CHICAGO - About 73% of banks have begun offering separately managed accounts, according to research released this week at a conference here, and the remainder plan to begin doing so within a year.
But some are not fully exploiting the opportunity to participate in a doubling or tripling of assets foreseen for the product, trade group officials and the research firm said. In a "moderate" forecast by Dover Financial Research, a Boston firm, assets held in managed accounts would have a compound annual growth rate of 15%, from $620 billion at June 30, to $1.5 trillion by 2011. Using more aggressive assumptions, said Jean Sullivan, a managing principal at Dover, assets in the product could reach $2.074 trillion by 2011.
Culture, proprietary products, and pricing are obstacles to banks' gaining share in the managed account industry, said officials of the Money Management Institute, which sponsored the conference.
Christopher Davis, the institute's executive director, said it all starts with culture. Despite widespread adoption of the product, "many institutions are still reluctant" to commit themselves to selling it, he said. Though open architecture is becoming the norm, perhaps half the assets in bank-run managed accounts are proprietary, according to Dover research.
Even pricing, where banks hold a big advantage, seems to indicate banks have been timid about exploiting the product's potential, the institute said.
Dan McNamara, the managing director of Bank of America Corp.'s consulting services group and co-chairman of the third annual Separately Managed Account Conference, said bank interest in managed accounts is rising quickly. Banks large and small are launching the product, he said.
"When we held our first conference and we talked to banks about offering these, people thought we were crazy," Mr. McNamara said. "Now more and more banks are doing it. There is so much momentum out there that I think this will open up." Seventeen community banks attended this year's conference.
Mr. McNamara said Bank of America's managed account platform has $23 billion of assets under management and he expects "double-digit growth" annually for the next five years.
But despite this sort of optimism, banks' market share has remained low. The Money Management Institute said banks managed 7% of the $620 billion of managed account assets at June 30, up from 6% in March 2003.
Dover's Ms. Sullivan said banks are well-positioned and motivated but are "still flailing."
Laura Varnas, a research partner at Dover, said most banks remain dedicated to their proprietary products even as the industry moves to open architecture. According to Dover's research, 69% of companies are using open architecture, 5% use only proprietary products, and 26% have adopted a hybrid platform of proprietary and nonproprietary products.
However, proprietary products and proprietary managers continue to dominate portfolios, Ms. Varnas said. Bank-run managed accounts still hold 40% to 60% of assets in proprietary products, according to Dover's research. "Banks are taking steps to be 'open architecture,' but the banks still want to be the architect," she said.
Sam King, the director of institutional sales at Lockwood Advisors Inc., a subsidiary of Bank of New York Co., said open architecture is essential because customers are demanding choice. But this does not require an abandonment of proprietary products, he said.
"A good managed account platform requires open architecture, including access to third-party and proprietary money management," Mr. King said. "This doesn't mean you have to open up to a universe of 100 managers or 200 products. … Advisers need choices as they are talking to investors."
Kevin Osborn, the director of Prudential Investments' managed account consulting group, agreed that banks do not have to abandon their proprietary products in order to offer open architecture. The Newark, N.J., insurance giant, which has offered managed account services to midsize banks since mid-2004 and will start going after smaller banks next year, has created platforms that incorporate proprietary and nonproprietary products, he said.
"Open architecture is really too strong of a word; we prefer to call it 'flexible architecture,' " said Mr. Osborn, who was a conference co-chairman. "Banks want to add outside products and outside managers that can complement what they already have."
In the wake of Citigroup Inc.'s swap of its proprietary products to Legg Mason, many industry observers have suspected that the rise of open architecture would mean the end of bank-owned products, but Mr. McNamara said open architecture is "not an all-or-nothing proposition."
"Banks need to continue to lead with their strengths," he said. "Bank of America had strong large-cap products, and we wanted to complement that with other products. The trap that banks fall into is the sense that they need to have investment products in every investment class. But the truth is, it is very difficult for one provider to be the best at everything."
Pricing also continues to be a major issue, Ms. Varnas said. Dover's research indicated that banks are charging an average fee of 1.15% of assets in their managed accounts and brokerage firms 2.5%.
Ms. Varnas said half of banks indicate that this differential gives them an advantage but the other half say investors see low prices as an indicator of an inferior product. "The truth is somewhere in between," she said. "Banks' pricing is too low."
Chris Cosentino, a spokesman for the Money Management Institute, said, "The price differential is staggering. It's almost like banks are afraid to sell these products."
Dover's Ms. Sullivan said growth will continue to be just incremental until banks can overcome these obstacles. Banks' share of the managed account market should grow to 10% in the next few years, she said.
"To reach more aggressive growth objectives, the managed account industry must expand beyond the wire houses," she said. The Money Management Institute says wire houses have 77% of managed account assets.
Mr. Davis, the institute's executive director, said the overall growth of managed accounts will depend on more than just banks. His organization is looking to help spur distribution of managed accounts through advisers at banks, regional broker-dealers, and insurance companies, he said. "The bank channel is the closest to moving aggressively," he said. "The bank channel is the one channel poised for more aggressive growth."
