While some small banks have abandoned asset management or turned to third-party outsourcers, others are entering or remaining in the business.
Mutual Federal Savings Bank, a unit of MutualFirst Financial of Muncie, Ind., has just acquired Wagley Investment Advisors and renamed it Mutual Financial Advisors.
Pat Botts, president and chief operating officer of Mutual Federal, said it has been looking to offer investment advice for a long time.
Mutual Federal has offered investment products to its customers through an outsourcing relationship since 1982 with Uvest Financial Services of Charlotte, N.C., Botts said. The Wagley acquisition will allow the bank to offer its customers long-term investment advice, rather than just investment products, he said.
Mutual Federal is not alone in bucking the trend among small banking companies of using turnkey platforms for investment management or leaving the business altogether.
Scott A. Armiger, a vice president with Christiana Bank and Trust in Greenville, Del., said it is committed to providing investment management to high-net-worth individuals, even though it has only $400 million of assets under management.
Christiana, which Armiger joined eight years ago after working at Wilmington Trust for 19 years, is committed to the asset management business, he said. His company also provides private banking and investment management services.
Small banks that offer investment products and services can compete with large institutions, as long as they stick with specific capabilities and do not try to launch too many products, Armiger said.
Christiana offers its customers managed account portfolios, including an actively managed portfolio of reasonably priced large-cap growth companies. If customers want further diversification, it also offers third-party exchange-traded funds, he said.
Geoffrey Bobroff, president of Bobroff Consulting in East Greenwich, R.I., said more small banks are adopting open architecture, because more money can be made on investment advice than investment management.
"Banks, especially midsize and smaller banks, need to focus on the fact that they can collect more robust fees by aiding clients in asset allocation, rather than just handling investment management activities," Bobroff said.
Charles "Chip: Roame, a managing principal with the San Francisco consulting firm Tiburon Strategic Advisors, said open architecture might not be the right answer for every midsize bank.
"I think their decision of whether to move to open architecture or stick with their proprietary strategy has to be based on specific customer research," he said. "If they offer open architecture, banks have to ask customers if it means heavy outflows from their proprietary products or a greater share of wallet. No one wants to cannibalize their assets."
Regional banks in smaller markets, such as Muncie, Ind., can profit from proprietary products, he said, unlike those in larger markets, which are "forced to compete against the Schwabs and the Fidelitys."
Karen M. Kruse, a senior vice president of wealth management at First Tennessee Bank, a unit of First Horizon National in Memphis, Tenn., said a proprietary fund family is a "high-maintenance program that requires a lot of resources and even more expenses." First Tennessee sold its proprietary fund unit, which had $1.4 billion under management, to Goldman Sachs Asset Management in December 2005.
It can be very difficult for some banking companies to let go of their proprietary fund families, Kruse said, because they have been profitable in the past. Moving to open architecture has given First Tennessee a competitive advantage, she said.
"I guarantee our wider array of nonproprietary products will continue to be an advantage for us," Kruse said.
Botts said Mutual Federal, which has $960.7 million of assets and 21 branches in Indiana, plans to use an open-architecture array of money managers, so it can focus on advising clients.
"We certainly don't feel we need to manage our own mutual funds, but we do believe we can serve clients and steer them to best-of-breed solutions," Botts said."Customers trust us," Botts added. "We want to be on the same side of the table as them."
Armiger said that Christiana will continue to manage investment portfolios actively, and that even though its investment management business was flat last year, he hopes to double assets under management in the next five years.
Armiger also said he is confident Christiana can remain competitive by using technology and third-party research."We want controlled growth," he said. "We realize that our investment management business is only a complement to our overall fiduciary trust services business, and sometimes we are a good fit, and sometimes our clients need an outside adviser."
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