Though Mellon Financial Corp. has spent the last two years getting out of traditional banking, it says it still views its remaining retail components private wealth management and Dreyfus Corp. as keys to its growth picture.
In recent months, Mellon has stressed that the December divestitures of its retail banking operation (to Citizens Financial Group) and Dreyfus online brokerage unit (to J.P. Morgan Chase & Co.) leave it with the right mix of growth and fee businesses.
The deals leave the company with two retail businesses: Mellon Private Wealth Management (created Jan. 17 by combining the private asset management, private banking, and private mortgage divisions) and the rest of Dreyfus, a mutual fund company acquired in 1994. In recent interviews, top executives at the two units explained how the businesses fit in, making clear the companys belief that managing mutual funds and providing financial advice and money management for very wealthy people, families, and the financial entities that serve them will be strong sources of fee income and asset growth as the company matures along its new path.
Like many firms that manage private wealth, the Mellon unit sells investment management and financial planning services to high-net-worth people, families, family offices, endowments, foundations, and charitable gift programs.
Its 65 professional investment management salespeople build relationships in affluent communities and find customers for Mellons private wealth management services. Thirty-two teams of portfolio officers, fiduciary officers, and investment relationship professionals in the Mellon units more than 60 offices nationwide manage all aspects of client relationships, from day-to-day investment management and financial planning to other private banking needs.
David F. Lamere, president of Mellon Private Wealth Management, of which private banking is a piece, said he sees the core of private bankings distribution strategy as direct sales through its offices.
His unit has also spent what Mr. Lamere describes as "a significant amount" to buy asset management companies, building up its assets and management capability. It has also added several investment management salespeople in the past year.
The most recent purchase, on Oct. 17, was of Van Deventer & Hoch, a private wealth management firm in Glendale, Calif. The transaction added three offices and $1 billion of assets to Mellon Private Wealths operation. Two-and-a-half months before, Mellon bought Standish, Ayer & Wood in Boston, a $41 billion-asset firm that manages money for institutions and high-net-worth individuals.
In October, on the strategic side, Mellon took a 15% stake in the hedge fund specialist Optima Fund Management, further cementing an alliance that was begun in June 2000. " we knew that private banking clients were going to be looking at hedge funds, so we had decided to affiliate with an organization that had a good breadth of products," Mr. Lamere said.
Hedge funds are one example of the asset-diversification investment philosophy that Mellon Private Wealth offers its clients something Mr. Lamere said is a key to the units growth.
"Asset allocation is a key to an effective portfolio," he said. "Five years ago, it was difficult for the concept of asset allocation to capture a clients attention. Over the last two to three years, however, as large-cap domestic returns changed, we found people more open to hearing about equities, hedge funds, private equities, and fixed-income investments. Weve tried to educate our clients about these things."
Though Mellon does not break out numbers for its private banking operation, the asset management division, which includes private banking, did not suffer as much as might be expected from last years stock market slump. It ended the year with an estimated $50 billion of assets under management, down 7.4% from the year before. Dreyfus assets under management rose an estimated 29%, to more than $180 billion.
The Dow Jones industrials dropped 7% last year, and the Standard & Poors 500 index, 13%.
Mr. Lamere mentioned no plan to open or buy offices this year, though he did not rule it out. He said he is planning, however, to revamp the 20 retail banking offices Mellon retained in Pennsylvania after the Citizens deal into additional wealth management branches. These offices already have a private banking function.
He said he sees most of his units growth coming from high-net-worth people with sufficient wealth to establish family offices and support community foundations.
Denis LaPlante, an analyst at Fox-Pitt, Kelton in New York, said that holding on to these branches will be important for Mellons private banking unit because it has a lot of old Pennsylvania money that it must keep in order to maintain its strategy.
"Mellon has not kept up over the past decade with other institutions in becoming a private banking force," Mr. LaPlante said, "but theyve been making strides in the past few years." However, "If they want to be in the game, they will have to enter new markets, either through de novo office creation or buying new offices."
Thomas F. Eggers, president of Dreyfus, also extolled diversification, but from a different standpoint, in explaining how Dreyfus weathered the past years down market.
Until the mid-1990s, Dreyfus was primarily dependent on direct retail distribution. "Many of our retail customers came to us directly, over the years, and several are in their third generation of being Dreyfus customers," Mr. Eggers said. Most of its mutual funds were money market, municipal bond, and taxable fixed-income portfolios, and assets came to the company through retail advertising.
However, once Mellon bought Dreyfus in 1994, the unit diversified into managing equity portfolios, creating a wider range of fixed-income products, and carving out two institutional distribution channels for broker-dealers and cash management.
Money flows into its funds rose last year, Mr. Eggers said, and redemptions, at 10% to 10.5%, were lower than the 21% industry average.
A growing source of income for Dreyfus has been its distribution through other financial institutions not just wire houses and regionals but also banks, insurance companies, and independent broker-dealers.
Dreyfus has 115 wholesalers overall, 28 of whom are dedicated to the broker-dealer channel.
Of total sales for the year, which Mr. Eggers said were about $18 billion, about $500 million came from Mellons former retail arm, which is now part of Citizens. Dreyfus will maintain its relationship with the former Mellon branches that Citizens now owns. It will continue to have dedicated wholesalers; will keep supplying mutual funds and annuities; and will continue due diligence, training, and backup for the branch salespeople.
Deepening the relationship, Citizens Financial said Jan. 17 that it had hired Dreyfus to manage and administer its $1 billion of money fund assets.
Part of its growth has come from Dreyfus expanded work with insurance companies. For eight years, it has sold a Dreyfus-branded variable annuity through Transamerica, a subsidiary of Aegon. Early this year, the company created a Dreyfus-branded fixed annuity for Nationwide Financial and also expanded the number of portfolio submanagement and proprietary annuity development relationships it has with its insurer clients, who now number 25. "Our flow share would put us in the top five for insurance company-sponsored products," Mr. Eggers said.
However, he said he does not see the insurance relationships as something that will be a primary driver of Dreyfus growth. "I dont know if we have the capacity to expand there," he said.
Dreyfus historical concentration on fixed-income also helped sales in 2001, as investors preferred these safer products, Mr. Eggers said.
One of the brightest spots for the units growth in 2001 was its managed money business (also known as separate accounts or wrap accounts), a new area for Dreyfus. In its first year, the business gathered $1 billion through brokerage firms. This year, Mr. Eggers said, he would like these accounts to grow to $2.5 billion. "Directionally, thats important. We have geared our business around it," he said.
Mr. Eggers talked about diversification and how it helps to handle a down market. The keys, he said, are being nimble and having a well-diversified product list and a range of investment styles from which to choose. "You cant stick with a game," he said. "You need to provide safe harbors and alternatives, but if you have an investment style that works for five to eight years, what are you going to do for the rest of the time?"
And if the market changes, "what you provide has to change," he said. "Otherwise your customers are going to cut and run."
Selling the online brokerage arm, which was not a part of the original divestiture program, was an example of being nimble the sale did not change the companys strategy.
Fox-Pitts Mr. LaPlante said he was surprised that Dreyfus sold the unit. "I saw it as another way to touch customers who could turn into private banking customers," he said. "But they probably thought theyd have had to invest money to make it work harder and might not have thought it was worth doing so."