Banks Up Profit Bets on the Rich

Updated to correct the types of insurance Chartis provides.

NEW YORK ( TheStreet) -- By the end of 2008, Bank of America ( BAC) had positioned itself as the bank on every corner for every consumer.

The combined BofA-Merrill Lynch-Countrywide-U.S. Trust franchise seemed to shout: Deposits? Mortgages? Subprime? Near prime? Wealth management? Derivatives? Investment banking? Insurance? Advisory services? We've got it all right here!

But now, like other big U.S. lenders hit by financial reform, Bank of America is nudging small-fry customers out of its network and aggressively targeting affluent, wealthy and super-rich Americans from whom it can get more bang for the buck.

On one end, it's been quietly closing branches, prodding customers to use online banking tools and ATMs instead of phone or face-to-face service and tacking fees onto accounts with low balances. On the other, it's been offering a spread of products and services to customers who have money to manage, assets to insure and estates to plan.

At a conference a year ago, CEO Brian Moynihan outlined this new strategy. He pointed out that Merrill Lynch clients have hundreds of billions of dollars parked elsewhere that could be at work within Bank of America. He mentioned that "affluent" customers who utilize an array of banking services bring in seven times more risk-adjusted revenue, on average, than "mass market" customers who have less income and fewer banking needs.

"For the financial advisor in Merrill Lynch wealth management, the opportunity is to get them more clients than anyone else in the business can," said Moynihan, "and to ... get more from the current clients based on the capabilities we have."

Since then, BofA's Global Wealth and Investment Management segment, headed by Sallie Krawcheck, has been on a mission to hire hundreds advisers and brokers with solid client bases and retain the good ones that exist within the franchise.

In a challenging environment, the segment delivered better results in 2010: Fee income up 7%, assets up 7% and deposits up 5%. And while GWIM was less profitable due to investments in headcount and infrastructure, the division earned money while home loans, card services and deposits were in the red.

Lately, though, Krawcheck's division has begun to show signs of stress - mainly because it's pursuing the same goals as everyone else. For instance, in December, Michael C. Brown, a former U.S. Trust advisor who managed $5.9 billion in client assets, left to join an independent firm called Dynasty Financial Partners. His departure led Krawcheck to implement a new rule that forces advisers to give 60 days' rather than two weeks' notice before resigning, accept reduced pay during that time and pledge to not solicit clients for eight months.

Industry veterans who work with wealthy clients describe the rules as draconian but not surprising.

"Competition has never been greater," says Dave Schug, a managing director at SEI Investments Company ( SEIC), which works with banks' wealth management and private banking departments.

"It's more competitive than ever," adds Jerry Hourihan, national sales manager for the private client group within Chartis, a division of American International Group ( AIG). "Ten years ago there was really only one provider, today there are five or six and I think, more and more, as institutions see what a good business it is, we'll have more competition."

Hourihan says that "nearly every major bank" partners with his team to offer everything from home and auto policies to insurance on wine collections or transportation services for fine art. As banks have shown more interest in catering to their wealthy clientele, Chartis began offering education programs on its products and services and how to pitch them the right way. Last year, more than 1,000 planners and advisers took the course.

While Bank of America appears focused on everyone from the mass affluent to the über-rich, competitors are taking different approaches.

Goldman Sachs ( GS), for instance, has long been a bank for the elite. But now that new rules on trading, capital and leverage have made certain operations less profitable, Goldman is working harder to woo and retain top-tier clientele.

But a Bloomberg Businessweek cover story this year detailed the struggles that its asset management arm is facing, due to management turnover, a bruised public image, poor returns and high fees. High-profile clients have pulled hundreds of millions of dollars out of GSAM as a result.

JPMorgan Chase ( JPM) -- whose CEO warned in January that the bottom 5% of its customer base may be dropped from the banking system due to new fees and charges -- has performed better. Funds managed by JPMorgan have outperformed Goldman's by a wide margin over the past one, three and five years, according to Morningstar data. Net income from its asset management arm climbed 20% in 2010 while revenue grew 13%.

Citigroup ( C) is also focused on the tippy top of the upper crust. Although it's selling its Smith Barney brokerage division to Morgan Stanley ( MS), Citi has been hiring aggressively in its private bank, which caters to clients with at least $25 million in assets. Citi Private Bank CEO Peter Charrington has made several big hires since saying last year that he'd like to double the number of private bankers in North America from a base of about 130.

Yet in 2010, the division's revenue slumped 3%.

Meanwhile, Morgan Stanley and Wells Fargo ( WFC) have been focused more on the retirement and brokerage needs of the almost-rich. That higher-volume, lower-fee business seems to be paying off so far.

Morgan Stanley's Global Wealth Management division reported a 35% increase in revenue and an 83% jump in profit last year, thanks to the addition of Smith Barney, which is still a joint venture with Citi. Wells, which acquired a huge brokerage and wealth management business with Wachovia, saw profit at its Wealth, Brokerage and Retirement division soar 90% in 2010, even as revenue climbed just 9%.

"If you're a financial institution or a bank that is ... seeing your fee income from debit card interchange reduced and overdraft-fee reductions and your decision is, 'Aha! Let me focus on high net worth,' that's not a quick turn," says David Carroll, who heads Wells' Wealth, Brokerage and Retirement segment. "You have to build capability, you have to build credibility, you have to attract talent and you just can't do that overnight...But I will tell you in our case, we are looking for the wealth management and asset management business to replace some of those revenues."

It's a good time for banks to start serving investors who were shell-shocked by sharp declines in their net worth during the crisis but have finally begun to wade back into the market. Investors pulled $281 billion out of equity mutual funds from the start of 2008 to the end of 2010, but have put $36 billion back in since the start of the year, according to the Investment Company Institute. Those investors have started once again to seek advice on retirement planning and wealth management.

Meanwhile, big changes in the financial industry have given high-net-worth customers the confidence to break away from longtime advisers - a move they might not have made in better times. Schug, of SEI, says industry consolidation and weak performance has "put a lot of assets in play" and created "opportunity for change."

"This is an industry where clients don't like to move and typically don't move if the markets are going up," says Schug. "But now you've got forced change. You see clients that have to make a change because a new firm has acquired their firm or their firm's gone under. Then you have proactive change where the market downturn has led to client unrest and increased demand on a service model. Banks are seeing an opportunity to capture some assets and this is a business that's valuable to them."

But Herb Kaufman, an economist, consultant and professor emeritus at the W. P. Carey School of Business at Arizona State University, is skeptical that wealth management and high-net worth clients can make up for the oodles of revenue lost from financial reform.

Kaufman agrees that wealth management can be a "fairly lucrative" business for banks that hire the right people and build strong relationships with customers - particularly as more baby boomers retire. But he notes that it's an also area that requires a greater investment of capital and time than the businesses banks are now exiting.

Additionally, he notes, while a wealthy client can provide more fee income than the average depositor, there are far fewer of them. Collecting $10 or $30 monthly fees from millions of low-income consumers is far more profitable than collecting $1,000 or $3,000 fees from the top 1% - otherwise banks would have been following their current strategy all along.

"These banks were collecting huge amounts of money from overdraft fees and credit card delinquencies and charges for over-limit and that kind of thing," says Kaufman. "That's a huge amount to make up."

-- Written by Lauren Tara LaCapra in New York.

>To contact the writer of this article, click here: Lauren Tara LaCapra.

>To follow the writer on Twitter, go to

>To submit a news tip, send an email to:

Readers Also Like:

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.