When John Serhant was named to direct State Street Global Advisors high-net-worth group in October, he was prepared to expand the firms profile among wealthy clients.
But he wasnt prepared for all the running back and forth across Bostons High Street.
On one side of High Street is State Street Corp., with its 200 years of institutional management experience. On the other is the global advisors unit, the companys money management arm, which has been managing assets for the wealthy since 1995.
Back and forth goes Serhant, a corporate vice chairman and chairman of the global advisors units investment committee. He taps the research and product expertise of the institutional shop on one side of the street to nurture the high-net-worth business on the other. Sometimes he can just use the phone, but often a trip across the street for a face-to-face meeting is in order.
"The backgrounds and qualities of people and their investment know-how translates from the institutional side to the high-net-worth side," he said. "We have a broad and deep team on the institutional side. We have been trusted with $755 billion in institutional assets, and that gives the wealthy a great deal of confidence to come work with us."
Since 1996, State Streets high-net-worth assets have tripled, to $20 billion, making it a midsize player in this market. To continue to grow, the company has spent more than a year launching products, buying companies, making alliances, and starting new units as it puts a full-court press on high-net-worth investors. The companys executives hope its history as an institutional asset manager will help it build clout in wealth management.
"We want to grow as fast as we can grow and as fast as we need to in order to gain a competitive advantage," Serhant said. "I dont know that now is a better time than two years ago or two years from now, but we are at a point where now is the best time for us to expand. We have realized that the wealthy family looks like an institutional investor, and we want to leverage what we have on the institutional side in order to gain a competitive advantage" on the high-net-worth side.
The push to accelerate growth began last February, even before Serhants appointment, when State Street bought 75% of Bel Air Investments, a Los Angeles investment firm that manages money for people with more than $10 million of assets under management.
Darrell Krasnoff, managing director of Bel Air Investments, said the sale created symbiosis. State Street has a terrific institutional presence, he said, and a strong group of products and services, while Bel Air, which manages $3.2 billion of assets for 250 clients, has a reputation for serving wealthy people.
"Clearly, their reputation as an institutional asset management firm had with it challenges in terms of growing its individual wealth management base," Krasnoff said. "We gave them a team and a platform with excellence in that area."
Krasnoff agreed that State Streets skills as an institutional manager are crucial to expanding the companys high-net-worth business. He said wealthy people are not looking for the next investment home run. Their No. 1 objective, as with institutions, is to protect their wealth.
"Individuals who are wealthy are singles and doubles hitters. They want a trusted adviser, a disciplined decision maker," Krasnoff said.
Having added Bel Air, with its platform for serving multimillionaires, State Street recently turned its attention to the ultrawealthy. On Jan. 29, it launched an Office of the Family Advisor, which offers integrated financial planning, investment management, and trust and custody services to individuals and families with more than $50 million of assets under management.
Since 1994, State Street had supplied a similar group of services to its institutional clients through an Office of the Fiduciary Advisor. Jared Chase, who has headed the institutional unit since joining State Street in 1998, also heads the family advisory office.
Chase said ultra-high-net-worth people and families resemble institutions. "They have similar needs. They need expert navigation," he said.
But the key to building the business is having the right depth of products for wealthy customers, Chase said, and when certain products are unavailable they must be created. For example, reflecting strong interest by wealthy investors in college savings, State Street became a partner with the state of New Mexico in November 2000 in starting a 529 college savings plan. It also created a unit, Schoolhouse Capital LLC, to handle education savings.
"State Street saw a void in the market and an opportunity to reach out to individual investors," said Ralph Constantino, chief executive officer of Schoolhouse Capital.
Constantino said his unit recognized from the beginning that, with a parent like the institutional manager State Street, it has exceptional abilities at its fingertips, such as research, but lacked distribution. He said Schoolhouse began pursuing "best-of-breed distribution" that would expand both its, and State Streets, reach among wealthy investors.
It now has four 529 plans in the market. In November 2001, the unit joined with New York Life and J.P. Morgan Chase & Co. to create CollegeSense. In December, it created Scholars Edge with Oppenheimer Funds, and on Jan. 8 it announced a "megapartnership" with Wachovias Evergreen Investments, Prudential Financial, and SunAmerica Mutual Funds to create a multimanager 529 college savings plan, Arrive Education Savings Plan.
Constantino said that, with only a handful of companies and an even smaller number of banks, possessing the capacity to offer 529 plans, Schoolhouse creates an interesting niche for State Street.
"You have to give State Street a lot of credit for moving into this market as it has," Constantino said. "This is a specialized business that requires a great deal of flexibility. Our partners manage and distribute, and we offer a strong turnkey product. And along the way, State Streets name is heard."
Eric Hayes, State Street Global Advisors chief fiduciary officer, said the college savings vehicles are just one example of how the firm is constantly "rounding out" the products and services it offers wealthy people.
However, Hayes said, sometimes the most popular services are not the ones that turn a profit.
"People arent always watching the bottom line. Managing money is a highly personalized service. We want to offer our individual clients whatever they need and whatever they are looking for," Hayes said.
This includes services that go beyond investing. For example, State Street has a licensed social worker on its staff who assists clients as they age. Also, to enhance its estate and financial planning services unit, State Street offers sophisticated estate planning simulations for free to clients with more than $3 million of assets.
Deborah Pechet Quinan, director of estate and planning services at State Street Global Advisors, said that, to create an accurate simulation, estate planners typically meet with clients three or four times over six months. This is all done for free in the name of developing customer relationships.
"This is an enormous value-added feature," she said. "It provides wealthy individuals and their families a huge level of comfort."
Quinan said companies that offer the best personal service will see less customer attrition as wealth is transferred from one generation to the next in the next few years.
"When it comes to investment management and estate planning, you are dealing with very personal issues for these people," she said. "You are dealing with divorce and marriage and children and their businesses. Institutions are dealing with money and assets, but each individual is dealing with unique family issues. Every conversation is unique."
A high degree of service for individual clients creates the potential for animosity between institutional and individual managers at State Street, but thus far, Serhant said, he has seen no sign of it.
"We get high marks for customer service, even on the institutional side. On the institutional side the pools are larger. Companies hire us to manage $300 million or $500 million, and we can have a great personal relationship with the treasurer at that company," he said. "State Street Global Advisors has always tried to remember it is the customers money. The only way to keep the customers is to keep their best interest in mind."
Analysts agreed that State Street has always been renowned as a high-touch institution so that giving a high level of service to wealthy people comes naturally.
"If you are going after the wealthy, you have to offer them the best service because if you dont someone else will," said Rus Prince, a high-net-worth adviser at Prince & Associates in Shelton, Conn. "Moving from institutional asset management to managing assets for the wealthy is a natural, natural step for them."
Catharine Murray, an analyst at J.P. Morgan Chase who covers State Street, said that it is entering a heavily competitive marketplace but is well positioned to do so.
"There is leverage for the firm," she said. "They already have a very developed institutional asset management product, and tailoring that to the high-net-worth market is an easy step."
"Getting the clients is the biggest hurdle" for State Street, Murray added.
In order to attract clients, said Hayes, the global advisors units fiduciary officer, State Street will keep doing what has worked on the institutional side offering the best products and services. It is planning to unveil a series of exchange-traded funds, he said, and a private equity fund designed in a joint venture with Wilton Investment Management. The firm is also looking to enhance its technology in order to offer the best online account aggregation service, he added.
At Schoolhouse Capital, Constantino said, he will continue to work on expanding distribution. In the next several months he plans to expand distribution substantially through the banking channel.
And as for Serhant, he is looking forward to not having to cross the street so much. State Street announced in November that it has leased more than a million square feet on 32 floors at One Lincoln St. in Boston.
Serhant said the move will not save him much elevator time, though, because he does not intend to change his formula for success. "Having us all under one roof doesnt change who we are or how we work," he said. "It just gets people in closer proximity to think of the best solutions for our clients."