Merrill, UBS Among Firms Losing Share of Richest U.S. Clients

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1 Merrill, UBS Among Firms Losing Share of Richest U.S. Clients E :50 (New York) Merrill, UBS Among Firms Losing Share of Richest U.S. Clients By Margaret Popper and Adrian Cox Aug. 23 (Bloomberg) -- Merrill Lynch & Co., the biggest U.S. securities broker, and UBS AG, the world's largest money manager, are among the Wall Street firms which together are losing some of the wealthiest Americans as clients, a group that pays as much as $28 billion in fees for financial advice every year. The percentage of people with at least $10 million in assets to invest who used full-service brokers as their primary financial adviser fell to 30 percent last year from 37 percent in 2001, according to Spectrem Group, a Chicago-based consulting firm. Independent advisers, who sell only advice, not financial products, rose to 46 percent from 30 percent. ``This is a wake-up call for Wall Street, and though a lot of firms have changed their practices there's still a long way to go,'' said Tanya McDonald, 34, a director at Spectrem who left J.P. Morgan & Co.'s private bank in ``Clients are skeptical that perhaps the firm's objectives aren't always aligned with their own.'' The No. 1 reason for switching advisers was a lack of trust, cited by 48 percent of those who changed, compared with 14 percent who changed because of poor investment performance, according to the survey. Spectrem, a 14-year-old firm that's worked with more than 500 financial services companies, surveyed almost 200 Americans with more than $10 million in assets in mid for its third biennial report in November. The survey's margin of error is plus or minus 7 percent. Hurt by Scandals ``There is no question that full-service firms were hurt by the scandals, the worst being tying research to selling investment banking, the mutual fund issues, and the initial public offering allocation issues,'' said Michael Hecht, an analyst at Bank of America Securities in New York. ``Another reason clients left full-service firms was that they wanted an adviser who was not compensated for selling certain products over others.'' The richest investors pay their advisers average fees of about 1 percent of their assets under management, Hecht said. Those Americans have about $2.8 trillion in assets to invest, according to Capgemini Group, a Paris-based consulting firm whose clients include 30 of the world's 50 largest financial services firms. By comparison, Germany's annual gross domestic product was $2.4 trillion in Those fees pay for investment management -- buying and selling of stocks, bonds and other financial instruments -- and increasingly include financial planning services and advice such as tax planning, how to meet philanthropic goals and make bequests to children, as well as lending, custodial services and cash management. Independent advisers also pay fees to Wall Street firms to implement their clients' investment strategies. Growing Wealth

2 About 90,000 Americans have assets of more than $10 million to invest, Capgemini said. Their wealth is growing by about 15 percent a year, according to Merrill Lynch and Capgemini's World Wealth Report published in June. ``There have been a lot of issues and decreased credibility of the financial markets,'' said Sofia Chappuis, a New York-based manager in Capgemini's wealth management practice. ``There's a very strong request for objectivity in people's advice, which is leading to independent firms increasing their market share slightly.'' Securities firms said they provide objective service that their clients trust. ``Ongoing client polls support our success in retention,'' said Erik Hendrickson, a spokesman for Merrill Lynch. ``We have found that client satisfaction levels with the advice they receive from their advisers are at three-year highs -- specifically in the categories of `providing objective advice' and `acting as a trusted partner.''' Merrill managed $370 billion last year for customers with more than $10 million to invest, compared with $300 billion the year before, Hendrickson said. Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News. Higher Margins Fees from investment banking -- debt and equity underwriting and merger advice -- totaled about $20.5 billion in the U.S. in 2003, according to Freeman & Co., a New York-based consultancy whose clients include Merrill Lynch and UBS. That may lag the amount paid by the richest investors by about a quarter. With potential pretax profit margins of 20 percent to 40 percent, private banking can be almost twice as profitable as retail brokerage overall, said James Mitchell, an analyst at New Yorkbased Buckingham Research Group. ``The appeal of the high net worth side is higher margins,'' Mitchell said. ``It's better than retail if you're a big investment bank.'' Private client services at Merrill, which includes all retail brokerage, accounted for $2.4 billion, or 45 percent, of the firm's net revenue in the second quarter. At UBS Wealth Management USA, the former PaineWebber broker network, operating income was $1.02 billion in the second quarter, 13 percent of total operating income. Retail brokerage at Morgan Stanley had net revenue of $1.2 billion in the quarter, or 18 percent of the firm's total. Cancelled IPOs Goldman Sachs Group Inc.'s unit that serves institutions and customers with a minimum of $2 million in their accounts had revenue of $601 million in the second quarter, or 11 percent of the whole. At Bear Stearns Cos., whose retail brokerage is also geared to the rich, brokerage revenue was $117 million, or 6.7 percent, of net revenue. Fees from wealthy clients are increasing in importance as revenue growth from investment banking shows signs of slipping. Twenty-one U.S. companies cancelled planned IPOs in August as oil prices rose to a record $49 a barrel in New York, depressing economic activity and driving down the stock markets. Trading volume on the New York Stock Exchange this month is down 10

3 percent from the same period last year, hurting stock trading fees. Feeling of Betrayal About 42 percent of those who use independent advisers say they do so because they receive more objective advice, according to Spectrem. Most independent advisers are registered with the Securities and Exchange Commission under the Investment Company Act of 1940, which mandates more disclosure of fees than is required by brokers who sell stocks and bonds. ``Investors are still recovering from a feeling of betrayal by Wall Street and the financial services industry as a whole during the market downturn,'' said Charlotte Beyer, founder of New York-based Institute for Private Investors, which helps the wealthy find financial advice over the Internet and through personal referrals. ``Wealthy investors feel they were sold a product instead of advice.'' UBS, Merrill, Goldman, Morgan Stanley, Credit Suisse First Boston, Citigroup Inc., Lehman Brothers Holdings Inc., JPMorgan Chase & Co., Bear Stearns and U.S. Bancorp Piper Jaffray agreed in April 2003 to a $1.4 billion settlement with regulators over allegations that they issued biased research to win investmentbanking business. All those companies are based in New York except Zurich-based UBS and Minneapolis-based U.S. Bancorp. Credit Suisse First Boston is a unit of Zurich-based Credit Suisse Group. Abusive Practices Mutual fund companies have also paid more than $2.3 billion to settle lawsuits over abusive sales and trading practices. Credit Suisse First Boston paid $100 million in January 2002 to settle SEC allegations that it improperly allocated shares of IPOs to clients, including wealthy individuals as well as institutional investors. During the bull market of the late 1990s, wealthy individuals didn't challenge their advisers ``because it was so easy to make money,'' said Sara Hamilton, chief executive officer at Family Office Exchange, a Chicago-based company that provides education, research and consulting for families with more than $50 million of net worth. ``When the market declined it caused them to raise their heads up and say what else is out there?'' Hamilton said. Brokerage clients realized that they could get advice that covered all of their financial planning and advice issues, Hamilton said. Bill Holland, the 65-year-old former CEO of United Dominion Industries Ltd. switched to an independent firm 2 1/2 years ago from a financial adviser at what he described as one of the top four banks in the U.S. Holland chose David Perkins at Charlotte, North Carolina-based CapTrust Financial Advisors, formerly of Wachovia Corp.'s Interstate Johnson Lane Inc. brokerage unit. Total Plan ``I wanted the totality of financial planning and estate planning,'' said Holland, who retired at age 62. The bank he was using did not offer these services. ``My wife is a very bright person, but finance is not her

4 area of interest,'' said Holland, who has been married 45 years and has three grown children. ``If something were to happen to me overnight it would be a real burden to her to step in and start managing all these issues.'' Holland had known Perkins for 15 years and felt he could trust Perkins with details of his personal finances because of his background as a financial planner, accountant and lawyer. They speak weekly and review a list of about 12 agenda items that range from individual managers of funds in Holland's portfolio to insurance to estate planning. Holland also said he changed to an independent company because he wanted objective advice and his bank adviser was increasingly pushing his firm's own financial products. ``They had a host of products, and they would send down this folder full of them, it was hard to go through it all,'' Holland said. ``Dave doesn't have any reason to urge me to go into certain investment products.'' No Kickbacks David Yeske, CEO of Yeske Co. in San Francisco and president of the Financial Planners Association, the trade group for more than 29,000 certified financial planners, charges clients with more than $2 million in their accounts 25 basis points for creating and implementing their financial plan. The client pays separately for the products or specialists, such as lawyers or accountants, which Yeske recommends. Once the fees to the specialists are included, the cost of the total services an independent financial planner and investment adviser provides are around 1 percent of a client's portfolio, about the same as those provided at a Wall Street firm, Holland said. ``By and large clients don't object to paying the appropriate fees, they prefer having them broken out,'' said Yeske. ``It diminishes conflicts. If I recommend that they significantly increase their insurance coverage, I have no vested interest in recommending the increase. If I send them to an attorney, I get no kickback from the attorney.'' Joining Partners Some Wall Street firms such as Merrill, Morgan Stanley and Citigroup's Smith Barney unit have more than 10,000 brokers who will accept clients even if they're not millionaires. By contrast, Goldman's private client group has always been devoted only to the very rich, having started in 1945 when clients asked to join the firm's partners in their investments. Bear Stearns' and Lehman's brokerages are similar to Goldman's. UBS, Merrill Lynch and Morgan Stanley have tried to address the needs of the rich by setting up special groups inside their retail brokerages to deal only with clients with at least $10 million of assets to invest or $25 million in net worth. Morgan Stanley has 140 advisers in this group; Merrill has about 270. UBS will increase its brokerage force to between 300 and 400 over the next two years. Happy Retirement ``Something magical happens at the $25 million net worth level,'' said Anthony DeChellis, 42, head of UBS's new group

5 devoted to this clientele. ``They suddenly become philanthropic. They feel, regardless of the number of children they have, they'll be able to have a happy retirement, and wealth starts becoming more complex.'' UBS, formed through more than $30 billion of takeovers since 1995, manages more than $1 trillion worldwide. Purchases of banks including Schroeder Muenchmeyer Hengst & Co. in 1997 helped it become Europe's largest bank by assets. In the U.S., UBS bought Paine Webber Group Inc. for $11.5 billion in 2000 to add 7,700 brokers and two million clients. The major Wall Street brokerages have hired experts in trusts and estates, philanthropy and financial planning to support their brokers. UBS hired 14 people away from Merrill Lynch, including DeChellis, for the group. Bear Stearns plans to boost the number of brokers in its wealthy customer practice by a third to about 600. Bear Stearns hired broker Richard Saperstein and a dozen of his colleagues from CIBC Oppenheimer in April last year to serve wealthy individuals. Saperstein brought with him $5.5 billion in client assets, said Steve Dantus, head of private client services at Bear Stearns. No. 1 on Auto-Dial Other firms bought entire companies to get the expertise they need. Last year, Lehman spent $2.9 billion on New York-based money manager Neuberger Berman, which has 100 money managers. Goldman bought Albany, New York-based Ayco, a financial planning firm with 500 professionals including lawyers and accountants, for an undisclosed sum. ``Our investment professionals' job is to become really important to the people we work with, and they become really important to us,'' said Tucker York, 44, head of Goldman's U.S. private client group. ``The goal is to be No. 1 on auto-dial. Everything else flows from that.'' While their share of wealthy clients may be declining, Wall Street's assets under management as a whole have grown. At Merrill, U.S. private client assets under management rose 9 percent to $1.18 trillion at the end of the second quarter from a year earlier. Only a Few Hours Morgan Stanley's retail assets under management also rose 9 percent to $579 billion. Morgan Stanley managed about $80 billion for U.S. decamillionaires at the end of 2003, according to Smith Barney analyst Ruchi Madan. UBS's U.S. wealth management group controlled assets that rose 5 percent to $522 billion. For investors with more than $10 million in the U.S., UBS managed about $122 billion at the end of 2003, according to Bloomberg calculations based on company filings. UBS has gained clients from financial planners that couldn't provide products they wanted, said Anthony DeValerio, 44, a Philadelphia-based financial adviser at UBS. ``They came to us because they felt they outgrew aspects of what was being provided,'' he said. ``You have to go elsewhere and pay for things like access to hedge funds.'' DiValerio said he even interrupted his vacation for a client. A 15-year customer of his received a call from an employee earlier this month to inspect damage to his 4,000-acre cattle ranch in Florida caused by Hurricane Charley.

6 DiValerio happened to be on vacation in Florida and his client called, asking him to visit the property, assess the damage and report back. ``The client said we have someone we can trust to do this,'' DiValerio said by telephone just before driving to the ranch. ``It's only a few hours away.'' Loyalty Wealthy clients are likely to stay loyal once they have chosen an adviser, with more than two thirds saying they ``usually don't try new ones'' once they are satisfied, according to Spectrem. A full 44 percent of clients have had the same adviser for more than 10 years compared with 18 percent who have used their adviser for less than three years. Just over half of brokerage customers rated them as satisfactory, compared with more than 90 percent of customers of independent advisers, Spectrem said. About 61 percent of clients who use independent advisers said they intentionally avoided hiring someone affiliated with a brokerage, bank, insurance or mutual fund company, Spectrem said. March of the Experts Some clients hired independent financial advisers for more personalized service than they get from a Wall Street broker, said Beyer at IPI. Clients who had been wooed by Wall Street brokers ``told me they march in the CPA, they march in the attorney, they march in the investment expert and these clients don't buy it,'' said Yeske, the San Francisco financial planner. Brokers including UBS, Merrill, Morgan Stanley and Goldman have tried to provide all the services offered by individual financial planners in-house. The executive in charge of a client relationship has access to groups within the bank specializing in tax, investments, risk management, philanthropy, estate planning and other areas of specialty, said Bruce Holley, head of Boston Consulting Group's wealth management practice in New York, whose clients include Wall Street firms. ``I've spoken to some of the best estate tax attorneys in the country,'' said Joseph Grano, 56, who left UBS Wealth Management USA as chairman this year and who now runs Centurion Holdings LLC, a business consultancy. ``I have found UBS's group gives you advice as good as any of those attorneys.'' Listening to Clients Banks such as JPMorgan and Citigroup have tried to combine their traditional trust and lending services known as private banking with their brokerage offerings. JPMorgan, which has $97 billion of assets under management for these wealthy clients, created teams of five or six professionals, usually including a tax and estate lawyer, a banker who acts as the relationship manager, a lender, and an investment adviser, all assigned to a particular group of clients. Wall Street brokers to the rich typically gain clients through referrals by lawyers, accountants and friends of the clients they seek, said Beth Rodriguez, a former trust and estates lawyer at mid-sized Chicago law firm Sachnoff & Weaver Ltd. Rodriguez became a broker for the rich at JPMorgan 10 years ago.

7 Much of her day is spent listening to clients. Many worry about how much to leave to their children and how much to leave to charity. ``Many of my clients are their own wealth creators,'' she said. ``They value that strongly, and want their children to have the same values. It's hard to instill that work ethic when the family has a private jet, three homes, and a staff.'' --Editor: Pickering, Kraus. Story illustration: See {CNP <GO>} for a series of functions relating to financial services firms. See {TNI FIN US <GO>} for financial services news. To contact the reporters on this story: Margaret Popper in New York at (1) (212) or mpopper1@bloomberg.net; or Adrian Cox in New York at (1) (212) or acox2@bloomberg.net. To contact the editor responsible for this story: Alec D.B. McCabe in New York at (1) (212) or amccabe@bloomberg.net.