There are signs that banks are starting to use more outside investment managers to run their large trust accounts, industry observers say.
Although most banks are reluctant to turn to outside managers, some have been goaded into action by their clients and by legislation demanding that investment managers seek expertise when needed.
U.S. Trust, Northern Trust, Chase Manhattan, Republic New York, and Bankers Trust are among the banking companies using nonbank managers employed by boutique money management firms.
"We see it as a trend," says Mary Lehman, managing director of the private bank at Bankers Trust. She added that her bank is putting together a fund with an outside manager.
Legal changes may speed up the process. "Prudent investor" legislation, versions of which have been adopted in more than a dozen states, demands that banks seek outside investment expertise when they need it. Many bankers, however, are reluctant to seek outside help.
"In order to comply with prudent investor legislation, we have to do it," said Ms. Lehman."It doesn't matter whether it is the most profitable for us or not."
Bank trust departments have employed outside managers mostly to manage the accounts of very wealthy clients, who can afford the charges. Generally, these managers handle portfolios that banks have traditionally not specialized in, such as hedge funds and venture capital funds.
It is difficult to measure how widespread this trend is because banks are typically reluctant to discuss it. Many institutions fear that clients not wealthy enough to qualify for this service may complain.
Also, banks do not want to be portrayed as inadequate money managers and would rather not emphasize others' strengths.
Finally, banks would rather not lose the high profits that come from doing their own investment management.
"The minute they do this, they're opening Pandora's box," said David B. Horn, chairman of Graystone Partners, an investment consulting firm that advises very wealthy families on choosing multiple investment advisers.
At the same time, Mr. Horn said, most banks have no option.
"For the banks that really want to capture the high end, there is no choice," Mr. Horn said. "They must build multimanager products. Their failure to do so is going to result in their losing the business to firms that are more innovative."
Mr. Horn said many wealthy families have for a couple of decades been using a mix of managers to invest their fortunes. The average Graystone client uses as many as seven managers, he said.
And Sara Hamilton, president of Family Office Exchange, an independent consulting firm that advises clients with more than $50 million in assets, said: "I have been talking to banks for years about the need to accommodate the philosophy of a sophisticated investor, which is to diversify and to do this willingly, as opposed to reluctantly."
