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How to Make Wealth Last for Generations

Stratos

April 1, 2009

With some of the nation's biggest banks and brokerages hobbled by the financial crisis, First Foundation Bank in Irvine, Calif., senses opportunity.

The $89 million-asset bank, which was founded by an advisory firm in October 2007, has been aggressively adding staff and lining up outside expertise. It has partnered with a former unit of U.S. Trust Corp. to select more third-party investment managers, and it has hired top talent Ñ including Tom Giddings, a former U.S. Trust and Lehman Brothers executive Ñ with the goal of attracting wealth management clients who seek an alternative to marquee names such as Merrill Lynch & Co. Inc. and Citigroup Inc.

"Banks like us, with large bank platforms and a community bank-type feel, have a great opportunity to seize a lot of business," said Scott Kavanaugh, the bank's chairman and chief executive. Community bank executives such as Mr. Kavanaugh and other observers say big firms are vulnerable, because they have suffered humbling corporate losses while their customers' investments have hemorrhaged, and recent mergers and acquisitions have heightened the perception that large institutions will become increasingly impersonal.

"Over a 12- to 24-month horizon, there is more opportunity than there has been over the past five years," said Don McNees, a principal with Deloitte Consulting LLP.

Some community banks are reporting an upswing in both inquiries and business from dissatisfied clients of large institutions. Surveys released in mid-2008, before the financial crisis had reached its highest levels of intensity, back up the perception that such clients even then were itching to change horses. Nearly two thirds of registered investment advisers queried by Citigroup Global Markets Inc., for instance, cited full-service brokerage firms as their main source of new client assets.

Charles Schwab Institutional's survey of independent advisory firms, conducted in July, found that 85% had gained clients from full-service brokerages over the previous six months. Though that does not indicate that community banks are gaining such clients, it does show that the clients have been on the move.

The Schwab survey found that clients' main reasons for leaving the big firms included a desire for more personal advice, investment losses, and a loss of trust in the institution. Not surprisingly, community bank executives overwhelmingly cited personal service as a primary reason they expect dissatisfied investors to turn to them.

"Community banks' wealth management focus has always been very high-touch," said Greg Vetter, the president of the $260 million-asset American Bank Center First in Bismarck, N.D. His bank is hoping for double-digit growth in both its wealth management and trust businesses this year, primarily because of large institutions' troubles, Mr. Vetter said.

At First Market Bank in Richmond, Va., more than half of the new wealth management clients in the fourth quarter came from big institutions, according to Tom Powell, the senior vice president at the bank's First Market Investments.

Typically, prospective customers "will come in and tell us their adviser is returning calls less often, and that they're in investment products they no longer understand," Mr. Powell said.

Ted Peters, the chairman and CEO of the $1.1 billion-asset Bryn Mawr Trust Co. in Pennsylvania, said it began fielding lots more inquiries from prospective wealth management clients over the summer, "when some of it started hitting the fan" - referring to the collapse of Lehman Brothers and the troubles that led Merrill Lynch to sell itself to Bank of America Corp.

Bryn Mawr Trust has gained "a few" wealth management clients in the fallout so far, Mr. Peters said, and it expects to attract as much as $200 million of new wealth management assets as investors slowly decide where to move their money.

"The wealth business has a long lead time," he said. "There's almost a request for proposals-type of process."

Bryn Mawr is already opening traditional bank accounts for new customers at three times the normal rate, Mr. Peters said. He expects that many of these customers will become wealth management clients as well.

"I have no doubt that we are going to see" significant amounts of new wealth management business, he said.

Bryn Mawr has invested with that specific aim. In the fourth quarter it boosted its ad spending by 25%. Its ads emphasized its local decision-making and the distant headquarters of large rivals. Mr. McNees of Deloitte said the timing is right for such a gambit. "If you were already dissatisfied or just indifferent to your adviser, what's happened with investment performance over the past few months is a push to be receptive to messaging from other institutions."

First Foundation and Bryn Mawr Trust pride themselves on their big-league wealth management capabilities. First Foundation's $1.4 billion-asset wealth management operation even employs a clinical psychologist to help families talk about money.

But the truth is that many community banks are somewhere in the same league as the biggest institutions in what they can provide, as a result of partnerships with third-party broker-dealers. Investment Centers of America, a subsidiary of Jackson National Life Insurance Co., provides banks with a broad array of investment products. Greg Gundersen, the unit's CEO, said it also has an eight-person team at its Bismarck headquarters that helps banks land unhappy clients from large rivals.

"Clients might be looking for a second opinion, so the rep will ship their account information here," he said. "We'll analyze it, find out where we can overlap their investments, and come back with a broader, life-planning approach."

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