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Commentary: The Perils of Going "Where the Money Is"


By Emily Thornton

David Walsh's $100 million fortune has long been the object of Wall Street's desire. For years, the president and chief operating officer of telecom company Global Crossing Ltd. (GX) kept a Prudential Securities Inc. account but resisted brokers' pitches to handle all of his money. Then, when the market began to crater last spring, he changed his mind. Now, Walsh relies on Merrill Lynch & Co. (MER) for advice on everything from taxes to hedging products designed to help preserve his wealth. "The more wealth you create, the more risk you have," says Walsh.

That's music to Wall Street's ears. With traditional money-spinners such as initial public offerings and mergers in the doldrums, banks and brokerages are desperate to bolster falling revenues. With Willie Sutton-style logic, they're going where the money is, scrambling to offer profitable fee-based wealth-advisory and management services to multimillionaires like Walsh. It makes sense: A mere 6% of households controls 60% of the nation's $18.6 trillion in investable assets, according to Chicago consultant Spectrem Group.

But the dive for cash is turning into a Darwinian struggle. Lehman Brothers (LEH), Merrill, Morgan Stanley (MWD), and others are all shooting for clients with $10 million or more to invest. It's not hard to fathom why. "It is one and a half times more profitable to serve the very high end of the wealth market," says Maria Elena Lagomasino, co-head of J.P. Morgan Chase & Co.'s private bank.

Trouble is, just 92,000 households have $10 million in liquid assets, says researcher VIP Forum. So there may not be enough to go around all of the firms now rolling out ambitious plans. Advising on such complex portfolios is also a tricky market. Few private banks, traditional managers of old money, have carved out even a 5% share. "It's getting very competitive," says Rebecca Elrod, vice-president for private-client services at brokerage A.G. Edwards & Sons Inc.

TEAM PLAYERS? Wall Street will need to change its culture. Brokers have mostly worked alone on commission. Now, they are being hastily retrained as team players earning fees. Morgan, Merrill, UBS PaineWebber, and Prudential are all reorganizing their brokers into teams to handle larger portfolios. This rush to suck up to the rich could lead to lesser service for those who don't qualify. J.P. Morgan Chase (JPM) now focuses on advising clients with $25 million to invest, shelving recent plans to reach out to more mere millionaires. Lower down the scale, both Morgan Stanley and Merrill Lynch are looking for cheaper ways to service clients with less than $100,000.

Catering to the super-rich may sound like a no-brainer. But it's not going to be an easy sell. Thornton covers investment banking.


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