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Overlay Projects Proceed Amid Downturn


Given the turbulence in financial markets, now may seem an inopportune time for financial advisers to make drastic changes to the way they interact with investors.

But according to bank officials and technology providers, plenty of banks are moving ahead with their plans to implement new systems, including those that offer unified managed accounts and overlay software.

"In periods where you need to batten down the hatches, the first thing on your list is not 'Let's get a new product,'" said Charles "Chip" Roame, managing principal with the San Francisco consulting firm Tiburon Strategic Advisors.

Most managed account upgrades, however, are outsourced, which means they do not typically have big up-front costs and projects can be rolled out without huge expense, Roame pointed out.

All banks eventually will have to use UMAs and overlay technology to stay competitive, he said. "The world is going to UMAs. Is today the right time? Well, yes and no."

Smartleaf, a Cambridge, Mass., company that offers account management technology, said it had 36% year-over-year growth of new clients for its overlay software in the second quarter, compared with 26% growth in the first quarter.

In December, SunTrust Banks Inc. added overlay technology to its system, which already manages billions of client assets, and the UMA technology it implemented in October is managing more than $300 million. The project took upward of eight months and thousands of man-hours to complete.

"I can't think of a big bank that couldn't write the check" for making such upgrades, "but I can think of a lot that can't get their constituents to agree or give their time to it," said Mark Peters, who heads SunTrust's private wealth management unit.

Dave Hanson, chairman and chief executive of the investment management firm Fulton Financial Advisors in Lancaster, Pa., pointed out that UMAs are less labor intensive for managers and 30 to 40 basis points cheaper to deliver to clients than separately managed accounts.

Fulton Financial Advisors, the affiliate of the commercial bank Fulton Financial Corp., had been providing actively managed third-party mutual funds, proprietary equity management and index funds when it began thinking about doing an upgrade in April 2007. Fulton skipped past providing separate managed accounts, the traditional starting point, and went straight ahead with providing UMAs, beginning in January of this year. It has had double-digit sales growth since then.

Hanson expects the new services to cost Fulton Financial Corp. an average of around $250,000 a year. "If we can't spend a relatively small amount of money to position ourselves to be competitive in the future, then we have a problem," he said.

He said some of his staff had to work overtime to implement the project. Also, Fulton Financial's wealth management business has been growing and hiring aggressively, though Hanson said it did "consolidate" some of its back-office and marketing people in recent months amid the slowdown.

Eric Paul, vice president of managed account solutions at the M&T Bank unit of M&T Bank Corp. in Buffalo, N.Y., said M&T started thinking about upgrading its account services around two years ago.

With the project nearly complete, M&T is working through the details with some vendors that Paul declined to name, figuring out how much it will ultimately cost. Paul said that the investment will pay off in the end and that so far M&T has not had to spend much.

"We believe" the movement in the industry toward UMAs "is here to stay and long term enough that we need to stay the course," he said.

It remains to be seen whether the recent pace of growth in UMA business for service providers will hold up in the coming months.

Jeff Strange, a senior analyst at the Boston research firm Cerulli Associates, pointed out that UMA projects take a long time to develop. He said he thinks banks will complete the projects they started during better times, but it could be difficult for UMA providers to initiate new ones right now.

"Clients are stressed," Strange said. "They have capital requirements that are needed elsewhere."

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