In 1848, James Marshall found gold in California, creating a rush of wealth-seekers to the state. Fast forward nearly 200 years and wealth managers are heading west in search of industry gold: ultra-wealthy clients.

Editor's Note: Hot on the heels of the now-controversial Facebook IPO, this is the first part in a two-part series on the wealth management market in California.

In 1848, James Marshall found gold in California, creating a rush of wealth-seekers to the state. Fast forward nearly 200 years and wealth managers are heading west in search of industry gold: ultra-wealthy clients.

Home grown banks such as First Republic, which offers a combination of private business and personal banking and has strategically set up offices around growth markets, are growing quickly, launching new offices and adding personnel. Just this month the private banking and investment division of Merrill Lynch launched an office in Palo Alto to serve the technology and venture capital communities in this area of northern California.

As the home of Silicon Valley, Hollywood, and an internationally-renowned wine producing region (not to mention the climate that goes with it), it is perhaps no surprise the Golden State is a hotspot for the high net worth.

California, which is by far the most populous state in the US, had the most ultra wealthy residents in 2010, with about 9,800 residents worth more than $30 million, according to Wealth-X. By comparison New York had about 7,300 UHNW individuals.

However it’s not all rosy. The state is regularly lambasted by CEOs in ChiefExecutive.net, which runs an annual survey of the best states to do business in according to hundreds of business leaders - in which California has come last for eight consecutive years (Texas is currently top).

Despite this, the business climate in California is friendlier than many might think, according to CONCERT Wealth Management, which told this publication that nearly 60,000 more businesses are starting up or moving to the state than are leaving.

A highly-taxed state

Figures from the Federation of Tax Administrators show that California has the second highest state income tax with 9.3 per cent on earnings above $46,767, only beaten by Hawaii with a top rate of 11 per cent. In Hawaii, however, only those making more than $200,000 annually pay the 11 per cent rate. In addition to the high income tax, which is paid on top of the federal top rate of 35 per cent, California has the highest state sales tax in the US with 8.25 per cent.

“California has been difficult for taxpayers’ for years; it has a very expansive government,” Brent Mead, state government affairs manager at the National Taxpayers Union, has previously told this publication.

However, this doesn’t necessarily imply a wealth drain: just 1.7 per cent of people moved from one state to another each year on average between 2001 and 2010, the Center on Budget and Policy Priorities, a Washington DC-based think tank, found in a report entitled Tax Flight Is A Myth: Higher State Taxes Bring More Revenue, Not More Migration.

Family Wealth Report spoke to a number of firms on their view of the wealth management market there.

A distinct client type

“California is a magnet for both start-up businesses and for entrepreneurial ventures of many types, with Los Angeles having the second largest number of billionaires in the US, second only to New York,” said Beverly Hills Wealth Management. “Additionally, retirees find the climate here very attractive.”

“California is unique in that it has more active wealth than many parts of the country,” said Chris Walters, executive vice president at CitizensTrust. “A higher percentage of HNW/UHNW families are wealth creators rather than inheritors. This presents wealth advisors with a distinct challenge as we guide families who operate ongoing businesses, have a high percentage of real estate investments and who are engaged in socially responsible initiative.”

Silver Bridge held a similar opinion, saying: “In California, we are typically engaged by families who have acquired wealth within their current generation (technology and other entrepreneurs) and families who generated wealth in prior generations. In many cases our clients hold financial as well as operating business assets.”

CONCERT stressed not only entrepreneurialism as a focus among Californian clients, but more specifically green innovation.

Rothstein Kass cited a “concentrations of entrepreneurs, investment managers and entertainers” as one of the pulls, as well as a large group of Baby Boomers and technology innovators. “Though at opposite ends of their career spectrums, both groups can require support in selling business interests or transferring assets,” the firm said. “California also boasts a renowned wine region that attracts high-net worth individuals to the area and promotes networking opportunities.”

Northern Trust highlighted demographic shifts in the state. “An increasing number of younger high net worth individuals reside in California, many of whom are enjoying sudden wealth for the first time, as result of wealth transfer, the growth and/or sale of a business or a similar entrepreneurial wealth creation event,” said Steve Bell, chairman and CEO of the West region at the firm.  

“Currently, investors are trending younger, and these individuals are less likely to invest in direct securities, are familiar and comfortable with technology that enables them to manage their assets and are seeking specialized advice when assets and planning needs reach a certain size,” Bell added.

Meanwhile, the geographic location of the state is a draw, said City National: “Another difference for California is the continued international growth associated with the Pacific Rim and especially with China.”

In the next part of this feature, to be published next week, the firms contributing to this feature, among others, will give exclusive insights into their Californian operations.