Article published on Fundfire on August 12, 2010
By Tom Stabile
The Bank of Hawaii is the latest wealth management outfit to ride the unified managed account wave, unveiling a new program that opens the door to third-party separately managed account managers for the first time. The Honolulu-based bankexpects to shift more than $2 billion of its $6.6 billion in client assets over to the new UMA program, which will include SMAs, mutual funds and exchange-traded funds (ETFs) in its inaugural lineup.
The commercial bank’s Investment Services Group touts itself as the largest trust and asset manager in the Aloha State’s financial services market. To date, the bank has funneled most of its wealth management services through its proprietary investing vehicles, including internal mutual funds and individual bond and equities selection handled by its own portfolio managers. The new UMA takes a much bigger step toward open architecture investing, says Steve Rodgers, the bank’s CIO.
“Right now we’re estimating that about $2 billion of our existing accounts will be converted over,” he adds. “We’re in the process of converting existing accounts over the next several months.”
The bank has gone down the path of many peer institutions in recent years, opting for an overlay management platform that it can operate in-house from Smartleaf of Cambridge, Mass., and getting manager research services separately from Denver’s Prima Capital. The approach differs from another common UMA delivery model – tapping an outsourcer that runs both the platform technology and manager selection in one externally housed package.
Bank of Hawaii had previously tried to build a UMA with another external provider, but didn’t go ahead with that effort, Rodgers says. He declines to name the provider.
“We decided to bring it in house, because it’s a more efficient process,” Rodgers says.
The new program also is introducing the first external SMA strategies to Bank of Hawaii’s clients, who are mostly high-net-worth individuals but also include institutions such as foundations and endowments. The initial focus is on large-cap equity strategies, and the bank has hired four managers for the program, Rodgers says. “We’re excited about offering those models,” he adds.
Among the new strategies it has added are the Eaton Vance Large Cap Value and Fifth Third Asset Management Active Growth. Rodgers says the bank has an ongoing review process to assess existing managers and seek new ones, relying on Prima’s assistance.
“As we go along, we may look at adding managers in some of the other asset classes,” he adds. Rodgers says in many cases, the question of whether to add an SMA version of a strategy versus a mutual fund or ETF turns on how many assets it expects to flow into those products. He says asset classes assigned smaller slices in the asset allocation would probably translate into investment amounts that fall short of standard SMA investment minimums – typically $100,000 per account industry-wide – and are more likely to appear as funds on the menu.
Managers across the market are increasingly viewing model delivery as an opportunity because of such program launches, says Jim Penman, principal at North Carolina-based Penman Consulting, a technology consultant. “Managers see their models as a piece of intellectual property to deliver,” he adds.
But the range of where those models can end up is wide. There are options stretching from the technology vendor model that Smartleaf and competitors such as Fiserv and Vestmark offer – where wealth managers can customize a platform but have to cover the manager due diligence effort – to the full-blown outsourcer that can provide the technology and manager research, usually as an external platform. Those options include Placemark Investments, Parametric, Natixis, Concord Wealth Management, FolioDynamix and others.
Several banks with a significant trust business, such as U.S. Bank and SunTrust Banks have gone the same route as Bank ofHawaii, selecting an in-house platform. “They prefer to maintain discretion in the trades, and retain a lot of the choices on tax management decisions,” says Karla Davis, senior consultant at Prima, which also counts many banks among its due diligence clients.
The bank market is not monolithic, however, says Craig Iskowitz, managing director for Ezra Group, a strategic consultant inEast Brunswick, N.J. He cites the traction of Placemark, FolioDynamix and others in offering UMA platforms to banks.
“I see the integrated [UMA delivery] model being more successful than the standalone in the greater market,” he adds. “But you will always have [wealth management sponsor] clients that don’t need it.”
For Bank of Hawaii, the UMA primarily is serving as the platform for its clients who are invested in a full asset allocation portfolio, rather than just individual securities or other isolated pieces such as a cash management account.
The bank retains the oversight of building the actual asset allocation, and once it has selected its investment priorities, turns to Prima to help it match up with appropriate managers and products. “We’ll also do ongoing monitoring and reporting on that, and their portfolio managers have access to our holdings-based analytic tools,” Davis adds.
Rodgers says the bank may look at adding alternative investments to the mix down the line.
Smartleaf recently announced it had topped the $25 billion mark in assets run by wealth management firms on its platform. Most of its clients are in the banking sector, and it frequently ends up on a team with Prima or Milwaukee-based Capital Market Consultants, another due diligence provider, said Jerry Michael, president of Smartleaf, in an interview earlier this year.
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