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Regions Bank, Prudential Wealth Sign Platform Deal As Industry Trends Converge
Eliane Chavagnon
18 January 2013
Two
big industry trends converged today in Regions Bank’s new platform deal
with Prudential Wealth Management Solutions: banks pursuing lucrative
wealth management opportunities and service providers targeting banks as
a growing wealth management platform market. Regions,
a regional banking powerhouse based in Birmingham, AL, with $122
billion in assets and branches spread across 16 states in the south,
Midwest and Texas, named Prudential, the Newark, NJ-based financial
services giant, as the provider of an integrated technology platform for
its wealth businesses catering to institutions and individuals and
families with over $500,000 in investable assets. The open architecture platform will include overlay portfolio
management technology, investment research, performance reporting and
desktop tools. Regions is the latest in a long line of banks to reorganize and shore
up its wealth management business in the last few years. In June 2011
it created a Wealth Management Group anticipating the sale of Morgan
Keegan, the bank’s brokerage unit. Last fall Bill Ritter, head of the
Wealth Management Group, brought in a new leadership team for its
various divisions and began running focus groups “to see what clients
were looking for in wealth management.” Advice and user-friendly technology were critical to growing the
business, Ritter concluded, and after issuing an “extensive”
request-for-proposal seeking a strategic partner, he settled on
Prudential. Banks under pressure In an era of miniscule interest rates, banks have been under pressure
to produce non-interest income to boost earnings, and wealth
management, with its relatively high margins and attractive recurring
fees, has becoming an increasingly high priority. The new platform, Ritter hopes, will spur both institutional revenue
and growth at the Private Wealth Management division, which currently
has $23 billion in assets, and will target individuals and families with
$1 million to $10 million in investable assets. “We’re not just selling
product,” Ritter said, “we want to offer the best advice.” Regions’ wealth management goal this year is to “deepen existing
relationships and acquire new ones,” Ritter said. He cited the bank’s
commercial lending group as an example, where a client may use Regions
for lending and banking services, but not for investments or wealth
management. “We want the opportunity to sell deeper into that
relationship,” he said. For its part, Prudential believes partnering with banks as they try
to grow their wealth management business is “a huge business
opportunity,” said John Yackel, senior vice president and director of
business development, sales and relationship management of the company’s
Wealth Management Solutions unit. Exploring outsourcing options Prudential is hardly alone. Well regarded outsource service
providers including Fortigent, Envestnet and SEI share Yackel’s
optimistic assessment, as do top technology vendors such as Advent,
SmartLeaf and Orion. “We see tremendous opportunities with banks that are exploring
outsourcing options for wealth management,” said Gary Carrai, senior
managing director for Fortigent, which already counts PNC, First
Republic Bank and Signature Bank among its clients. “Many banks have outdated wealth management technology and investment
solutions which is making it harder to compete with RIAs and big
brokerages,” Carrai said. “For example, many banks that still offer a
proprietary investment solution are warming up to the notion of hiring
third-party managers.” In addition to technology and access to top managers, Regions choice
of Prudential “came down to people,” according to Ritter. “We were
confident Prudential could partner with us, get the right tools in the
hands of our associates and get implemented quickly.” Yackel, who has been with Prudential for the past two years following
four years at Fortigent and 15 at SEI, also stressed Prudential’s focus
on working with bank personnel. “The value we provide is dedicated
people in the field to provide support and drive adoptions,” Yackel
said. Pricing issues Terms of the Regions-Prudential deal weren’t disclosed, but Yackel
said price is typically an asset-based fee determined by “scale and
complexity and scope of the engagement” as well as the sophistication of
the technology, degree of field support and “current and future asset
potential.” In addition, the agreement usually includes “incentives to
get the organization to scale,” Yackel said. Negotiating pricing and “which institution gets which share of basis
points” is one of the most contentious issues between platform service
providers and banks, said industry consultant Tim Welsh, president of
Nexus Strategy. Pricing can be “all over the place” because so many
different sets of criteria can be used, according to Joel Bruckenstein,
publisher of Technology Tools for Today. But the price is sure to be considerably less expensive, Bruckenstein
added, if a bank uses financial products manufactured by the platform
provider. “The strategy is to create another distribution channel through
technology,” Welsh said, “which is very smart. Once you have scale in
your technology infrastructure, you can partner with other institutions
that don’t have manufacturing in the form of a managed account platform,
such as banks, but do have advisors.” Banks’ advantages Competition for the bank business is only expected to increase as the banks ratchet up their own focus on wealth management. Consulting firm Booz & Co estimates that banks’ wealth management
business will grow 6 per cent to 7 per cent annually, and by next year
retail bank revenue from wealth management should top $80 billion, the
firm projects, up from $65 billion in 2009. To be sure, banks are seen as having a number of advantages in the
race for wealth management assets: a built-in base of plentiful and
loyal customers; a plethora of other lines of businesses offering
opportunities for cross-selling; a reputation for stability (perhaps
tarnished during the financial crisis but mostly restored); and an
established local presence in the community. According to wealth management industry consultant Jamie McLaughlin,
the “primary advantage” for banks when competing against RIAs is perhaps
obvious but powerful: capital. Cultural challenges But banks are also burdened by a reputation for having less than
stellar talent, low pay by wealth management standards, lack of a sales
culture and a narrow range of products. “The key to growth is innovation, but this is hardly an innovative
industry,” Kenneth Thompson, senior vice president and division head of
M&T Banks’ Investment Group told an industry conference last year. Thompson also pointed out that only 17 per cent of all accounts at
M&T had an investment product. While that woeful statistic may
underscore the headwinds banks face in wealth management, it also
represents an enormous growth opportunity. The good news for platform providers, as Bruckenstein points out, is
that banks “need the right tools, right away,” to have a fighting chance
in the fierce competition for wealth management market share.