As they look at the competitive landscape early this year, many big banking companies are counting on unified managed accounts and health savings accounts to play important parts in their efforts to attract new assets.
Bank of America Corp. is one of two companies among 17 sampled by American Banker that said they would start a unified managed account to bolster fee-based offerings this year. Eleven others already offer the product in what an analyst called an apparent effort to play catch-up with financial planners and brokers that have been long been wooing the wealth management market with cutting-edge products.
U.S. Bancorp this month introduced the newer product of the two, health savings accounts, which since their authorization in tax law a year ago had been started by eight banks in the sample. Its U.S. Bank unit was one of five big banks that said they plan to begin offering the product this year.
"We see an opportunity for growth throughout the next five to six years," said Dan Kelly, a U.S. Bank executive, but early entrants will gain the bulk of available business.
For Bank of America, the essential investment product is the unified managed account, which allows the bank to "see" and manage both proprietary and nonproprietary products on a single platform.
"We have come to the conclusion that there isn't one specific solution for every need," said Dan McNamara, a managing director in Bank of America's consulting services group. "We have to offer a very diversified mix of products and services, and there is no way that we can offer every product through proprietary channels."
Among the banks sampled by American Banker, most were being cautious about introducing investment and insurance products. They said they were interested in offering a wide array of both proprietary and nonproprietary investment vehicles and carefully and selectively introducing other platforms to cross-sell and expand customer relationships.
"Bank customers right now are very interested in comprehensive simplicity," Mr. McNamara said. "They want us to be able to provide sophisticated advice and best-in-breed solutions. We can develop assets just by providing a nice neat package for that."
Eleven large banks already offer unified managed accounts. And besides Bank of America, Fifth Third Bancorp says it will expand its fee-based services by introducing a unified managed account platform. Comerica Inc. is planning to expand distribution of the unified managed account it started last year.
A unified managed account links a collection of investment products on one platform, including everything from separately managed accounts to mutual funds. The product first appeared five years ago.
The bank units of companies like MetLife Inc., Wachovia Corp., BB&T Corp., and M&T Bank Corp. say they expect to introduce health savings accounts this year.
These accounts allow people with high-deductible health insurance plans to set up tax-free savings accounts to cover medical expenses. The accounts earn tax-free returns and can be carried over from year to year, and withdrawals to pay health costs are also tax-free. They came into being last January as a result of the Medicare Prescription Drug Improvement and Modernization Act of 2003.
Only eight of the 17 banks in the sample offered health savings accounts by yearend 2004, but five of the nine holdouts planned to start them this year, were considering it, or in the case of U.S. Bancorp launched the product this month.
Burton Greenwald, a Philadelphia investment products analyst, said banks have lagged the brokerage industry for years in developing fee-based products like separately managed accounts and unified managed accounts. These products require a lot of due diligence, technology, and monitoring to assemble a platform, he said, and banks have been hesitant to incur this kind of cost for fear they would not gather enough assets to make it pay.
"Banks are still up against the perennial problem that, unlike the brokerage industry, banks continue to serve the 'entry' marketplace," he said. "Banks serve people that are just dipping into securities and investments on a modest scale."
Mr. Greenwald said unified managed accounts illustrate the continued evolution of banks in investment management. After years of talking about attracting high-net-worth customers and building wealth management business, are banks getting ready to take back the market share they've ceded in the past decade and a half to wire houses and financial planners?
"These are relatively sophisticated products that require a minimum investment in the low six figures, and that hasn't been a core part of business for many banks," he said. "These products are upscale products. The banks are finally coming around to recognizing that they have by default lost out on a major share of the market to more aggressive financial planners and brokers who have attacked the wealthier portion of the market for the past 10 years. The banks are finally playing some catch-up ball."
The banks that have started health savings accounts are in near the beginning, but they may have to wait a while for the product to really take off.
Carmen Effron, the president of the C F Effron Co. LLC consulting firm in Westport, Conn., said HSAs are attractive for banks to offer because they work like a 401(k) plan with a checking account and banks are familiar with both. HSAs also are geared toward small-business owners - a clientele banks would like to expand.
Though it will take some time for HSAs to catch on, Ms. Effron said, the product has staying power. "It's going to take a while for people to understand it," she said, "There will be a slow acceptance, but if the product is managed well and easy for people to understand, banks should not have a hard time selling it."
"Banks could get a head start over brokers by disseminating information," she said, because banks have more resources for educating clients. "It's not an easy product to understand," she said.
Other banks in the sample are pointed in a different direction altogether. Bank of New York, for example, said it plans to expand and develop its well established managed account platform this year. Through its Lockwood Advisors unit it already has 43,000 accounts and $14 billion of assets.
And Mellon Financial Corp. says it wants to expand its menu of alternative products.
Terry Charron, the director of alternative strategy at Mellon's private wealth management unit, said it has sold hedge funds since 2000 and manages $500 million of hedge fund assets. In the last 18 months, he said, hedge funds, which have been showing less tolerance for risk in the past year, have started to gain traction with individual investors (as opposed to the institutional investors that were hedge funds' typical customers).
"People are using" hedge funds "as a bond substitute," Mr. Charron said; "it is gaining ground, and we want to gain share. These are generating returns at a higher level than what the bond market can offer."
For U.S. Bank "it's important to have" health savings accounts, said Mr. Kelly, the manager of HSA services in its institutional trust and custody unit. "It's important to have HSAs, and it's important to be early. We pursued an early entrance because of market research on consumer health-care initiatives."
He predicted growing popularity for the product, which targets medical companies, insurance companies, and individual employers.
Health savings accounts are important for banks to offer, Mr. Kelly said, because customers want full service, including record keeping, investment options, trust and custody services, and retirement plan administration.
Mellon, meanwhile, which has many benefits and human resources customers, lined up partners for the health savings account program it started last year. The Pittsburgh company has said that WellChoice Inc. of New York, the parent of Empire Blue Cross Blue Shield, will offer Mellon's HSA services in conjunction with the insurer's high-deductible policies.
The JPMorgan Chase Bank unit of J.P. Morgan Chase & Co. started approaching health insurers in April about HSA partnership deals and its first health savings accounts became active in August.
Seven of the nation's 10 biggest health insurers - including Anthem Inc., WellPoint Health Networks Inc., and Cigna Corp. - have signed up with the New York bank.
Cigna HealthCare in Bloomfield, Conn., and JPMorgan Treasury Services have agreed to jointly market a health savings account combining health-care and financial management features. The agreement adds financial transaction capabilities to the Cigna Choice Fund Health Savings Account, which is available now for employer plans.
Meanwhile, MetLife Inc., the giant New York insurer, has a bank unit that is planning to introduce a health savings account this year, taking advantage of the tax break enacted a year ago and of the escalation in health-care costs that stimulated the legislation."There is a health-care crisis in America, and legislation is helping people manage those expenses," said Shailendra Ghorpade, MetLife Bank's president and chief executive officer. "It's an added benefit, and we currently have a group of people looking into it." The health savings account would meet customer demand and round out the bank's product menu, he said, though he declined to specify when this year the HSA launching would take place.
Four years after buying an $80 million-asset New Jersey bank and giving it its name, MetLife believes it should take its widely known and trusted consumer brand into the banking marketplace, Mr. Ghorpade said. Its customers expect a wider range of products, he said, and that means health saving accounts.
"It's different for us. A typical bank offers insurance and annuity products, but we refer our customers to sister companies," he said. "Technically, we sell none of the products."
Wachovia Corp. introduced the first bank unified managed account in 2002. Its Diversified Managed Allocations was started in December 2002 and by Aug. 31, 2003, had accumulated $500 million of managed assets. By last July 31 it had $2.57 billion.
Banks, family offices, and independent wealth managers collectively manage 30% of the assets held in unified managed accounts, and brokerage firms manage 70% according to Placemark Investments, a Wellesley, Mass., company that distributes the products. Lee Chertavian, its chairman and chief executive, said he expects brokers will manage 40% of these assets within five years, banks 40%, and family offices and independent wealth managers about 20%.
David Skolnik, a senior vice president and the sales and marketing director for wealth and institutional management at Comerica, said the Detroit banking company decided to start its unified managed account platform in November because clients were leaving the bank to go to companies that had the product.
Comerica plans to use the platform as a way to increase sales of its other products, including its managed accounts and mutual funds, Mr. Skolnik said, and he expects to generate $50 million to $75 million of assets on the platform by next Dec. 31.
"To look at the high-net-worth segment of our customer base, we realized we needed to not just push a product," he said. "We needed to offer a tool with solutions across the products they had and the products they wanted."
B of A's Mr. McNamara said the product would let its financial advisers view and manage an entire client relationship regardless of how many products or services the client has.
Unified managed accounts will let Bank of America advise in a relationship regardless of what products the customer owns. That is why so many banks have started or are interested in the product, he said.
"The client is driving the growth of these unified managed account platforms," Mr. McNamara said. "Everyone defines these products differently, but at the core is the same thing - the customer. Everyone wants to manage that customer. This is a product-neutral, client-centered strategy."
He added, "The unified managed account is really the seamless integration of advice and solutions. It is not one versus the other."
Mr. McNamara acknowledged that other large banks - its North Carolina rival Wachovia is a prime example - have begun to aggressively gather assets with the product.
"We admit we are really late getting into this business and getting further into the fee-based business," he said. "But there are some advantages to getting in this late. Today's technology is really different than what a lot of our competitors started with, and our technology can give us an advantage." (Of course, the earliest bank adopter of the product, Wachovia, made its move only about two years ago. Most banks, moreover, were slow to begin offering managed accounts as the product's asset total burgeoned under wire house domination.)
Keith Sykes, a product manager in the retirement unit of Charlotte-based Wachovia, has said the company wants to develop a product that will enable it to retain its customers after they retire and begin spending their retirement savings."This is a product that needs to be about more than just wealth accumulation," Mr. Sykes said. "We have to find a way to keep customers beyond retirement."
Wachovia will start a managed account this year that customers can use into retirement, he said. It will let them develop a draw-down strategy to disburse funds as they are needed.
"The majority of individuals are still accumulating assets, but over the next 20 years that is going to shift," Mr. Sykes said. "We need to enhance our tool set to help people moving into retirement."
Mr. McNamara said banks should not get lost hunting for the next hot product. They have a strong base of conservative customers who will work with companies that offer the best solutions, he said.
"As an industry, sometimes we want to be so cutting-edge that we forget that this is about delivery," Mr. McNamara said. "Customers want simplicity."
