In the second part of a series looking at the Chicago wealth industry, this publication discovers how the sector has worked at recovering after the market turmoil of the past two years.

This is the second part of a feature on the Chicago wealth management sector. To view the previous item, click here.

The financial downturn that began in the fall of 2008 has had a profound impact on every wealth management market in the country, Chicago being no exception.

To be sure, the market is still considered an attractive one, as perhaps best evidenced by Wells Fargo Private Bank’s aggressive expansion into Chicago that began as a start-up three years ago and yielded net income after tax of $1.5 million.

Last year that number leapfrogged to $20 million on $50 million of revenue, said Chip Flannagan, the bank’s senior vice president and regional director, and he expects exponential growth to continue.

Wells will have 50 client-facing professionals in Chicago by the end of the year, Flannagan said, 80 by the end of 2011 and over 150 by the end of 2012.

“It’s a huge, lucrative market,” he said. “There are over 24,000 households with investable assets over $5 million, and the corridor between the Miracle Mile downtown and Lake Forest is one of the wealthiest in the world.”

Turning the corner

Looking ahead, Flannagan believes Chicago has finally “turned the corner” after a difficult year and a half.

Like many Chicago wealth managers, a sizable chunk of Wells Fargo Private Bank’s clients are business owners in what Flannagan  calls the “middle market: ” companies with between $50 million and $500 million a year in revenues.

“We’ve seen resurgence in the middle market in the last few months,” he said.

“People have been asking how do we grow a business from a wealth management perspective. That’s the last thing they wanted to talk about over the last 18 months.”

Joe Calabrese, president of Harris myCFO, is also optimistic that the worst is over.

“We’re seeing more private equity coming into the market, more people thinking about succession planning and more issues around selling,” he said.

Harris myCFO itself is poised to take advantage of a market rebound, Calabrese said, noting that Harris, thanks to its parent company the Bank of Montreal has “significant capital to make acquisitions.”

New reality

Nonetheless, wealth managers in Chicago have had to adjust to a post-2008 reality.

“There’s been less new wealth creation,” said Matthew Bonaguidi, partner at Gresham Partners. “The world we live in now is a lot more complex. We have to be innovative and proactive about to manage risk. And clients are certainly more proactive and feeling anxiety about their house, their retirement and their business. The debt overhang is also a big concern. All this requires a lot of expectation management.”

Fees have also come under pressure, wealth managers said.

“Fees have become more of an issue because of lower returns and return expectations,” said Wallace Head, chief executive of wealth management for The Private Bank.

Head also called the current environment a double-edged sword for wealth managers.

“Wealth managers have to demonstrate to people that they need some help, but at the same time they better know what they’re doing and meet client expectations or they won’t be in business very long,” he observed.

Going forward, Head said he expected an increasing focus on absolute returns, downside risk protection, active management and “an increasing use of non-US strategies in all asset classes.”

The Chicago market’s historic reliance on traditional asset classes is indeed changing, agreed Doug Regan, president of Northern Trust’s wealth management group.

“We’re seeing more interest in high-end hedge funds and private equity managers,” Regan said.

But real estate will remain an important factor in wealth creation in Chicago, he predicted.

“Chicago is an historically strong real estate town,” Regan said, “and there are some real opportunities for Chicago families with cash to make significant headway in commercial real estate over the next 24 months.”

Chicago is also becoming more of a global market, according to Regan.

“The client base is evolving. More people are moving into the city, people are coming from all over the world, the city’s commercial base continues to expand and the city is investing in real infrastructure and transportation projects that will make it more attractive as a place to do business and create wealth.”