This year is set to be another active one in the US private wealth management market, especially as liquidity events in the Bay Area and Houston continue at the current pace or grow in number, according to a new white paper.
In other trends, financing demands from entrepreneurs will give access to clients to those private banks which are ready to deploy credit, and onerous regulation of proprietary trading will see large firms turning to wealth management for growth and fee income, according to Wealth in Motion, from the New York-based executive recruitment firm David Barrett Partners.
Last year, turnover of top executives was high at wealth management firms, especially for the chief investment officer function. Meanwhile, “cutting the fat” among top-level staff was a key driver among firms, which sought to remove unnecessary functions and layers, according to the white paper.
Strategies were mixed as some firms focused on getting top leadership in place while others stuck to cost-cutting, seeing some top talent depart with compensation packages.
Advisors: outside hiring strategy flawed
At the advisor level, firms have been looking outside of the industry for talent that can be trained – presumably to reduce costs – but many that pursued this strategy were consequently disappointed due to the time it took to gather assets. “Many mid-level advisors new to the sector that were hired in 2009 have been let go,” the report says.
Due to the fact experienced advisors can bring client assets, competition has appeared to remain robust for high-producing teams, with news emerging of many top teams switching firms - as well as going independent and joining networks such as Dynasty - already this year.
The compensation question
Last year delivered a “mixed picture” on top-level compensation. Some firms cut costs in other areas to reward their most-valued staff; others “sent a message to mediocre performers in their 2011 bonus numbers,” says David Barrett Partners.
On the plus side, relative to other areas of the wider banking industry, wealth management has weathered the downturn well, escaping some of the savage cuts to hit investment banking arms, for example. Many of the large international banks, such as UBS, are slashing their risk-weighted assets in investment banking, focusing on wealth management instead.
In the RIA/MFO space, firms had their sights set on growth: many created business development teams and positions with a view to expanding assets under management, and successful business developers were “compensated very well,” says the white paper.
In private banking, firms awarded those advisors that were focused on investment management mandates and net new clients.
Where’s the money at?
According to David Barrett Partners, the five most coveted regions for large wealth managers to have a strong presence in are: the New York Metro area, California, Florida, Texas and Illinois.
“Not covering these markets effectively erodes the ability to be a true national player as these regions account for half of the country’s wealth (within the UHNW segment in particular),” says the white paper.
At the same time, new “regional pockets” of wealth are springing up, providing opportunities for local and boutique players to establish ties with these markets. Areas to watch for these are states such as Washington, Colorado, Ohio as well as the DC Metro area, says Conor Hourigan, partner and head of US wealth management and author of the report, as these become increasingly interesting to firms.
Larger firms are also in tune to this, and Northern Trust and BNY Mellon are examples of two firms that opened new offices in the Washington DC in the second half of last year.
Some of the traditional centers of wealth, such as Boston, Philadelphia and Atlanta, are not seen as offering the same growth opportunities, according to the white paper. However, while these may not be the new epicenters of growth, they remain a focus.
MFO/RIA industry: expected to gain market share
The multi-family office and registered investment advisory industry is capitalizing on the lack of trust in Wall Street, and a firm providing open architecture, proprietary product that has been performing well, and high-touch client service is proving a “compelling” offering, the white paper says.
David Barrett Partners expects MFO/RIA firms to gain market share this year and to hire talented leaders, product specialists and asset raisers.
“The ‘pull’ for senior talent is the opportunity to work in a boutique investment focused environment with less politics, a partnership structure and a seat at the table,” says the recruitment specialist.
However, on the downside, people making this move take on more risk, and compensation weighted exclusively on medium-term upside has been a barrier for some considering the switch. To overcome this, firms can offer guaranteed compensation in the first year plus medium-term upside to attract the most talented staff, advises Hourigan.
SFO industry: “buoyant”
Meanwhile, the single-family office industry remains buoyant. “Despite global economic uncertainty…single-family offices are sprouting up across the country, particularly in the $1 billion and above segment,” according to the paper.
Turnover in the SFO industry rose last year as families sought to grow their offices into larger enterprises such as “mini foundations and endowments,” while Forbes 400 individuals looked to in-house capabilities to provide privacy.
Particularly, the recruiter said many families were looking for a chief investment officer, with a CFA qualification and strong investment track record, as opposed to the “standard leadership position,” such as a CFP/CPA-qualified individual.
As these families represent top-tier wealth they are the least likely to be affected by prevailing economic uncertainties, and so likely to sustain demand for talent in 2012, says Hourigan. This provides an opportunity for private equity and hedge fund professionals looking to make a move into this space.