Who Wants To Manage A Millionaire? Just ask Goldman Sachs, Citigroup, and even discounter Charles Schwab. And as these titans vie for the richest prizes, there's little they won't do.
(FORTUNE Magazine) – The back-fin crab came first--served chilled in margarita glasses with avocado, mango, and just the right touch of tequila. The 100 guests, all clients or prospective clients of Citibank Private Bank and all worth in excess of $100 million, had been serenaded in the courtyard by a string quartet and were delighted to see the appetizer as they entered the great hall at Morven, an 8,000-acre private estate near the Blue Ridge Mountains. Soon after, waiters with the gentlest Virginia accents uncorked the cabernet. Then came the beef tenderloin prepared with a port Stilton glaze and white asparagus. Later, after the salad, the former poet laureate Rita Dove spoke eloquently about providing a balance between abundance and spirituality. Diners listened attentively and nibbled on chocolate praline tortes with raspberry coulis while their Citibank hosts took mental notes.
Over the next two days, between walks through the estate's rose garden, guests were engaged in a variety of nonfinancial topics, ranging from "fostering family unity" to "raising children in prosperous families" to "getting in touch with values and passions." After panel discussions, including one led by a Beverly Hills psychologist, the gathering broke into working groups in which some of the most powerful executives and technology entrepreneurs in the world confessed their concerns about raising children who'd never know what it was like to fly coach. They talked about marriage, philanthropy, God. Everything, that is, but the area in which the Citigroup unit makes its money--selling financial services to those same wealthy families. The private bankers never even discussed stocks, bonds, insurance, or portfolio diversification. Had they left the meeting to pass out roses at the airport, no one would have blinked. "The more we know about wealthy families, the more we can do to solve their problems," Peter Scaturro, CEO of the private bank, later explained.
Ah, to be a high-net-worth investor these days. Everybody, it seems, wants to solve your problems. Private banks, brokerages, money-management boutiques, insurance agents, accountants, and even lawyers are vying for a piece of what promises to be one of the most lucrative markets in the financial services industry. Indeed, as much as recent deals like Chase Manhattan's acquisition of J.P. Morgan highlight the seemingly do-or-die importance of being a top dog in the investment-banking sweepstakes, Wall Street powers have clearly been searching for another prize as well: the rich. With J.P. Morgan, for example, Chase's once stodgy commercial banking business suddenly has access to a vein of truly upper-bracket investors. In purchasing Paine Webber, UBS gets instant recognition as a force in managing the money of affluent Americans. And then, of course, there's Charles Schwab's acquisition of U.S. Trust, a deal that puts the discount brokerage in charge of one of the oldest and toniest asset-management firms for the well-to-do.
In each case, the acquirer paid top dollar. And that's just the beginning. Go to any exclusive country club and you're likely to hear tales of solicitations from brokers--everything from "Can we meet and discuss your finances?" to "Would you like to have dinner with Henry Kissinger in Zurich?"
Brokerages and other asset-management firms have always gone after the rich, of course. But the scramble for the millionaire market has suddenly gotten fiercer. Why? Well, the so-called rich niche is enormous, for one thing--and growing fast. Indeed, Spectrem Group, a New York-based research firm, reports that there were 7.2 million millionaires in the U.S. in 1999, more than double the level of five years earlier. And when it comes to those with $5 million or more to invest, the growth is more remarkable still: In 1994 a mere 90,000 households met that mark. Today the number is just below a million and is expected to reach close to four million by 2004 (see charts).
Even Schwab, a firm not exactly known as a money manager to the well-heeled, discovered a few years back that its client lists were crammed with millionaires. Some were individuals with the bulk of their money at a full-service firm. But increasingly those ranks were being filled by baby-boomers who had benefited from both the long-lasting bull market and the explosion in stock option grants. And millions of those boomers will turn 55 next year--the beginning of a decade that analysts say will be their peak years of stuffing away money.
Growth alone might seem ample reason to unleash the hounds. But there's another factor: profit margins. It's simply easier to make money dealing with rich people. Hardly an executive on Wall Street isn't thinking about the impact of falling trading commissions on his firm's bottom line. When it comes to asset-management, however, wealthier clients often still pay fees based on the dollar size of their accounts. And since most brokers complain they spend just as much time servicing (and handholding) the $100,000 client as they do the million-dollar one, many firms have simply abandoned the lower tier of the market and gone upstream.
"It's like Willie Sutton said. You go there because that's where the money is," jokes Guy Moszkowski, an analyst at Salomon Smith Barney and a FORTUNE All-Star. Moszkowski reckons that a wealthy client will often agree to pay a 1% annual fee on assets under management in exchange for the most in-depth services. That adds up to $10,000 in revenue on a $1 million account and a cool $1 million on the $100 million client. The new math has even shifted Wall Street's hungry eyes from pension fund clients and the like to the booming population of affluent entrepreneurs, observes Stephen Gresham, managing principal of the Gresham Co., a wealth consultancy based in Madison, Conn.
Where there's a doozy of a market, of course, there's often an equally big marketing challenge. In a business where everybody's basic pitch is "Really, you're our top priority," there's more to the game than making sure the beef tenderloin is properly seared and the romaine isn't wilted. The surprise, however, is that the three leading contenders for this niche have radically different game plans--strategies so divergent, in fact, it's hard to imagine that they're going after the same black-tie crowd. Citibank Private Bank, a unit of Citigroup that serves clients with a minimum of $3 million in assets, has transformed many of its elite private bankers into personal attaches for its clients. Goldman Sachs, hoping to translate its investment-banking and institutional-trading prowess into portfolio management for those worth at least $25 million, has perfected the clubby tag-team approach, in which the sales pitch is passed along like a secret handshake: "We made you rich, we'll make you richer." (It helps when many of your clients are entrepreneurs whose firms you just took public.) And then there's Schwab, which, believe it or not, had emerged as a major player in handling money for wealthy individuals even before its recent acquisition of U.S. Trust. The firm's ability to provide handholding on the cheap for self-made millionaires--while dropping the hard sell altogether--has been a remarkably effective strategy so far.
"This is the last great frontier, and all the players know it," says Gresham. "The stakes don't get any higher than this." For the dominant firms, naturally, the prize could be untold millions of dollars in new revenues. The question--for prospective investors and millionaire clients alike--is: Who's top beluga?
The Trusted Advisor
The lights dim. You're at the Seattle Opera with Aya Hamilton, a private banker at Citibank who manages $1.3 billion for 25 clients. Hamilton is the picture of elegance: Her chestnut hair at chin length, she is dressed in a black Moschino cocktail dress set off by a pair of flawless single-carat diamonds and a strand of custom-designed pearls as big as grapes. She's seated in her usual spot at center orchestra for the performance of Wagner's Die Walkure. At the break, she steps out for a sip of champagne. Modus operandi: There's no talk about how the Nasdaq is plummeting or the Dow looks dumpy. Instead, she asks what you think of Der Ring des Nibelungen. Wagner is so powerful, but not as graceful as Puccini. Have you been to the Paris Opera? Hamilton, a former ballerina, is fluent in French.
None of this should mislead you into thinking Hamilton is a mere socialite. She's a certified financial planner with an MBA and an undergraduate degree in political science and French. She can talk stocks as well as geopolitics, can work a Bloomberg terminal like a trader, and knows more about estate planning than a fair share of lawyers. But the role Hamilton really fills is problem solver to the rich, a role she calls a "trusted advisor." She finds answers. More and more, her clients are the working wealthy--not Palm Beach polo grandstanders, but people who sit in rush-hour traffic no matter how much money they have. They need total advice and are willing to pay for it.
Consider what happened this past spring when one of Hamilton's clients, the wife of an executive at a Seattle-based software maker, called her in crisis over some damaged artwork. The client's 18-month-old daughter, it seems, had put her tiny fist through a historic calligraphic copy of the Korean constitution by her husband's grandfather--a famous artist in Korea. After hiding the work behind a grand piano, the wife contacted Hamilton. Citibank actually employs a full-time staff of 12 art experts to handle such requests, but Hamilton took it upon herself to call the nearby Asian Art Museum directly about making repairs.
Far more than a financial butler--traditionally the role filled by private bankers in Switzerland--Citibank sells its newest breed of millionaire manager as a full-fledged aide-de-camp, a personal attache who can tell a client everything from which hotel in Prague is best to which hedge fund suits his needs. But part of Hamilton's job is simply navigating the maze that is Citigroup, turning the gigantic warehouse of financial services into a boutique of customized products for her clients.
And managing a multimillionaire's money is hardly as easy as it once was. "This is no longer an order-taking business," she says. "I need to be able to approach clients with specific ideas--equity hedging, for example, how to set up a collar that will protect them from the downside. How to put on rate swaps if interest rates come down a bit more."
Citi's strategy, naturally, is to keep many of the services in-house. And for the wealthiest of customers, there are few strings at the behemoth company that Hamilton can't pull. Could she arrange, perhaps, for the executive committee chairman (and former U.S. Treasury Secretary), Robert Rubin, to pop out to the West Coast for a meeting with her client? Sure. Would Jack Grubman, star telecom analyst at Citigroup's Salomon Smith Barney, be willing to come along to offer his insights on a client's portfolio?
Now flash forward a few days from the opera, and Hamilton, 40, is busy at work in her office in downtown Seattle. It's a fairly small room with no TV, but with a view of the Space Needle. She's aware that the office is not flashy. "Clients wouldn't want to come in here and see Italian marble and Oriental sofas," she explains before returning to a call with one such client. He's a retired executive, and she's trying to persuade him to set up something called a South Dakota Dynasty Trust. South Dakota, it turns out, is one of the only states in which a trust can be established in perpetuity. The money in the trust is not taxed, so it continues to accumulate for the client's heirs. She's been talking to the client about the trust for weeks and ends the call without a conclusion.
Next she begins a conversation with another retiree, this one a former oil company executive. He's interested in doubling his survivorship insurance to $20 million. That should cover estate taxes so that his wife, who is much younger, won't have to bear too much of a tax burden after his death, and help him protect his heirs. Hamilton connects one of Citibank's tax lawyers to the call, and they come up with a plan to execute a private split-dollar arrangement, a fairly sophisticated method that involves gifting and loaning funds to an irrevocable life insurance trust that purchases insurance to cover estate taxes. The maneuver can save the client thousands in out-of-pocket expenses. She ends the conversation by briefly going over a shift in some equities in his portfolio. "My clients want to know that if I say I'm going to do something, I'll do it," she says, with one of those perfectly turned smiles. That, perhaps, and get seats for opening night at the opera.
The client, a man in his late 50s who runs a prominent communications company in Boston and is worth several hundred million dollars at last count, is thumbing though a half-inch-thick dossier on his personal finances as his advisor from Goldman Sachs offers an assessment of the most recent results. Seated around a conference table, they breeze through the big-picture explanations about opportunities in Europe, continued strength in the U.S. economy, and unease in tech stocks. Then the client, yawning a bit, flips forward a few pages to the latest numbers on his portfolio. He runs his index finger across the bottom line and covers his mouth with amazement. He's trouncing the S&P 500 this year. Over the past five years, he's even beating the Nasdaq--and with a lower-risk portfolio. "How'd you ever do that?" he asks the advisor. Jim Donovan, a 34-year-old Harvard Law grad with a degree in chemical engineering to go with his MBA from MIT, shrugs as if it's no incredible feat.
Inside, Donovan has got to be bubbling with energy. He'd never show that outwardly because that isn't the Goldman way. Nor is he flashy--he's dressed in an inoffensive gray Hickey-Freeman suit, with a gold and green Hermes tie around his neck and a Cartier watch on his wrist. What he is, however, is competitive. Back in college, Donovan was a standout on MIT's crew team, Division I, as he'll gladly tell you. His steady stroke set the pace for the rest of the oarsmen, and his passion for winning kept everyone focused on the goal.
It's not hard to see that the fire is still there in his belly. As the leader of a squad of five wealth advisors who work with 90 clients, he's responsible for drumming up new business and coordinating Goldman's platoon approach to managing money. Why would a prospective client choose Goldman over other firms that offer sophisticated investment approaches? "We're the smartest and we're the best," Donovan says, clenching his jaw ever so slightly. And it's as if a flint has ignited in his eyes.
This isn't just any investment house we're talking about. This is the Rolls-Royce of Wall Street, the Harvard Club with cubicles, the NASA of stockpicking, the 19th hole at Cyprus Point when the members give you that wink-wink, country-club nod that says that if you're lucky enough, you can be one of them. There probably isn't an investment-banking client--that is, one who's worth at least $25 million--who hasn't felt Goldman's velvety tug. Indeed, most of them, say firm officials, have signed on in the past year.
Even so, asset management is not something that springs to mind when people think of Goldman Sachs. The firm makes most of its money ($824 million last quarter alone) from investment banking and institutional trading. Nor does it want to be seen as the next Fidelity Investments. It doesn't want just anyone's money. (Dollar-cost averaging, what's that?) It wants very rich people's money. All told, the private wealth-management unit handles over $300 billion--and that's not including mutual fund holdings. "We're trying to position Goldman Sachs as the lead manager in wealth creation," says Peter Mindnich, a former investment banker who now heads up a team of advisors on the West Coast.
What's the draw? Letting individual investors in on the institutional game. All those trading strategies and mathematical formulas that make the average guy scratch his head. The firm's elite wealth-management unit employs five Ph.D.s who use all kinds of weird science to come up with customized asset-allocation plans--for everything from real estate to emerging-market stock-holdings. It's trickier than it sounds when you consider that many of them are for clients who have nearly all their wealth tied to a single stock. "We understand the hard science of investment management," crows Philip Murphy, head of the firm's private-wealth-management division.
But then, who's kidding whom? The real draw for Goldman clients isn't so much science as access--being part of the club, an elite fraternity of the super-rich. And that message is subtly reinforced by Goldman's 550 wealth advisors, who work in close-knit teams of four to seven members.
These aren't Princeton cheerleading squads, mind you. These are WWF tag teams dressed in Brooks Brothers slacks instead of Spandex tights. In Donovan's case, crew members sit side by side in cubicles, eavesdrop on one another's phone calls, and enter notes on every client contact into a shared database. They test one another on how much they know about a client or prospect. Does he have a girlfriend? What's his favorite band? When is his company slated to go public?
Once a week Donovan's gang of five gathers for a strategy meeting. His colleague Jennifer Jordan--also a standout crew member, at Brown University--passes out several sheets of paper detailing the latest transactions made for Goldman clients (we can't reveal their names but can say that most would ring a bell), a status report on prospective clients, and an update of the team's referral sources, typically clients who pass along the names of friends.
One prospect is a fellow MIT alum who, Donovan observes wryly, is worth $100 million or so and hasn't bought a new car in 12 years. Another just received $800 million in stock from the sale of his tech company to a major optical networker and needs investment advice. The team decides it would be wise to put $100 million into a vehicle called an exchange fund that allows Goldman clients to transfer a portion of their restricted holdings into a tax-efficient diversified portfolio that includes the concentrated holdings of other clients. The clients use one another to diversify and avoid selling company stock.
Another wealthy customer is putting a raft of money into a new private equity fund. But quickly, as it often does, the discussion turns to the performance of GS Capital Partners III, a private fund that allows the creme de la clientele to invest in startups side by side with Goldman. Launched just two years ago, it turned a $35 million investment in Storage Networks into $1 billion.
As if there were any doubt: The rich get richer.
Millionaires Like a Bargain Too
The elevator doors open onto the 18th floor of 445 Park Avenue at 57th Street in Manhattan. A narrow hallway leads to a closed door with a sign that reads, sternly, BY APPOINTMENT. Once past the waiting area and the receptionist, the office opens into a maze of marble floors, cherry-wood trim, and windows that overlook one of the wealthiest strips in the world. The carpeting is still settling in, and the paint smells fresh. Tags remain on the chairs. Within each office sits a single broker behind a richly polished desk. In this particular case, the broker is a handsome 33-year-old French citizen named Renaud de la Pierre, and he's rifling through a file folder in search of some stationery--thick, white parchment paper with letters in elegant black and silver. Somehow, they spell out CHARLES SCHWAB.
When even the PR person guiding you around is shocked by the surroundings (and wonders whether this is the wrong floor), you know you've stumbled upon something surprising. And, indeed, this is a stunner. Schwab, the firm that more than any other is responsible for forcing down trading costs, wants in on the millionaire game. So in July the company opened this posh new office on 57th Street to serve clients with $1 million or more in investable assets.
But there's a twist. Schwab isn't changing a thing in its cost structure. After all, millionaires didn't get that way by throwing away money. A millionaire can choose to do business with de la Pierre, but the commission is still $29.95 a trade. There are, of course, additional fees for financial planning, estate planning, and the like. But it's nowhere near as expensive as going to a traditional private banker.
Why the decision to offer more to wealthy investors? Much as Citigroup is a high-end warehouse of financial offerings, Schwab--a firm that has defined the democratization of investing since the 1970s--has become a low-cost pipeline for products and services designed for investors of every financial stratum. Want to invest in a hedge fund? Perhaps U.S. Trust, a firm that has handled "old" money for a century, can help. Worried that your 401(k) isn't properly diversified? Try out this hot new asset-allocation program on the Web (it's free) that duplicates most of what private bankers do--minus the opera tickets. "Choice has always been at the core of our business," says Dan Leemon, Schwab's corporate strategist. If an investor got rich making his own decisions, Leemon says, why would he want to hand the car keys over to another driver?
The "signature office" fits into this strategy. For instance, not only is there no additional charge to work with de la Pierre, but he'll make sure an assistant tracks your transaction and any other financial cleanup work you need done. This is the first look at what are expected to be more than a dozen such offices in locations that cater to Schwab's wealthier clients. And, in fact, the company has plenty of them. Though the average account size is a more modest $120,000, Schwab says it is capturing 10% of all new million-dollar accounts. In many cases, these are people who use Schwab's outside financial advisors or who simply got tired of having a full-service broker handle their money.
But that's not to brush aside a major shortcoming of Schwab's strategy: Until earlier this year many of its services fell well short of meeting the needs of truly affluent investors--particularly those who wanted face-to-face assistance. As far back as 1987, prior to Schwab's Web offerings, the firm began referring higher-bracket clients in need of personal attention to outside advisors, who then made their transactions through the discount brokerage. Even now, roughly 25% of the company's $1 trillion in assets is managed by such advisors.
What is less known is that for several years, Schwab has had its own corps of advisors to handle the needs of affluent investors. These select outside advisors, more than 400 in all, currently handle $9.6 billion, with an average account size of $1 million.
As with clients of full-service brokers, these high-end investors want advice. Still, it's not so much the "buy" and "sell" recommendations churned out by other brokerages that they crave, but rather counsel on selecting mutual funds, minimizing taxes, and the like. The U.S. Trust deal now adds another option for wealthy clientele by providing traditional private banking services as well as investment analysis. Schwab executives plan to unbundle certain proprietary U.S. Trust services such as estate planning and alternative investments, offering them to a broader group of customers. "Schwab's thing is always providing the client with as many options as possible," says consultant Gresham. "They do this high-wire act between the affluent client they want to serve directly and the proclivity of the affluent to want an advisor. This positions them to pick up an enormous number of new clients."
And de la Pierre fits neatly into the strategy. He's been sending out special letters to millionaire clients in Manhattan inviting them to see the new office. His approach is soft-sell all the way. Those who qualify to join don't have to. They can keep trading online or through the regular branch office on the ground floor of the same building. If they decide to take the elevator up to the 18th floor, says de la Pierre, "their experience will be an extraordinary one."
Main Street, it would seem, has finally met the millionaires.