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Small Banks Seek Edge with Managed Accounts

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.