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Banks Muscle in on Big Five's SMA Command

Banks aren't exactly knocking the Big Five brokers out of the SMA ring - but they're throwing them a few jabs.

Domination by the five large sponsor firms in the separately managed account business has been challenged over the past few years, as banks have more deeply penetrated into the fray and begun to gain market share.

By most attendees' accounts, a recent SMA banking channel conference in Chicago, sponsored by Thomson Media and the Money Management Institute, successfully combined a how-to type seminar and success stories to help banks gain even more than the 2% increase they realized in the industry from 2001 to 2002.

Although banks' share of the SMA market today is 6%, that is expected to continue to grow considerably.

"I think a lot of banks understand they need to be offering SMAs, but they just don't know how to do it or how to incorporate it into other products and services they offer," said Jerome Paolini of Wells Fargo, who led the conference along with Len Reinhart of The Bank of New York.

Paolini, who serves as Wells' senior vice president and director of investment consulting, said the question of why more and more banks are becoming involved in SMAs should be more of a question of, "Why not?"

"If a client has the relationship, the trust and the services that an [investor] wants or needs, why wouldn't they do business with the bank?" he asked.

Single Point of Sale

With the growing number of affluent and high-net-worth clients and a desire by many of them to streamline investment decisions into one relationship, many banks, both large and small, have wisely begun adding SMAs to the quickly growing myriad of private-client products they offer.

With the almost 80% market share still enjoyed by wirehouses Merrill Lynch, Smith Barney, Morgan Stanley, UBS and Prudential, in order of dominance, banks realized that they were missing out on some of their best customers by not offering SMAs sooner.

"Banks are entering this space because the wirehouses have increasingly been [intruding] on their best customer, the high-net-worth investor," said Darlene DeRemer, executive managing director of NewRiver, which provides business and communications solutions to investment firms.

Some banks that have jumped on the SMA bandwagon have realized some significant gains. Bank of America, for example, increased its earnings between $6 billion and $7 billion less than two years after its initial SMA offerings, according to DeRemer.

DeRemer's presentation at the Chicago conference, which analyzed the "Challenges of Prudence, Profits and Platforms,'" offered statistics, results from a survey about which aspects of SMA are considered most important and information about marketing, sales and service.

The five wirehouses saw their share in the market drop from 83% to 79% in the past two years, while banks jumped from 4% to 6%.

SMAs were introduced in 1997, and according to Paolini, banks in general weren't sure initially whether they would last as a viable investment product.

"Brokerage houses have been doing it for a while, but banks are more cautious," he said. Banks that were being cautious, Paolini explained, constantly asked themselves whether SMAs were merely the latest fad.

"They're seeing that this is not a fad," said Paolini, whose bank has been in the SMA business since 1998, and now offers them through both its brokerage and private banking divisions.

Even with SMAs being offered more and more by banks, some industry experts don't think the upward tilt in their market share will be drastic.

No Giant Jolt

Chris Davis, executive director of the Money Management Institute, said that while issues of customer loyalty, convenience and, recently, better marketing have helped banks gain more SMA customers, the rise hasn't and won't come in one giant jolt.

"The banks, if they stay with this, and I think they have to, won't pile up assets rapidly. I think it will be a slow and steady process," Davis said.

Tangentially, one key aspect of the Chicago conference was the message that getting involved with SMAs is not an immediate transition, but rather a stairwell with multiple steps and floors.

"This is a process, not a product," Paolini said. "It's not something you get into immediately. You have to strategically get into it."

More Rich Get Richer

But besides feeling pressured into offering SMAs simply because of their growing popularity, banks have felt the need to serve a growing population of affluent Americans. The number of mass affluent (those earning between $100,000 and $1 million per year) and high-net-worth clients (those earning over $1 million per year) has increased over the past few years to the point where banks' hands have been forced in the SMA department.

"The amount of wealth today in the U.S. dictates that offering an SMA is appropriate, especially when clients are calling for it," Paolini said. "Banks need to realize they have to give their clients what they want to be competitive."

Fee-based compensation, which banks are trying to shift toward from commission-based, is easier to justify in the SMA business. DeRemer said customers understand that fees are warranted when a bank is acting as a consultant rather than a full-fledged money manager.

So, as banks slowly begin offering SMAs to compete with the major five wirehouses and even smaller regional brokerages, the question is not whether it will continue to gain market share. The question is how quickly.

Copyright 2003 Thomson Media Inc. All Rights Reserved.