Everybody is a wealth manager these days. But just what does the term wealth manager mean anyway? The term used to be solely the domain of trust departments in blue-blood firms, such as J.P Morgan. But now everybody is getting into the action, including small community banks, according to a survey, “Who’s Who in Wealth Management,” published by The Bank Insurance Market Research Group.
The study says that wealth management is now much more than just private banking. It also includes estate planning, brokerage, asset management, insurance and “holistic” (itself a catchall term) financial planning. There are a number of permutations across the industry. “It’s a somewhat illusive term. It goes beyond trust and insurance,” says Andrew Singer, managing director of the Mamaroneck, N.Y., firm and author of the study.
In fact, many firms are combining the different business lines under one umbrella, further blurring the lines between brokerage and trust. In retail brokerage, Merrill Lynch restructured its business segments to include its global private client group under the global wealth management unit. Among banks, there are 29 bank holding companies that report net income from wealth management business lines, Singer says. “Wall Street analysts want to see these numbers,” Singer says. The top five banks on the list, respectively, are Bank of America with $2.4 billion, Citigroup at $1.4 billion, JPMorgan Chase at $1.4 billion, U.S. Bancorp with $589 million and Northern Trust at $314.6 billion. In addition, the survey lists 60 bank companies that are players in the wealth management space.
To be included on the list, an institution must have more than $15 million in annual trust revenues as reported to the Federal Reserve Board in 2006, or $20 million in trust plus brokerage services. The median contribution from wealth management in terms of net earnings in 2006 from these 29 institutions was 10 percent, the study says. Northern Trust had the highest relative wealth management contribution with 47 percent of the company’s $665 million in 2006 earnings.
Bruce Miller, national sales director at Independent Financial, says there is “a trend toward putting both trust and brokerage in a common reporting line” as part of a larger effort by banks to offer scalable advice. “It’s difficult to establish a hard line in the sand,” Miller says. “There’s been a meshing of these two business lines. And wealth transfers very quickly in this country. A person’s net worth can change significantly at any time.” Given that reality, banks want their different tiers of service to look and feel the same so there is a seamless transition when they move up the food chain.
But this hasn’t always been the case at banks. Five years ago, that line in the sand for brokers was a $100,000 in investable assets. If a client had more than $100,000 in investable assets, he or she had to be handed over to the trust department, Miller says. Today, that number typically hovers around $500,000, and in some cases gets as high as $1 million.
The shift in strategy was likely prompted by losses in market share, the report suggests.
Banks have been losing trust clients to the major wirehouses and investment advisory boutiques in recent years. Indeed, personal trust assets held by U.S. banks fell 10 percent to $986.2 billion in 2005 from a record-high of $1.1 trillion in 1999, according to the Spectrem Group of Chicago. (Although a three-year bear market is likely to have caused some of that bloodletting).
Another reason for the intermingling of banking and brokerage is what Miller calls “channel conflict.” Banks have long had brokerage clients and trust clients at opposite ends of the spectrum. But in recent years the gap has narrowed. “There are always customers that fall somewhere in the middle.” Cost savings are also a consideration when combining the two business lines. Since they have similar products and similar compliance requirements, it makes sense to have them reporting to one head executive overseeing the sales of those products, Miller says.
What’s next for wealth management at banking institutions? Expect banks to get more sophisticated in streamlining their services under wealth management. With the help of technology, minimums for separately managed accounts have come down significantly. Reliance Trust, for example, offers an SMA for as low as $100,000 to invest. Meanwhile, the SEC is considering raising the bar for those who qualify as accredited investors to $2.5 million in investable assets from $1 million in investable assets. Also, people are living longer. “That will clearly drive the wealth management industry for the foreseeable future,” says Chris Meares, CEO of HSBC Group Private Banking.
One of the things you’ll also see, Miller says, is more dually licensed reps. “You’ll see a dramatic jump in the number of advisory licenses on the bank RIA side,” Miller says. At his own firm, the number of reps holding a Series 65 or 66 license was “zero” 18 months ago. Today, he says, 23 percent to 35 percent of the firm’s reps hold a Series 65 or Series 66 license.