Banks' domination of HSA biz seen likely to continue

Jul 25, 2005 @ 12:01 am

By Gary S. Mogel

NEW YORK - Asset management business for health savings accounts will continue to gravitate toward banks rather than other types of asset managers because banks excel at servicing large numbers of relatively small accounts, according to a new study by TowerGroup in Needham, Mass.

"Since the maximum annual HSA contributions are currently $2,650 for individuals and $5,250 for families - and the average annual contribution is approximately $750 - account balances will not be large initially and won't grow as fast as other savings vehicles," noted the study, "Health Savings Accounts: The Prognosis for Asset Managers," which was released this month.

"Asset managers should give careful consideration to their strategy before competing for HSA business," said Peter Delano, a senior analyst for TowerGroup.

The study predicted up to $26 billion in HSA assets by 2010, along with financial woes for asset managers who seek a share without knowing the pitfalls.

The study concluded that HSAs will at best be an "ancillary product" for asset managers. However, it said, the business will benefit banks, as they have much of the required infrastructure already in place, by allowing them to solidify and extend their client relationships.

Banks have edge

Banks already are dominating the HSA market, according to a separate study released in May by Washington-based Inside Consumer-Directed Care. The two largest are HSA Bank in Sheboygan, Wis., and Exante Bank in Salt Lake City, which together account for about half the $460 million in HSA deposits managed by the 21 firms studied.

The greatest HSA opportunities might exist for diversified banking institutions with custodial and card-issuing capabilities or alliances, the study found.

Smart-card technology has become an integral part of using HSAs to pay for medical services but is a stumbling block for some financial services companies considering entering the HSA market. For instance, many fund companies don't offer HSAs, because they lack experience with the cards and the call centers needed to service the cardholders, according to Gayle Holcom, president of Pilkey Hopping & Ekberg Inc., an insurance agency in Tacoma, Wash.

Some insurers entering the HSA market, such as The Principal Financial Group Inc. in Des Moines, Iowa, offer HSA debit cards and checks from their banking subsidiaries.

Banks are good at HSA investing because they have a lot of the off-the-shelf products such as certificates of deposit and other investments that suit this market, said Alan Ziegler, president of Futures Funding Corp. in Rochester, N.Y.

More expertise

Also, banks have more expertise - and a greater number of offerings - in fixed-income investments and money market funds. Such investments are staples of many HSAs because of the liquidity needed to pay potentially large medical bills, said Eric Remjeske, co-founder of Devenir LLC, a Minneapolis firm that developed an investment platform for HSAs.

"The relatively small asset base for HSAs over the next five years points to two roles that asset managers could play: investment-only HSA providers and investment managers/record keepers," Mr. Delano noted.

Investment-only firms that choose not to build the infrastructure needed to provide HSAs must focus on distributing via alliances with administrators, he said. Mr. Delano mentioned The Vanguard Group Inc. in Malvern, Pa., as a company that has chosen this route.

"The administrator uses Vanguard funds to invest the HSA dollars but handles all record keeping and other functions," he said.

On the other hand, firms might choose to pursue a full-service strategy, as Boston-based Fidelity Investments has done, Mr. Delano said. New York-based Merrill Lynch & Co. Inc. and San Francisco-based Wells Fargo & Co. also are among those using this approach, the study noted.

"Those that choose to pursue a full-service strategy must determine the direction of their product offering," Mr. Delano said. "For instance, they might choose to offer an interest-bearing account and earn spread on the assets or offer mutual funds with management and account fees."

Companies probably will layer at least four distinct fees on HSAs, such as an annual or setup fee, transaction fees, monthly or quarterly fees and an incremental administration fee based on managed assets, according to the study.

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