SEI, Trusting in Its Expertise, Expects Further Growth

As businesses go, SEI Corp. is in an enviable position: The Wayne, Pa.- based company has found a way to play all angles of the investment business. It supports bank trust departments on an outsourcing basis, designs and sells systems to banks and other organizations for use in supporting the management of investment funds, and runs its own investment management operation.

"We know the trust and banking businesses, and we know mutual funds," said chairman and chief executive Al West. "We're technologists; we're investment experts."

And when dealing with financial institutions, that kind of expertise can pay off handsomely. For 1994, SEI reported net income of $19,250,000 - a 19% increase over 1993 - on revenues of $263,765,000. And Mr. West and his colleagues expect continued growth, even in the face of a consolidating marketplace.

The optimism stems in part from SEI's standing in the market. The company's trust accounting system, for example, has a reputation for having the capacity to handle more accounts than any other system currently available to banks - upwards of 100,000 accounts per client institution, according to Mark Hardie, technology analyst with the Tower Group, Wellesley, Mass.

So when two large banks merge, even if only one is outsourcing its trust operations to SEI, the Pennsylvania company has a better chance of emerging as the surviving service bureau.

SEI also has a knack for the customer conversion process.

"One of SEI's strong points is that they're able to convert customers very quickly," said Mr. Hardie. "That's important in a consolidation. To have a conversion drag on is to have your business end up dead in the water."

According to Mr. Hardie's research, there are 126 bank holding companies using SEI to process trust accounts on a service bureau basis, including several large regional holding companies with huge account bases, like Banc One Corp. and Fleet Financial Group. "A big bank that's acquisition happy (and that uses SEI) can have confidence that a new acquisition won't put it out of the range of SEI's systems," said Mr. Hardie.

And for SEI, the more accounts a bank puts on the system, the better the company's earnings prospects: fees are based in part on the number of accounts a client bank puts on the system.

Outsourcing has been SEI's bread-and-butter business for more than 20 years, and likely will help sustain the company for years to come. "Banks in general are looking at outsourcing more favorably than they have in the past," said Mr. West. "They're our number one prospect."

But SEI has not been without setbacks. Earlier this year, Cleveland- based Keycorp said it would switch to a trust processing system from Broadway & Seymour Inc. And last June, SEI lost another customer, Comerica Inc., to the Charlotte-based technology firm. The Detroit-based bank said it would move its trust processing operations in-house when its outsourcing contract with SEI expired.

To survive in this competitive marketplace, SEI, like its clients, has discovered the need to change. So the company has expanded its scope of operations.

One area SEI has been pursuing with apparent success is liquidity management. The company currently manages more than $15 billion in short- term assets for more than 400 institutional clients. For its bank customers, SEI can combine that expertise with its technology know-how to offer a turnkey approach that helps stem the tide of disintermediation and lets banks snag a share of the corporate liquidity market.

Today, commercial banks control only about 5% to 10% of the short-term corporate liquidity market, according to data compiled by Treasury Strategies Inc., Chicago. Yet, noted Tony Carfang, a Treasury Strategies partner, banks control all the information corporations need to make short- term investment decisions.

"Corporations can't even make investment decisions until they know how much money they have to invest," observed Mr. Carfang. A company's cash management bank knows that number before the company's cash managers know it, he noted.

Banks also handle the settlement and safekeeping associated with corporate investments. "Yet securities firms do most of the transactions and make most of the money," said Mr. Carfang.

Some banks are discovering that they can leverage the information they have on corporate customers' cash positions to support those customers' investment needs through sweep arrangements.

SEI is angling to support that trend. Sweep accounts are checking accounts designed so that excess funds are moved automatically into and out of overnight investments such as money market mutual funds.

Mr. Carfang sees a great future in sweeps for banks and for SEI. Data compiled by his firm indicates assets in commercial bank sweep accounts rose 83% between 1993 and 1994, from $37.7 billion to $56.1 billion.

SEI can support bank sweep account offerings with software, as well as with consulting and product management services. The company's hottest prospects are banks in the $1 billion to $10 billion asset range that can't justify the research and development costs of a homegrown system, according to Dennis McGonigle, SEI senior vice president. SEI client banks can sweep customers' overnight balances into proprietary mutual funds or into funds managed by SEI. Either way, the potential rewards are substantial, observed Mr. McGonigle.

"What we've seen is that for every dollar of (demand deposit account) money that moves off a bank's balance sheet under a sweep arrangement, the bank is picking up an additional $4 in investment money from that customer," he said. It's a service that helps banks recapture money that has been lost in the past to nonbanks.

"Because the banks are increasing the efficiency of the investment process, cash managers don't have to worry about where their cash is and about whether it's working for them," Mr. McGonigle said.

Although SEI's sweep product has allowed it to make inroads into the commercial side of banking, the company's strengths continue to lie in the ability to support bank trust departments and nonbank investment advisers. "We believe there is a significant amount of growth in bank trust departments, simply because of the efforts banks are making to position themselves as investment management firms," said Carmen Romeo, SEI executive vice president. "To the extent they do that, they'll have to deliver to their clients much more diversified products than they do today."

And that spells opportunity for SEI, which can offer new investment products and programs, and tools that help client banks grow investment management business lines - tools like on-line access to investment research data.

A customer segment where Mr. Romeo sees significant growth opportunities for SEI, and for its clients, is high net worth individuals, those with $500,000 or more in investable funds.

Mr. Romeo estimates there are 3.2 million households (or 3.4% of all U.S. households) that fit this bill, and that these households control $5.3 trillion in investable assets. Only about 33% of those assets are professionally managed, Mr. Romeo said, so the opportunities are good for banks to snag a big piece of that pie.

For SEI to profit from these opportunities, however, and to remain competitive in today's marketplace, requires technological know-how. So the company has created a new corporate technology unit and has embarked upon a three-year, $30 million project to convert its systems to an open architecture. The idea, explained president and chief operating officer Hank Greer, is to create a technological environment that makes it easy for customers to create links between SEI systems and systems supporting other areas of the bank.

In addition, SEI spends upwards of $20 million a year on product and technology development efforts, Mr. Greer estimated. "We invest a lot back into the business," he said.

SEI also has devoted time and effort to reinvent its corporate culture. The company has torn down office walls in favor of an open space concept, where multidisciplinary teams work together in support of specific products and services. Secretarial help is nonexistent; even Mr. West and Mr. Greer answer their own phones.

The result, say SEI executives, has been a marked improvement in productivity. "To the extent you have offices, it inhibits spontaneity," observed Mr. Romeo.

"It really does facilitate a more responsive environment to the client," said Mr. McGonigle.

And responsiveness to customer changes is what has kept SEI at the top of its market for more than 20 years, observed Mr. Greer. "We try to stay focused on our customer needs. To the extent we make them successful, we will be successful," he said.

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