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Wealth Management Market Report: Hunting for Big Game in Tinsel Town

Wealth Management Market Report: Hunting for Big Game in Tinsel Town

But local wealth management executives say the Los Angeles market isn't saturated--yet.

Like the glamorous actors and actresses Los Angeles is famous for, the city's wealth management market stands out on the national scene.

It's loaded with high- and ultra-high-net-worth clients, trailing only New York among U.S. cities in terms of the number of ultra-rich who call it home, according to Northern Trust and Phoenix Marketing International's Affluent Practice division. Phoenix research shows that Los Angeles has over 236,000 households with $1 million or more in liquid assets.

It is also a vast, sprawling market, covering thousands of square miles from the Pacific Ocean to mountains and desert inland, and is fragmented into a slew of sub-markets differentiated by geography and distinctive economic characteristics.

Los Angeles County is, in fact, the most populous county in the country, with nearly 10 million people and 88 incorporated cities spread out over 4,752 square miles, an area larger than Rhode Island and Delaware combined. And L.A. is, of course, the home of the entertainment industry, which has created much wealth and a large community of actors and directors who rely heavily on business managers to help them make their financial decisions — and serve as intermediaries between them and wealth managers (see sidebar).

But there is also great wealth from other sources, including real estate, the aerospace industry, medical technology and owners of medium-sized manufacturing and service business that comprise the city's thriving “middle market.”

Unlike San Francisco, where registered independent advisors dominate, large wirehouses, banks and Wall Street firms have pride of place in Los Angeles, say industry observers. And while L.A. is considered a tough market to break into, it is also seen as still having enormous upside potential, and continues to attract every shade of wealth manager from multinational firms to breakaway teams hanging out their own shingle.

“We see Los Angeles as a huge opportunity,” says Doug Ketterer, managing director who heads Morgan Stanley Private Wealth Management. “There's no dominant player, it's very splintered, and we're in the process of hiring new managers there.”

Morgan Stanley isn't the only firm expanding in Los Angeles. In November, Northern Trust acquired Waterline Partners, a highly respected independent with $807 million in assets under management run by Jeff Coyle. Chicago-based Guggenheim Partners recently opened a Los Angeles office, and Dynasty Financial Partners, the new high-profile independent start-up, is also set to plant its flag in the market.

Hiring Boom

There is also an FA hiring boom in Los Angeles. U.S. Trust has begun dramatically beefing up its West Coast presence, including Los Angeles, and is intent on hiring away about 200 top wealth managers from rival firms over the next two years, according to west division executive Thong Nguyen. Local independents like Convergent Wealth Advisors and Luminous Capital are also hiring, as is Northern Trust, and local wealth managers say they are also being courted by a slew of major financial institutions that are looking to add manpower in L.A., including Barclays and J.P. Morgan.

But local wealth management executives say the Los Angeles market hasn't been saturated — yet.

“It's a vast market that covers a lot of geography and many different potential clients that is still somewhat untapped,” says Pat Soldano, president of GenSpring Family Offices' California division.

What's more, the Los Angeles market is “still in its infancy as far as awareness of the different models of wealth management that are available,” says Rob Francais, chief executive of Aspiriant. As a result, he adds, “Los Angeles lags in the independent category.”

Bigger Is Better

By contrast, large brand-name firms are seen as market leaders. “Los Angeles is very wirehouse-driven,” says Matt Cooper, president, private client services for Beacon Pointe Advisors in Newport Beach.

And that's because so-called business managers (see sidebar below), key gatekeepers between FAs and clients in the L.A. market, seem to prefer bigger, better-known firms over smaller independents. Perhaps because who you know is so important in the land of glitz, a high-profile national brand simply carries more weight.

“You can't get in trouble for hiring Goldman Sachs,” says Grant Niman, a Los Angeles-based business manager who heads Niman & Associates. “Your risk tolerance gets lower when you're dealing with someone else's money.”

Wealth managers from large firms also claim, of course, that they have better lending capabilities and a wider array of resources than their independent rivals.

“They like us because we're a one-stop shop,” says Rebecca Rothstein, managing director, Morgan Stanley Private Wealth Management. “Clients here are super-busy, and we can give them asset allocation, bill pay, estate planning, tax preparation and lending in one offering. Independents can't compete with us as a total solution. This appeals to business managers enormously.”

A sense of safety and comfort is also a key concern for clients, “especially in the entertainment business, which is fickle and volatile and where people are never exactly sure where their next check is coming from,” says Richard Jones, managing director of Merrill Lynch's private banking and investment group in Los Angeles.

But the entertainment industry isn't the only game in town, and independents say they're gaining ground in the market by differentiating themselves and appealing to a wide range of clients in different businesses.

For example, Luminous, the fast-growing three-year-old RIA founded by former Merrill Lynch and Goldman Sachs advisors, now has approximately $4 billion in assets under management. The firm says it hit a growth spurt last year selling a fund made up of distressed residential mortgage-backed securities.

“It was an opportunity we saw that we wanted to take advantage of,” says founding partner Mark Sear. “We had to move fast, and we were able to raise $100 million in 30 days. That's something we couldn't have done at Merrill Lynch and it was a way to differentiate the firm.”

For Convergent Wealth Advisors, which is owned by L.A.-based City National Corp., the primary source of new business has been the sale of businesses in middle-market companies worth between $10 million and $1 billion, according to managing director Duncan Rolph. Convergent has also been able to draw on the client base of its parent company for new business.

“City [National Corp.] is a very well-known brand on the west side of Los Angeles, known for high service banking,” he said, “and we've seen that clients' tolerance for unproven entities has gone down dramatically since 2008.”

Breaking In: Cracking The Code

So how hard is it to break into the L.A. market? Geography, connections and performance are the biggest barriers, say local executives.

“Los Angeles is so fragmented that it's very hard to establish an identity in this geography without a brand or an existing footprint,” says Linda Davis Taylor, chairman and chief executive of Clifford Swan Investment Counsel in Pasadena. “Pasadena, for example, which is more conservative and has a lot of old money, is completely different from Santa Monica, an hour away, more liberal, with lots of new money.”

And while relationships are critical for wealth managers everywhere, local executives say they are especially so in Los Angeles, particularly in the entertainment business.

“The entertainment business is very much about who you know, and what they may be able to do for you,” says Aspiriant's Francais. “It's very promises and dream-oriented, as opposed to analytical reality.”

“It's a market that's very dependent on relationships and, if you want to be successful, you have to be very deep and very targeted,” says Bob Graziano, managing partner, family advisory services, for Northern Trust.

Despite the challenges, Los Angeles wealth management firms are reporting steady growth and an appetite for expansion. Assets under management for Jones' team at Merrill, for example, grew 20 percent to $5 billion in 2010 and Luminous' AUM jumped 48 percent to $4 billion in 2010.

Firms that aren't in hiring mode in L.A. are the exception. And companies that made acquisitions last year say they're still looking. “There's still room to grow in Los Angeles,” says David Murdock, managing director, family advisory services for Northern Trust.

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