Shrinking assets under management and rising compliance costs forced First Tennessee Bank to yield to the same realities that had pushed other midsize banks out of proprietary fund management in the past couple of years.
“Smaller proprietary fund businesses have really had to do a self-assessment over the last 18 months,” said Karen Kruse, a senior vice president of wealth management at the Memphis unit of First Horizon National Corp. The bank has national aspirations for its wealth management business, and its regionally well-known First Funds family was no help there, she said.
All these forces combined to prompt last week’s announcement that First Tennessee would sell the family to Goldman Sachs Asset Management Group. The deal is expected to close in the first quarter; its price was not disclosed.
“Regulatory costs have been rising exponentially,” Ms. Kruse said. “It makes you realize that [fund management] isn’t a core competency when you’re in the financial services business. The back end has driven us from the fund business.”
Ms. Kruse said First Funds had $1.5 billion of assets under management at Nov. 30, and this total continued the slow shrinkage from $1.6 billion at Sept. 30, 2004, and $1.7 billion at June 30, 2004, according to data from Financial Research Corp. in Boston.
Banking companies including what was then Banknorth Group in Portland, Maine; FirstMerit Corp. in Akron, Ohio; Riggs National Corp. in Washington; and Citizens Banking Corp. in Flint, Mich., have unloaded their proprietary mutual funds in the past two years. Federated Investors Inc. of Pittsburgh and Goldman Sachs have been buyers.
A recent Financial Research study concluded that fund companies need $5 billion of assets under management to break even and said that 80% of fund proprietors fall below the threshold.
First Tennessee’s First Funds comprise seven portfolios — three money market funds, two equity funds, and two fixed-income funds.
Ms. Kruse said last year that she was meeting with executives at First Tennessee to determine the future of First Funds. She said that to grow beyond its home market, First Tennessee wanted to establish wealth management teams in places such as Northern California, Phoenix, Seattle, Kansas City, Dallas, Baltimore, and Northern Virginia.
Last September, the bank said it had begun to branch out nationwide with wealth management teams in 10 states from Virginia to Washington.
Securities and Exchange Commission regulations adopted in 2004, in response to the fund-trading scandals that began the year before, require mutual fund providers to adopt comprehensive policies. These require registered investment advisers to appoint chief compliance officers, have policies and procedures to prevent and detect violations of securities laws, and annually evaluate their investment programs.
Ms. Kruse said last year that First Tennessee and its First Funds were in compliance with the tighter regulations. Her unit had hired a chief compliance officer, she said, and regulatory costs would not be a factor in whether the bank kept its fund unit.
Regarding the open architecture product mix needed to compete, she said, “we are evolving, and as the market evolves you have to evolve with it.”
Because First Funds are not well known outside Tennessee, shedding the proprietary fund business and focusing on open architecture became necessary for First Tennessee to market its wealth management services nationally, Ms. Kruse said on Tuesday. In the past year, it has been looking to acquire wealth management teams in Northern Virginia, Atlanta, and Dallas — places where the bank already offers mortgage lending.
Though First Tennessee had always offered third-party funds in addition to its proprietary products, the Goldman deal lets the bank go 100% to open architecture, Ms. Kruse said. It has offered 15 to 20 fund families, including portfolios from Calamos Asset Management Inc. and American Funds Distributors Inc.
First Tennessee’s strategy is to develop a wealth management platform rather than focus on selling products, she said last year. First Tennessee was already offering managed accounts then from FundQuest Inc. of Boston.
First Funds could not compete with the diversity of investment styles offered through open architecture platforms, Ms. Kruse said this week. “We haven’t been able to develop the robust [proprietary] offering we were striving for,” she said. “We were lacking in certain styles, such as mid-cap funds.”
The bank does not anticipate any significant organizational changes as a result of the Goldman deal, she said.
