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Open Architecture Key to SMA Platforms


CHICAGO-As more banks weigh whether or not to offer separately managed accounts, their key considerations should include pricing, training, compensation and an open architecture platform that includes a mix of proprietary and outside investment products. That was the advice of speakers at Money Management Institute's Fourth Annual Separately Managed Accounts Conference here last week.

The first thing a bank must do is assess if the SMA business fits in with their business model and secure senior management buy-in. "The SMA platform has to be the most important thing on the president's agenda. If it is not, then it might be best to rethink the decision to start a platform," said Paul Ahern, a principal with Winslow Capital Group of Penobscot, Maine. The president has to understand the difference between commercial banking and wealth management. Otherwise, the cost and effort may not be worthwhile, he added.

For the most part, banks are led by former commercial lenders or treasurers. Banks tend to think about gross margin and compare their trust business to their loan business, Ahern said. Many bank trust departments are viewed as low margin or potentially unprofitable service centers.

"If a president does not understand that the trust and wealth management business is a business operating inside another business,' then a bank should rethink whether adding another layer of complexity is sustainable," he explained.

Next, banks need to think about the cost of implementing a platform and whether it is better to build or outsource their program. The technology supporting an SMA platform can be expensive, experts said.

It is also crucial that banks know their target audience and understand their needs. The typical SMA investor is affluent. Most have $500,000 or more in investable assets. Their median age is 56. Ninety percent have a college degree. Eighty-nine percent are married, and 68% are either working or are semi-retired, according to data from Spectrem Group of Chicago.

As of 2005, there were 14 million affluent households, with 65% of them owning managed accounts, said Catherine McBreen, a managing director at Spectrem. However, while most SMAs require a minimum balance of $100,000, there is talk of having the balance requirement drop to $50,000, said Anthony Gallea, managing director of wealth management at Smith Barney of New York.

Affluent investors seek a collaborative relationship with their financial advisers and do not want products pushed on them, experts agreed. Investors in SMAs have become more sophisticated and expect in-depth knowledge from their advisers and more investment product choice, McBreen said. They are also very concerned about having enough money throughout their retirement.

One of the most important aspects of setting up an SMA platform, but that banks often overlook, is to include portfolio managers when selecting outside investment choices to include in the platform, Ahern said.

"When devising an SMA offering, most banks do not pay proper attention to their portfolio managers, forgetting that they most often make decisions on when and how to use a new offering," Ahern said. "Portfolio managers that end up feeling railroaded can resist in very subtle ways to their client's, their own and their bank's detriment."

SMA portfolio managers should also have more contact with the trust department and with clients, acting not just as stock pickers but as financial advisers, said Jean Sullivan, a managing principal with Dover Financial Research of Westwood, Mass. Their role now includes greater emphasis on planning and advice activities, such as client reviews and identifying client preferences, she said.

Investors must be sold products that meet their needs, and financial advisers must recognize that different products serve different roles. "For the affluent investor that is price sensitive, it is very hard to have just an SMA. Additional products such as exchange-traded funds can be packaged in a portfolio," Gallea said. Most of the time when investors decide not to invest in an SMA it's because they have not been shown the value of the product, said Gallea.

Joe Heffernan, a senior vice president with First American Bank, a small community bank based in Elk Grove Village, Ill., explained that before an investor opens an SMA account with his bank, a representative goes over their risk tolerance and goals. It's all about the customer experience and potential clients will open accounts with a bank if the process is done right, said Heffernan.

Throughout the entire SMA process banks need to pay attention to detail and assess the SMA platform continually. "Banks assume things are running smoothly and miss a lot of subtleties, which will make or break their platform," Ahern said.

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