Solid Infrastructure, Consistent Support Also Key

NEW YORK - Tapping into the banking distribution channels to sell increasingly popular separately managed accounts has third-party providers salivating. But before investment advisors can cash in, they must be prepared to offer comprehensive training, solid infrastructure and consistent support.

"Understand: you are not selling a product, you are working with them for a solution," said Peter Green, senior vice president in the managed accounts consulting group at Prudential Investments of Newark, N.J.

Finding a solution means more than offering good products, agreed panelists who spoke at a conference last week sponsored by Santa Cruz, Calif.-based Financial Research Associates. A solution also means providing the technology and training needed to help their products mesh with the culture of the banks. Most importantly, it takes patience, they said.

"If you're not willing to put in the time and effort, do not go near the bank channel," Green warned.

For those providers that are willing to put in the work, though, the rewards can be tremendous. The $500 billion industry is enjoying 18% annual growth, according to T. Neil Bathon, founder and president of Financial Research Corp. of Boston. By 2010, the SMA market is expected to swell to $1.5 trillion, as more Baby Boomers start searching for a means of managing their Individual Retirement Accounts and other retirement plans.

The combination of wide-ranging networks and longstanding clients makes banks an ideal channel for SMA sales. At the same time, banks, which watched customers pull out savings and invest with brokerage houses in the 1980s, can use SMAs to help lure some investors back, and, perhaps even more importantly, to keep such an exodus from happening again. Banks want to ensure that as Baby Boomers get ready to pull out their savings for retirement, the assets they have stick with the bank, said Dan Anniello, vice president with JPMorgan Chase in New York.

But grafting SMA products onto the sales platforms of traditionally proprietary product-oriented banks can be tricky.

First, there are the logistical challenges.

"Technology drives this product," said Bevin Crodian. Both private and commercial banks provide an incredible network to capture, but the foremost problem facing SMA providers is not product design or demand, said Crodian, a managing director with Market Street Advisors in Edison, N.J. "You need the underlying middle and back-office technology," he said.

One challenge that large wirehouses face, he said, are systems that are, in some cases, 20 years old. Because they were built when open architecture was a laughable proposition, many of these antiquated systems are, by design, incompatible. Rather than replace them wholesale, brokerage houses have patched in new programs over time, leaving broker/dealers with cumbersome systems that force them to toggle between different software to get accurate data and make trades.

Banks, although a fragmented marketplace, offer the advantage of a clean slate, said David H. Gardner founder of FiConnLLC. Successful SMA providers must be able to offer a system that blends with that the one the bank already uses for its own products, Gardner and other speakers said.

When The Commerce Trust Co. of Kansas City, Mo., entered the SMA marketplace, executives were concerned that customers would be inundated with long, confusing documents or unfamiliar statements, said Barbara S. Turley, a vice president with Commerce Trust, whose holding company Commerce BancShares, operates 340 branches across Missouri, Kansas and Illinois.

"Interface is a challenge, and making the links is one of our value propositions," Green said. Prudential worked closely with Commerce Trust to allay those concerns and develop an interface that gelled with the one that the bank already relied upon, along with customer statements that would resonate with the bank's clients.

"You need to have flexible partners," Turley added.

Flexible partners are also critical in addressing the second challenge, which is cultural.

"If you come in thinking you will replace the existing [asset management] products, you are actually not going to do very well," Green said. "Don't ignore the importance of proprietary asset management, and do come in to complement the existing products." Banks that already have their own line of products or their own groups of portfolio managers may be off-put by third-party products and perceive them as cannibalistic competition, rather than another helpful tool.

"This is an enormous cultural change," said Ted Hovivian of Bank of America's consulting services group in Boston. "We underestimated that." Part of the problem was that bankers did not know how to sell SMAs. Shifting from picking sticks to pushing products proved especially hard for the bank's former portfolio managers, he said.

Bank of America started with a uniform training program, Hovivian said, but soon found it ineffective. The bank then segmented its sales force with targeted training: one curriculum for those straight stock pickers didn't understand the utility of the portfolios, a second for those who understood the product, but were unsure how to close deals, and a third for those employees, mainly wirehouse veterans, who understood the product, but simply needed to know more about its composition.

SMA providers that can offer solid training programs help avoid such speed bumps, said Bob Morganthau, chief executive of Northroad Capital Management in New York. "It's needed, it's soaked up, and it's absolutely additive," said Morganthau, whose firm specializes in providing internationally oriented SMA products to banks.

Some banks start with a hybrid approach that mixes third-party products with proprietary funds, in effect helping bank representatives wade into the SMA space, said Greg Bottjer, wealth management product manager for PNC Advisors in Boston.

And investors, who often already have longstanding relationships with their banks, often appreciate it. "The bank has more credibility if it can position proprietary funds alongside third-party products," said Jennifer Hartmann, a senior vice president with Smith Barney in New York. Advisers who can tell clients which proprietary funds are strong and which are better replaced by third-party offerings, will gain trust and draw assets, she said.

Good bank advisers will draw even more assets if they are motivated through their compensation packages, Hartmann, Anniello and Hovivian each stressed. "At the end of the day, people do whatever they are compensated for," Hartmann noted.

"The right and entrepreneurial way is [to tell clients] we're going to provide the best possible products through the filter of a bank with which you have a longstanding relationship based on trust," Anniello said.

When it comes to trust, it is important that SMA providers make a concerted effort to keep bank portfolio managers aware of the product, and to believe in it.

"It's important that the money manger can get the portfolio managers on the phone. They are the gatekeepers," said Green. "Don't underestimate the willingness of an investment adviser to question your expertise."

Finally, that sense of personal contact is important to bank-based wealth advisers, Turley said, because it makes them feel as though they are part of the process. "The more [providers] put in, the more you get out," she said.

"Our portfolio managers are very interested in learning about the [third-party] portfolio managers so that they can feel confidence and conviction to go beyond their products and to be able to articulate the manager's story," Turley said. Even if it means competing with their own products, she said. "Overall, they are interested in providing good numbers to clients," she said.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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