Compass Bancshares knew it had to dump its proprietary fund family if it wanted to make any impact as a wealth manager, and it, like many smaller banks, believes it has found an impact product in separately managed accounts.
Todd Smurl, hired three years ago to run the $30 billion-asset Birmingham, Ala., bank's wealth management arm, said the $1.2 billion fund family was failing because it lacked "the requisite distribution and scale to grow and be profitable." Senior management then decided to adopt open architecture.
"The bottom line is, we didn't set out to be innovators. We just wanted to solve a problem here," said Smurl, the executive vice president of Compass Bank's wealth management group.
"Banks don't have to be gargantuan in size in order to compete as wealth managers," Smurl said.
Compass sold its proprietary fund group to Goldman Sachs in February and began offering a unified managed account platform. Today, from a non-proprietary menu of 10 money managers and 30 mutual funds, the bank's portfolio managers handle asset allocation and third-party manager selection.
"What small banks are good at is developing relationships with wealthy families," Smurl said. "It is really hard to try to beat a benchmark on a consistent basis. It is relatively easy to provide advice. In this business, it makes sense to do things you can accomplish."
Compass is not alone. Community banks in towns like Searcy, Ark., Grand Rapids, Mich., Nashville, Tenn., and Milford, Mass., are launching open-architecture, fee-based platforms. Once considered the preserve of the largest banks and brokerage firms, these platforms are letting small banks compete for wealth management share.
Lee Mackey, the head of wealth management at $1.8 billion-asset First Security Bancorp in Searcy, said the rise of open architecture and fee-based platforms lets small banks do better than just compete. His company launched a unified managed account platform two months ago, and "this gives us an advantage," he said.
"Over the past three to five years, with all of the negative publicity surrounding proprietary products, open architecture is what customers want," he said. "Customers want unbiased and objective investment management."
Dover Financial Research in Boston has reported that 73% of banks in a survey were offering managed accounts and the other 27% expected to do so within a year. Dan McNamara, the managing director of Bank of America's consulting services group, said banks large and small are launching open-architecture products. And at Money Management Institute's conference on managed accounts in Chicago last month, 17 community banks were among the participants, including all four small banks interviewed for this article.
"More and more banks are doing this, and not just large banks," McNamara said. "We are facing competition from a lot of small banks."
Executives at small banks said that, since most have dumped or never had proprietary products, their transition to managed account platforms with open architecture has been swift. Brian Downs, a senior vice president at $1.8 billion-asset Macatawa Bank in Grand Rapids, said managed accounts actually suit small banks.
"This is really the only option we have unless we hire staff and launch investment products," Downs said. "We are getting accounts and customers that once were with the big banks because these customers don't like self-serving institutions that are forcing proprietary products on them. Customers like our best-of-breed approach."
Small banks are able to offer relatively sophisticated products like managed accounts through partnerships with turnkey asset management providers, such as Placemark Investments. Downs said Macatawa Bank, which has $500 million of assets under management, chose a partnership with William Blair & Co. in Chicago to help it offer non-proprietary mutual funds and managed accounts.
Barry Moody, an executive vice president of the asset management arm at Nashville's Pinnacle National Bank, said Raymond James Financial of St. Petersburg, Fla., was his bank's choice to provide a managed account platform. He said 40% of Pinnacle's $400 million of assets under management is in fee-based products, up from 5% six years before.
Moody, whose bank has $872 million of assets, said these services offer good opportunities to cross-sell and deepen relationships.
"This is a big referral business," he said. "If you have someone who is happy and you are offering them an open-architecture array of products, you can generate referrals through them."
First Security in June chose a partnership with Placemark, a Dallas unified managed account manager for financial services companies. Previously, the Arkansas bank had offered retail brokerage and trusts. Mackey said he joined First Security in February to establish a wealth management structure for asset gathering. Placemark's unified managed account lets the Arkansas bank compete with wirehouses and large banks, he said.
"Through our brokerage platform, we could offer traditional investment products like stocks and bonds and mutual funds, but what we realized from the marketplace was that a lot of firms were doing the same thing," Mackey said. "We wanted to do something a little different."
In September, Placemark introduced Placemark Select, which lets any qualified financial services company offer full-service unified managed accounts. Randy Bullard, Placemark's president, said the turnkey program lets the wealth management divisions at smaller banks, broker/dealers and registered investment advisors offer a unified managed account program without investing in extensive back-office infrastructure or the research and technology staff needed for a fully customized unified managed account program.
Interest among small banks prompted Placemark to launch Placemark Select, Bullard said. Banks of this size see unified managed accounts as a way to "leapfrog" broker/dealers, he said.
"We were receiving an increasing volume of inbound inquiries from second- and third-tier banks," he said. "We are talking bottom of the top 50 and below in terms of deposits."
Bullard said Placemark has a handful of small banks, including First Security, on its client roster and is in active dialogue with a dozen others. Small banks that launch a unified managed account platform can compete immediately because they are not burdened by infrastructure costs, he said.
"With banks and the CPA market, the client relationship is rooted in trust," Bullard said. "The second you tie that relationship to proprietary products, you put that relationship at risk."
Mark Linehan, a senior vice president at $300 million-asset Milford National Bank and Trust in Massachusetts, said his bank is trying to add a managed account platform. By the first quarter of 2006, he said, the bank hopes to be offering a platform from Sungard Data Systems of Wayne, Pa., the provider of its trust platform.
Milford National hopes that by expanding its product mix, it will be able to compete for new business beyond the $100 million it currently has under management, Linehan said.
"We are still not expecting to compete for customers with more than $5 million," he said, "but with customers with $1 million to $3 million, this gives us a better shot than if we only had our in-house products."
Like many small banks, Linehan said, Milford National offered in-house, large-cap equity portfolios and some fixed-income products. "By offering broader asset allocation," he said, "we may be able to manage more money for our clients."
Compass' Smurl said that, rather than form a partnership with a turnkey provider, his regional banking company hired a technology vendor, Prima Capital of Denver, and decided to build its own overlay portfolio platform. Now that Compass manages $4 billion of assets, Smurl said it is crucial for the bank's value proposition to remain in charge of its assets.
But not all banks are anxious to offer open-architecture platforms. Christopher Davis, executive director of the Money Management Institute, said some smaller banks remain wary of changing their wealth management platforms because of concerns about profitability.
Initially small banks may generate less profit with a new platform, Bullard said, but over time, deepened client relationships on an open-architecture, unified managed account platform will pay off.
Mackey said he knows that First Security is giving up some short-term profit in its partnership with Placemark but that this enables a focus on gathering assets and developing client relationships. "We looked at doing it all ourselves," he said, "and we may have made more money that way, but we couldn't put together the platform that Placemark had in place. We wanted to be focused on our customers, not on administration."
Bullard also said banks have generated limited profits from fee-based platforms because they have historically undercharged for these services. Dover's research indicated that banks are charging an average fee of 1.15% of assets on their managed accounts while brokerage firms charge 2.5% on average.
"Banks still feel that they have to compete on price," Bullard said. "Implicitly, by doing so, they are saying to customers that this is not a competitive product. Banks need to break that mentality. They have to sell market competitive products at market competitive prices, and ultimately they will be profitable."
In addition, offering a complete unified managed account solution rather than just separately managed accounts and other products can differentiate banks from brokerages in the SMA space, Bullard said. "Only a fraction of broker/dealers are offering unified managed accounts. If small banks put a unified managed account solution on their shelf, they will leapfrog the two-thirds of broker/dealers that don't have one," he said.
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