Tapping the rich: U.S. regional banks eye wealth management

BANGALORE Fri Oct 15, 2010 7:38pm BST

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BANGALORE (Reuters) - Smaller regional U.S. banks are getting into the wealth management business to tap into the near $11 trillion held by the nation's super-rich as a way to counter slow loan growth and tighter regulation that threatens to chip away at bank margins.

As the most ambitious financial regulation overhaul since the Great Depression makes it tougher for banks to charge for overdraft protection schemes and credit and debit card transactions, and as sluggish loan demand dents banks' earning power, wealth management is seen as an attractive add-on.

And there are rich pickings.

Despite the recession, North America still has the largest number of high net worth individuals in the world, whose wealth rose to $10.7 trillion in 2009, according to a Capgemini and Merrill Lynch Global Wealth Management report.

"Banks will see this as a way to diversify revenue streams to help offset some of the other pressures," said Mark Muth, an analyst at Howe Barnes Hoefer & Arnett.

Already banks such as Associated Bancorp and Fulton Financial are looking to move beyond transaction-based services by growing their wealth management teams.

"The (wealth management) business is attractive to banks because it does not require much capital and has low credit risk associated. It's a safe, high return on capital," said Guggenheim analyst Jeff Davis.

Recruitment has picked up in the wealth management sector as smaller regional banks hire experienced managers -- and hopefully get their clients, too -- often raiding their larger rivals.

Bigger lenders like Comerica, Regions Financial, Marshall and Ilsley and PNC Financial have thriving wealth management practices, and are targets for the smaller banks seeking to build up their wealth management teams.

"There's a bit of an arms race in the wealth management area. We're seeing firms losing people to others and then recruiting people to fill slots," said Guggenheim's Davis.

IberiaBank hired four bankers from Regions Bank for its newly launched Iberia Wealth Advisors team, while City National hired six staff from BNY Mellon's wealth management unit for its Private Client Services group.

City National, which has about 70 bankers and advisors at its wealth management unit, is looking to hire more people who have worked with the rich, said Michael Pagano, Executive Vice President of Private Client Services.

"A way (to grow) is to attract talent from other banks, (who then) bring those relationships over to their bank," said Keefe, Bruyette and Woods analyst Bain Slack.

And smaller banks may find it easier to attract talent by offering managers more independence and flexibility.

"There's a trend in the market of very senior advisors showing interest in working on smaller, flatter platforms, especially in organizations in which they can build equity," said Dan Ryan, who works in the financial services practice at executive recruitment firm Heidrick & Struggles International.

The ability to customize products and build new platforms may help soften the impact of slipping down the managerial pay scale.

"If you're moving to a smaller platform, you're not generally going to get the same type of deal as at a big institution ... but you could get equity or a higher payout," Ryan said.

PERSONAL SERVICE

The fight is for the minds and wallets of high net-worth Americans, who traditionally bank with the big wealth brands such as U.S. Trust, Bank of America's wealth unit, or BNY Mellon, JPMorgan, U.S. Bancorp and others.

"We continue to see clients who want to work with a safe and sound organization that they won't read about in the papers and can deliver everything locally," said City National's Pagano.

The smaller banks may also have an edge in that they are seen as offering a more personalized service.

This helped Boston Private Financial Holding's wealth management business beat out the wealth management units of Wells Fargo and Bank of America as the wealth manager of choice among the rich.

Pagano, who moved to City National from BofA's wealth unit, said smaller banks can also customize every product to the client's needs, and can set up face-to-face meetings whenever the client wants.

However, the smaller banks are unlikely to lure away the seriously rich -- those with $25 million or more in investable assets -- as their need for complex hedging strategies, lending capabilities and trust services keep them tied to the bigger wealth managers.

While lacking some of the big brand cachet and ability to attract high net worth individuals, the hiring strategy should see new managers bring in mass-affluent clients -- those with $2-$5 million in investable assets and less complex needs, from their previous employers.

"In the mass affluent space, the larger institutions could see some attrition," said Heidrick and Struggles' Ryan.

"If the advisor is confident that the client respects their opinion and the book of business is portable, then there is interest (in moving). There's not as much loyalty to the platform anymore," he added.

(Reporting by Jochelle Mendonca in Bangalore, Editing by Ian Geoghegan)