CHICAGO - Banks continue to lag behind wire houses and registered investment advisers in attracting assets to separately managed accounts, conferees here were told, but many are skipping SMAs and going right to the next generation - unified managed accounts.
Dover Financial Research, a Boston consulting firm, said at the annual Separately Managed Account Conference here on Tuesday that 11% of banks in a survey were offering unified managed accounts and 67% were developing or planning to develop a platform within 12 months.
"We are really surprised that banks are this far down the curve on unified managed accounts," said Jean Sullivan, a managing principal at Dover.
Unified managed accounts let advisers offer their clients a single account that combines all their investments, including managed accounts, exchange-traded funds, annuities, and mutual funds. The platform is attractive because it lets banks offer an array of proprietary and nonproprietary products in a single account.
Large banks have worked to develop their own unified managed account platforms, and smaller banks are using third-party providers. In 2002, Bank of New York Co. bought Lockwood Advisors Inc., a Malvern, Pa., company that specialized in separately managed accounts and now has a unified managed account platform.
Leonard Reinhart, the chairman and chief executive officer of Lockwood, said it is creating such platforms for other financial institutions. It introduced a unified managed account platform two and a half years ago which included only Lockwood products. This platform, which Mr. Reinhart said has not been marketed or advertised heavily, now has $700 million of assets under management.
The company also is launching a unified managed account product that offers the tools for financial services companies to build their own platforms, he said.
"The banks are skating to where the puck is," Mr. Reinhart said. "Banks, more than other financial services firms, study and plan intensively. Some people say banks are slow to react to things, but banks are reading the research that says this business is moving toward UMAs, so some banks are going to build a UMA platform rather than just an SMA platform."
Bank trust and private banking arms have had "UMA-like" services without calling them that, he said, so Lockwood's type of platform is a natural fit. Now that banks must "develop the technology to deliver what they have done manually for their high-end clients, [they can] deliver it more efficiently to their lower-end customers," he said.
But as banks look to develop unified managed accounts, their interest in separately managed accounts appears stagnant. Banks' share of separately managed account assets declined one percentage point in the second quarter, to 7.8%, though assets in the product grew 5.8% overall, to $773.8 billion, according to the Money Management Institute.
"Banks are making inroads, but significant progress eludes them," Ms. Sullivan said.
Charles "Chip" Roame, the managing principal at the San Francisco consulting firm Tiburon Strategic Advisors, was more blunt. "Banks stink at separately managed accounts," he said at the conference. "Don't fall into the trap of thinking that [banks] are doing OK."
"Banks are not going to gain market share in the SMA business," he added. " … Banks were in the catbird seat. They sat there and did nothing and watched two channels blow by them" - a reference to wire houses and registered investment advisers.
Last year, the Money Management Institute released a Dover survey predicting that banks would double their share of the SMA market by 2010. But bank growth has stalled.
Ms. Sullivan said banks recorded "incremental" growth during the past three years while their market share grew from 6% in 2003 to 7.8% at June 30. Growth was slowed by banks' refusal to develop open architecture managed account platforms, she said.
Dover says separately managed account assets make up only 5% of banks' trust assets. "Banks are making little progress in growing market share and penetrating the trust market," Ms. Sullivan said.
About 15% of banks have adopted the infrastructure needed for an open architecture separately managed account platform, she said, and 35% have not.
A survey of wealth management executives released Thursday by SEI, an Oaks, Pa., asset management provider, says 57% offered a mix of proprietary and open architecture investment products and only 8% sold just proprietary products.
On Monday, U.S. Bancorp announced its introduction of an open architecture separately managed account platform. Mr. Roame said many banks are cautious about moving to open architecture because they are concerned about putting their proprietary investment products up against nonproprietary offerings.
Banks can evolve to open architecture with "baby steps," he said, and without burying their proprietary products.
"Offering open architecture means you have to offer choices, you have to offer other asset classes, but you don't need every manager known to mankind," he said. "You can plan around what you already have and play defensive ball."
Ms. Sullivan said attitudes are changing. In the past year Bank of America Corp. and Wells Fargo & Co. have joined the top 10 providers of separately managed accounts.
Christopher Davis, the Money Management Institute's executive director, said he believes "huge potential" remains in banks. But Mr. Reinhart, the institute's chairman, was not as optimistic. Banks will continue to gather assets with separately managed accounts, he said, but he does not expect them to pull share from wire houses and broker-dealers.
"To gain market share, banks are going to have to gain on everyone else," he said. "Banks could quadruple assets and still not gain share if everyone else is growing too. Banks could double their assets by 2010, but will they double market share? I'd say 'no' because everyone else is running really hard too."
