Most people don't think of the trust industry as being part of a modern-day gold rush. But it must be. Why else would virtually every type of financial institution — from independent trust companies and banks to brokerage houses — put such huge efforts into luring the ultra-affluent clients who used to be the private property of trust banks.

They're invading each others' turf with a variety of strategies. “Everybody, every bank, every trust company, every broker-dealer, has decided the wealth management business is the market to go after,” says John P.C. Duncan, president of Duncan Associates in Chicago. At the top end of the market — portfolios with assets of $75 million and up — wealthy families also are competing, by forming their own family offices and private trust companies to handle their money.

What's behind all the competition? First, there are demographic trends: the rising number of truly wealthy Americans, the potential transfer of assets to baby-boom age inheritors, and the sale or liquidation of thousands of family-owned businesses created in the immediate post-war era. But there are also significant changes in the financial services industry driving changes in wealth management. With the introduction of interstate banking, commercial banks have been able to compete for wealthy clients on a national basis.

There is also the continuing consolidation of banking, creating possibilities for the merged operations and their competitors looking to pick off customers who might suddenly be available. In July 2003, Lehman Brothers said it would acquire asset manager Neuberger Berman for $2.6 billion. Among other things, Neuberger brings a larger trust platform and new proprietary products to Lehman. In addition, in October, Bank of America said it would take over FleetBoston Financial Corp. for $47 billion. And J.P. Morgan Chase in January of 2004 forged a plan to buy Bank One for $58 billion.

Long term, these deals may alter the competitive landscape; in the meantime, however, there is “a lot of confusion,” says Kathryn McCarthy, a New York-based consultant to family offices.

Confusion spells opportunity, says Al King III, chief executive officer of South Dakota Trust Co. LLC, and a former officer with Citibank's private bank. He says that his clients have left banks when they got lost in the shuffle of a merger. “We just had one client worth about $50 million who had gone through three mergers with one bank and hadn't received a phone call from anyone in months.”


Not too long ago, the wealth management industry was comprised mostly of local banks with their own trust departments. That started to change in the mid-1990s with the passage of legislation allowing interstate banking, and the rash of bank mergers that followed. Banks were allowed to go after a larger market — and they did, with gusto. While there are many fewer banks offering trust services today than 10 years ago — 1,860 compared to 2,996 in 1993, according to the Federal Deposit Insurance Corporation — total assets in trust accounts rose from $10.6 trillion to $38.5 trillion during that time. Then, with the change in the so-called prudent investor rule, trustees were free to create more aggressive portfolios for clients, placing a greater percentage of investment in equities. Those changes, says Duncan “allowed everyone to start going into everyone else's regions. You suddenly had a lot of organizations saying, ‘We can enter a nationwide wealth market, where the potential is tremendous. Let's go after it.' ”

The market seems to be wide open. “There isn't a single institution with more than about 2 percent to 3 percent of the high-net-worth market,” says Rob Elliott, senior managing director for Bessemer Trust in New York. In fact, according to Cap Gemini, a market research firm in Cambridge, Mass., there are an estimated 102,000 people with $20 million in investable assets worldwide and 268,000 with $10 million, providing a lot of potential clients. Also, a huge amount of inheritance will pass to boomers, then to their children between now and 2052: as much as $153.7 trillion, according to researchers at Boston College. Even if these numbers are off — if, for example, the parents of boomers live longer and spend more and/or boomers leave little for their progeny — there is still a huge amount of money that could be available for wealth managers.

Only problem, according to John Havens, co-author of the study that famously identified this huge baby boom wealth transfer, is that conentrated wealth will be passed on to a relatively small number of beneficiaries; it's estimated that only 2 percent of the estates have a value of $10 million or more. So advisors can expect to play an intense game of musical chairs. For, whenever money is inherited, there is a market opening, says Bruce Holley, vice president and director of the Boston Consulting Group: “Once the money held in trust starts to be liquidated, the next generation tends to switch institutions.” These days that's also more likely because wealthy clients now typically build into their trusts the ability to name successor trustees and wealth managers.

To keep clients in the fold, institutions that have traditionally tended to the wealthy are reaching out to form closer relationships with younger family members. “We want to get the next generation familiar with us, so when there's a change, there's no question they want to continue with our firm,” says Vernon M. Schreiner, managing director and co-head of U.S. Fiduciary Services at JPMorgan Private Bank. Bessemer Trust, for example, holds workshops for scions ages 18 to 30, ostensibly aimed at educating them about such topics as investments and taxes. But the workshops also help “solidify the relationship,” says Elliott. Deutsche Bank has a program called “Wealth with Responsibility,” which sponsors events throughout the year, such as multi-family get-togethers with seminars on everything from grant giving to transferring wealth.

But there is another generational change underway, as founders of family-owned businesses cash out. According to a recent survey by MassMutual Financial and the Raymond Family Business Institute of more than 1,000 family-owned businesses started after World War II, about 40 percent of company founders plan to retire in the next five years. At the same time, only 42 percent of those planning to retire have named a successor. In addition, just 5 percent of family-owned businesses stay in the family after the third generation, King notes. The upshot: An avalanche of money from sellers of family-owned businesses should be up for grabs in the near future.

That money will produce another influx of clients into the market. So, a key growth strategy for all competitors — including the old-money bastions such as Mellon and Bessemer Trust — will be to target relatively new wealth. Says Elliott: “Probably 75 percent of new clients are first generation wealth.” That includes recently cashed-out business founders, recipients of an inheritance, corporate executives, and highly compensated professionals.


A core strategy for attracting the new money — and holding on to the assets of the old-money families — is providing one-stop-shopping for wealth-management services. Generally, that means a team with a group of experts in every discipline: a trust officer, an investment advisor, a tax specialist and an expert in philanthropy. “Clients prefer to be able to have a banking relationship, a broker relationship, a trust relationship, an asset management relationship, and a lending relationship, with as few vendors as possible,” says Christopher Poch, managing director of Private Wealth Management at Smith Barney.

For some institutions, the approach isn't anything new. At Mellon, where Lawrence Hughes heads Mellon Wealth Management, the team approach has been used “for many years,” he says. There are 40 teams in all, with 10 to 15 specialists on a team dedicated to one client. On the other hand, Bank of America, which wants to boost the proportion of its client base with $3 million or more in assets from its current estimated 20 percent, formed a new group within the private bank about a year ago, combining investments, trust, and credit and banking services; about 200 four-to-five person teams in 100 offices work with clients in the $3 million-and-up range.

At brokerage houses, there tends to be a different twist. Merrill has private wealth advisory teams made of members with strengths in different disciplines, such as estate planning or investments, aimed at clients with $10 million in assets and up. Around half of Smith Barney's 12,000 financial consultants work in multi-disciplinary teams. The other half work on their own. Financial consultants with clients of $5 million in assets and up are supported by 10 centers across the country staffed by people with expertise in such areas as trusts and estates and philanthropy. Plus, three years ago, the company bought a firm called Geneva & Co., which specializes in mergers and acquisitions for privately held businesses. Through those advisors, clients can discuss exit strategies, as well as philanthropic and governance issues. Ultimately, “all the assets will flow into the Smith Barney trust company or into their regular securities account,” says Poch. For clients with more than $50 million in assets, there's also a new family wealth advisory service, which focuses on issues related to the inter-generational transfer and management of wealth.

When it comes to finding new wealth, commercial banks have a big advantage in their ability to lend. Wealth management relationships often begin with commercial lending: an entrepreneur succeeds and turns to the bank that helped him create his fortune to then manage it. “You catch them early, they tend to be more loyal to you. That's definitely one approach,” says Elliott.

“The power of the platform is being able to deliver both sides of the balance sheet, satisfying lending and investment needs,” says Michael Santo, president of Bank of America's trust operation and chief operating officer of the private bank. At Deutsche Bank, Gloria Neeland, head of private wealth management, recalls how the breadth of capability helped the bank serve a particular client. The customer needed cash quickly to buy a company. “We structured a loan on his portfolio, and because of the nature of the transaction, he will be able to pay off the loan in a short period of time,” she says. “Many of our competitors without our investment banking capabilities wouldn't have been able to do that.”

But banks face challenges, as well. Most important are the potential problems caused by too many mergers. That's one reason why J.P. Morgan and Bank One haven't made any formal plans to merge their private banks, says Schreiner. Instead, they want to iron out the wrinkles, to reduce potential disruptions to clients, before going any further. “You always learn lessons with mergers,” says the veteran of J.P. Morgan's merger with Chase. “If there are any sort of bad lessons to be learned, you remember them, and don't do it again.”

Of course, the high level of multi-disciplinary service that clients are seeking can be costly. About 70 percent of expenses in wealth management are related to staff costs such as salaries and continuing education, according to the American Bankers Association. “It's an expensive platform to assemble and deliver,” says Schreiner. That's one reason why institutions generally only apply the comprehensive team approach to the clients with $5 million and over in assets. Still, wealth management can deliver gross profit margins of 20 percent to 30 percent, according to Elliott, compared to 10 percent to 20 percent for consumer banking.

Where do retail stock brokerages fit into this giant puzzle? They also may have an edge with the entrepreneurial new money. “We deal more with wealth creators — business owners and corporate executives,” says Christian G. Heilmann, who serves as chairman and chief executive officer of Merrill Lynch Trust Co. as well as managing director of the private banking and investment group. “The traditional trust and private banking organizations deal more with wealth inheritors,” he claims. Merrill, according to Heilmann, has one-quarter of Fortune 500 CEOs as clients.

But, attitudes towards financial advisors held by many wealthy clients could work against brokerages. According to a recent study of investors with $5 million or more in investable assets by the Spectrem Group, a Chicago market research firm, 65 percent of respondents who use independent advisors intentionally avoided choosing advisors connected to brokerage, banks, insurance, or mutual fund companies. Thirty percent use full-service brokers as their primary advisors, down from 41 percent in 2001. For people under 50, only 26 percent use full-service brokers.

Why? Wealthy clients tend not to want to be tied down to proprietary products and managers, but want access to the best choices available. And therein lies a challenge for both banks and brokerage houses. To attract top clients, they have to provide some form of “open architecture” — access to outside products and money managers. And therefore, in the past two years or so, more and more institutions have started introducing an open system, with various approaches. A year and a half ago, Deutsche Bank began offering a completely open architecture platform. At the merged Neuberger Berman-Lehman Brothers, Neuberger Berman CEO Jeffrey Maurer and former CEO of US Trust expects a hybrid architecture with some proprietary and some outside investments offered to their high-net-worth clients.


The one-stop shopping approach is not for the ultra-rich, who insist on top expertise in every aspect of their wealth management. “Of the $2 million to $3 million up to $30 million to $40 million client, a huge percent want one-stop shopping,” claims King. “Above that, the interest drops.” Profit margins also tend to be less when serving those with $50 million plus, King notes, because those people “negotiate the heck out of things.”

The ultra-rich's penchant for control extends to creating their own platforms. In some cases, that means using independent trust companies that offer personalized service to just a handful of clients. There are about 300 such independent trust companies today, up from a handful a decade ago, according to Herb McPherson, president of the Association of Independent Trust Companies. Acting mostly as administrators, the independents allow wealthy clients to tap into whichever specialist they might want, creating monogrammed networks with hand-selected outside money managers, banks, custodians and other advisors. This approach creates efficiencies. King of South Dakota Trust, for example, points to one wealthy family with money in 300 trusts. “They don't want to go to a money manager and open hundreds of accounts,” he says. Instead, there's a master partnership, through which all account units can be distributed.

The other major contenders for the super-wealthy clients are single-family offices and private trusts. “If you ask who are our biggest competitors for our trust business, I would say it's the families themselves,” says King. The estimated 3,000 single-family offices in existence are generally only used by families with $100 million or more in assets. They handle all of an individual family's wealth management needs, from setting up a trust to making investment decisions and preparing taxes, sometimes hiring outsiders to do almost everything.

Recently, the family office approach has been pushed down-market, and made available to mere multi-millionaires. This has been made possible by the rise of multi-family offices, in which a number of wealthy families band together, sharing expenses, or, more commonly, one wealthy family like the Rockefellers, decides to cuts its expenses by offering its office's services to other families. Often, these multi-family units are able to negotiate lower fees with money managers, thanks to the heftier size of their assets under management. A multi-family office called Asset Management Advisors, bought by Sun Trust three years ago, offers a newer twist. With offices in West Palm Beach, Orlando, Charlotte and Greenwich, Conn., it organizes itself into “local family offices.” Each location includes three teams consisting in a financial advisor, wealth advisor and service coordinator, handling no more than 20 families per team.

Like single-family offices, private trust companies serve only one family. The trust generally hires a manager, who in turn hires other professionals to pick stocks, take care of custodial duties and other tasks. As a result, they offer people with enough wherewithal the ultimate in control over their trust — and they're usually only for top-of-the line wealth. Duncan of Duncan Associates, for example, says his average client has more than a billion dollars in net worth. He estimates there are about 100 private trusts in existence, but expects another 20 to 25 to be formed this year.

Some institutions have thought of ways to join forces with private trusts and family offices. Mellon, for example, will act as custodian for a family office, providing such back office tasks as centralized reporting, online tools for reviewing accounts, and measurement of managers' performance.

Ultimately, however, it's anyone's guess which institutions will wind up with the lion share of the big bucks bonanza. And until that time, the gold rush — and confusion — are sure to continue.