Many Banks Poised to Buy Wealth Managers

Banks and other financial companies that are willing to stomach a few more quarters of volatility could find themselves well positioned to acquire wealth management companies or talent, according to analysts and industry executives.

 

Sean Cuniff, a research director of brokerage and wealth management for TowerGroup, said that many wealth managers see the “opportunities in the upheaval” of the financial industry and that he expects banks to be buyers rather than sellers in the wealth management sector over the next few years.

 

“Banks are not getting out of wealth management; no one is exiting wealth management right now,” he said in an interview. “Certainly, some independent shops that haven’t been that strong will be purchased or will merge. There is a flight to quality right now, both in terms of advisers and firms. The stronger wealth managers will get even stronger.”

 

But before banks can think about expanding, they will need to work hard over the next several months to retain customers.

 

Cuniff said the next year will not be an easy one for wealth managers, which will be pressed to tighten risk management and cut expenses.

 

Wealth management companies likely will cut their technology spending by 5% to 6% over the next 12 months to offset asset losses, Cuniff said .

“In the short term, I do expect asset levels to go down because of market activity, but long-term inflows will be strong and the wealth management industry will come out of this even stronger,” he said.

 

Worldwide, six asset managers sold themselves in the third quarter, two more than in the third quarter of 2007, according to Jefferies Putnam Lovell, the investment banking unit of Jefferies & Co. Inc. The amount of assets under management changing hands more than tripled, to $1 trillion, and the acquisitions were valued at a combined $6.4 billion, a 4.9% increase, Jefferies Putnam said.

 

Registered investment advisers are merging as well. According to Charles Schwab Corp., there were more than 49 merger or acquisition deals involving registered investment advisers in the United States in the first nine months of this year, and Schwab says that more large financial institutions are showing interest in buying smaller registered investment advisers.

 

Cuniff said he expects some runoff as financial advisers working for large financial services companies that are being sold in part or in full, including Wachovia Corp. and Washington Mutual Inc., consider taking their book of business elsewhere.

 

In the long run, he said, advisers who stick with banks will be able to increase their assets under management.

 

“There is a real opportunity for advisers that work in the bank channel, because they have the opportunity to look at both sides of a client’s balance sheet, both in terms of their assets and their liabilities,” Cuniff said. “Advisers that work for banks have a more complete picture than they have ever had before and a truly holistic view of the client.”

He expects consolidation to continue in the wealth management business.

 

“We think that there will be some robust competition to buy broker/dealers, specifically by banks looking to buy, and that indicates health in the wealth management industry,” Cuniff said.

 

He said banks could use some of the funding they receive from the Treasury to buy wealth managers. But other wealth management analysts were skeptical about that, since many banks indicated during their quarterly earnings calls last week that they plan to use the funding to improve their Tier 1 capital position.

 

Burton Greenwald, an analyst with BJ Greenwald Associates in Philadelphia, said, “Banks like having a wealth management unit right now, because having a diversified revenue stream is important in difficult economic cycles.

 

“But that doesn’t mean that they are going to invest in their wealth business or make any major deals right now,” Greenwald said. “They aren’t going to be buying, but they aren't going to be selling right now, either.”

 

Most banks and wealth providers are taking a “foxhole approach,”Greenwald said.

 

Tim Clift, chief investment officer at FundQuest, which provides managed account platforms to banks, said his banking clients’ chief concern is retaining nervous investors. He said he has met with financial advisers at banks and provided marketing material that they can pass on to customers. “It is all about hand-holding right now,” he said.

 

FundQuest is retaining its established customers and, despite the financial crisis, signing up new ones. The Boston company has added 23 clients this year and expects to add more business over the next few months as smaller banks look to outsource certain wealth management services, said Jim Graves, its managing director of marketing.

 

Bob Peatman, FundQuest’s managing director of national sales, said: “Right now, success is measured in low redemption rates. We are working hard to keep our clients and our advisers. It is hard to reclaim these people after they leave.”

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