Trust banks' growing use of outside investment products is boon to mutual fund industry, report finds

A growing trend toward the use of more outside investment products by trust banks could present a broader distribution opportunity for the mutual fund industry, according to the latest research from Cerulli & Associates Inc. “More banks are catching up with the times and moving in the direction we've seen across the financial services industry,” said Benjamin Poor, a director at Cerulli. Bank trust assets declined by more than 5% between 2001 and 2008 — but the portion of those assets allocated to third-party products grew by 36%, according to the research. Cerulli's research was based on data from the Federal Deposit Insurance Corp. and only included those trust banks that fall under the FDIC's purview. The market under review was at $924 billion at the end of last year, including $307 billion in third-party assets. Mr. Poor estimates that the overall trust bank market could be as high as $1.7 trillion. Much of the non-FDIC market is held in trust banks run by asset management firms for institutional investors that use closed-architecture programs. The movement toward open architecture is no simple step for most banks, according to Robert Testa, a Cerulli analyst who also worked on the research report. “Going open architecture is not as simple as it might sound, because it is a fundamental restructuring of the bank,” he said. “But as more banks move in this direction, the opportunity is enormous for asset managers.” One reason banks have been reluctant to move toward a system that utilizes more outside products is because trust departments already operate on thin margins and internal asset management can represent up to 80% of revenue, Mr. Poor said. “We have seen a lot of banks that have always wanted to move to a more open architecture but have faced challenges,” he added. Mr. Poor said the open-architecture trend could help mutual fund companies that are losing ground in the defined-contribution plan arena where target date strategies are becoming increasingly popular. “Most banks don't use target date strategies, so the fund companies won't have to face that competition,” he said.