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Your Newest Rival: Your Firm's Own Private Bank

Tom, a financial planner for Schwab Institutional's unit, had a client named Walter. He had worked with Walter for almost 10 years, knew his family and, now and again, played golf with him. Tom had watched as Walter, a small business owner, increased his personal assets to upwards of $70 million in a span of only a few years. (Both names changed by request.) Tom couldn't believe his luck. Then one

Tom, a financial planner for Schwab Institutional's unit, had a client named Walter. He had worked with Walter for almost 10 years, knew his family and, now and again, played golf with him. Tom had watched as Walter, a small business owner, increased his personal assets to upwards of $70 million in a span of only a few years. (Both names changed by request.) Tom couldn't believe his luck.

Then one day, Tom got a call from Schwab's headquarters in San Francisco. “I've got some guy on the phone, who I've never met and never heard from ever, telling me they want to take away my client,” Tom recalls. “I was, like, what the sh-t?”

The voice on the phone explained how U.S. Trust better understood Walter's needs, better than Tom ever could. “I mean, I know this guy,” Tom says now. “He's my client.” The edict: U.S. Trust, Schwab's private banking unit, would be taking over Tom's client now that he had raised his net worth into rarified territory.

Ultimately, Tom was able to keep his client, thanks to Walter's insistence. But Tom can't help but wonder what would have happened if he was prospecting Walter as a new client with his current asset level. “I wonder, if I'd just met him, if they would just pass him over to them before I realized what was going on?” he says.

Tom's experience throws into stark relief a concern many reps have, not only at Schwab, but also at firms across the country. With a new emphasis on specialized care for ultra-high-net-worth clients, rank-and-file advisors are in danger of being denied the most desired clients. Ultrarich people have always been targets from rival advisors and their firms, of course, and many a rep can tell harrowing stories of treachery by FAs in their own branches. But now do you have to worry about your own firm — competition on an institutionalized basis?

“It's a concern,” says a recruiter who says he has had several clients complain to him about the prospect of losing their top clients. “Firms won't admit this, but many of them are hesitant to trust a nonspecializing advisor with a huge, valuable client with special needs. They're just too important — and rare.”

A Growing Market

Well, not as rare as they used to be. Ultra-high-net-worth clients represent a rapidly growing market. According to Department of Labor statistics, there are more than 430,000 households with more than $10 million in assets, double the number in 1989. But not all use the Labor Department's definition of the “ultra-high-net-worth client.” Some say that “ultra” care is needed for people with just $5 million in liquid assets; others start at $50 million. For admission into Morgan Stanley's private bank, you'll need $40 million. According to a Schwab spokesman, U.S. Trust, one of the old names in the bespoke banking business, has no specific asset number minimum.

Nothing illustrates the trend more aptly than the New York Private Bank & Trust, recently founded by real estate impresario Howard Milstein. The minimum net worth: $50 million in assets, according to a company spokesperson. The firm declined to talk in much detail, only stating that it is “appealing to clients in a way competitors cannot.”

Not surprisingly, there has been some concern that such boutiques — and their very snooty mystique — could dislodge the ultra-high-net-worth from the Merrill Lynches and Smith Barneys of the world, both fine firms but without the exclusive cache of, say, a Goldman Sachs and other high-end institutions that do not take the average retail investor.

“You see a lot of these clients wanting to be catered to, specifically, with all the products and back-rubbing that only really rich people are going to want,” one analyst says. “The trends show that with all the different cooks in the kitchen at a lot of larger firms, clients are feeling marginalized, that they're not as important anymore.”

Take a Number

And then there is the consolidation trend (even Morgan Stanley has been rumored to be a takeover candidate; see related story on page 73). Many wealthy investors are becoming jittery that as more firms merge, they'll lose their velvet glove treatment and be treated as a number by giant financial institutions, says Chip Roame of Tiburon Strategic Advisors. While large firms have deep expertise in many areas, especially in initial public offerings and complicated alternative investment strategies, some ultrawealthy have gotten used to such high-touch services as bill-paying and even car-washing services.

Hence, the arrival of the bull-rushing private banks. Not that the private bank is a new phenomenon; it dates back to the 17th century, and has often suffered — or benefited — from the notion that it is secretive in its dealing, able to source nonpublic investments via its deep, old-school connections (one advisor calls private banking firms “like the Carlyle Group of our industry”).

What, Exactly, Is It?

If private banking and wealth management sound somewhat similar, they are. But there is a difference. It's true that the wealth management business model lends itself to solving the needs of high-net-worth clients, but in private banking, according to a representative of an exclusively private banking firm, there is a higher sophistication in how the client is treated. “There's no offer for credit cards or research or any of the things a lot of these banks and places have,” she says. “We exist purely to cater to their whims, not offer them special product or anything. They know what they want, and we know exactly what they want and don't bog them down with other stuff.” More important, private bankers have fewer clients and can spend more time on each client. That said, wealth managers at traditional wirehouses say they can give ultra-high-net worth clients precisely what private banking institutions can. But others aren't so sure.

Of course, the real difference is in in-office expertise of complicated financial needs, like trusts and estates and other high-end tax advice. Private banks are attracting clients with sophisticated strategies and investments rather than small-scale services, like retirement plans, mortgage and cash management offerings. That's the key to their success. “Private banking relationship managers can deliver extensive and unique credit capabilities,” Roame says. “They are able to manage all aspects of trust accounts in-house, an increasingly important fact with the aging boomer population.”

But, at the end of the day, it's also partly marketing. Private banks, quite simply, are chi-chi. These firms are glamorous and wreak of class and taste — of privacy and discretion. [One ultra-high-net-worth advisor at Goldman Sachs says, “The less I'm seen or heard from (by the media), the better.”]

Unlike the problems at Schwab's U.S. Trust, which acknowledged in November 2003 that market-timing had occurred in some of its Excelsior Funds, private banks usually don't suffer from the same conflicts of interest that can plague their rivals that are owned by traditional Wall Street firms. At Goldman Sachs Asset Management, in fact, they take great pains to make sure that the asset management arm and the private banking arms are kept as far away from each other as possible. A spokesperson says that specific procedures make sure any possible conflicts are avoided. Roame says that's common, citing Goldman as an example. But the lack of communication can work as a detriment as well. An advisor at a large firm with an established private banking unit tells the story of a client who, unbeknownst to him, had begun searching for other potential advisors and firms to which to transfer his assets. Without realizing that the two arms were connected, the client contacted the firm's private bank. The two advisors were competing for the same client — without realizing it. “It was a comedy of errors,” the brokerage advisor says.

But banks and wirehouses aren't exactly hiding under the desk either. “We are confident that the full-service wealth management we provide is unmatched in the industry, particularly among those smaller boutique firms,” says a spokesperson for Bank of America's private banking division, which has 150 offices in 39 states and $170 billion in assets under management. “We offer a breadth and depth of expertise and a broad product suite that can be tailored to meet the individual financial needs of clients and a unique geographic reach.”

But even that representative admits that the private banks are hard charging. Roame agrees. “This is going to be a serious challenge to the whole industry,” he says. “It's, in a way, opposite to the direction brokerages are going. They're trying to put everything under one umbrella, but that's exactly not what these wealthiest clients want.” Or, as “Tom,” the Schwab advisor puts it, “I fear the day that all my clients are hotel workers or janitors.”

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