“The Last Gentleman on Wall Street”

Spooky coincidence:

On the back of the business section of today's New York Times, a full-page age ad from Brown Brothers Harriman with a clever headline – "Should you talk with your children about your wealth before they Google you?"

Inside, Robert  D. Hershey Jr.'s obituary for one of Brown Brothers most celebrated former employees: Richard Jenrette.

After Harvard Business School, Jenrette "joined Brown Brothers Harriman, the very model of an old-time Wall Street firm, whose oak-paneled ambience included roll-top desks, a large coal-burning fireplace and oil paintings of the founders. He spent two years there as a portfolio manager — one client was Greta Garbo — before leaving at 30 to start his own firm…."

Jenrette's partners were two Yalies he met at B school – Bill Donaldson and Dan Lufkin. Their firm, Donaldson, Lufkin and Jenrette, was "the first Wall Street securities firm started from scratch since the early 1930s." DLJ specialized in smaller growth stocks and in the 1960s that was a road to riches.

Donaldson and Lufkin eventually left the firm. Jenrette sold to Equitable Life and devoted his extremely high net worth to his passion for historic preservation. Several remarkable houses he restored and refurnished are held in a non-profit he founded, Classical American Homes Preservation Trust.

"Gone With the Wind" inspired Jenrette's love of antebellum houses. He must have purchased and preserved more white columns than any other American. Some may be seen on the Roper House in Charleston, South Carolina, where he died.

Roper House

Jenrette never married. His remarkable collection of houses, he said, were like his children. 

Who’s Stealthier?

Who disrespects the public more? The private sector or the politicians?

Private sector: Years ago an online brokerage operation promised me free trades for life. Cool! Despite mergers and management changes, I'm still getting commission-free trades. But I began to notice that each trade was costing me a $2 "fee" for processing or whatever. By last year the fee had doubled, to $4 per trade. This year? Six dollars.

Politicians. This morning's news tells us the Democrats still seek to phase out itemized deductions. Republicans will agree to this, the theory goes, because voters won't  notice that the phase-out increases some people's income taxes. The Wall Street Journal terms it A Stealth Tax Hike.

Can we trust anybody these days?

Different Regulators for Different RIAs?

Unlike brokers, Registered Investment Advisers are held to a fiduciary standard. Generally, they're regulated by the SEC. Congressman Bachus of Alabama has a different idea, Investment News reports. He's added an amendment to a bill being marked up in the Financial Services Committee that would shift regulation of Registered Investment Advisers associated with broker-dealers to FINRA.

Is it a good idea to take regulation of some advisers away from the SEC? No, was my snap judgment. Then I remembered who was supposed to be regulating Madoff.

Will Banks Miss Their Brokers?

Citigroup's decision to convert their in-branch brokers to fee-based advisers (see preceding post) draws approval from Reuters' Matthew Goldstein.

Will other banks bow to threats of legislative or regulatory action and follow suit? To borrow a phrase from one commentator, are "guys who are transactional" an endangered species?

Such a change could impact bank earnings. As mentioned here last year, bank brokerages have been highly profitable. That's partly because the mass affluent tend to be less sophisticated, less cost-conscious. As Robert Frank notes in The Wealth Report, millionaires get the better deals.

18,500 New Fiduciaries?

Could Smith Barney's 18,500 brokers (a.k.a. "financial advisors") suddenly turn into fiduciaries? The Wall Street Journal reports on the prospect:

Buried in President Obama's proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher "fiduciary" standard that would compel them to place their client's interests ahead of their own.

Top “Wealth Manager Brands”

Courtesy of Bessemer Trust, here's the Luxury Institute's 2009 survey of top wealth manager brands.

"Brand." When that term stops being overused, the marketing of financial services to the well-endowed will be better off. Meanwhile, note that BofA's US Trust "brand" is fading but still ranks higher than BofA's Merrill Lynch "brand."

A New Herd For Wall Street

Shout out a welcome to Wall Street's new wire-house colossus, with over 18,000 brokers. Morgan Stanley Smith Barney has been formed sooner than scheduled by Morgan Stanley and Citigroup.

In addition to offering investment products, the joint venture will be "equipped for advanced financial planning," including estate planning. But please heed the footnote:

"Morgan Stanley Smith Barney and its Financial Advisors do not provide tax or legal advice."

Broker? Private Banker? Hard to Tell

Citigroup is spinning off its full-service brokerage, Smith Barney, into a joint venture with Morgan Stanley. Sounds fairly straightforward. Yet as this post on Seeking Alpha suggests, the line between private banker and full-service broker isn't exactly clear:

Citi’s private bank (focused on people with net worth of $10 million and up) and brokers who are housed within Citibank branches will not be part of the joint venture. Morgan Stanley’s (MS) franchise focusing on high net worth individuals, analogous to the Citi Private Bank, will indeed be part of the joint venture.

* * *

Citi…complicates its own dismantling with respect to the Smith Barney transaction because, well, it’s not easy to answer the question, “Which advisers are part of Smith Barney?” For years Smith Barney has been hiring away brokers who focus on high net worth individuals but didn’t want to be part of the private bank–these teams had a structure and style all their own. These teams also use the private bank’s platform and infrastructure. Where do these brokers go? With the joint venture or to the private bank?

Can the Broker and the Fiduciary be Friends?

Brokers work the sell side; asset managers in bank trust departments represent the buy side. Never the twain shall meet?

Don't be too sure. As brokers seek more fee-based business, via managed accounts and such, the gap is narrowing.

This Bank Investment Consultant report on bank "book brokers" spotlights top producers who mostly emphasize fee business. Many are affliliated with Sun Trust, including Tom Gletner:

Gletner became the poster child for Sun Trust's team approach, which enables him to bring in private bankers, trust and estate officers, insurance experts, financial planners and lenders whenever he meets with a new client.

A. G. Edwards Redux?

A recent post here expressed regret that Wachovia had ditched the A. G. Edwards name when it acquired that brokerage firm. Now Citigroup is buying Wachovia's banking operations but not Wachovia's brokerage or fund units.

Will we get to see that A. G. Edwards name again?

Paine Webber Redux?

Reeling from derivatives losses and tax-shelter scandals, UBS ponders breaking itself up. At Investment News, Evan Cooper wonders if that could mean the return of Paine Webber, the venerable wirehouse UBS absorbed not that many years ago. Cooper also offers another reminder that in the financial industry, big can be bad:

The UBS problems just prove the hubris inherent in the idea of a worldwide, universal financial institution that can lend, underwrite and advise, all under one roof. Sure, you can get such creations to work, but why? The gigantic, ponderous beasts aren’t necessarily all that profitable and can create problems of international proportions.

In finance, as in so many businesses, smaller is often better. In the case of UBS, it’s why selling or spinning off the U.S. retail business (that is, PaineWebber) could work.

Bank Brokerage: Where the Money Is

"Don't like our CD rates? Step right over here and let that nice saleperson sell you an annuity."

Banks get plenty of bad press for selling expensive annuities to seniors who need them like they need holes in their heads. In The Wall Street Journal, Jeff Opdyke told how bank brokers ripped off his grandmother and tried to rip off his mother.

Will the Opdyke family turn to those banks for trust or other wealth-management services? Don't think so.

So why do banks persist in dragging customers into close confinement with bank brokers?

Here's the answer, from the appendix to the Rand study of brokers and advisers mentioned in an earlier post:

Bank-owned brokerage firms have much higher profit margins than do nonbank brokerage firms (28 percent versus 14 percent, pretax, as of 1999). A bank-owned brokerage firm has ready access to existing clients, which lowers marketing costs, and, due to easy customer access, representatives are paid less, which lowers compensation costs. Bank-owned brokerage firms also focus on higher-margin products, such as annuities and funds, as opposed to stocks and bonds. Moreover, the bank-owned brokerage firm is reported to offer a narrower product selection with less research, all of which reduces expenses.

Silos, Private Brokers and Farmers

On March 3, Sallie L. Krawcheck, Citi’s head of wealth management, announced that Smith Barney and Citi's Private Bank would restructure, from “silo-first” to “client-first.” This post on a NY Times blog (which includes the text of Ms. Krawcheck's internal memo) suggested the move could lead to a culture clash:

“Citi had moved from a strong U.S. Private bank, to a more commoditized one, to clearly one that favors the brokerage model,” said Allan Starkie, a private banking industry recruiter at Knightsbridge Advisors. “They are taking private bankers and turning them into brokers.”

Some critics deemed Ms. Krawcheck's "silo" reference dated. As The Wall Street Journal noted almost a year ago, the jargon crowd has moved on. The new in-term is "bucket:"

[T]he humble bucket has become a trendy fixture of corporate boardrooms and PowerPoint presentations. It is pushing aside other business-speak for describing categories or organizational units, such as silo and basket.

But wait! Ms. Krawcheck has history on her side. Check out this 1958 ad from Citi's predecessor, First National City Bank. The trust and investment people were kept in a silo called City Bank Farmers Trust Company!