Reeling from the rapid-fire succession of bankruptcies, distressed sales and nationalizations of some of the U.S. financial giants that dominated the landscape for decades, the rich are yanking their money out of Wall Street banks knee-capped by the financial crisis and moving it to trust companies, family offices and independent wealth managers once shunned for being conservative and boring.
“Clients in general are panicking,” says Henry Johnson, president and co-CEO of Fiduciary Trust Co. International. “We’re working into the wee hours of the night and weekends to switch clients over.”
During the 1990s firms such as Goldman, Sachs & Co., Merrill Lynch & Co. and Lehman Brothers raked in new business as wealthy investors began to turn their backs on the old-line trust companies and traditional banks that had managed their money in a sleepy, but safe, way since the turbulence of the Great Depression. The Wall Street brokerage firms offered cachet, the promise of big returns and access to potentially lucrative new products, such as closed hedge funds, structured products and shares in initial public offerings.
That was then. The credit crisis that first erupted in the summer of 2007 has flipped this model on its head. “These are tumultuous times,” notes Bruce Holley, a partner at the Boston Consulting Group, a research firm in New York. “Wealthy people are wondering why a firm that has problems managing its own balance sheet will do any better managing their money.” Adds Peter (Tony) Guernsey Jr., head of national private wealth management at Delaware’s Wilmington Trust Corp., “There’s been a big flight to quality, and we, and a handful of others, are a big beneficiary of that.” He notes that advisory revenue at Wilmington Trust was up 14 percent in the third quarter of last year compared with the same quarter in 2007.
Other winners include Bank of New York Mellon Corp., Northern Trust Corp., Bessemer Trust Co., JPMorgan Chase & Co. and Glenmede Trust Co. BNY Mellon Wealth Management logged $12 billion in net new assets in 2008. The parent company didn’t provide a comparable figure for 2007, but revenues in the wealth management group rose 3 percent in 2008 from the previous year. Client retention rates are also high, hovering between 95 and 97 percent, says David Lamere, the group’s CEO.
The company has been staffing up its distribution force since the merger of Bank of New York Co. and Mellon Financial Corp. in July 2007, which Lamere says has helped boost growth. It has established a system to avoid conflicts of interest: The sales force gets paid for generating new clients; those accounts are then turned over to managers whose pay is based on metrics of client satisfaction. Lamere says the bank also benefited from a vote of confidence when it was named an administrator for the federal government’s Troubled Asset Relief Program.
New York–based Fiduciary Trust, which is owned by Franklin Templeton Investments, is another beneficiary of Wall Street’s woes. As of September 30, 2008, investment management fee revenue was up 8.1 percent over the previous year, notes co-CEO Johnson. Although he wouldn’t disclose client numbers, Johnson says the firm brought in three times as many new clients in September as it does in an average month.
Robert Elliott, senior managing director at Bessemer Trust, says it’s been the best year on record since the firm opened its door to external clients in 1974, after having managed only the money of the family of Henry Phipps, one of the founders of Carnegie Steel Co. Bessemer brought in almost $4 billion from 170 new clients in 2008.
The shift from Wall Street to firms like Bessemer illustrates a back-to-basics trend, Elliott asserts. “It’s about trustworthiness, financial safety and soundness — not making quarterly earnings,” he notes. “Clients were drawn to brokerage firms for product access, the allure of their size, but people didn’t look at the underlying financials.”
It doesn’t hurt that Bessemer, a trust company known for its conservative due diligence, took a pass on investing with Bernard L. Madoff Investment Securities, whose founder allegedly ran a $50 billion Ponzi scheme. “Our clients pushed us, but we just couldn’t get comfortable with their investment process,” explains Elliott. The scandals over auction rate securities also made many clients cynical about firms that both underwrite securities and sell them to their clients, he adds. The auction rate mess left thousands of individual investors with illiquid investments when the market for those securities froze in early 2008. “You earn clients’ trust by being unconflicted,” he says.
Howard (Chip) Wilson, executive vice president at Glenmede, says his firm has attracted more new business this year than ever before in its 52-year history. “Clients are saying, ‘I need to sleep at night, and I need to know the organization I hired to manage my assets will be here tomorrow,’” he notes. Glenmede, a nondepository trust company that falls under the oversight of banking regulators but doesn’t offer regular deposit-taking accounts, wasn’t tempted by mortgage-backed securities and other illiquid assets, he says. The challenge going forward will be for the firm to find the best way of dealing with this new breed of clients, who are like “deer in the headlights and want to put their money under a mattress.”
In the end some firms, such as Brown Brothers Harriman & Co., are winning out simply by promoting their no-frills portfolios, which are suddenly back in vogue. The 190-year-old, privately held New York–based bank with about $16 billion in private wealth uses mostly equities, municipal bonds and other straightforward instruments in client portfolios.
Robert Gould, a partner who heads the firm’s private wealth management, says Wall Street posed stiff competition in years past, wooing high-net-worth clients with promises of access to high-flying hedge funds and other exotic products.
Times have changed. Although Brown Brothers won’t reveal specific figures, Gould says the bank is enjoying heavy inflows; “the pace is a record,” he allows, noting that the firm has relied on plain-vanilla portfolios for its clients, whose priority is to maintain the purchasing power of their money. Performance is also a factor in the firm’s success, Gould says, adding that Brown Brothers’ BBH Core Select Fund, a mutual fund proxy for the individual portfolios the bank creates for wealthy clients, is down 21.7 percent through the end of 2008, 16.1 percent better than its peers.
Indeed, maybe 20 percent down really is the new up.
