HSAs are creating new bedfellows

Apr 10, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Health savings accounts are increasingly bringing together banks and broker-dealers that individually may lack the ability to both service the accounts and invest the assets.

Health insurers and banks have been forging alliances since last year, marrying the accounts' insurance and administration.

HSA Bank in Sheboygan, Wis., last month announced that it is teaming up with Transamerica Financial Advisors Inc. in Los Angeles to offer HSAs to clients of Transamerica advisers. In addition, Transamerica's investment services - including securities brokerage, mutual funds and unit investment trusts - will be available to the bank's clients.

Exante Bank in Salt Lake City for the past nine months has had a similar relationship, a private-label investment program, with Minneapolis-based broker-dealer Devenir LLC.

Specializing in HSAs, HSA Bank and Exante control about half the market between them, according to a study last year by Washington-based newsletter Inside Consumer-Directed Care.

Other banks that are beginning to seek out this business, as well as many broker-dealers that want to offer the accounts, may soon jump on the partnering bandwagon, according to industry observers.

Other partnering relationships in the HSA industry have not been publicly announced, but they are in the works, according to Eric Remjeske, co-founder of Devenir.

"There are at least five deals out there involving large broker-dealers and large banks with very recognizable names," he said.

While he would not identify the firms involved, Mr. Remjeske predicted that the deals will probably be announced in June or soon afterward.

Mutual benefits

Alliances can benefit banks that don't have their own broker-dealers, and broker-dealers without banking subsidiaries, noted Mike Glatkowski, vice president of national brokerage for HSA Bank. "HSA business is starting to gravitate toward advisers, and banks are looking to have broker-dealer distribution for their HSA products," he said.

An impetus has been the model that San Francisco-based Wells Fargo & Co. established to offer HSAs through its financial adviser network, industry experts noted.

Previously, broker-dealers weren't interested in HSA business, because the account balances were small, usually less than $5,000.

However, that's starting to change as the accounts become more popular and the assets begin to grow.

The banks were content with offering their proprietary mutual funds and certificates of deposit as HSA investment choices.

But as the balances grow, the account holders are becoming less than content with these options.

"Banks will have to offer a greater variety of investment options if they hope to attract more HSA business," said Alenka Grealish, manager of the banking group for New York-based Celent LLC. "Banks that already have broker-dealers are building integrated platforms to serve these accounts."

Even banks that own broker-dealers and vice versa may seek outside relationships to expand account administration and investing options, Mr. Remjeske said.

For instance, HSA Bank is owned by Webster Bank NA of Waterbury, Conn., which also owns Webster Investment Services Inc., a Kensington, Conn.-based broker-dealer.

And firms may not be limiting themselves to only one partner, Mr. Glatkowski said. HSA Bank will likely do business with other broker-

dealers in addition to Transamerica, he said.

HSA investing different

"There's no best practice or industry benchmark for when an HSA account should be transferred by a bank to a broker-dealer," said Kevin McKechnie, staff director of The HSA Council, a Washington-based trade group for banks doing such business.

Some banks transfer the amount in the account that's in excess of $5,000 to their broker-dealer, he added.

One strategy is to invest the first $2,500 in a savings or money market instrument, which has historically been a banks' strength, noted Mr. Remjeske. After that, mutual funds, self-directed brokerage accounts and other riskier and more sophisticated investments for which broker-dealers can offer greater depth and variety may be appropriate.

"Banks don't want to lose HSA business because of unattractive investment choices like many previously lost much of their [individual retirement account] business," Ms. Grealish said.

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