KeyCorp private bank’s decision to move to an open architecture model in wealth management exemplified a couple trends analysts have noted in this business line.
Open architecture has become the rule rather than the exception across the industry, but observers say the holdouts have tended to be midsize regional banking companies, very much Key’s profile.
Charles “Chip” Roame, the managing principal at the San Francisco consulting firm Tiburon Strategic Advisors, said some larger banks adopted the platform years ago because they were comfortable letting their products compete against third-party offerings. Community banks succumbed to the strategy in the past two years when they realized they could no longer afford proprietary asset management.
“Midsize banks are really lagging behind when it comes to open architecture,” Mr. Roame said.
KeyCorp’s private bank has moved to an open architecture wealth management strategy in the past three months. David Legeay, a senior vice president and director of portfolio management at Key Private Bank, said it had looked in the past nine to 12 months at its “asset base and what was going on in the industry and realized there was a disconnect.”
He took a different view of where KeyCorp fits in the overall trend, however.
“We aren’t on the front end, but we aren’t late to the game. I’d say we are right in the middle,” Mr. Legeay said. “We have seen anywhere from five to 10 announcements from different firms in the Midwest in the past couple of months touting their new open architecture approach.”
Some also have noted a gap between what large banks have pledged to do and the degree to which it has been executed.
“I think all banks are really still in the process of moving to an open architecture platform,” said Brandon Sharrett, a senior vice president in private banking and trust at SEI Investments Inc., an Oaks, Pa., asset management provider. “I think larger banks have been better marketers of their intent to move to an open architecture structure, and there is an honest intent there, but they all have a long way to go before they can say they are truly embracing this business model.”
A survey of wealth management executives released by SEI in October said that 57% of banks offered a mix of proprietary and nonproprietary investment products and only 8% sold proprietary products only.
Mr. Legeay said Key’s private bank had developed assets and customers by offering internally managed mutual funds and other proprietary products but that the industry had shifted in the past couple of years.
“When we looked at the industry and some of the deals that were done, like PNC selling BlackRock and the Citi-Legg deal, it was clear that the industry was moving in another direction,” he said. “Everyone was moving to more of an advisory-based model where the investment adviser positions himself as a consultant rather than as just a money manager.”
KeyCorp, a $94.1 billion-asset Cleveland banking company, announced in September an agreement to sell McDonald Financial, its proprietary wealth advisory unit, to Zurich’s UBS AG for $280 million. (Mr. Legeay said KeyCorp’s decision to sell McDonald had nothing to do with deciding to move to open architecture. “We were well down that path prior to announcing that Key was divesting McDonald to UBS,” he said.)
The private bank is trying to position the right products and build the proper internal technology to offer its clients the correct solutions, Mr. Legeay said.
Geoffrey Bobroff, an analyst at Bobroff Consulting in East Greenwich, R.I., said more banks are adopting open architecture because more money can be made on investment advice than investment management.
“Banks, especially midsize and smaller banks, need to focus on the fact that they can collect more robust fees by aiding clients in asset allocation rather than just handling investment management activities,” he said.
Mr. Roame said open architecture might not be the right answer for every midsize bank.
“I think their decision of whether to move to open architecture or stick with their proprietary strategy has to be based on specific customer research,” he said. “Banks have to ask customers, if they offer open architecture will it mean heavy outflows from their proprietary products or a greater share of wallet. … There will be a different answer from different midsize banks depending where they are in the country. No one wants to cannibalize their assets.”
Mr. Legeay said he has seen a good response from both prospective and existing clients to the Key private bank’s new approach. The unit had $15 billion of assets under management at Sept. 30. He said he expects double-digit annual growth for the next three to five years.
“I think we have to expect that in order to maintain a competitive edge,” he said. “We have to grow our assets under management consistent with the rest of the industry.”
