BARRON'S COVER
Who Can You Trust?
By SUZANNE MCGEE
Jolted by Madoff and the markets, wealthy investors are questioning their advisors like never before. Many are moving their accounts from one firm to another, reshaping the wealth-management industry. Should you switch or stay put? Welcome to Barron's New Penta Section
BETWEEN THE ROCKY MARKETS, THE SHAKY BANKS and Bernie Madoff, the relationship between wealth managers and their clients didn't stand a chance. Rightly or not, investors first grew suspicious of their advisors and bankers, then contemptuous. Says one ultra-high-net-worth investor, who oversees billions of dollars in family investments: "I'm better off assuming that all these people are only out for themselves."
That kind of deep distrust is starting to dramatically reshape the world of wealth management, where banks, brokerage houses and other investment outfits compete to serve millionaires and billionaires. More than one out of four high net-worth investors yanked money from their wealth managers in 2008, according to a survey by consulting firm Capgemini and Merrill Lynch. And some bankers believe that as many as four out of five are now thinking about firing their managers and picking new ones.
"The amount of money in motion is probably several orders of magnitude higher than this industry has ever seen before," says Bruce Holley, a senior partner who heads the Boston Consulting Group's U.S. wealth-management practice. "Clients are aware that it's more critical for them to get good advice in such turbulent times, but at the same time, they are more nervous and wary than ever before." For bankers and advisors, he adds, "there's tremendous potential to either win or lose relationships."
That's evident in Barron's annual ranking of America's top wealth-management outfits. None of the top five players, and only one of the top 10, holds the same position as last year, the result of both money on the move and crisis-driven mergers. Another factor: We've tightened our definition of wealth management. We think the term now denotes services for accounts of $5 million and up, versus $1 million-plus in the past, as firms increasingly cater to the very richest.
Top Wealth Managers: Bank of America (ticker: BAC), No. 3 on our list last year, now towers over the field with $685 billion in accounts of $5 million and up -- reflecting its acquisition last year of Merrill Lynch, previously No. 1, and its earlier purchase of U.S. Trust. Morgan Stanley (MS), No. 5 in last year's listing, moves to No. 2 as a result of teaming with Smith Barney, previously a unit of Citigroup. Wells Fargo (WFC), now owner of the old Wachovia Securities, JPMorgan (JPM), the leader in ultra- high-end private banking and Goldman Sachs (GS), long a powerhouse in the field, round out the top five. But the reshuffling extends deep into the ranks.
Some of the biggest winners were smaller old-line private banking outfits, which benefited as last fall's financial crisis rocked some of the giants to their core. Bessemer Trust, formed more than 100 years ago to manage the money of the Phipps family, partners of Andrew Carnegie, shot up to No. 13 in the ranking from No. 20 last year. Northern Trust (NTRS), long a favorite home for Midwest fortunes, climbed from No. 13 to No. 8. Fiduciary Trust, started during the Great Depression to serve the anxious rich, leaped to No. 29 from 37. "We have just had the two best years in the 16 years I've been working here" in terms of attracting new assets under management, says Henry Johnson, president and co-CEO of Fiduciary Trust.
Johnson attributes some of the growth in clients to the firm's conservative investment approach, which produced returns that looked relatively appealing, compared with the losses on major market indexes. "But," he says, "there's also a big element of a flight to quality happening out there, as clients seek out someone that they feel can help them rebuild their trust in the system."
Even Fiduciary's name can be a plus, since a growing number of potential clients understand the meaning of the word "fiduciary" -- an investment professional with a legal obligation to put the client's interest ahead of his own.
THE SURGE OF MISTRUST DIRECTED at private bankers and other advisors is logical, argues Maurice Schweitzer, an associate professor at the Wharton School. "Suddenly, clients recognize new ways that things could go wrong that had never occurred to them before, and if there isn't an extraordinary degree of transparency and communication, it's inevitable that the level of trust in their advisor will decline," says Schweitzer, who has studied issues of trust in a variety of industries. "They're going to be asking for extra reassurance in many areas, and that is going to be expensive for private banks to deliver, but it's completely reasonable. The Madoff debacle showed people that they might not be able to trust the printed statements they got from their advisor."
Tony Guernsey, the New York-based head of National Wealth Management at Wilmington Trust, has been on the receiving end of just that kind of client anxiety in recent months: "I've had clients walk in and say, look, I got a statement from Bernie Madoff that said I owned such and such, but it turns out that I didn't own anything -- so prove to me you're not Madoff."
Suddenly, Guernsey says, investors are hungering for information about the arcane workings of third-party firms used for clearing transactions and holding securities in custody. Customers of Madoff certainly would have been a lot better off if he hadn't been handling such back-office tasks through a unit of his own firm, which helped mask his Ponzi scheme.
Each time Guernsey is asked, he walks the client through their Wilmington statement in chronological order, spelling out the complete process of where each asset came from and where it now resides. "I reassure them, 'See, you can tell that none of this is in our name, it's all held in your name at an independent custodian.'"
Of course, suspicions and blame can go too far. It's unrealistic to expect your manager to have posted gains last year when the huge majority of pros were down. But if the manager greatly trailed the market, that's another story.
If a wealth manager has been hard to reach on the phone during stressful times, that's a clear red flag -- and most firms now realize that more than ever. "If the client has to call you, then you don't get points for that," says Dean Junkans, the chief investment officer of Wells Fargo Private Bank. For more tips on how to decide whether to dump or keep your wealth manager, see the box on this page.
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In many cases, distrust is sparked by a simple misunderstanding or miscommunication. "People have different, unstated, beliefs about what represents a betrayal of trust, and what are referred to as 'psychological contracts,'" says Schweitzer. "In that case, it's the perception of the client that matters -- that is the reality."
For instance, a banker might reassure clients that their portfolios are protected from sudden shocks. In the banker's eyes, relative outperformance would meet that criterion, but the clients might interpret the reassurance as a promise they wouldn't lose money.
Earlier this month, Peter Skoglund, co-head of Credit Suisse Private Banking USA, No. 11 in the rankings, met with a client who had experienced just this kind of miscommunication with his previous private bankers.
"The advisor had invested his assets in some private-equity and hedge funds and now he's 'gated' and he can't withdraw his funds," Skoglund says, referring to lockup arrangements under which it can take up to 18 months for an investor to retrieve assets after requesting their return from a fund manager. The fault could lie with the client for not asking the right questions, but in Skoglund's eyes, at least, it's always up to the banker to be sure that any potential questions are addressed. "The winners are going to be those who can be most transparent with their clients, and who solve the issue of communication," he says.
NOT SURPRISINGLY, MANY BANKERS and advisors are ramping up the nature and frequency of communication with the wealthy families whose assets they manage. "When the markets are strong and going up all the time, that communication is less valued by the client," says Peter Charrington, CEO of Citi Private Bank in North America, No. 22. But now, with transparency the buzzword, "people want to be more actively aware of how we are generating returns for them," Charrington says.
Communication of course isn't just about returns. Says John Taft, head of RBC Wealth Management for the U.S.: "Our industry, for a long time, focused on a whole bunch of fancy complicated products that weren't properly tested, instead of emphasizing our role as responsible stewards of our clients' wealth," he says. Now, he argues, the trend is in the other direction. "Private banking has to move back to the basic, fundamental issues, communication with our clients chief among them."
To that end, Fiduciary Trust's Johnson insists that his private bankers travel -- despite a firm-wide cost-cutting blitz -- to meet with their clients face to face on a regular basis. He also urges them not to try to cram too many meetings into one day in the name of efficiency. "We would rather do two or three good meetings a day, than five meetings a day," he says. "The process of rebuilding or reinforcing trust takes time."
Clients are now asking some questions that private bankers have never dealt with before. "They are being frank and freely asking what would happen if the bank collapses -- how does the FDIC insurance guarantee work, for instance," says Robert Reilly, the Philadelphia-based head of the wealth-management division at PNC Bank, No. 21. Answering such questions has been winning business from people who use PNC for other services, such as corporate banking, as well as from customers of National City Bank, a Cleveland institution that PNC acquired after it was hobbled by mortgage losses.
Customers "want to know what it means that we are regulated by the Fed and the Office of the Comptroller of the Currency," Reilly says. The goal, he adds, is to "proactively address any concerns before mistrust becomes a fixed part of our clients' attitude to the financial system."
It's all highlighting the changing requirements for success. "A good wealth manager is a quasi-psychologist, able to understand a client's hopes and fears," says Boston Consultant Group's Holley. "A lot of wealth managers organize their meetings with clients around process and returns, but if you don't increase the emotional component, you're just checking a box by having that meeting."
And here's the biggest change: "There is going to be more healthy skepticism on the client's part about the kind of promises a bank makes," says Johnson of Fiduciary Trust. "The industry will have to adjust to that."
When promises are both believed and kept, life will start looking up for clients and bankers alike.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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