Northern Trust, like other banks with a strong custodian business, acts like a plumber to financial institutions such as family offices. The financial crisis is driving demand for its services, the US firm says.

Northern Trust’s wealth management division is setting its sights on the Swiss and Asian markets, as it seeks to exploit what it expects to be a surge in demand for independent custodian banks amid the credit crisis and Bernard Madoff scandal.

The financial turmoil and the Madoff Ponzi scheme fraud will drive demand for independent custodian banks that provide much of the financial “plumbing” to the financial system, a service that, like plumbing, tends to be most valued when there is a breakdown, Douglas Regan, president, wealth management group at the Chicago-based bank, said in an exclusive interview with WealthBriefing.

“People want to ask, how secure is the institution that I am putting my money with?” Mr Regan said at Northern Trust’s offices in
Canary
Wharf,
East London.

He said that he has worked in
Florida in the past, and knows the

Palm Beach community of wealthy families in the area and knows that people had lost entire fortunes to Mr Madoff, who pleaded guilty to charges of fraud last week and faces a long jail term. “What has happened to them is a tragedy; it is like something out of Franz Kafka.”

Mr Regan, talking at the start of a week-long visit to Europe, said he was interested in developing Northern Trust’s business links in
Switzerland - but did not elaborate on specifics - and he noted that
Asia was also an important growth market for the firm.

His colleague, Clare Flanagan, business development manager, wealth management, said in the same interview that the
Middle East was also an important market as wealthy clients were setting up family offices and requiring custody services.

Northern Trust ranks among the big hitters in the world of administration and custody of assets for institutions ranging from hedge funds through to private banks. Other players in this sector include Bank of New York Mellon and State Street. Northern Trust’s Wealth Management group looks after more than 20 percent of the Forbes 400 Wealthiest Americans rich list and currently works with more than 413 families across 15 countries. As of 30 December, 2008, this division of the bank oversaw $168.4 billion in assets under custody and $29.0 billion in assets under investment management.

The sheer scale of its assets means this firm has a ringside seat in observing the changing fortunes of the financial world. In particular, it enables Mr Regan and his colleagues to see how asset allocation has dramatically shifted since the start of the current financial crisis.

“We are seeing movement away from traditional hedge funds and moving into things such as cash. We are seeing private equity funds holding up quite well, however,” Mr Regan said. “There will be a flight to quality. Financial institutions that have avoided the credit crunch issues and maintained strong balance sheets will thrive over the next 24 to 36 months. There will be relatively few of them.”

“About 45 per cent of the assets that we administer globally are in alternative assets, such as private equity, hedge funds and property. There has been a move away from hedge funds. In the

US, at any rate, hedge funds are unregulated; there is now a trend towards demand for greater transparency,” he said.

“I believe the hedge fund industry will become more tightly regulated and there will be a contraction of hedge fund assets,” said Mr Regan.

Clients of Mr Regan’s business unit must hold at least $200 million of investable assets, a segment that covers institutions such as family offices, a sector that he says continues to expand around the world.

On the custodial/asset servicing business, Mr Regan said Northern Trust’s business model works well because the bank can oversee custody of all of a client’s financial assets, such as through its electronic Passport service. Northern Trust aggregates a client’s assets onto a single platform.

“More and more clients are interested in aggregating all their assets with one manager,” he said.

Ms Flanagan said this process has been accelerated by the hard questions clients have asked of their business arrangements in the wake of the Madoff scandal.

“Particularly post-Madoff, we are seeing a trend towards looking at who is behind an investment. This trend was moving at a snail’s pace and events such as the Madoff scandal have really focused people’s minds. People want to know about counterparty risk and where the assets are custodied,” she said.

“About 45 per cent of the assets that we administer globally are in alternative assets, such as private equity, hedge funds and property. There has been a move away from hedge funds. In the

US, at any rate, hedge funds are unregulated; there is now a trend towards demand for greater transparency. We are seeing movement away from traditional hedge funds and moving into things such as cash. We are seeing private equity funds holding up quite well, however.”

Another trend that Northern Trust sees is the greater demand for wealth management firms that are more transparent about their activities and financial strength: “A year ago, private banks had a tactical advantage in the marketplace. After the credit crunch, they will be under increased pressure to disclose more about what they do.”

On other trends, Mr Regan predicts that the flows of money within the wealth management arena will take place within the context of a static or declining pool of assets, at least in the short run.

“I think M&A will be relatively chilled globally; the focus will be on retaining the clients that an institution has. The money in transition will be a takeaway game rather than the new generation of wealth,” he said.

He also hopes that with greater demand for independent custody of assets will come improved pricing power for such products.