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Banks Try to Muscle in on Brokerages' SMA Market Share


CHICAGO-Banks hold only a 7.8% market share of the separately managed account industry, and as they try and gain assets from the registered independent advisors and wirehouses that dominate the market, they will be faced with challenges of pricing, open architecture, sales and marketing.

"There has been little progress in growing the market share," said Jean Sullivan, a managing principal with Dover Financial Research of Westwood, Mass., speaking at Money Management Institute's Fourth Annual Separately Managed Accounts Conference here last week.

But she sees that changing. "As banks are more selectively and strategically thinking about SMAs, the market will continue to see growth in incremental stages," she said.

Dover Financial interviewed 50 banks varying in size from $2 billion to more than $100 billion in assets on their SMA platforms and complied a second annual report for MMI. Dover found the main challenges are culture and the positioning of investment management capabilities, pricing, profitability and infrastructure.

Typically, because banks lack broad investment knowledge, training programs have to be completely revamped and new investment knowledge taught across the board.

Banks also need to train their financial advisers and their sales staff about selling SMAs. "No one should be selling performance, but selling a process," said Anthony Gallea, a managing director at Smith Barney of New York.

Oftentimes, investment consultants at banks get referrals, and they need to improve their close ratios, said Chip Roame, a managing principal at Tiburon Strategic Partners of Tiburon, Calif. "It is a problem when bank brokers can't close referral business that was given to them." Additionally, advertising is a key part of the business, and money should be spent on getting the message out about SMAs.

Banks need to reevaluate pricing, another major challenge. "Banks are so far off the mark with their pricing. They need to get out of the pricing game because they are pricing against themselves," Roame said. Major issues include rampant discounting and legacy proprietary business being priced too low, making selling higher-priced nonproprietary funds difficult. In addition, most banks sell products based on low cost rather than on value, according to Dover.

To overcome these challenges, banks need to raise prices and put an end to huge discounts, experts said. Banks are also moving toward asset-based pricing models, which offer more transparency. "A few banks have developed pricing approaches that attempt to rationalize pricing across multiple products. And, some banks are in the process of unbundling pricing by separating the advisory fee from the management fee," according to the report. In addition, some banks are now charging clients more for nonproprietary funds, as the cost of offering them to investors is higher.

Additionally, the compensation structure for bank trust officers and salespeople needs to be increased to attract and retain talent. "The market is competitive, and if salespeople make more than the president, people need to be comfortable with that," said Galan Daukas, executive vice president of Washington Trust of Westerly, R.I.

Another challenge to banks is their infrastructure. Many banks lack the infrastructure, technology and account processing capabilities to offer SMAs, Roame said. However, there are a lot of products and platforms available on the market, including urnkey asset management programs or TAMPs, a one-stop shop for SMA platforms, he added. TAMPs perform due diligence to select SMA managers and even assemble SMA portfolios.

According to Dover's report, last year approximately 60% of the banks interviewed reported that the biggest obstacle in implementing open architecture in SMA platforms was infrastructure. Most indicated that vendors did not understand their unique needs, such as the necessity of linking to their custody and trust account systems. Some progress has been made this year, however, with vendor offerings becoming more tailored to bank requirements.

When offering SMAs, banks should also shift their focus to comprehensive wealth management and offer investors related products, such as credits and trusts, areas in which they have traditionally seen success.

"Banks need to stop thinking about how to beat firms like Merrill Lynch and Charles Schwab and start doing more wealth management, such as charitable giving, credits and trust. If banks change the game to wealth management, they will be in a better spot," Roame said.

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