
 
The way we describe it is there has to be some clear out of bounds lines. There has to be clear boundaries within which your frontline employees can actually make decisions, make judgments, negotiate deal terms with customers. And then once they go beyond those boundaries is when they have to get approval from somebody. That's where you have to go up the chain of command to get someone else to sign off on it. And because that is a hard thing for banks to actually manage and control, what happens is, is they over-correct.
 
And like right now, those out of bounds lines have just become incredibly narrow. There is no wiggle room whatsoever so that means you're having to have executive level intervention on just about every decision that's made. And so that's the tricky balance for banks to find, is how do you move those out of bounds lines in times like this where you do have to shift your risk tolerance and what you want to happen to your customer base? That needs to change and sometimes it needs to change pretty quickly. So how do you communicate that the lines are now different and that expectations are different?
 
That's the hard part for bankers where you're doing these complex transactions and you're doing many thousands of them maybe across your footprint. And you've got individual humans actually making those decisions in real time. So that balance is really, really hard. It's really tricky. And I think that's what we'll talk about today is maybe the communication of that line and how do you... It's one thing for an executive to decide where that line changes. But how do they then get that rolled out so that then the business can function as normal? The frontline employees can still make the decisions they're allowed to make just within a new set of parameters. That's the part that banks are really struggling to pull off right now.
 
Jim Young: Before we get into that, I want to go into a little bit more of the juicy headlines part of this which is when we first started this topic, when it was first mentioned to me, again, it was sort of, "Hey, I'm talking to this bank and they're worried about this sort of thing." And I started thinking of, I'm going to botch my French pronunciation of these, Jerome Kerviel from Societe Generale.
 
Dallas Wells: Nailed it.
 
Jim Young: Nailed it. Thank you. For all of our French listeners out there, you're welcome. But, lost about $7 billion. And then there was another one I think with UBS that lost $2 billion. But those are the equities and derivatives. So one, is that totally apples or oranges? And then I guess my other thing is, you talked about over-correcting. Part of this sort of is the fear is legitimate, I guess, is what I'm wondering about. We have these sort of fantastic stories that maybe overplay the concerns or maybe is it that the concerns are legit, they're just not nearly as headline grabbing? It's just more small amounts and not nefarious but simply mistakes that are what execs are basically trying to avoid and over-correcting on.
 
Dallas Wells: Yeah. I think it's not exactly what we're talking about here. I think that's outright fraud. So that's a different thing and banks have lots of controls that they have put in place and that they continue to put in place to try to deal with things like that. But there will always be fraud. There will always be bad apples that are going to find the holes in the system and take advantage.
 
So, of course, there's always the incentive to fix that. But, I think what we're really talking about here is employees that have good intentions. They actually do want to do what's right by the organization and by their customer. It's just that things get really unclear. As the rules change and the bigger the organization, the harder that is to communicate and to make sure that everybody actually understands, okay, this is the new policy, this is the new rule going forward.
 
So you have people breaking a rule, not out of fraud, but just because they didn't know that was the new rule. They were out on vacation that week that you had the big town hall meeting. So they didn't know. It's more of organizational change and communication that is not unique to banking. It's just that the potential losses in banking, highly leveraged, lots of zeros, especially commercial deals, you forget to fill out the new cover sheet for the TPS report on a $25 million loan that's backed by the government. You might lose a lot, a lot of money. So there's a difference between fraud and just getting everyone to match the new risk acceptance, the new risk levels that the organization's willing to take, or the new strategy. Or to say, we're not going to do deals with that industry anymore.
 
Simple pivots in the business that, again, get hard to actually implement. And it's even harder now because you got people trying to do this from their living room, instead of in the shared conference room where you can walk down the hall and make sure, "Hey, is this right? Is this how we're doing this now?" It's just a lot more variables and a lot more complexity than we've ever faced before in a situation like this.
 
Jim Young: So thanks for totally raining on my parade and trying to make this much more of a sexy topic ripped from the headlines, law and order sort of stuff. But you're right. But I am curious, though, before we sort of get into implementation and also then the enforcement, I guess one thing I'm also curious about, and this was mentioned, was, is the concern about bankers sort of starting at incentives and sort of reverse engineering from that.
 
And I guess what I'm wondering, too, is, and I guess I've lived this before, I think we probably all have at some point, whether at a bank or some other company, where a new directive comes down from on high, but the way that we're being measured hasn't changed and those two can be in conflict. And so if I'm being measured as a commercial banker on loan growth still, because that's what we decided at the beginning of 2020 and now they're telling me, "Don't do this, don't do that. Don't do this. Don't do that." I guess that seems to me like maybe one of the first things is, before you do this, make sure you're actually going to incentivize people to follow it or not put them in conflict, basically.
 
Dallas Wells: We've had a lot of conversations over the last few years with banks about incentive comp plans and that's not what we do. We're not incentive experts. It's just that the platform we happened to build seems to provide a lot of those metrics and it's where those bankers are doing a lot of the work and it's an easy place to measure it. So we can measure production and we can measure profitability and we can measure risk levels and it's a lot of the inputs to the incentive comp plan. So we ended up tangled up in a lot of those discussions. And bankers have been in an interesting and tight spot with those in that, you're right, you want the incentives to align with the strategy but changing incentive plans is not a decision to be made lightly. That's someone's paycheck.
 
And so it has all kinds of follow-on implications and it really does change behavior. The simple truism of you get what you pay for is exactly what you're talking about. We came into this year, in January we thought, "Hey, it's another year where times are good and it's pedal to the metal and let's grow the book. Let's keep expanding market share." And then all of a sudden, in a matter of a couple weeks, the strategy did an about face, but you're still paying people based off some pretty aggressive, probably, growth goals.
 
So it is a backwards misaligned incentive. And that's why we have cautioned against making those incentive comp plans too important, too tied to particular kinds of metrics. You want those things to be aligned with the long-term interest of the bank. That's a simple concept and a really hard thing to execute. You want long-term portfolio health and risk adjusted profitability growth, and banks try to get cute with, "Well, we've got a big quarterly number to hit so we want these quarterly growth targets that are just volume-based because that's what we're after is new bookings in this quarter."
 
Well, okay. But what about two years from now, when all those deals that you high-fived because you got them on the books, how many of them now don't match up with that more long-term strategic view. I think that's a good concern to have, but I think it's maybe a reminder of... It's another thing that's easy to forget in the good times. Like, the risk metrics have been good for 10 years. We'll worry about that when it's time to worry about that and the time to worry about it came upon us faster than I think anyone could have possibly imagined.
 
And so when this dust clears a little bit, I don't think now is the time to do that, but when things settle just a little bit, I think it's worth going back to those and looking at over the long term, over a full cycle, over 10 to 15 years, what are the metrics that actually drive performance and let's measure based on those. Let's make incremental progress on those each quarter, and let's not try to get too cute with growth of a certain kind, cross sell of a certain product. If you do those things, let's keep them small enough to where they don't change important critical behavior in times like this.
 
Jim Young: Okay. So going back to the implementation part, and I'm going to pull back the curtain here. I feel fairly confident, you mentioned the banker goes on vacation, comes back and doesn't realize that policies have changed, continues to plow forward with that sort of thing. That would be me. I will not name the name of my wonderfully patient coworker who has reminded me, I think, every day this week to sign off on the particular company policies that we have to have signed off on by today. And she finally escalated it to a direct Slack to me about five minutes before this podcast of, are you going to sign this? So I guess what I'm saying is, is all right, you can come up with all these great policies. You may even come up with them in a way that works really well with your incentive plans. But again, you've got human beings on the other end that need to see it, absorb it and understand it and then follow through on it.
 
So how many TPS reports can you put out there? And particularly if you also throw in the small bank, big bank part of this thing. It's one thing to go down the hallway and lean on somebody and knock on someone's door and say, "Are you going to do this?" It's another thing when you've got thousands of bankers in multiple time zones and different continents and trying to make sure they're all aware and following policy.
 
Dallas Wells: A lot of stuff to cover in that question. Because again, it's management science here, change management across an organization. But I think the reality is... And look, we've had a lot of discussions about this at Precision Lender. There's an idealistic view that we've tried to adhere to as much as possible, which is provide relationship managers with help, with good, insightful guidance, and give them the information that they need in the moment that they need it so they can make a good decision. And so we want to... Well, a design element of Precision Lender from the early days in trying to solve for how to make a deal work, there was a series of green dots on the screen. Here's the ways to make it work. And that was novel at the time. Still is, really, in most instances.
 
Most bank systems have a series of red dots that need to be cleared. These are the problems. These are the things outside of policy. These are the flags that must be cleared before the deal can move forward. And we tried to shift that and say, "Here's 10 ways that you could make it work. Use one of those or some combination of those to get to where you need to be," instead of just a big red X on the screen, basically. So that's always been kind of baked into our DNA and what we think is the right approach. There's a pragmatic reality, though, that just as you described, I get some of those friendly reminder emails that slowly escalate, too, until eventually my boss says, "Hey, HR says you still haven't signed the form. What the heck?" That's the accountability loop that you as an organization and especially as the organization gets larger, is just going to have to be part of your reality.
 
There has to be some policing of this, and that's the part that can get really, really tricky of how to actually make that happen in a helpful, useful way. Humans are also really good at tuning out those nags, and especially if you try to use technology to do it, those automated emails from the system that you're supposed to, "Hey, don't forget to do this. Don't forget to do that." Bankers have a ton of these, right? Here's all the technical exceptions that you're supposed to be working on. This borrower still owes you their quarterly financial statement. I'll get to it when I get to it, right? So figuring out how to cut through the noise for the things that are really important, hold your people accountable, there has to be some combination, even in small organizations, some combination of positive, proactive coaching to help on the front end and then holding accountable on the back end, which takes some reporting, some monitoring.
 
You start by reminding the employee, let them solve it themselves, but then it eventually has to be escalated and you have to have another human intervene and say, "You got to do this. You have to follow the rules on this." Or, as we're talking about banking, if you want to do this deal, somebody has to sign off on it. It's not going to go through until an SVP signs it, whatever your policy is. So it's that tricky balance of finding ways for accountability, monitoring of that, that just has to be a part of this.
 
We've had to add more of that to our systems through the years and especially as we've moved into larger and larger enterprise and global banks. When you're trying to hold 10 relationship managers accountable, yeah, you can make the rounds in the office and talk to everybody about it before lunch and you're good. If you're trying to get 10,000 relationship managers to adhere to something, there has to be a technology response. There has to be a report. There was somebody who was out on maternity leave so they've been gone for months. You got to make sure that their stuff is where it's supposed to be. And so there's a whole apparatus that has to go along with that.
 
That is another aspect of what makes this difficult. If you want to move the out of bounds lines, all of those systems have to be updated. Everything has to be changed. The thresholds to have to be moved, how it gets escalated has to be moved. Things that sound simple when you write them on the whiteboard, the engineers come back and they're like, yeah, in four months we'll have everything updated. It gets hard so I get it, but that's why you have to do this prioritization of which things really matter, which things are really important. Try to spend your relationship managers' time and attention on the things that really move the needle and remove as much of the other noise and nagging as you can. And it's hard.
 
Jim Young: Yeah. Gosh, it just comes up with a couple more sort of what-abouts that add some difficulty to it. Because, again, going back to my example, what I was getting was the sort of the tech start of it, which was the automated emails that go out to everybody sort of thing that's the easier part to implement. And I have sort of mentally trained, not in a good way, but automated email, that's not necessarily that important. Direct Slack from someone? Okay, now it is. But again, multiply me times 10,000. Direct Slacks aren't an option.
 
And it's the sort of thing of you want people to not feel ...  And I think this is again, what some of the bankers over in Europe were asking, it was, "How do we do this in a way that doesn't... We have to know when people are outside those lines. We have to know that and we have to be able to tell them to stay between them, but we also don't want to make them feel like there's a closed circuit camera in their office all day long monitoring every movement.
So how do you let them know that, listen, you need to stay within the lines. We're going to know when you go outside the lines but don't feel like we're over your shoulder all the time. You know?
 
Dallas Wells: Yeah. I think there's two keys to that. And again, saying it's easy. I get that the implementation's hard. But I think these are the concepts that matter. First of all, is with that noise factor. The reason that a lot of that stuff gets ignored is, how many reports do you send out to your bankers? How many emails do they get that are system generated? Even for us, and even when we were much smaller, there were times when I would get automated emails from Salesforce talking about reports that I had set up, sending me new versions of that, and I'd get 5 or 10 a day. How many of those do you think I looked at? It got to be where I tuned out even the important ones because they were buried in the noise of the unimportant.
 
And so, the one more report approach to this is not going to solve it. You have to use the modern technology to pick out what's important and you have to view the attention span of your bankers as what it is, which is a finite resource. There's only so much that they can give before it all gets tuned out. It's valuable real estate so you have to be really cautious about what gets put on that real estate and really thoughtful. And every time you say, "Well, we'll just send it out in a report. Every Monday we'll send out the report of overdrawn commercial deposit accounts and that way the bankers will know if one of their customers is overdrawn and they'll deal with it." Well, no, they won't. They'll tune it out eventually.
 
Instead, you need to use the technology to target it to them. The more specific you can be, the more helpful it is. So if instead of, here's the report, go look for your name in column G and on row 304, there's the customer that's way over the line and has been and is the real risk, pick that out for them. Remove the noise around it and escalate that one to them. Use the technology to do that. That's the stuff that will take some investment of resources and a little time from other staff at the bank, but that's how you scale it. So then, if a relationship manager gets an email about declining deposit balances, it's because it's been flagged and it's been measured to know that it's the real one that's actually risky, that needs human attention paid to it. And the one that just overdraws once a quarter and it's by 300 bucks and it's no big deal, ignore that one. Only notify when it matters. That's the first thing.
 
The second thing is that approach matters, too. Every notification should be... Again, your bankers, your relationship managers in particular, they're senior members of your organization. They're the face of the business. You pay them extremely well. You always want more of the ones that are good. I sure assume there's been a pretty good vetting process there and that you believe your relationship managers have the best interest of your bank at heart, that they truly want to do a good job. So design these things, not as nags but as reminders. That seems subtle, but I think it's important of basically we know you want to do a good job so here's the way that you do that. Here's the things that matter. And it's related to that first one, right? Here's the thing that's actually important for you to do well to provide good customer service, to protect the bank, whatever the issue is, just a reminder that this is the thing we need from you.
 
And kind of come from the understanding that these bankers have a lot on their plate. There's more things than the human brain can pay attention to that they're supposed to be monitoring and responsible for. So design all these things as helps instead of slaps on the wrist. So language matters, how it's delivered matters, expecting them to go log into a separate system to find reminders about things is, and if you don't do it, we're measuring how often you log into that system. And we'll slap you on the wrist for that. Find them where they are. Send them an email, send them a text message if it's one that's really important. There's ways to make all of this happen, but do it in a way that's a friendly reminder instead of the sort of nagging and tattletale bots that a lot of banks are creating.
 
And again, those are subtle things. They're hard to pull off at scale, but if you just take that approach from a top level, I think it does get you to a better place and your bankers will do their best to comply. They will really try to do what's right and if you help them find the things that really matter, they'll get them done.
 
Jim Young: Yeah. I think the number one frustration I hear from bankers is somewhat along the lines of basically they're making my job so hard. You know what I mean? Like that part of it, not necessarily like I'm asked to get this particular ROE or that sort of thing, it's just more of they're making, it's all the other stuff they're asking me to do in addition to the regular part of my job. How you can do this in a way that is supportive and not intrusive is huge. And I guess the last thing I would say is that you mentioned this is complex and this is difficult. But again, going back to the European banks in that market, the regulatory groups monitoring this aren't particularly concerned about how difficult it's going to be for you. They don't strike me as the types to go, "Well, hey, do the best you can with this." That's got to be some... Talk about incentives. That has to be an incentive to do this hard work, because they're not particularly interested in excuses at this point.
 
Dallas Wells: Yeah, you don't have a choice and they don't care if they hurt your feelings. They're not real interested in that.
 
But I'll give you a tangible example. We see banks that do things like they spend, this will be my technical term, they spend a crap load of money on a new CRM system and they're having trouble getting adoption. And so what they do is they create a report that says who logged in when, and then they go to the leadership, the market leadership, and they say, "Here's a list of your bankers that have not logged in, in the last 60 days." And then you're supposed to go make sure that they log in.
 
So I get that adoption is important. Find a reason for them to go into that system, give them some incentive, put something that's helpful to their job in there. And then maybe they'll go in there. This force thing, that's when bankers start complaining of saying, "Well, I'm supposed to go log into this thing. It doesn't do much for me. And it starts nagging at me and it has extra tasks to do." Everything that's in there is not something that's for them, it's to help the tech group that spent the money or it's to enter this thing in because it's data collection because that group wants it. And the RM gets to the end of their day and they've spent six hours doing things like that, these administrative data entry tasks, and then what their boss really wants to know, and what's going to affect their paycheck is, did your deals move forward today? Did you get new stuff on the books? Are your customers happy? Did you deal with that risk thing? How's your portfolio?
 
And they're like, "I don't know, but my Salesforce profile looks great. I cleared all those check marks. I got all those nag bots to leave me alone, but I didn't do the thing that I'm actually being paid to do." That's where the frustration comes.
 
And I think the impetus is on management teams to say, "If you want them in the CRM, put something in there that they need and helps them do their job and spend the time and effort and money to automate some of the things that you don't really need them to do." If you can have the machine do what machines do best, data entry and measuring things and calculations and remembering to fill that system in with the number from that system over there, let the machines do that and invest the money to have the machines do that, and let the humans do what the humans are supposed to do, build the relationships, make the judgments on the hard things, use their experience and intuition to extrapolate things forward. All the things that humans can do and machines can't, if you've used that sorting logic, yes, your technology budget will go up, but your people will become more efficient, more productive. And that is the thing that you really have to maximize in this business.
 
Jim Young: All right. Well, I think that'll do it for this episode and I'm going to go fill out those forms that they want me to fill out.
 
Dallas Wells: Yeah, get that done, Jim, before you get in trouble.
 
Jim Young: Exactly. So we can make sure we have another future purposeful banker episode. So Dallas, thanks for coming on again.
 
Dallas Wells: Yep. Thanks, Jim.
 
Jim Young: All right. And again, that'll do it for this week's show. Thanks so much for listening. Now for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit the resource page precisionlender.com or you can head over to our homepage to learn more about the company behind the content. If you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play, or Stitcher and we love to get ratings and feedback on any of those platforms.
 
Until next time, this is Jim Young, Dallas Wells. You've been listening to The Purposeful Banker.

About the Author

Jim Young

Jim Young, Director of Communications at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender he manages the many ways in which the company shares its philosophy on banking and the power of relationships Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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