Bank trust departments risk losing business in the high-net-worth market to competitors that are less conservative in product development, a survey report from Financial Research Corp. suggests.
Brokerages and independent investment advisers' alternative offerings position them to steal the bank units' customers away and prevent them from getting new business, said D. Chris Brown, vice president of research at Financial Research.
"The demographics are going against banks," he said. "The more you move up the asset scale, the more clients move toward individual securities and alternative investments rather than mutual funds."
The survey found that roughly one-third of high-net-worth asset managers use managed accounts rather than mutual funds. This gives them more control over their clients' tax consequences, the report says.
Exchange-traded funds appeal to high-end investment managers for similar reasons: They trade like other individual securities but incur fewer tax liabilities, Mr. Brown said.
Banks generally shy away from creating such alternative products, Mr. Brown said. Edwin Morrow, president and chief executive officer of Financial Planning Consultants, in Middletown, Ohio, agreed.
"The conservative environment at bank trust departments tends to encourage the most independent thinkers to go elsewhere," Mr. Morrow said.
Also, many bank-owned trusts rely on other departments within the bank - and sometimes outside companies - for asset management, said an executive at a private bank in New York.
Banks are not ignoring these products entirely. Virginia Parker, president of Parker Global Strategies, a hedge fund consulting firm in Stamford, Conn., noted that few banks trust departments manage their own hedge funds, but many offer "funds of funds" that invest in hedge funds. The reason for this is that bank trust departments tend not to have the best asset managers, but still want to offer such products to their clients, she said.
Mr. Morrow said the solution for banks is to such outsourcing arrangements to improve their alternative product line, and another trust consultant said many banks are starting to do just that so they can distribute such products to their clients even if they cannot create them.
E. Thomas Welch, president of the Association of Independent Trust Companies, in Naperville, Ill., said that when trust companies grow they tend to use these sorts of products more. Investors with less that $5 million tend to avoid hedge funds or venture capital products because of the higher risk and higher minimums, he added.
