Shake-Out in the Private-Banking Industry Barron's Online

	Monday, October 13, 2008

BARRON'S COVER Good Gracious! By SUZANNE MCGEE A shake-out in the private-banking industry has begun, as wealthy clients flee to the perceived safety of larger institutions. ALAN TRIPP HAS WITNESSED FAR MORE FINANCIAL SHOCKS than the average American, beginning with the 1929 Wall Street crash, when he was a child. The Bryn Mawr, Pa.-based entrepreneur also knows all about risk: His former company, Product Resources International, specialized in finding ways to commercialize bleeding-edge technologies. Thomas Michael Alleman(L); Brad Trent (R) Clients no longer ask for access to hot products, but for protection, says Wells Fargo's Ron Florance (left). Frances Aldrich Sevilla-Sacasa (right) of U.S. Trust says clients want help navigating through "uncertainty." But this year's market mayhem caused more anxiety than he could stomach. On Sept. 11, his 91st birthday, Tripp ended a 30-year relationship with his financial advisers at Lehman Brothers' private banking division, Neuberger Berman -- just days before Lehman went under. "I was verbally assured that my assets were safe," he recalls, "but I know when things are falling apart, funny things can happen." He yanked his money and sent it to another bank. Plenty of other rich investors are just as dismayed, a result of dismal investment performance and mounting concern about the strength of financial institutions. More than 80% of wealthy investors in one survey said they planned to withdraw at least some of their money from their private bank, and more than half plan to dump their banks altogether. Many of the respondents probably were venting, rather expressing actual plans. But it's clear that private banks -- outfits that cater to the wealthy and are owned by banks, brokerages and others -- haven't been immune to the turmoil of the past year. Assets under management at the top 40 private banks increased just 4.3% in the year through June 30, versus 20%-plus in each of the previous two years, according to an annual study by Barron's. See nearby table for a ranking of the top 40, based on assets in $1 million-plus accounts. Reflecting both weak investment returns and fewer new accounts, the asset growth was the slowest in the seven years in which Barron's has tracked private banking. And the 12 months covered in our latest survey ended before things turned really ugly in the final two weeks of September. As chief executive officer of JPMorgan Private Bank, Mary Callahan Erdoes has lived through 15 years of industry-wide changes. "But a period of 15 days has changed everything once again," she says. "Every single client is reassessing the level of confidence and trust they have in the institutions that advise them." DOW JONES REPRINTS This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com. • See a sample reprint in PDF format • Order a reprint of this article now. Table: 2008 Top Wealth Managers in the U.S. WITH SOME VENERABLE INSTITUTIONS failing and others vanishing in mergers, many clients have little confidence that any firm is above the fray. "It's not surprising that clients are wondering aloud if they can entrust their family's balance sheet and finances to a firm that can't seem to manage its own balance sheet and finances," Erdoes says. Already, the private-banking landscape is undergoing tectonic shifts. By early next year, the wealth-management division of Merrill Lynch, which has topped Barron's annual survey every year since it was launched in 2001, will be absorbed by Bank of America's private-banking operations, No. 3 as of June. The combined entity will be a behemoth with some $1.7 trillion in assets under management in accounts of more than $1 million, more than twice the size of second-ranked Citigroup's wealth-management division. That assumes BofA holds onto those clients and their assets. Citigroup is negotiating some big changes of its own. Its high-profile private-banking honcho, Sallie Krawcheck, left last month after a power struggle with Citigroup CEO Vikram Pandit. In the wake of Lehman Brothers' bankruptcy filing, meanwhile, two private-equity firms have acquired Neuberger Berman, which will operate as an independent entity. Barclays has taken on other private-banking assets from Lehman. (Our ranking excludes Lehman, instead showing where the independent Neuberger and reconfigured Barclays would have stood at June 30.) National City, a Cleveland-based bank long favored by wealthy families in the Midwest, appears to have suffered a real loss of cachet. Amid rampant fears about its mortgage holdings, National City's private-banking assets fell 11% in the year through June 30, to $25 billion. It was against this backdrop -- and that of a rapidly falling stock market -- that research firm Prince & Associates surveyed wealthy investors in September. Some 81% said they would pull at least some of their money from their private bank, up from 68% in July. The portion that planned to dump their bank nearly doubled, to 57% from 30% in July. And 86% said they wouldn't recommend their bank to friends, up from 38%. Some of this is an emotional overreaction, says Hannah Grove, a New York-based managing partner at Prince & Associates. But she notes that private banks can't afford to underestimate the sense of betrayal that their clients are experiencing. "Everyone is reeling from the speed with which things have happened, and there is a widespread feeling among clients that private banks let them down," observes Grove. Maria Elena Lagomasino, Palm Beach-based CEO of Genspring Family Offices, which serves scores of wealthy families, says that some private bankers have been thrust into an uncomfortable position, owing to the problems at their parent firms. "We are hearing from the private bankers that they feel caught between serving the client and [serving] the company they work for." At the very least, rich investors are re-examining their investment strategies in the wake of a series of disappointments. Auction-rate preferred shares, often marketed to the rich, proved to be far less of a sure thing than advertised. Hedge funds weren't always hedged, and stocks fell at sickening speeds. In September alone, the Standard & Poor's 500 slumped 9%, and $1.24 trillion of market value was wiped out, based on the DJ Wilshire 5000 index. Unhappy Returns: Asset growth of the top 40 private banks has fallen sharply this year. "Our conversations with clients have changed fundamentally," says Ron Florance, director of asset allocation and strategy at Wells Fargo Private Bank in Los Angeles. "Instead of asking what access we can get them to the latest and greatest hedge funds or other products, they are asking how we will protect their assets and what kinds of hidden risks might be in their portfolio." But only a small portion of wealthy investors is radically shifting gears. Most, following the time-honored advice of private bankers and others, are trying to ride out the crisis by staying well-diversified by asset class and sector, with some adjustments. For instance, some have lightened up on cyclical industries, such as energy, and boosted holdings of defensive sectors, such as health care. "A small minority has just said" 'Get me out of the market and put everything into Treasuries,'" says Neil Hokanson of Encinitas, Calif.-based Hokanson Associates, a longtime adviser to the wealthy. "An even smaller number see this as a chance to bottom-fish in the financial stocks. They say they don't care what the stock prices are for the next five years; they are comfortable taking risk capital and betting on a very long-term turnaround." FOR NOW, THE CLEAR WINNERS among private banks are the institutions that have managed to emerge with their reputations relatively unscathed. In the week in which politicians, government officials and regulators battled to pull together a bailout or rescue plan in Washington, JPMorgan's private bank, No. 7 in the rankings, was seeing inflows of as much as $1 billion every hour, Erdoes reports. "Right now, the instinct people have is that they want their money safely in a place where they can see it and get to it quickly," says Jim Dunigan, executive vice president and managing executive for investments at PNC Wealth Management. "They are reassured when we can explain to them that the assets in a bank-trust department are segregated from the bank's own balance sheet." PNC, ranked No. 22, has been able to boost assets under management during past bear markets, Dunigan says, but this year's flood of new business has surprised him. "We are far exceeding our targets in terms of the number of new clients," he says. Among the newcomers: Tripp, the seasoned client who defected from Neuberger Berman. No. 3-ranked Bank of America, a giant even before its Merrill acquisition is complete, is also grabbing plenty of new business amid the turmoil. "People want advisers who can help them navigate through the uncertainty," says Frances Aldrich Sevilla-Sacasa, president of U.S. Trust, a Bank of America private-wealth-management unit. In the first eight months of 2008, U.S. Trust's assets under management grew by $13.8 billion, and the bank has attracted more than 900 new clients. Despite the credit crunch, the bank's lending activities are also up 6.5%. Now Sevilla-Sacasa and her team are fielding expressions of interest from private bankers looking for a new home. It remains to be seen whether the biggest banks will remain the biggest winners. Anthony deChellis, head of private banking for the Americas at Credit Suisse, says clients and advisers may fear being marginalized at one of the newly merged entities. If there are, say, "20,000 private bankers all trying to get to the same research material, well, the question is, what value can you add?" The nation's private banks -- and their customers -- will soon find out. In Pursuit of the Ultra-Rich By John Hintze IN TIMES LIKE THESE, PRIVATE BANKERS do plenty of hand-holding. And the hands they hold the most are those with at least $10 million to invest. Such "ultra-high-net-worth individuals" often get daily calls from their bankers, one-on-one meetings with analysts and economists, and prompt replies to e-mails. The fact is, private banks have been tripping over each other to win and keep investors with at least $10 million, since those clients can require an array of products and be cost-effective to serve. Increasingly, they're the only clients who get truly red-carpet treatment. That's why Barron's, for the first time, is providing a ranking of private banks based on assets in accounts of more than $10 million (see table, "2008 Top Wealth Managers"). Our main ranking of the top 40 private banks, see table remains based on accounts of $1 million or more. Many of the top 10 players on the new list also lead in the main ranking. But there are surprises, too. SunTrust, which caters to entertainers, athletes and entrepreneurs, ranks No. 9 in serving the ultra rich, versus No. 18 on the main list. SunTrust's status as a deposit-taking regional bank -- and one not in the news -- draws ultra-rich investors looking to consolidate their financial relationships in turbulent times, says Mark Peters, head of private-wealth management. Bessemer Trust gets 100% of its assets from accounts of more than $10 million. That makes it No. 8 on the new list, versus No. 20 in the main ranking. Bessemer's Robert Elliot says its "agency" approach -- it doesn't make products -- continually pulls in new clients. Avoiding problem markets like auction-rate preferreds hasn't hurt, either. Ultimately, helping the ultra-rich invest isn't much different from helping the merely rich. "Our objective is to create a long-term asset allocation and stick to that strategy," said John Longley, CEO of private banking at Citi Global Wealth Management. Still, that doesn't keep clients from asking questions, especially now. "They're looking for access to practitioners, whether it's the credit-default-swap trader, an outside money manager, the guy running capital markets, or [economist and market expert] Stephen Roach," says Michael Armstrong, global head of Morgan Stanley's private-wealth-management business. For $10 million, you may never again be lacking for conversation. JOHN HINTZE is a financial writer based in Newark, N.J. E-mail comments to mail@barrons.com URL for this article: http://online.barrons.com/article/SB122367858478924491.html CONTINUED

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