Staunching the asset flow to the wirehouses calls for a cultural overhaul. Retail banks have to improve their investment offerings if they want to stop hemorrhaging assets to wirehouses and other competitors, say wealth-industry players. Though frequently touted as the fastest growing distribution channel for retail separately managed accounts (SMAs) banks' share of that market - a proxy for measuring fee-based investment consulting to high-net-worth investors - was just 7% in 2003 compared with the wirehouses' 80%, says Cerulli Associates, a Boston-based research firm.

"Banks haven't done a good job capturing investment assets," says Frank Campanale, a freelance wealth-industry strategist and former head of Smith Barney's Consulting Group. "They tend to keep private banking and trust, where they have investing capabilities, separate from what I call the 'dumb money' side: deposits and lending." So when a customer rolls in with $100,000, "the teller's first instinct is to put it in a [certificate of deposit] because banks don't train their staffs to do anything else," he says. "Even private bankers are more focused on lending than investing."

Down the drain

And private banks have paid a steep price for that. According to another Cerulli finding, their portion of high-net-worth assets plummeted from 62% in 1992 to 24% in 2003, with most of it draining into wirehouse accounts.

The picture, at least in terms of public perception, isn't much brighter on the trust side. A recent survey by third-party investment platform GlobalBridge Advisors shows that 47% of Americans have no idea that bank trust departments offer investment services to non-trust customers. And even if a thin majority of the 2,500 surveyed say they are at least dimly aware of that fact, less than 10% of the total indicate that they know it for sure.

"We were a little surprised it was so low," says GlobalBridge founder and CEO Kelly Thomas Coughlin. "But then the banks we work with are already committed to re-branding - more than 're-branding': re-building - their wealth investment services." Minneapolis-based GlobalBridge offers SMA programs to high-net-worth investors, mostly through "middle-market" banks with between $5 billion and $10 billion in trust assets under management.

In a bind

But Coughlin says that some trust departments are in a tough position, caught between wanting to offer "leading-edge investment capabilities" while maintaining reputations, often decades in the making, as specialists in asset preservation. "Trust banks are seen as safe places to put 'serious' assets," he says. "But banks that haven't gone to 'open architecture' or 'best-of-breed'" - industry terms for non-proprietary investment management - "are losing out to the wirehouses." Banks still have to present themselves as safe places to "store money," adds Coughlin, but they have to show that their investment capabilities go beyond "old Bob sitting in the corner managing assets."

Wirehouse brokers know that banks aren't the public's favorite places to invest for growth. As a result, brokers have tended to view them less as competition than as "a source of money," says Campanale. "Some [banks] have awakened to the fact that they need to have open architecture so that investors really know that they can provide the best of the best." But even those banks frequently operate at a "cultural disadvantage," he adds. "In cultural terms, fee-based brokers are focused on growing assets; trust officers are focused on protecting assets; banks are focused on liabilities.

These divides are especially hard for big banks to bridge, according to Campanale. "They all talk about 'synergies' and 'cross selling,' but they're working in [profit-and-loss] silos for brownie points that have more to do with executive compensation than anything else," he says. "It isn't just that the right hand doesn't know what the left hand is doing; sometimes the fingers on the same hand aren't working together, and it's the client who suffers."

Nimbler

And that leaves middle-market banks to lead the way. "Some of the smaller regional banks and mid- to large-size community banks are showing that they're more agile and able to put in place the operations and customer service they need to compete with the big brokerages," says Campanale.

Alan Teraji, a senior executive v.p. with First American Bank in suburban Chicago, believes a bank has to commit to making real changes to a pre-existing investment platform if it wants to become a wealth-service provider. "We are not simply selling an old, non-competitive product dressed up to look good; we are actively changing the way we do business, offering highly competitive new programs and platforms," he says.

First American uses GlobalBridge's SMA program, which offers a selection of outside managers in a "custody-neutral" environment - something GlobalBridge says distinguishes from its competitors. Other investment advisory platforms include Pershing's Lockwood Advisors, PFPC's Advisorport, SunGard Advisor Technologies, Lydian's Fortigent and independents such as Brinker Capital, FundQuest, Envestnet Asset Management, Advisor Partners and U.S. Fiduciary Services. -FWR