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The Great Divide

There aren't a lot of $50 million clients out there, so when one comes around, there's going to be competition to win his business. One such situation arose a couple years ago, after Morgan Stanley and Dean Witter merged but while the two were still distinct entities. A Dean Witter broker in a large branch had managed to get his hands on this lucrative client but thought that a private wealth advisor

There aren't a lot of $50 million clients out there, so when one comes around, there's going to be competition to win his business. One such situation arose a couple years ago, after Morgan Stanley and Dean Witter merged but while the two were still distinct entities.

A Dean Witter broker in a large branch had managed to get his hands on this lucrative client — but thought that a private wealth advisor (from Morgan Stanley) was encroaching, according to a producer in that branch. That private wealth advisor had been introduced to the client by a mutual friend, and was aggressively courting him as well — threatening the Dean Witter broker, who had his hands on the client first.

“It did get a little nasty there for a while,” says the Morgan Stanley source. Eventually, the situation was worked out — the first one to get there won the account, at least in this situation. But it does highlight an internal-competition issue amongst the large broker/dealer sales forces that seems to be growing as brokerages aim for the super-rich.

Over the last couple of years the largest retail broker/dealers have been setting up wealth management groups — private wealth boutiques, using brokers with enhanced credentials — to go after the $10 million-plus crowd. Merrill Lynch, Smith Barney, Morgan Stanley and now, UBS Securities, all have these boutiques as they attempt to compete with the trust banks and smaller, independent wealth managers around the country.

Although the ultra-high-net-worth boutique does make sense, the business model is not always well received in the field. Some rank-and-file advisors resent the concept, since it in effect creates a special caste of advisor with whom “regular” advisors must share their super-rich clients. Some critics say it institutionalizes competition between groups of people at the same firm. And some managers have been perturbed to find that the top brokers weren't reporting to them.

“Do we not diminish the brokers who work at the lower level?” asks a longtime veteran of the brokerage industry. Private wealth brokers “aren't allowed to practice law, do corporate trustee work, handle taxes…they're allowed to manage money. So what's different about them?”

As a result, in the last few months, broker/dealers have made some changes to help communication and ease some of the barriers between these groups — but also reinforce that these are, in many ways, separate businesses. Morgan Stanley has combined the two sales forces, which were previously distinct groups, but has a rule now that private wealth advisors won't get paid for client accounts smaller than $1 million. Merrill Lynch has increased partnering efforts between these groups of advisors — but they've renamed the private wealth operation “private banking and investment,” emphasizing a distinction from the rest of retail brokerage.

“Junior producers will see it as a chance to move up the food chain,” says Sunny Patpatia, a wealth management consultant in San Francisco.

Not Better, Just Different

There are good reasons the biggest broker/dealers are more intently focusing on the ultra-high-net-worth crowd. As of 2003, there were 650,000 American households with at least $5 million in net worth, according to the Spectrem Group. Also, such accounts are very profitable, and fragmented among brokerages, trust banks and independent advisors. Since the over-arching strategy among big b/ds is to spend more time with more affluent clients, many are beefing up wealth management services for the $10 million-plus crowd, and hoping to attract advisors from competitors in the process.

“The pace [of competition] has quickened,” says Jim Hays, chief operating officer of Merrill Lynch's private banking and investment group. “People are moving quickly in hiring talent, and building out infrastructure — there's a realization that it's a good opportunity for the industry, as it's a fragmented marketplace.” He believes that the increased lending capabilities, enhanced technology and strength of platform means that Merrill can beat the trust banks in attracting such clients.

Overall, what Merrill and others are doing is something that's risen out of an industry-wide strategy to push for a greater share of one client's assets. Be it “Total Merrill” or Smith Barney's “March to a Million” strategy, retail firms have been seeking ways to deepen relationships with existing clients. It's a strategy that big brokers do agree with.

Different firms approach it different ways. While a $200,000 client and a $650,000 client may have different needs, in many ways the strategy for soliciting and servicing them isn't all that different. But those clients with $20 million present a challenge that often differs from a client with, say, $2 million, largely related to concentrated stock positions and extra complications with tax issues.

As a result, larger firms have increasingly embraced the segmentation strategy — delivering different services and resources to varying clients, and also a different sales force. Merrill Lynch, in developing its private wealth division, opened hub offices in New York, Chicago, Los Angeles and San Francisco, with offices in Atlanta and Dallas expected later this year. Currently, 91 teams of advisors populate these offices, servicing about $380 billion in assets, according to Merrill officials. Meanwhile, Michael Schweitzer, managing director and co-head of private wealth services at UBS, estimates needing 100 to 150 teams for UBS' group.

Reps who want to become part of Merrill's private wealth operation must pass an extensive examination revolving around estate planning, tax planning and, perhaps most importantly, dealing with concentrated stock portfolios, which many ultra-wealthy people (such as CEOs) contend with. Clients have to have at least $10 million in investable assets. “It's almost like an institutional relationship,” Hays says.

However, creating another type of advisor has caused some tension at a number of firms, because to some, the model represents a ceiling on the kind of account the “regular” broker can target. It raises the specter that no advisor wants to contemplate — that someone would consider “taking their accounts” away from them. “I have accounts in my office of $25 million,” says a Morgan Stanley producer. “On paper, those should be moved over, but that's absurd.”

Morgan execs recently moved to address some of the resentment between the separate sales groups that existed between the private wealth group — “Morgan Stanley,” as some called it — and the old retail sales force, “Dean Witter.” At the end of 2003, the firm combined the two sales forces in an effort to tone down the feeling that there were two distinct sales forces. (Or, as another Morgan source put it, “so they didn't feel like they were giving business to Merrill.”)

Differences remain, though. Morgan instituted partnership guidelines that stipulate that reps in the general sales force with a $20 million-plus account have to partner with a private wealth advisor (with a sharing of fees). Accounts smaller than $10 million are for the regular financial advisors, and accounts between $10 million and $20 million can be pursued by both types of advisors, says Michael McVicker, director of national sales for the HNW segment at Morgan. Some producers still worry that the private wealth advisors' floor will be dropped to $10 million.

The stratification cuts both ways, however — private wealth advisors aren't paid on accounts smaller than $1 million.

Shirts and Skins

Diffusing the notion of a divide between sales forces has been a challenge at Merrill as well, something Bob Mulholland, co-head of Merrill's Americas division of global private client last year called “breaking down the issue of ‘shirts vs. skins.’”

In response, Merrill has increased partnership situations between private wealth advisors and the bulk of the sales force, but has also attempted to more clearly mark the reasons for the separation between the financial advisor population and the smaller private banking group — hence the rebranding. Hays says the group was renamed the “Private Banking and Investment Group,” to better define the experience a client will get from the boutique-like division, as well as to compete with the trust banks. One recruiter commented that it's “possible that they wanted to seem like, because it's banking, that it's completely different from brokerage.”

Schweitzer of UBS acknowledges that this issue exists, but thinks too much is made of it. “There's conflicts all the time in every industry, anytime you have more than one person pursuing an opportunity,” he says, adding that the firm hasn't decided whether to have separate offices or not. “It seems to be more highlighted with a wealthy client at the center. Everyone in this business wants to build relationships with wealthy clients. I don't see it necessarily as a bad thing.”

Christopher Poch started Smith Barney's wealth management group in 1999 with the idea to avoid some of these internal conflicts. As a result, the private wealth management group at the firm is a small group based out of New York responsible for assisting any of the firm's 12,200 reps to work with UHNW clients. “We want to make sure a 25 to 30-year vet at the firm has an opportunity for a certain client relationship,” Poch says.

However, it does raise a question as to whether the average broker has the means and experience to compete with firms putting together large proposals to serve mega-wealthy people, like, say, Northern Trust and Bessemer. Clearly, those who believe in the model of separate offices feel this way. Poch disagrees. “Only if you assume they're incompetent,” he says.

But, he adds, less experienced reps may need to partner with reps who have attained the firm's private wealth advisor designation. Currently, there are only about 20 of these reps — many who take the exam fail “on the second or third try,” Poch says. He says Smith Barney expects to have between 50 and 100 such accredited reps by the end of the year.

Mighty, Mighty People

Cross-selling and better targeting of clients through segmentation strategies have been viewed positively by analysts, including Citigroup's Ruchi Madan, who in a Sept. 2003 report said that accounts at Merrill Lynch, in particular, are becoming “stickier” as a result of those strategies. Madan's research of more than 1,100 affluent investors found that just 28 percent of clients were likely to leave Merrill if the rep left, compared with 70 percent at UBS. There's serious motivation to hold these clients: “It's more attractive than the mass affluent because the margins are higher, the growth rates are higher and there's fewer people to service it,” says Poch.

Observers say the tinkering by the firms is evidence that while segmenting the client population makes perfect sense, segmenting the advisor force is harder to manage. “We have respect for pre-existing relationships,” Hays says. Ultimately, “it starts with the client,” he says, adding, “The needs of this type of client are very unique.”

The answer may lie within the combination of promoting extra communication and a streamlined management structure and making it clearer that those serving the mega-rich are in a different business. However, the question of whether setting ceilings for some and floors for others — no matter how flexible — limits the aspirations of reps. The Morgan Stanley producer, says, however, that among individuals, things have gotten better.

“We have several $20 million-plus accounts, and [PWM] has been careful to stay hands-off,” he says. “They're attempting to do it right. They're introducing themselves, telling us what they do — the PWM guys are working stiffs like anyone else.”

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