Cover Story: By Andrew Singer

"It was a temptation—but we stayed boring," recalls Worsoe.

Then in late 2008 the financial crisis hit—with a vengeance. Bear Stearns collapsed. Lehman Brothers vanished. Washington Mutual was seized by the government. Merrill Lynch was sold to Bank of America. Morgan Stanley and Goldman Sachs became bank holding companies.

The key to managing WM in stressful times? 'Staying very, very close tot he client,' says Worsoe, 'and focusing on their well-being.'

Yet, through all the turmoil, Union Bank's wealth management (WM) business has remained profitable. Yes, assets under management (AUM) declined over the last year from $21 billion to $19 billion. But private banking (i.e., credit) income was up. Union Bank did more residential mortgage business with wealthy individuals. Many WM clients became bank depositors.

"We're seeing growth in the business now," Worsoe told us in December, which might seem improbable for a year in which the Dow Jones Industrial Index plummeted 34 percent (its worst annual decline since 1931) and the Standard & Poor's 500 Index fell even more—39 percent.

Union Bank's wealth management division is staffing up. Worsoe expects to hire 60 to 70 new 'line people' in the next year—private bankers, trust officers, brokers, and asset managers.

Despite the economic crisis, "we're still very profitable, and we now have the ability to play offense" when it comes to wealth management, he told us.

An opportunity

Is Union Bank's experience atypical? Probably. But it isn't unique. It may even suggest something of the opportunity that awaits banks today in the WM arena.

Yes, this was a tough year. "There was no place to hide. Everyone got hurt," observes Nicholas Mariniello, executive managing director, Concord Wealth Management (Matawan, N.J.). "They [bank clients] are not as happy as they were this time last year."

That said, "This is a great opportunity for banks to be marketing themselves." Banks have been losing WM share to Wall Street firms for decades. Now they may win back some of those clients, says Mariniello. The wirehouses, after all, are in turmoil. "Every client in America is in play today."

Banks are conservative. That has hurt them in past years when it came to investment management. But today clients are bailing out of alternative investments like hedge funds. "Many banks did not get involved in the esoteric products," says Mariniello, whose firm works with a number of depository institutions in the wealth management area.

Pershing Managing Director Randy Reynolds has seen a "substantial increase in very large [wealth management] accounts"—those in the $30 million, $45 million range—moving in recent months from wirehouses into some of the stable, better-capitalized regional banks.

This stands in contrast to the trend of the past few decades where WM assets largely flowed out of commercial banks and into wirehouses and wealth management boutiques. "They grew up and went away," observes Reynolds of the bank-managed funds.

Demand for relatively exotic alternative investments—the forte of wirehouses—has abated. "It's back to basics," says Reynolds. Clients are saying, "I want to be in quality products."

Those with a "prudent investment philosophy" carried the day in 2008, observes Brian Lucareli, who heads wealth management at Wisconsin's Johnson Bank (Racine, Wis.).

In recent years Johnson Bank reduced its WM clients' exposure to high beta equities. They often favored conservative fixed-income investment instruments like Treasuries. All this was before the crisis hit. As a result, the bank's investment advisory business—AUM was roughly $5 billion at the beginning of 2008—dropped only 7.5 percent in 2008.

The bank, owned by the Johnson family, which also controls the consumer goods giant SC Johnson & Co., is known for its long-term, conservative operating philosophy. Historically, it has boosted revenues more by 'organic growth' than through acquisitions. This solid reputation proved to be a "big factor" in a year where "people didn't know where to run," says Lucareli. "The Johnson name paid big dividends."

Reynolds says that many HNW clients may stay away from the wirehouse firms until things have stabilized. Announcements like BofA's acquisition of Merrill Lynch, and the merger of Morgan Stanley's and Citigroup's brokerage businesses—"all those developments make people anxious."

'This is a great opportunity for banks to be marketing themselves. Every client in Americas is in play today.'

—Nicholas Mariniello, Concord Wealth Management.

Will some of these bank WM gains become permanent? "Absolutely," answers Reynolds. Large WM accounts don't move very often. Once migrated, however, they tend to be "stickier," he notes.

Banks' penetration of DDA (demand deposit account) clients with wealth management products has always been low—in the single digits as a percentage of the overall bank DDA client base, notes John D. Phillips, executive vice president, National Sales, National Financial/Fidelity, which works with most of the top 50 bank-owned broker/dealers that use outside clearing. Many banks want to increase that percentage. The current financial crisis may abet that quest, suggests Phillips. The crisis is creating a new view of banks among HNW clients, particularly as wirehouses vanish or appear increasingly shaky.

As paradoxical as it might seem, the financial crisis is good for bank wealth management, then?

That may be going too far, answers Pershing's Reynolds. "When the tide falls this far, everyone has problems." But bank WM departments appear to be "less impacted" than other bank areas, and meanwhile they are helping to solve banks' funding problems, he says (more on this shortly).

Having conversations with clients

When it comes to investment management, "We've outperformed our peers," says Union Bank's Worsoe.² Many managed assets were in fixed-income instruments and cash, and their equity investments were not the more volatile kind—but "if the clients are losing money, the clients are losing money." Clients don't really care about a bank's relative performance. Under such circumstances, "You still have to have conversations with your clients."

Union Bank has accelerated conference call updates with WM clients. Their one-on-one contacts are increasing in intensity, although the bank has no set formula for contacting clients. "This is the time you want to stay close to your clients." These are the moments where you really earn that long-term relationship, says Worsoe.

In many ways the bank is in an enviable position. "If you're not focusing on survival, if you don't have to wonder if the bank will survive, you don't have those distractions."

That is a luxury. By contrast, some of his bank competitors are now "very distracted," and their WM clients may be the "second or third thing on their mind. That's just human nature."

It's important to be in touch? "The winners are making pro-active phone calls," says Pershing's Reynolds. Wealth managers have a duty to explain to clients what their banks are doing on both the credit and investment management sides, he says.

Banks are doing more hand-holding of their HNW clients, agrees Mariniello. It's in a down market, after all, where an advisor demonstrates his/her real value. They're staying on the phone with clients, reassuring them: "We will get back to normal times."

Johnson Bank was in touch with a higher percentage of HNW clients in 2008, says Lucareli, and it conducted many face-to-face meetings. If a client is not hearing from an advisor, he or she often concludes that the advisor is indifferent, or the client doesn't matter, he notes.

"Last year you had to meet pro-actively with clients," says Lucareli. "Some didn't want face-to-face meetings, but others wanted to be reassured." The bank often sent clients financial news items, although they were careful not to overdo it given the drama in the marketplace.

Johnson Bank took another look at investment policy statements. They examined again their clients' tolerance for risk. They reminded clients that there was always risk in the equities market. The majority of clients, in spite of everything, said "no" to changing their risk tolerance statement. "We didn't see a lot of clients exit." They saw it [i.e., the crisis] as a global markets issue, not a Johnson Bank issue. That said, these are "difficult times, unprecedented times," says Lucareli.

"We strongly believe in communicating" says National Financial's Phillips. In a recent three-month period, National Financial sent out 60 "unique communications" from executive management to its client broker/dealers—many of which were shared with advisors—that discussed what was happening in the industry, regulatory developments, the strengths of their organization, etc. "Openness of correspondence is important" in such times, says Phillips.

'Last year you had to meet proactively with clients. Some didn't want face-to-face meetings, but others wanted to be reassured.'

—Brian Lucareli, Johnson Bank

Hiring opportunities

Johnson Bank's Lucareli has long emphasized the challenges of recruiting and retaining talent in the WM sphere. "It was easier to recruit" in 2008, he says. "We're seeing more of a buyer's market. More resumes are coming in the door."

The hiring pace at Union Bank picked up in November. "We're seeing resumes from some of our most formidable competitors," says Worsoe, both bank and nonbank. All things being equal, Union Bank prefers to hire professionals from bank WM units—as opposed to investment banks—because they are more likely to have credit (lending) skills, says Worsoe.

Demand for relatively exotic alternative investments—the forte of wirehouses—has abated. 'It's back to basics.' Clients are saying, 'I want to be in quality products.'

—Randy Reynolds, Pershing

Altogether, Union Bank has 350 to 400 front-line employees—those interfacing with customers—in its wealth management sector, says Worsoe, including some 100 private bankers (who lend to HNW individuals). They also have 15 to 20 portfolio managers, 15 wealth advisors (planners), and 12 to 14 HNW brokers.

More often than not a private banker (lender) is the client's relationship manager, but other times it can be a portfolio manager or a broker. The bank takes a team-based approach to the WM client. It has 15 to 20 WM teams overall. Each team has a representative from the bank's four WM disciplines—credit (private banking), brokerage, portfolio management, and trust—as well as a planner (wealth advisor). Altogether, 100 to 120 people work on teams, not including junior support staff.

Union Bank's 12 to 14 HNW brokers are distinct from the bank's 110 retail brokers. The latter are not part of wealth management—they report through the retail bank—although they, too, ultimately report to Worsoe. The HNW brokers are more sophisticated advisors who are as comfortable with fee-based products as they are with commission-based products. Union Bank defines the WM client as an individual with $1 million in investable assets.

In May 2008, after a WM reorganization (but before the current crisis), the bank stated that it expected to double wealth management profits by 2012.³ That is still the goal, Worsoe told us.

The bank is undergoing "a period where we're investing" in WM, says Worsoe. "It won't pay off for three years" or so, arguably. When plotted on a graph, growth may assume the dimensions of the proverbial hockey stick.

All told, it's not a bad time to be hiring, says Worsoe. Many bankers and advisors are looking for a permanent home.

Safer products

The sorts of products sold in bank WM units have changed over the last year. In October 2008, notes Reynolds, there was a virtual panic in the financial marketplace. Clients wanted to be in Treasuries (i.e., negotiable U.S. government debt obligations) even those with zero yields, a development he describes as "amazing."

Recently there has been a strong push on the part of WM clients to buy insured tax frees, i.e., bonds of fiscally sound municipalities. CDs (certificates of deposit) are also being sought. Pershing has a CD product in which a client (by way of example) writes a check for $2 million, and Pershing invests in perhaps a dozen separate CDs, each with FDIC insurance (the threshold was recently raised to $250,000). WM clients continue to invest large sums in the CD market.

Reaction to events has been pronounced. Some banks, after all, "got out of balance with their stakeholders," says Worsoe, putting them in risky alternative investments.

That was not the case at Johnson Bank, which two years earlier sought to put more WM clients in a higher quality brand of fixed-income investments. In the bank's view, "Yield was not as important as quality."

In late 2006 they moved clients' 'cash' assets from high-yield money market funds to lower-yield Treasury instruments. Granted, this accounted for only about 2 percent of overall AUM, but it was "very well received" when the money markets were hammered in late 2008, says Lucareli.

In early 2007, also before the market meltdown, Johnson Bank reduced its WM clients' exposure to high beta investments, including international equities and small cap stocks. They found diversification in large cap stocks. That said, "no one foresaw what happened in September, October and November," Lucareli says.

The current financial crisis is creating a new view of banks among HNW clients, particularly as wirehouses vanish or appear increasingly shaky.

—John D. Phillips, National Financial/Fidelity

At the beginning of 2008, Johnson Bank had about $5 billion in AUM on the domestic side, and $4 billion on the international side. (It owns a Swiss bank.) From Jan. 1 to November, investment advisory was down 7.5 percent, and brokerage fell 23 percent. So AUM did not drop precipitously. Fixed-income investments helped to buffer the decline. Also, their sales numbers rose—which also tempered the decrease. "New business increased last year," says Lucareli.

Overall, "To have a profitable year, with no layoffs, speaks well for our long-term strategy. We're planning for growth in 2009," or at least in the following year, says Lucareli.

Union Bank expects to hire 60-70 new 'line people' in the next year—private bankers, trust officers, brokers, asset managers. Worsoe sees this as an 'investment.'

Bank WM divisions are also getting more attention these days for their ability to drive core deposits. When Pershing's Reynolds recently visited with a "top 25" bank, a large part of the discussion focused on how WM directed money market funds could be converted into core bank deposits. "They don't want to sweep into a money market fund"; that is a strong trend now, says Reynolds. They want to put that money into FDIC-insured deposits.

In recent asset-allocation models, 30 percent to 40 percent of client WM assets could now be in money market funds—an unusually high percentage. Banks in need of more core deposits are looking, and should be looking, at ways to convert these into FDIC-insured deposits, Reynolds says.

Managing in stressful times

Overall, what is the key to managing wealth management in stressful times? "Staying very, very close to the client," says Union Bank's Worsoe, "and focusing on their well-being."

Some banks appear to be forgetting about their WM clients now, he notes, focusing entirely on survival. Union Bank, by contrast, is getting back to basics, seeking to build those long-standing relationships with clients that form the basis of all WM success, in Worsoe's view.

The institution's commercial banking business is a "fantastic franchise," declares Worsoe, and through periods of time it will carry profitability at the company. But other times retail and wealth management bear the profitability load. This is such a time. (Union Bank's revenues are roughly 60 percent derived from commercial banking and 40 percent from retail banking and wealth management.)

"We're hedged," says Worsoe, speaking of the retail and WM businesses. "We'd like to hedge more," by which he means expand those businesses further, because they offer a stable source of income. It is all contingent on developing long-term client relationships.

"It has to be all about the clients, and if you don't put the client in the middle, you won't be successful," Lucareli told us last year.⁴

And today? "Our philosophy has not changed. It's become more germane."

This isn't always easy. Those asset allocations strategies that worked so well for decades—"went out the window" in 2008, says Mariniello, "but we will get back to normal times." Each era had its go-go products. The 1980s had limited partnerships. The 1990s had interest-rate-only CMOs. The present decade had its hedge funds, "which many people didn't understand," he says. "The banks, to their credit, often said if they didn't understand them, they wouldn't sell them."

That worked against them in 2007. But now it can work in their favor.

"When Wall Street comes up with new products, it's always in the best interests of Wall Street," adds Mariniello. By comparison, he can "count on one hand [the number of] banks that put their clients in hedge funds."

"Banks do a good job of focusing on clients' needs," adds Mariniello, especially in the HNW client segment. Now they should also tell them to "stay the course, make adjustments" and recognize that because of one abnormal year, one just can't "throw out everything."

¹ An alternative investment is regarded as an investment product other than traditional investments such as stocks, bonds, money markets, and/or cash, according to Wikipedia.

² Union Bank is a subsidiary of UnionBancal, a U.S. bank holding company, which is owned by Japan's Mitsubishi UFJ Financial Group.

³ Garmhausen, Steve, "UnionBanCal's Wealth Group De-Siloing," American Banker, May 12, 2008

⁴ See Singer, Andrew, "Meeting the Needs of the High Net Worth Client," Bank Insurance & Securities Marketing>/i>, Winter 2008