Wealth Management: Panning for Gold

Wealth management, the most profitable and fastest-growing niche in financial services, presents a golden lode of opportunity for banks. Unfortunately, they're not the only ones mining it.

The wealth management market has grown increasingly competitive, experts say, with brokerages and advisory firms chasing the same shifting market as banks, often going after clients who may be younger, more tech-savvy, more self-directed than before. Many have earned their money instead of inheriting it, which might make them less loyal to one financial service institution than the traditional private-banking customer.

"In the U.S., you have the banking model and the brokerage model, both fighting in the same marketplace. Both those players are establishing private client services for private wealth clients, basically setting up...private banks," said Lars Weigl, vice president and global sector leader of asset management and private banking at Cap Gemini Ernst & Young.

Indeed, banks have stepped up their wealth management offerings, which can include securities processing, portfolio management, multicurrency capabilities, trust services, estate planning, cash management and custody, as well as managing such nonliquid assets as a car or art collection.

"Many have underinvested in their private client business," said Weigl. "It was sort of sleepy and not a priority for some players." But that's changing. "It's a growth area, and a stable source of revenue," he added.

STRENGTH IN NUMBERS

Growth might be an understatement. The high-net-worth market recorded more than $150 billion in fees in 1999, according to TowerGroup, revenue that results from charging clients 1% to 2% annually of assets under management.

And despite volatile markets and the dot-com demise, the number of high-net-worth individuals-those holding more than $1 million in liquid financial assets-continues its worldwide climb. According to Merrill Lynch/Cap Gemini Ernst & Young's World Wealth Report 2001, close to 180,000 new people became millionaires last year, bringing the worldwide tally to 7.2 million, with total liquid assets of $27 trillion.

Although last year's numbers mark a long drop from the vertiginous heights reached in 1999 when more than a million newcomers earned the high-net-worth designation, the report's analysts predict an 8% annual increase in the group's investable net worth over the next five years-down from 12% the year before but still enough to send a steady stream of business to private banks.

The economic downturn could benefit banks that have integrated private banking, asset management and brokerage into wealth management. "People lose confidence in themselves when they get smacked around in a bad market," said Robert Sterling, senior analyst for financial services at Jupiter Research, "and they're more likely to go back to a full-service provider."

TECHNOLOGICAL EDGE

Drawn by potential returning customers and high margins, at least 1,200 financial institutions around the world have set up private banking divisions, and have devoted increasing amounts of funds toward improving private banking technology, either by replacing or modifying existing systems or providing new applications connected to current core systems, according to TowerGroup, which estimates the compound annual growth rate for such expenditures at 11%.

Looking to improve efficiency, Wells Fargo's Private Client Services, for example, imaged its trust documents three years ago. "It was extraordinarily paper intensive," said George Leis, senior vice president and director of the investment management trust centers at Wells. "Imaging documents basically replaced the file cabinet. Traditionally, when a client had a question and we had to do some sort of review, we went to the file room, tried to find the file, pull it out. It was time consuming, accuracy suffered, our ability to respond to the client was impaired. Now we can have the trust document there when a client calls."

Chicago-based Northern Trust, with about $35 billion in banking assets, $1.7 trillion in trust assets and more than $300 billion in assets under management, ranks among the 20 largest U.S. money managers. "Basically, you've got needs that run across a wide variety of users," said David Bailey, senior vice president and director of technology for the personal financial services and wealth management groups at Northern Trust.

The most basic user, whose net worth might fall in the $1 million to $5 million range, could be tracking their personal finances in Quicken or Money. The bank's Private Passport connects to these systems, delivering a consolidated view of a client's in-house banking, brokerage, trust or custody accounts (clients enter the data over the Internet) along with bill payment. Private Passport can also link to the bank's brokerage side to provide online trading, and comes with a wireless capability.

For ultra-high-net-worth clients, with a complicated asset mix that may involve partnerships, hedge funds and investable net worth averages of $100 million, Northern Trust provides more customized reporting services, usually through a family office. "It could be tax focused, accounting focused, performance-measurement focused. We need to provide a way to move fairly significant amounts of data about those investments to their in-house systems," said Bailey.

The bank serves family offices through Family Passport, which links to their external financial accounting packages, and allows clients to input external assets, such as large blocks of company stocks or hedge funds. "We capture that data in a feed, which we can then export through some of our other tools and include in their monthly reporting packages," said Bailey. "We can put certain tools on the menu or take them off, depending on what their needs really are.

"It's a very difficult market when you have so many differing needs for reporting and different types of servicing capabilities," Bailey continued. "There isn't really a single technology solution that will fit everybody. We've tried to create some building blocks that will allow us to adapt quickly to the different needs that our different clients have. A lot of those serving the high-net-worth market have standardized reporting templates. I don't think that really hits the market. It's much more complex than that."

THE CONTENDERS

Banks are not the only financial institutions fine-tuning wealth management systems to gain a bigger slice of the high-value-client pie.

Some brokerages have allied with banks to extend their reach to the affluent. Taking advantage of the restraints lifted by the Gramm-Leach-Bliley Act, Charles Schwab bought private client asset management group U.S. Trust last year; UBS acquired Painewebber and Merrill Lynch linked with HSBC.

Merrill Lynch claims to have more million-dollar households under management than any other financial service concern in the world, including more than $900 billion from households with $1 million or more of investable assets and $300 billion from households of more than $10 million and a family office that serves many clients with in excess of $100 million.

Essentially kept out of the securities industry by Depression-era barriers, banks have to catch up, said Jupiter's Sterling. "Brokerages were not restricted from going after that business for years and years. Banks are new to the game."

And various online wealth-management advisory services, such as myCFO based in Mountain View, Calif., stand ready to step in. Started in 1999 by Netscape's founder Jim Clark, myCFO, with its retinue of accountants, lawyers and tax planners on hand to provide services across all disciplines-from bill paying to tax planning, investments, philanthropy and estate planning-mimics the traditional family office.

With more than 300 clients with generally a minimum of $10 million in investable assets, myCFO sells advice, not products, over the Internet and face-to-face, and has developed a proprietary Internet-based expense-management and bill-paying application that brings together data from diverse sources. It has also designed another proprietary application for consolidated asset reporting that combines stocks, bonds, hedge funds and equities, as well as such nonliquid assets as planes, boats, cars, jewelry, art, wine.

Seeing myCFO's services as more complementary than competitive, Northern Trust led a group of investors that poured $45 million into the advisory last March. "We had a common client base," said Northern Trust's Bailey. "They don't provide custody services, and the underlying reporting and tracking of investments and collecting income and all those types of activities...that is not something they were doing, and I think that's where we were able to add some value for them."

EMERGING MARKET

Just as Northern Trust and other institutions refine their systems to better serve high net-worth clientele, technology has redefined the market and presented a new wealth management segment for banks to exploit.

As banks and brokerages look for new ways to generate income in the face of dramatically declining transaction-based revenues and the dramatic growth of wealth in the United States, they've selected technology components reserved only for high-end individuals, said Dennis Ceru, an analyst at TowerGroup. And through the ability of the Internet and advances in technology, computing power and the drop in the cost of RAM, they've created wealth management solutions for people who wouldn't have qualified a few years ago.

The result: Some private banks have courted people with as little as $100,000 in investable assets as "emerging" wealth clients, in the faith that they will eventually be worth at least a million net. "So now we have these wonderful segments of ultra high net worth, high net worth, emerging affluent, and I don't know who that leaves," said Ceru.

Metavante, a Milwaukee-based purveyor of software and transaction systems, is developing a personal cash management product elastic enough to accommodate anyone from emerging affluent to high net worth. "It scales from $500,000 of investable assets on up," said Norrie J. Daroga, senior vice president and general manager in wealth management at Metavante. "It's very flexible, depending on the size of the institution that wants to use it."

The idea is to attract emerging wealth clients early in their affluence and build the relationship. "When they get to the point where they need ancillary services, the relationship has been established," said Daroga.

An integrated transaction investment account that includes a checking and money market account and a line of credit to an investment account, the personal cash management service not only provides a consolidated assets and liabilities statement but allows a client to transfer funds among the three accounts via the Internet. "You don't have to keep money in the checking account," said Daroga. "You can dip into the line of credit or trade securities to pay for purchases."

"It's all tied together electronically and can be individually customized as far as limits and dollar sizes in each of the categories," said William Moore, senior vice president at Washington Trust Bank, Spokane, Wash. "The customer can get a capsule judgment of his net worth and liquidity at any point in time."

A community bank with 99 years of trust and investment experience, Washington Trust has worked with Metavante to design personal cash management, and will beta test the product later this year. "We're looking anywhere from a half million to a million dollars at least in securities, and then a portion of that could be in money markets, depending on what kinds of fluctuations and variability that client may want as far as liquidity is concerned."

Moore believes the personal cash management service will help draw high net worth clients. "Being able to access a high-net-worth individual's investable funds via something like a line of credit tied to that investment account is an attractive option for them. They don't have to keep a lot of liquidity available to meet their extraordinary cash needs."

Moore sees even more potential for the tool.

"A portion of it may be self-directed, so that an individual who may want to have the bulk of his portfolio managed professionally but may want to have 10% or 20% of it where he can self-direct, can buy or sell for his own account," he said. "We hope to be able to accommodate that need."

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Aggregation A Vital Building Block

Whether trying to attract and serve the emerging high-net-worth, the high-net-worth or the ultra high-net-worth client, aggregation-the task of combining data from many accounts at different financial institutions for a single unified view-forms the cornerstone of any strategy.

Advent TrustedNetwork, from Advent Software in San Francisco, provides cross-institutional aggregation services especially suited to the high-end market. Functioning like an electronic clearinghouse, TrustedNetwork collects holdings data from multiple accounts directly from participating custodians through direct feeds from about 70 network members, including Yodlee, Northern Trust and Boston's State Street Bank, into its database.

Applying a layer of analytics, TrustedNetwork consolidates each individual investor's holdings and delivers the information online to recipient institutions as authorized by their clients. The analytic tools yield information about portfolio performance, realized gains and losses and asset allocation. U.S. Private Banking at Deutsche Bank and Vanguard recently joined TrustedNetwork. Morgan Stanley participates as both a data provider and a recipient.

Advent also signed an agreement with SunGard, in which SunGard's 700 bank and trust clients can connect to Advent's data provider network. Cole Taylor Bank, First Republic of San Francisco and Provident Bank were among the initial 40 bank and trust institutions that have joined Advent TrustedNetwork through the agreement.

"We don't serve the high-net-worth investor directly," said Steve Lewczyk, vice president at Advent TrustedNetwork. "We build products, services and tools for the financial intermediary-a brokerage, a bank, an investment adviser, a family office, hedge fund managers to a certain extent-who in turn serves the high-net-worth investor."

MorganOnline, the Internet advisory tool within J.P. Morgan Private Bank, uses Yodlee to aggregate client data, showing all assets and liabilities across all providers, whether it's J.P. Morgan, Schwab, Merrill or Goldman Sachs, said David Levi, vice president of design and development at MorganOnline. "We've pushed the envelope a little with Yodlee."

Launched in March 2000, MorganOnline last January was integrated into J.P. Morgan Private Bank as an online component offered exclusively to private banking clients, who have about $25 million in net worth each.