Managed Account Companies See Growth in Regional Banks
Managed account providers are targeting midsize regional banks as a promising distribution channel for their fee-based products.
"Mid-sized banks are ready to offer a variety of fee-based solutions," said Bill Crager, an executive vice president and chief marketing officer at EnvestnetPMC Inc., a New York managed account provider. Large "banks have suffered from offering only proprietary solutions. Mid-sized banks are looking around; they are looking for outsourcing."
EnvestnetPMC, which has developed $6.5 billion of assets under management in fee-based products since opening in 1999, has relationships with 12 banking companies, including U.S. Bancorp, Bank of America Corp. and J.P. Morgan Chase.
Crager said his company is in talks with a lot of midsize banks, with between $1 billion and $2 billion of assets, that want to offer third-party managed accounts and mutual fund wrap accounts.
"It is becoming more cost-prohibitive to build your own platform," he said. "It costs over $10 million to build a platform. It is not possible for a mid-sized bank to make that commitment. Large banks can build a platform, but the question becomes, what is the benefit when you can outsource and be up and running in a short period of time?"
In addition to EnvestnetPMC, FundQuest Inc. is another managed account provider with relationships with 25 banking companies, including Bank of America, Comerica Inc., Huntington Bancshares Inc. and FleetBoston Financial's Quick & Reilly brokerage subsidiary. It said it expects to add 10 bank relationships this year.
The big insurer Nationwide Financial began distributing its managed account program to banks earlier this month. It manages $102.9 billion of assets and said it plans to leverage its 400 banking relationships for fee-based business.
Crager said his company is targeting banks, financial advisers and accountants in "wealth centers" nationally. Specifically, EnvestnetPMC wants to increase its business in Florida, on the West Coast and in the Northeast. He said banks, advisers, and accountants are interested in "a multiproduct, multimanager platform."
Analysts and executives have said they perceive bank interest in selling fee-based products. A report issued by TowerGroup, a financial services research firm in Needham, Mass., predicted a compound annual growth rate of 18.5% for managed accounts in the next five years - from $398.7 billion of assets at Dec. 31 to $1.1 trillion in 2007.
Matthew Schott, an analyst at TowerGroup, said wirehouses have managed 70% of the assets in managed accounts but that banks and regional broker/dealers have begun to start programs. Companies that are selling these products to banks are taking advantage of the opportunity offered by institutions too small to develop their own, he said.
"Mid-sized banks are cautious about what products they sell, but clearly, more and more banks want to sell managed accounts," he said.
Crager said managed accounts are the most sought-after investment products in the market. He said his company's research with a sample of 82 financial advisers found 59% mentioning managed accounts as among the most popular investment products this year. Asked to list which two competitors they considered the biggest threats, about 48% of the financial advisers named accountants, 37% cited banks and 36% named wirehouses.
"Managed accounts are clearly the bull's-eye for where the market is headed," Crager said.
Executives at large banks still believe that they are well positioned to distribute managed accounts. Joel Kesner, an executive vice president and the managing director of brokerage products and services at FleetBoston Financial Corp., has said, "It takes an enormous amount of money to develop a robust fee-based platform."
Kesner said integrating these products is not easy, though. Fleet's sales of fee-based products fell from $200 million in 2001 to $140 million in 2002, he said. However, he added, "banks, large or small, need these products if they want to compete."
Kevin Daniels, an analyst in Boston, said that regardless of size, banks have the opportunity to succeed in selling managed accounts because of the types of clients they serve.
"Banks have strong ties to their customers, and fee-based products are all about customer relationships," he said. "Accountants work with their clients once or twice a year. A financial adviser may see his clients quarterly. We are in contact with our bank every single day."
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