BANK JOBS OUT INVESTMENT OPERATIONS: NAT’L COMMERCE-MORGAN STANLEY DEAL MAY FORECAST TREND

In what may be a banking industry first, a Southeastern regional bank has moved to outsource virtually all its investment-management services, including those for private-bank and trust clients, to Morgan Stanley Asset Management.

Morgan Stanley’s alliance with Memphis, Tenn.-based National Commerce Bancorp. could become a model for other banks that have struggled to build assets in mutual funds and investment products managed in-house.

The deal with Morgan Stanley gives the bank’s customers access to virtually all the New York-based investment powerhouse’s mutual funds. But the unique aspect of the arrangement is that National Commerce’s wealthy customers also will have access to Morgan Stanley’s separate-account management — a service normally available only to large institutional investors.

The bank runs $1.5 billion for small institutional and high-net-worth clients, $300 million of which is in its proprietary Riverside Capital mutual funds. Assets in the mutual funds will be rolled into Morgan Stanley funds, and the Riverside Capital name will be discontinued — perhaps as early as this week.

The alliance, in the works for six months, started with the recognition that National Commerce couldn’t compete in the asset-management business, says Russell M. Niefie, head of trust and asset management for the bank. That was a difficult step.

“This is an old-money bank. It has a great reputation,” he says. “I think the bank did a very good job of saying, ‘We’re going to pull our ego out of it. We can’t guarantee a solid performance, especially in the volatile markets we’re facing now.’ ”

The bank considered keeping the brand name and using Morgan Stanley as a subadviser, but that would have hiked fees for investors as the bank covered distribution and other costs, Mr. Niefie says.

gains from outsourcing

National Commerce, with 130 branches in Tennessee, Virginia, North Carolina, Georgia and Mississippi, has laid off three analysts, but will keep two portfolio managers. Th
ey will continue to run money for clients who want to keep at least some of their assets in current portfolios to avoid realizing capital gains.

The efficiencies the bank gains from outsourcing asset management should help cushion the immediate blow of lost management fees. On the mutual funds, for example, National Commerce will get merely 25 basis points through 12b-1 distribution fees levied by Morgan Stanley rather than the full management fee it was getting before.

But for private clients the bank and the investment house will split fees, subject to a floor fee Morgan Stanley has negotiated in case assets don’t grow. Mr. Niefie doesn’t expect that to be a problem since he’ll be selling the services of Morgan Stanley managers with typical institutional minimums of $100 million to clients with as little as $250,000.

Morgan Stanley did not return calls seeking comment, but the unusual alliance is a tack more banks ought to be taking, says Eli Neusner, a senior consultant with the Spectrem Group, a San Francisco-based management consulting firm.

“It’s a very sensible and progressive initiative,” he says. “Some banks are realizing it pays to make a big splash with their investment management group. But trying to bootstrap their way up using their own portfolio managers, that just ain’t going to work.”

The main problem, for regional banks particularly, is attracting and keeping talented money managers, Mr. Niefie says. Most have to hire young guns recently out of business school, who cut their teeth and then leave for New York.

wave of the future

Mr. Niefie says good people were hard to find even when he oversaw the investment of billions for the Employees’ Retirement System of Texas, a job he left six months ago to join National Commerce.

“It was very difficult to attract and retain people,” he says. “I think most regional banks are finding that impossible to do. Too much of that money is going to New York.”

Mr. Neusner expects to see more subadvising of
bank mutual funds in the future, but believes outsourcing of separate-account management will be slower to catch on.

A bear market will take care of that, says Mr. Niefie. “The market’s been growing at 30% a year, so (banks’ investment-fee) revenue grows at 30%. What happens when the market turns flat or goes down? They’re going to be forced to do it.”