Like a determined suitor, Central Trust & Investment Co. in St. Louis had spent more than a year offering its trust and wealth management services to the wealthy family-all without success.
"They liked our people and had been interested in doing business with us," explains Bob Jones, president and CEO of Central Trust, which manages $3.6 billion of assets. "But they were a client of another bank, and they preferred its investment platform."
In October, however, the wealthy family suddenly moved $8 million of its assets to Central Trust, a unit of the $8.9 billion-asset Central Bancompany in Jefferson City, Mo. The reason? Central Trust had upgraded to a wealth management platform built around what's known as overlay management, which is helping to improve the performance of clients' investments.
In part because of its ability to provide overlay management, Central Trust is aiming to increase its number of client accounts by 25 percent over the next five years. "It makes us more competitive in the marketplace," Jones says.
Overlay management is a cutting-edge process for investing wealthy clients' money. It involves the use of sophisticated software that helps advisers maintain a mix of investments that will give clients the highest long-term returns with the smallest tax bill. The process requires putting all of a client's investments - from stocks to mutual funds to exchange-traded funds - into a single, unified managed account. Advisers then use overlay management software, purchased from vendors such as Smartleaf and Fiserv Inc. unit CheckFree, to make pinpoint decisions about when to buy, sell or hold the investments within it.
Through overlay management, advisers can increase investors' after-tax investment performance by as much as 4 percent a year, said John Sawyer, chief investment officer at BBVA Compass.
Investor demand for this new approach is clear. Assets within accounts that use overlay management are poised to grow 35 percent per year, reaching $327 billion by 2013, according to the Boston research firm Celent. That explains why BBVA Compass and Central Trust are among the dozens of banks that have adopted overlay the past few years.
Todd Smurl, an independent consultant to bank wealth managers, says the combination of UMAs and overlay management "allows banks to grow their revenues without adding staff."
Overlay gives wealth managers greater control over taxes and risk because it allows them a complete view of a client's investments. Portfolio managers within banks often oversee just a portion of an investor's assets, meaning they may not know much about mutual funds and other investments the client holds outside the bank. When that's the case, bank portfolio managers must make investment decisions where clients may end up with a mix of overlapping investments and a portfolio with more risk. But with overlay, if a client has too many shares of, say, technology stocks spread across different types of investment vehicles, his portfolio manager knows to hold off buying more tech shares.
BBVA Compass was one of the first banks to implement overlay technology back in 2005, and Sawyer says that, without it, adjusting to wild market swings can require hours of sifting through clients portfolios manually. "We would have had a much harder time navigating the past two years," says Sawyer.
Overlay technology has also laid the groundwork for a revolution of sorts inside the cautious world of bank trusts. Before its arrival, wealth managers would often invest a portion of clients' assets outside the bank - in third-party mutual funds, for example.
The idea was to get access to an investment style - one with a focus on international or small-cap stocks, for example - that they did not provide in-house.
But many wealth managers worked with third-party firms reluctantly. They simply don't like handing over assets to an outside manager, says Central Trust's Jones. Most mutual funds, for example, are managed with an eye toward before-tax returns, even though the taxes they accrue can trim investment gains significantly.
Overlay management provides an alternative to exporting assets. Instead of sending money to an outside manager, banks can now buy that manager's investment advice, in the form of so-called model portfolios. Overlay technology allows bank trusts to invest based on those instructions in a way that is coordinated with the larger portfolio.
Because they are nothing more than investing instructions, model portfolios are relatively inexpensive. A trust department with $10 billion of assets under management could earn an extra $5 million to $10 million for clients annually by using the models, according to Smurl. "This is by far the cheapest and best delivery mechanism for access to third-party money managers," he says.