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The report found that nearly half (46%) of benefactors have not discussed their inheritance plans with their children. And only 34% have revealed their wealth. More discussions lead to better and happier wealth transfers — and, as the report points out, an estimated $40 trillion of personal wealth expected to change hands by 2050 means there is a lot to talk about.
- The traditional view of inheritance is changing—it’s more than a will.
- Parents and children aren’t talking to each other about it—but they’re happier if they do.
- Reluctance to communicate is driven by emotional barriers on both sides.
- Increasing longevity makes inheritance only part of wealth transfer planning.
- Boomers and Millennials have different perspectives on wealth transfer.
For many, the idea of inheritance means discussions in a lawyer’s office about a family member who has passed on, and a dramatic reveal of the contents of a will. The latest issue of UBS Investor Watch—our quarterly survey—examines the changing dynamics surrounding inheritance; in particular, what families are saying, what they’re not—and why.
The traditional view of inheritance is changing—it’s more than a will. Inheritance planning is no longer about just having a will or waiting until the end. It’s about parents actively engaging children earlier on. Satisfaction with the inheritance process goes up significantly when children know the details ahead of time—with 90% being highly satisfied.
Parents and children aren’t talking to each other about it—but they’re happier if they do. Active inheritance planning increases the need for dialogue. But neither party feels comfortable having this conversation. In fact, while 83% of parents have a current will, only 50% have discussed inheritance plans with their children. And only 34% have revealed their wealth.
Reluctance to communicate is driven by emotional barriers on both sides. Parents don’t think inheritance is a pressing issue and are often in denial about their mortality. They also don’t want their children to feel “entitled.” Conversely, children don’t want to appear greedy or break the family standard of not talking about money. But both sides agree; it’s up to the parents to start the conversation.
Increasing longevity means inheritance is just part of wealth transfer planning.
Inheritance planning includes elements such as “giving while living,” multigenerational giving, and tax and estate planning. 60% of parents would prefer to begin passing on their wealth to their children while living. But they must take into account the impact of realities such as long-term care and increasing healthcare costs.
Boomers and Millennials have different perspectives on wealth transfer. As Boomers live longer, they prefer to transfer part of their wealth while living—and they want to do so more than parents of any other generation—to enable and share cherished experiences with their children and grandchildren.
Read the e-brochure
Read the report (PDF)
Posted by: Steven Maimes, The Trust Advisor
Yahoo! Celebrity article by Suzy Byrne
When the Capote actor died of a heroin overdose in February, he left the bulk of his estate to his partner, Mimi O’Donnell, and added the unusual request that their offspring be raised outside of Los Angeles. According to his accountant, David Friedman, these decisions were made to keep his children from becoming trust fund kids.
In court papers filed July 18 in Manhattan Surrogate’s Court and obtained by the New York Post, attorney James Cahill Jr. — who was appointed by the court to protect the interests of Hoffman’s children Cooper, 10, Tallulah, 7, and Willa, 5 in his estate proceeding — interviewed the actor’s accountant as part of the legal process. Friedman “recalled conversations with [Hoffman] in the year before his demise where the topic of a trust was raised for the kids and summarily rejected by him,” Cahill wrote, according to the newspaper. He “did not want his children to be considered ‘trust fund’ kids.”
Friedman said he wanted his estate — which was an estimated $35 million, according to Forbes magazine — to go to O’Donnell because he knew she would “take care of the children.”
While he was living apart from O’Donnell at his time of death — residing in an apartment a few blocks away from their family home, reportedly due to his drug problem — “Friedman also advised that he observed Hoffman treating his partner/girlfriend … in the same manner as if she were a spouse,” Cahill reported. And Hoffman told Friedman that the reason they never married was simply that he “did not believe in marriage.” However, “The size and nature of the jointly held assets support the position that [Hoffman] regarded [O’Donnell] as the natural object of his bounty,” Cahill wrote.
As we reported in February when the will was submitted, Hoffman asked that Cooper (his only child at the time the document was written) be “raised and reside in” Manhattan, Chicago, or San Francisco. “The purpose of this request is so that my son will be exposed to the culture, arts and architecture that such cities offer.”
Hoffman also set up a trust for Cooper, but stipulated that it only be used for “education, support, health, and maintenance.” O’Donnell is the trustee. According to the document, Cooper will get half of the trust when he’s 25, and the rest when he’s 30.
The actor’s latest film, A Most Wanted Man, opened on Friday.
Posted by: Steven Maimes, The Trust Advisor
NYT article by Paul Sullivan
Picking a financial adviser who understands what you want has never been easy. Broker or independent adviser? Lone wolf or team player? Holistic planner, numbers-crunching investor or backslapping golfer?
While always tough, the decision must now be more self-reflective: Do you understand what investment model your adviser is using and know if he or she has the skill to make good on what that approach promises?
In a new report, the consulting firm Casey Quirk evaluates four new investment models being pursued by financial advisers. While the report is intended for investment management companies, it contains valuable insight for investors who are trying to understand how their money is being managed and how their advisers are being paid to manage it.
All four models seek to distinguish themselves from the old model — in which an adviser or wealth management firm essentially relied on a select family of mutual funds for all of a client’s investments, whether stocks or bonds.
While this model seems simple, it is not always in the best interest of the client. And it’s unlikely that all of a company’s investment strategies are going to be top performers. Although 34 percent of advisers use the strategy, it’s eroding for several reasons: First, advisers are looking less at a client’s risk tolerance and an investment’s benchmarks and more at what clients want to get out of life and how much they’re going to need to pursue their interests. Second, more complex products are being created in hopes of delivering the desired outcome in both up and down markets. And third, since many advisers have a fiduciary responsibility to their clients, they have to look for the best-performing investments, not stick with one fund company for everything.
On the surface, the four new approaches might have advantages over the cozy relationship of yore with one fund company. But they all also have pitfalls that an investor needs to be aware of as well.
Here’s a look at each to prepare for your next chat with your adviser.
These advisers try to take on the role of big institutional money managers for their clients. But instead of concentrating on just one type of stock or industry, they aim to make selections across a broad array of investments.
Their pitch to clients is that they, and not a distant fund manager, are ultimately in charge of how money gets invested. They can customize a portfolio for a specific client and manage it to minimize taxes.
It’s a lot of work, though, since those advisers are still going to be asked to do financial planning, offer more general advice — on college savings, for example — and keep bringing in new clients. For this reason, the approach probably works best in teams. Jeffrey A. Levi, a partner at Casey Quirk and one of the report’s authors, says he would be skeptical of a solo adviser who promises to act as a portfolio manager for all clients.
The obvious downside here is that the adviser — who is making more money by managing everything alone — may not be qualified to select investments. According to a separate study by Cerulli Associates, a Boston-based research firm focused on financial services, only 4 percent of financial advisers in 2013 held the chartered financial analyst designation, perhaps the most rigorous investment designation. Some 17 percent were certified financial planners and 11 percent were chartered financial consultants.
Many of the larger brokerage firms have programs that aim to accredit advisers who want to manage clients’ money directly. Sometimes called “reps as portfolio managers,” they may not be true portfolio managers. Instead, they’re executing the firm’s strategies. For these advisers, though, being accepted into the program means they will probably also be able to keep a higher percentage of the fee revenue for themselves.
This group of advisers believes that investing broadly at lower costs through index funds and exchange-traded funds will be better for their clients.
“The adviser earns his fee through asset allocation and financial planning,” said Tyler Cloherty, a senior manager at Casey Quirk and an author of the study. “They punt on security selection and show that asset allocation is more important because it lowers your costs.”
The knock against this approach is that it is passive. Some investors want active management if they’re paying a fee. They don’t see the value in an adviser allocating their money into passive vehicles that will replicate an index.
Clients might also think they can buy index funds from Vanguard and exchange-traded funds from State Street Global Advisors on their own and save even more on fees.
These advisers put money into more sophisticated funds whose goal is total return and not beating a benchmark. (For example, if a benchmark is down 30 percent but the stockfund is down only 20 percent, the fund beat the benchmark but the client still lost money.)
Mr. Levi said a typical execution of this strategy would be for advisers to put 45 percent of a client’s portfolio equally into three different multi-asset-class investment funds — the Blackrock Global Allocation Fund, for example, invests anywhere it finds the best opportunity — and to give the rest to other managers or to do it themselves.
A concern with this approach is that the adviser may not know exactly what the client’s money has bought, beyond a fund that says it invests globally across sectors. This is where the client needs to be confident that an adviser is doing the due diligence on the various funds, or the three seemingly different multi-asset-class funds could have very similar strategies and holdings.
There is also a secondary risk akin to the one that plagues the old manager selectors who get wined and dined by firms trying to have more money sent their way: Instead of spreading money out among a number of funds all operated by one company, the adviser is putting more money into a single product.
This approach is similar to third-party outsourcing except that nothing is really outsourced. The responsibility for a broad investment approach leaves the adviser’s office but not the firm itself.
With this approach, a large firm has a central office that is doing all of the research and security selection. It also asks the advisers to funnel money its way. On the positive side, that central hub should have more knowledge than an individual adviser and be easier to monitor than a third-party firm.
There are, however, quite a few negatives, at least in terms of perception. Such a strategy is one-size-fits-all. A client could reasonably wonder what conflicts of interest are contained in the home-office approach.
It also makes the advisers fairly interchangeable: If everything they’re doing for a client comes from the home office, what’s the incentive to stay with that adviser? And do the advisers actually know anything, or are they simply parroting what they’re being told from headquarters?
Casey Quirk isn’t saying which approach is best. But the firm does make predictions as to which strategies are likely to gain market share in the next three years: Portfolio managers and third-party outsourcers will gain 8 percent of the money being managed, at the expense of the manager selector approach.
Beyond that, the firm is taking the position that this is a sea change moment for investment management. “We’re talking about the evolution of an industry,” said John F. Casey, chairman and co-founder of the firm. “It’s a relearning about investing and how it’s done and how to apply some of the things that are being done.”
As with any new approach, some things are going to work and some things are going to fail. It’s going to be up to the clients to understand what their advisers are doing for them.
Posted by: Steven Maimes, The Trust Advisor
The country’s largest banks have all comfortably beaten expectations this earnings season thanks to an uptick in global debt trading activity in June. But Morgan Stanley’s outdid its peers by reporting a net income figure which was nearly double that for the same period a year ago. Earnings for the period were, in fact, 26% higher than those for the first quarter – a period that receives a marked seasonal boost each year.
It is not difficult to see the reason for this, though, as the investment bank received a $609 million discrete tax benefit over the period which almost completely wiped out its tax expense. A better idea of Morgan Stanley MS +1.54%’s quarterly performance comes from the fact that the pre-tax income figure of just under $2 billion was 11% higher year-on-year, but 15% lower quarter-on-quarter – in line with the trend demonstrated by its peers.
The one-time tax gain notwithstanding, Morgan Stanley reported balanced results for the quarter, with continued growth in its wealth management revenues making up for the shortfall in trading revenues. The bank’s advisory and underwriting unit also saw a notable increase in fee revenues. On the flip side, the bank reported total compensation expenses of $4.2 billion in Q2 – just 2% lower than the figure for the previous quarter. As Q1 compensation figures are high due to payments of annual bonuses, the elevated Q2 figure points to higher performance-related payouts to employees.
Improving operating margins for the bank’s wealth management unit, coupled with a better-than-expected showing by its debt trading desk, prompted us to revise our price estimate for Morgan Stanley’s stock upwards from $35 to $38.
Trading Revenues Slipped After Strong Q1 Showing
Unlike its other major competitors in the U.S. – namely Goldman Sachs, JPMorgan, Citigroup C +0.91% and Bank of America BAC +0.03% – Morgan Stanley’s trading business relies more on equity trading operations than fixed-income to generate value, due to a conscious decision by the bank to scale down the latter. This fact is evident from the chart above, which shows that its equities trading desk contributes almost 30% of its total share value while the FICC (fixed-income, currencies and commodities) desk is responsible for less than 15%. The bank also kept its trading operations largely out of focus over the 2010-2012 period – choosing to concentrate its efforts on its wealth management business.
This is why investors were surprised when Morgan Stanley delivered its strongest performance in more than two years in Q1 as the equities and debt trading desks each roped in $1.7 billion in revenues. However, the bank failed to replicate the success in Q2 as total trading revenues of $2.8 billion were 18% lower than in Q1 2014 and 14% lower than in Q2 2013. It should be noted here that equities trading still managed to make $1.8 billion in Q2 2014 while FICC trading revenues fell to just above $1 billion. This trend of strong equity trading revenues is definitely a good sign for Morgan Stanley’s overall business model in the long run.
Wealth Management Pre-Tax Margins Grow
Morgan Stanley’s struggle to eke out profits from its wealth management business is no secret, with the bank unable to break the trend of single-digit margin figures for two long years in 2010-2011. But it stuck to its decision to completely buy out Citigroup’s stake in the Smith Barney operations, with this being the focus of its capital plan even in 2013. Having achieved the self-imposed 17% margin target for the business well before the 2014 deadline in Q4 2012, Morgan Stanley has seen revenues steadily outpace expenses since then. Having crossed the 19% mark for the first time in Q1 2014, operating margins for the division touched an unprecedented high of 21% in Q2. This helped the division report a pre-tax income of $767 million in Q2 compared to $691 million in Q1 2014 and $655 million in Q2 2013. Considering the fact that the bank is eyeing compensation cuts for brokers in the near future, the margin figures are only expected to improve going forward.
Posted by: Steven Maimes, The Trust Advisor
Securities America, a subsidiary of Ladenburg Thalmann Financial Services Inc. (NYSE MKT: LTS), announced a definitive agreement to acquire certain assets of Sunset Financial Services, Inc., a full-service broker-dealer, from Kansas City Life Insurance Company (NASDAQ: KCLI).
Sunset Financial Services has approximately 268 registered representatives in 48 states plus the District of Columbia, approximately $18 million in annual gross revenue and $2.4 billion in client assets. KCL Service Company will operate as a branch of Securities America for these representatives. Following the transaction, Sunset Financial Services will continue to assist Kansas City Life in issuing and promoting its variable insurance products.
“The primary objective of this agreement is to improve the services Kansas City Life provides to our customers and representatives,” said Walter E. Bixby, Kansas City Life Insurance Company executive vice president and vice chairman of the board. “This agreement caps a two-year broker-dealer search to find the best match for our customers and representatives. Securities America is well equipped to provide more robust technology, more diverse products and enhanced practice management.”
Earlier this month, Securities America announced its acquisition of Dalton Strategic Investment Services of Knightstown, Ind., an independent broker-dealer with 60 advisors and $950 million in client assets. In 2013, Securities America added 30 advisors from Eagle One Investments in Washington, Iowa. The year prior, the company transitioned 140 advisors from Investors Security Company Inc. In 2010, the company transitioned 45 advisors from Equitas and 40 from ePlanning. In 2009, Securities America acquired broker-dealer Brecek & Young Associates from Security Benefit Corp., adding 260 advisors.
“This business has become increasingly challenging for smaller broker-dealers,” said Jim Nagengast, Securities America chief executive officer and president. “We welcome the advisors from Sunset Financial Services and look forward to helping them grow through our expertise in advisory business, retirement income distribution, practice management solutions and technology.”
The transaction, expected to close by the end of 2014, is subject to customary closing conditions, including regulatory approval. Shareholder approval is not required.
About Securities America
Securities America is one of the nation’s largest independent broker-dealers with more than 1,800 independent advisors responsible for $50 billion in client assets.
About Kansas City Life Insurance Company
Kansas City Life Insurance Company (NASDAQ: KCLI) was established in 1895 and is based in Kansas City, Mo. The company operates in 48 states and the District of Columbia. For more information, please visit www.kclife.com.
Posted by: Steven Maimes, The Trust Advisor
Reuters News by Bernard Vaughn
Five former employees of disgraced investment manager Bernard Madoff should be sentenced to “significant” prison sentences of up to 20 years or more, prosecutors said in a court filing on Friday.
“The five defendants here, along with others, were the people who allowed Madoff’s fraud to succeed as wildly as it did,” prosecutors with U.S. Attorney Preet Bharara’s office in Manhattan said in the filing. “Justice requires that each receive a significant prison sentence, commensurate with their active and long-standing role in the fraud.”
A jury in March convicted Madoff’s former office director Daniel Bonventre, portfolio managers Annette Bongiorno and Joann Crupi, and computer programmers Jerome O’Hara and George Perez for helping their former boss conceal his multibillion-dollar Ponzi scheme for decades.
In the filing, prosecutors said that Bonventre and Bongiorno should be sentenced to a term greater than the 20-year sentence recommended by federal probation officers; that Crupi should be sentenced to more than the recommended 14-year sentence; and that O’Hara and Perez be sentenced to “substantially more” than the recommended eight years for each.
The five-month trial was one of the longest white-collar criminal trials in Manhattan federal court history, and the first criminal trial stemming from Madoff’s fraud.
Madoff pleaded guilty in 2009 to running the Ponzi scheme estimated to have cost investors more than $17 billion of principal, and is serving a 150-year-prison sentence.
During the trial, attorneys for the former staffers cast their clients as mere puppets of a pathological liar who bewitched them into becoming unwitting accomplices.
“They thought he was almost a god,” said Eric Breslin, a lawyer for Crupi, during the trial.
The jury disagreed, however, and found them guilty on all counts, including securities fraud and conspiracy to defraud clients.
In court filings, attorneys for Bonventre, Perez and O’Hara requested a sentence of home confinement and community service, or a short prison term. Attorneys for Bongiorno recommended she be sentenced to between eight and 10 years. Crupi’s lawyer asked the court to exercise leniency, arguing that 14 years is “nearly as bad as a life sentence,” as she would then be 70 upon her release.
Gordon Mehler, a lawyer for O’Hara, and Larry Krantz, a lawyer for Perez, declined to comment. Lawyers for Bonventre, Bongiorno and Crupi did not immediately respond to a request for comment.
Posted by: Steven Maimes, The Trust Advisor
NYT article by Tara Siegel Bernard
If you have a problem with your investment broker and you cannot resolve the dispute on your own, you probably won’t get your day in court. But you will be heard, most likely in a conference room somewhere, before a panel of arbitrators.
The moment people open a brokerage or investment account, they most likely — and perhaps inadvertently — waive their right to sue. The fine print of most customer agreements almost always contains a clause that says the customer agree to resolve any future disputes through arbitration, largely through the forum operated by the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, known as Finra.
The mandatory nature of these agreements — which are increasingly appearing in other consumer financial products as well and have been repeatedly blessed by the Supreme Court — is a frequent complaint of consumer advocates. And if you try to avoid brokers’ so-called predispute arbitration clause, you may have little choice but to stow your savings in a mattress.
While arbitration has its share of benefits — it’s much quicker and cheaper than litigation — some securities lawyers who represent investors argue that they would get better results before a jury of their peers. But other legal experts point out that many investors wouldn’t have a chance to be heard if it weren’t for arbitration; federal securities laws, along with some states’ laws, are not always investor-friendly.
“From the investor’s perspective, the great advantage of the Finra model is that arbitrators might be able to find a remedy for investors that is not supported by law,” said Barbara Black, a professor at the University of Cincinnati College of Law.
But it doesn’t always work in investors’ favor, according to securities lawyers. And on Thursday, Finra acknowledged that its arbitration process, which has come under recent criticism, could be improved when it announced a 13-member task force to look into improving transparency, impartiality and efficiency.
So how do investors fare in arbitration right now? Last year, about 18 percent of customer cases, or 499 claims, were decided in arbitration. Customers received monetary or nonmonetary damages in 42 percent of those cases. But 77 percent of customer cases — including settlements between the parties and arbitration awards — resulted in some sort of monetary or nonmonetary relief (such as canceling a stock purchase and getting money back).
Investors’ lawyers say, however, that even a $1 win would be considered an award so the statistics don’t necessarily provide the full story. “It is seldom that you see a home run,” even on stronger cases, said Robert Rex, who typically represents retirees in Boca Raton, Fla.
“One of the big deficiencies in the process is the quality of dedication of the arbitrators,” Mr. Rex added. “You can have some that are very smart and they try to do the right thing. And then you have people in there who are career arbitrators, and know if they give a big award they won’t get on another case” because the brokerages will not choose them to be on their panels.
Finra and some academics contend, however, that the $400 a day arbitrators earn isn’t enough of a financial incentive to create a bias.
The leading reason consumers pursue arbitration is because of claims of a breach of fiduciary duty, which is the legal way of saying the broker did not act in a customer’s best interest. There were nearly 1,900 of those cases last year, according to Finra, followed by lesser numbers of cases involving claims of negligence and misrepresentation. Problems involving stock investments were the most frequent, followed by mutual funds and variable annuities.
Investors are often surprised at how the process works. Arbitration is considered an “equitable forum,” for instance, which means arbitrators don’t have to strictly apply the law. “The court applies the law to the facts and makes a decision,” said Jonathan Morris, chief legal officer at Dynasty Financial, who has served as an arbitrator. “In arbitration, they might not rule all for one side or another. The investor can be partially right and partially at fault and arbitrators can split the difference.”
Depending on the circumstances, the lack of a legal standard can help or hurt your case. Someone like Phil Ashburn, whose case was arbitrated last year, may have done better if his case had been heard by a jury, at least by his lawyer’s estimation, because the laws in his home state, California, are more favorable for investors.
Mr. Ashburn, a former phone installation and repair technician, said he pursued his claim after an “adviser” who visited his company offices, and later his kitchen table, urged him to take a company buyout instead of a $1,500-a-month pension. He was 51 at the time, and took the buyout.
The adviser then invested the $355,000 he received into a high-cost variable annuity. Mr. Ashburn needed income right away, so she recommended that he take advantage of a tax rule allowing penalty-free withdrawals before retirement age. He took out about 9 percent of his money each year. “She kept stressing the fact that you are never going to go broke,” said Mr. Ashburn, now 63 and working as a part-time dog trainer out of his Pleasanton, Calif., home. “And I believed her. It was my ignorance.”
He filed his case in 2009, seven years after he met with the adviser, and went to arbitration early last year. He, along with five of his co-workers, lost, though the opposition had to pay the arbitration fees.
Mr. Ashburn said he didn’t feel like he had received a fair hearing because the head arbitrator was hard of hearing, while the two other arbitrators struggled to stay awake. He said he also overheard the head arbitrator in the lobby laughing about the facts of the case.
Legal experts say that most arbitrators are well-intentioned, though Finra’s training program needs to be more rigorous. And Finra did recently improve the impartiality of the panels: Until 2011, the panel of arbitrators included one industry arbitrator and two “public” arbitrators, with no industry ties. Consumers can now request an all public panel. Finra also proposed a rule to make it more difficult for people with former industry ties to be listed as public arbitrators.
Still, Melinda Steuer, Mr. Ashburn’s lawyer, said that the makeup of a panel played a large role in the outcome of the case. “In a jury system, there are more protections, including the judge, the law and the right to appeal,” she said, noting the virtual impossibility of appeals in arbitration. But she also has had cases in which the arbitration rules worked in her clients’ favor, she said.
“There is much more room to plead a whole range of alleged violations in a Finra statement of claim,” said Linda Fienberg, president of Finra’s dispute resolution forum.
Whether investors win or lose, they rarely know arbitrators’ reasoning because they don’t have to provide any explanation. Investors can request one, but will receive it only if the opposing party also agrees; legal experts say that typically doesn’t happen. (Awards, however, are made public on Finra’s website.)
“Brokerage firms love the confidentiality,” said Andrew Stoltmann, a securities lawyer. “We have these product cases where brokerage firms create these really complicated defective investment products and in arbitration, it’s all kept quiet.”
The lack of transparency is a frequent complaint. “If the vast majority of the cases are being decided in arbitration, they are deciding the law,” said Mercer Bullard, an associate professor at the University of Mississippi School of Law. “The problem you have now is you have so much of the law being decided in secret we don’t know what the law is. There is no accountability.”
The Securities and Exchange Commission, as part of the financial regulatory law known as Dodd-Frank, was given the authority to adopt regulations to ban, limit or condition mandatory arbitration clauses, but consumer advocates do not expect the S.E.C. to push forward.
For people who decide to pursue arbitration, legal experts suggest finding a lawyer with significant experience in Finra arbitration. But many lawyers, who typically work on a contingency basis, do not take on claims with less than about $150,000 of losses.
Claims under $50,000 are typically resolved through a simplified arbitration process in which written complaints are submitted and decided by one arbitrator (Finra’s website has a list of clinics that offer help for smaller investors). The problem here, legal experts say, is that a lot of these cases turn on credibility, which doesn’t necessarily shine through on paper.
The Finra task force might start with figuring out ways to make the process more equitable for these smaller investors, for whom every last dollar counts.
Posted by: Steven Maimes, The Trust Advisor
Reuters news by Jed Horowitz
Bank of America’s continuing investment in its Merrill Lynch wealth management business caused expenses in its global wealth sector to grow more quickly than revenue in the second quarter, the company said on Wednesday.
The accelerating expenses and a string of declines in new money under management caused profit in the Global Wealth and Investment Management sector to fall 4.8 percent from a year ago to $724 million, the company said.
The sector, the second-smallest of Bank of America’s five businesses, focuses on selling investment products and financial planning services to wealthy individuals and their families. Merrill Lynch and its 13,845 financial advisers generated 83 percent of the sector’s total revenue, with the rest coming from the bank’s U.S. Trust private banking unit and money-management services within the bank’s branches.
The high costs and sluggish asset growth at Merrill contrasts with a report rival Charles Schwab Corp issued on Wednesday. The firm that once focused only on gathering commissions from self-directed investors said the $22.7 billion in new assets it gained in the quarter was the highest in six years, while net income jumped 27 percent from the year-ago quarter.
Merrill Lynch boasted that its client balances reached a “milestone” $2 trillion by quarter end due to new assets and stock market advances. But Schwab ended the quarter with $2.4 trillion in client assets.
Unlike Merrill, Schwab obtains the bulk of those assets from independent investment advisers who direct clients to place assets with and make transactions through the discount broker.
Executives at Bank of America made no apologies for the performance of Merrill and its other wealth management businesses. New assets under management, $12.0 billion, were the lowest in four consecutive quarters but were 74 percent higher than in the second quarter of 2013.”We were pleased with yet another strong quarter of long-term AUM flows of $11.9 billion,” said a spokesman.
The bank said it has had 20 consecutive quarters of “positive” flows into client accounts and continues to progress in its core goal of selling more mortgages and portfolio-secured loans through its brokerage force. Loan balances in the wealth management business grew $4 billion during the quarter, to $123 billion, up 7.4 percent from a year earlier.
But costs in the wealth businesses nevertheless grew 5.4 percent, to $3.3 billion, while total revenue inched up only 2.0 percent to $4.59 billion.
The discrepancy between revenue growth and expense growth, known as “operating leverage,” hurt profit at Merrill, although bank executives said they are investing for long-term growth. Profit from services for the wealthy is much more stable than other sectors such as investment banking and corporate lending.
“We have made some near-term investments, including training programs and hiring people in the branches,” BofA Chief Executive Brian Moynihan said in a conference call with investors. “But (operating leverage) is something we have to monitor closely.”
Merrill Lynch paid out more in bonuses and other compensation to brokers than a year ago and has poured $100 million into combining a crazy-quilt of money-management and investment choices for investors into a single platform called Merrill One. The program will increase broker productivity, create efficiencies for clients and limit the ability of brokers to offer reduced commissions to top clients, the company said.
Merrill Lynch wealth management, like most large U.S. brokerage firms, has been trying to shift clients from transaction-based commission accounts to fee accounts that charge the clients a percentage of their account assets. As of the end of June, 46 percent of the firm’s advisers had at least half of their client assets in a fee-based relationship, up from 45 percent three months earlier.
At Schwab, about 50 percent of clients receive a fee-based advisory service, the company said.
Asset management fees at Merrill Wealth in the second quarter grew 16.6 percent from a year ago, to $1.5 billion, while revenue per average broker – measured by fees and commissions collected by each – was unchanged from the previous quarter at $1.06 million. Asset management fees at U.S. Trust grew 9 percent from the first quarter to $413 million.
As part of its growth policy, Bank of America is allowing Merrill to reverse years of shrinking its brokerage force. Merrill added 120 brokers during the second quarter, although its 13,845 advisers still number 327 fewer than a year ago.
Posted by: Steven Maimes, The Trust Advisor
Bloomberg News by Giles Broom
Assets under management at the Zurich-based lender rose 15 percent to $1.97 trillion, cementing its No. 1 spot in the ranking by Scorpio Partnership, a London-based consultancy. Bank of America Corp. (BAC) was second with $1.87 trillion, followed by Morgan Stanley (MS), Credit Suisse Group AG (CSGN) and Royal Bank of Canada (RY), all unchanged from a year earlier.
It was “a healthy year for wealth managers across the industry,” Sebastian Dovey, founder of Scorpio Partnership, said in an e-mailed statement today. “Good performance in the financial markets contributed to assets under management increases, as did strong net new money.”
The wealth-management industry oversaw $20.3 trillion at the end of December, compared with $18.5 trillion a year earlier, Scorpio Partnership said in the statement. The companies surveyed by Scorpio accounted for $14.9 trillion of the total.
The top 209 private wealth managers saw client assets advance 20 percent on average last year, after securities investments rallied and millionaires handed over more money to private banks.
HSBC Holdings Plc dropped two places to eighth position after pulling out of markets it deems incompatible with its strategy. Julius Baer Group Ltd. (BAER), the third-largest Swiss wealth manager, climbed three places to 12, after the acquisition of Bank of America’s non-U.S. Merrill Lynch businesses helped boost managed assets more than 40 percent.
Companies surveyed reported an average 11 percent gain in income, while expenses surged 14 percent, increasing the average cost-to-income ratio to 83 percent, from 80 percent.
Scorpio Partnership said where possible it excluded deposits, loans and client assets held in custody — versus those being managed — from its annual ranking.
2013 rank by assets under management – ($ billions)
1 UBS AG 1,966.9
2 Bank of America Corp. 1,866.6
3 Morgan Stanley 1,454
4 Credit Suisse Group AG 888.2
5 Royal Bank of Canada 673.2
6 BNP Paribas SA 395.1
7 Deutsche Bank AG 384.1
8 HSBC Holdings Plc 382
9 JPMorgan Chase & Co. 361
10 Pictet & Cie. Group SCA 338.1
11 Goldman Sachs Group Inc. 330
12 Julius Baer Group Ltd. 282.5
13 Barclays Plc 233.2
14 ABN Amro Group NV 231.7
15 Northern Trust Corp. 221.8
16 Wells Fargo & Co. 218
17 Cie. Lombard, Odier SCA 198
18 Banco Santander SA 196.5
19 Bank of NY Mellon Corp. 185
20 Credit Agricole SA 182
Posted by: Steven Maimes, The Trust Advisor
Opinion from: The Client Driven Practice by Stephen Wershing
Should you try to retain your clients’ assets when they pass away and leave those assets to the next generation by recruiting your clients’ kids now? My recommendation, and Michael offers the same advice, is no.
We all know that it is far easier and cheaper to retain a client than it is to obtain a new one. And that, of course, is the thinking behind developing relationships with your clients’ kids. Have your clients bring them in, start a relationship with them while they are still young, and when they inherit their parent’s assets the portfolio will stay with you. On the surface it makes a lot of sense. But dig into the idea even a little bit and marketing issues become apparent.
Your clients’ kids are probably not attracted to your value proposition. What differentiates you from other advisors is not what those kids want. Many of the advisors I work with have sophisticated financial planning services and high account minimums. If you run a family office with the feel of a private bank, that’s not what those kids need or are looking for. They want Oxygen Financial – a firm designed for their generation.
The analogy Kitces makes is the nursing home that attempts to replace the residents who pass away by making the facility attractive to the residents’ kids. But, the kids don’t want to live in a nursing home. There is a big enough stream of people getting to the age where it becomes attractive to sell their home and move into an elder care community to keep the facility at capacity for a long way into the future. It makes a lot more sense to work on attracting those people then to replace their current residents with the next generation.
Some firms are utilizing younger associates to service their clients adult children. In some ways it is a good match. That next generation is closer in age to the associate and their needs do not require the sophisticated planning skills of a partner. But there is still a problem: those younger associates will not be delivering your firm’s value proposition to that next generation. A successful referral marketing strategy is enhanced when every client of your firm gets the same nature and quality of service. When some clients, whose parents happen to be clients of the firm, get “planning lite” it dilutes your brand. When they talk with their friends about what you do for them it is not what you want to be known for. You don’t want referrals from the kids.
Regardless of your target market, there will likely be people in or entering that niche for years to come. Even if you work with people transitioning into retirement, members of the baby boom generation will be hitting that retirement age in very large numbers for at least the next 15 years. You want referrals to those people, not to the next generation down.
Now it may be that you have not been attracting many new clients or referrals over the past few years. And that makes you a lot more nervous about your clients passing away and the assets leaving your management. But that is still not a good reason to attract their kids as clients. The better response to that would be to create a successful business development discipline as a strategic priority.
You may still feel you must have a service offering for your clients’ children. I hear many participants at client advisory board meetings express a strong desire to be able to bring their kids in to get started. If you feel you must have something to offer them, create something different. One firm I work with is setting up a subsidiary with a similar but separate name, separate staff, and an explicitly different service mix. Scaled-back planning. Fewer face-to-face meetings. If a client of that division becomes successful or inherits their parents wealth, they can “graduate” to the main firm. As advisors in the subsidiary gradually gain more knowledge and experience, they may get promoted to the main firm. But it is separate by design, and established to answer the demands of their clients to provide a resource for their kids without contaminating the firm’s brand.
If your clients want to introduce you to their kids or if you feel like you need to bridge to that next generation to retain assets, think twice. You might be making it harder to attract your ideal clients.
Posted by: Steven Maimes, The Trust Advisor