“We wanted a good, competitive offering to put in the salesperson’s bag,” says McGuire. “This levels the playing field at a reasonable cost, and allows us to compete head-on with the wirehouses.”
Other vendors, including SEI and EnvestnetPMC, offer soup-to-nuts solutions similar to FundQuest’s. The goal is to help smaller banks compete in an area that is expected to register sharp gains in both volumes and fee generation over the next few years. “We’re seeing a tremendous migration by smaller institutions into the fee-based wealth-management business,” says FundQuest CEO Bob Del Col. “But in order to be successful, they need to offer the same choices the big guys offer. We help them do that.”
Fee-based products aren’t for everyone. Many banks lack the sales culture, customer base and organizational and compensation structure to accommodate such offerings. Others may be uncomfortable sharing vital customer information with a third party. “You’re talking about giving up total control of the investment management process,” Del Col says. “Some banks have a difficult time with that idea.”
Rachel Malatesta, an analyst with Cerulli Associates, says bank efforts are hindered by a lack of commitment. Only three percent of banks offering investment products considered it “core” to their strategies, she says, while the remainder view it more as an “accommodation” to clients. This translates into sluggish sales. According to a Cerulli study, in 2000 fee-based products accounted for just three percent of total bank brokerage sales, compared to 13 percent for wirehouses.
But for growth-minded banks with existing wealth-management capabilities-and the willingness to tweak their approach to the business-tacking on fee-based products through a third party can amount to a no-brainer. By offering products and advice to jaded investors, banks can boost wallet share, attract and retain wealthier clients and add a new annuity-like revenue stream to the income statement.
“We think this is a tremendous source of fees and a great way to cement existing relationships,” says Gregory Bean, svp and executive trust officer at FirstMerit Corp., an Akron, OH bank that recently supplemented its core wealth-management lineup with fee-based products supplied by SEI.
Kevin Keefe, vp and senior consultant with Financial Research Corp., predicts that assets in mutual-fund wrap programs will grow 22 percent by 2005, while separately managed accounts (SMAs) will gain more than 30 percent. By 2011, he projects, SMAs alone will grow from today’s $417 billion to more than $3 trillion in investments. “People are lining up for these products,” he says. “If you’re in the game to grow, then you’ve got to consider offering them.”
The trick lies in managing and administering such programs effectively. In total, about 1,000 banks market fee-based products to customers, Malatesta says, with another 400 or so planning to do so. With the exception of the very biggest institutions, few banks have the resources to provide a complete menu of fee-based products, let alone the supporting technology and training. “There’s really no way to do it without a third party.”
That’s where third parties come in. Most charge a modest upfront fee plus a percentage of assets under management-usually around 80 basis points-lowering the risks and giving vendor partners a strong incentive to make bank programs successful.
Webster Trust Co. in Waterbury, CT, has outsourced its wealth-management functions to SEI, charging clients about 190 basis points for a complete package, including brokerage commissions. After SEI’s cut and other expenses, Webster comes up with annual net revenues of around 70 basis points of assets. “Clients look to us as their main provider, and then we look to SEI to provide the specific management capabilities,” says CEO Ed Fisher, whose group manages about $1.1 billion in assets. “An organization our size couldn’t do this on our own.”
Managed by professional money managers, SMAs provide investors with both asset-class diversification and control over specific stock holdings and the timing of share sales-making them a powerful tax-planning tool for high-net-worth and even some mass affluent customers. The rub is that such programs require proper asset allocations, rigorous selection and oversight of mutual fund and money managers to ensure they’re living up to expectations, as well as top-flight processing and clearing capabilities.
SEI, which has about 450 bank clients, considers the business a “natural extension” of its long-standing trust outsourcing business, says Brandon Sharrett, svp of the firm’s bank advisor network. The firm manages about $15 billion in trust and wealth-management assets for banks, and gets about $100 million in annual revenues from the segment.
For SMAs, SEI has “manager of managers” relationships with about 13 different money managers, utilizing best-of-breed providers-Alliance Capital and TransAmerica for large-cap growth, for instance, and Lazard Asset Management for international stocks-for each asset class. It conducts periodic on-site visits with managers, tracks every trade they make to protect against “style drift” and will change managers if their performance falters.
The combination gives a bank powerful capabilities, with costs that are rolled into the product fees. “But the big benefit,” Bean says, “is in higher quality products,” which allow him to compete effectively with big local banks, like KeyCorp, as well as Merrill Lynch and other wirehouses. After just nine months, FirstMerit has more than $80 million in its SMA pipeline. “We’re growing our niche aggressively,” he adds.
Using the vendors’ platforms requires a change in bank thinking. Many banks have traditionally stressed their stock-picking abilities. Sharrett argues that, in the current climate, most banks don’t have the resources to provide truly diversified stock portfolios. Investors, meanwhile, are drawn to offerings run by fund managers they’ve heard of. “Investors aren’t buying the notion that community banks are good money managers,” he says. “They want strength and diversification, and we’ve got 20 different asset classes.”
With vendors managing the products, banks must act more like consultants, and work harder to generate referrals from within the bank, especially the deposit side. According to Cerulli, about 69 percent of bank investment clients-and 80 percent of in-house referrals-emanate from the deposit base. “Success hinges on the ability of reps to generate both referrals and needs-based analysis to customers,” Malatesta says.
This can be a mindbender for reps who have been trained to focus on generating commissions. At Webster, reps now spend more time walking clients through assessments of their life situations, investment goals, tax situations and the types of stocks they do and don’t want to own. They then plug that data into SEI’s asset allocation models to come up with a recommended portfolio. “We’re spending a lot more time providing advice and holding hands,” Fisher says. “It’s different, but clients respond better to the idea that you win only when they do.”
In addition to changes in the sales approach, reps often require training in areas such as providing high-level tax advice. Once again, the vendors lend a hand. FundQuest employs a team that provides both face-to-face and online training to sales reps. The firm helps with such basics as naming the program and creating marketing brochures and presentation materials. It also regularly sends out blast emails with marketing tips and keeps reps apprised of changes in tax laws. “The support is great,” says First Tennessee’s McGuire. “They’ve got an inside sales desk we can call if a client has a question we can’t answer.”
Vendor pricing and offerings are generally competitive, and a bank’s choice often comes down to technical compatibility and other intangibles. Webster’s Fisher weighed references, infrastructure and financial stability before selecting SEI. “There are a lot of newer firms offering this that don’t have the same wherewithal,” he explains.
Bean, like other bankers who have signed on, expect to continue using vendors. “This is what the market is demanding, and there’s no other way to do it,” he says. “If you don’t offer it, you’ll lose the customer to someone else.”