The boom in wealth management
by Joseph SantangeloInvestment group Merrill Lynch and consulting company Capgemini recently calculated that there are 8.7 million millionaires worldwide. A large number live right here on Cape Cod.
Thousands of high net worth individuals call Cape Cod home or have vacation homes here. The number reporting wealth exceeding $1.5 million should rise from 5,800 to 7,700 by 2010. Those households with $1 million to $1.5 million of wealth are expected to increase from 6,200 to 8,000.
To service the wealthy and near wealthy, financial companies from one-person boutiques to international giants are competing intensively across Cape Cod to provide what are now called wealth management services. Firms of all sizes and shapes are reorganizing staffs and stepping up marketing efforts to reach this important demographic group.
Peter Holden, vice president and former resident director of Merrill Lynch in Hyannis, boasts that “this will be a flagship office in the firm. What you will see there is absolutely state of the art technology. This will take us right to the pinnacle.”
What makes the Cape ripe for such major expansion?
The two biggest factors: Our booming retirement and pre-retirement population, plus the predominance of small businesses.
Many wealth management firms want both to serve the business and personal side together – especially on Cape Cod where more than nine of every 10 businesses are defined as “small.” In these cases, business assets and personal portfolios are highly interdependent.
Merrill Lynch, for example, will combine portfolio analysis with helping a business lease bulldozers. “We are very active in business services, such as cash management, employee benefits and financing,” Holden said.
He’s not alone. Banks from Cape Cod Five to Sovereign to Community are zeroing in on small businesses at the same time as they are enhancing their wealth management services.
Alison Benz Czuchra, senior vice president of TD Banknorth Wealth Management Division, heads an office of 28 professionals, one of the largest on Cape Cod. Her strategy – a holistic and multidisciplinary approach to client services, including investments, insurance and tax preparation – is becoming a necessary model for competitors of all sizes. Smaller, more specialized firms are establishing strong relationships with complementary businesses to meet the diverse and integrated needs of their clients.
Pearson Financial Services in Dennis, for example, recently moved into much larger quarters to accommodate not only Seth Pearson’s financial management business, but also the separate legal and estate practice of Kathleen Fowler – so their clients could have a holistic support system.
Says TD Banknorth’s Czuchra: “We really think the [holistic] approach makes sense and covers the full gamut of client needs. We note the huge increase in retirees with significant wealth and the number of people on the Cape who have made significant wealth through real estate holdings and other ventures, and that’s the market we’re trying to capture.”
TD Banknorth also reaches out through seminars with the Cape’s many nonprofit organizations to help manage their finances. It also operates the largest insurance agency in New England.
Cape Cod Five Cents Savings Bank, which has the largest deposit share on the Cape, with more than $1 billion, last year established its wealth management presence in a stately $3 million building adorned with paintings on loan from the Cape Cod Museum of Art and paneled conference rooms, located on an impeccably landscaped site in Orleans.
Warren C. Marsh, senior vice president and chief wealth management services officer, touts the strength of Cape Cod Five’s community franchise, varied services for different wealth levels and the quality of its staff. They also do house calls.
“We assign a particular manager and trust officer to every account,” he said. “We even provide bill paying for customers, help customers balance checkbooks and allow older folks to remain independent as long as possible. When one client’s smoke alarm was going off, she called the trust officer, who went over and found it was full of spider webs.”
Through trust offices and bank branches, Cape banks offer a range of investment services. Cape Cod Cooperative Bank operates an investment management arm called Cape Cod Financial Services. Community banks handle securities transactions through third-party trading firms such as Connecticut-based Infinex Investments Inc. Citizens Bank offers securities and investment services through its own affiliate, CCO Investment Services Corp.
Jon K. Henderson, investment executive at Cape Cod Cooperative Bank’s Cape Cod Financial Services in Sandwich, said, “People like the convenience of going to the bank and covering all their needs at once. It’s nice to be able to see the big picture.”
William “Bo” Murdoch, first vice president, and wife Jayne Scanlon, an attorney, are two of eight brokers at the Osterville branch of 174-year-old brokerage Janney Montgomery Scott. They specialize in comprehensive financial planning too.
“When we meet people, we want to get their background, to be part of the family, so to speak. How much is their mortgage, what other loans do they have and what type of life insurance? Many times, they have the opportunity for older insurance policies to be reviewed and replaced. One client with large cash value in a life insurance policy was able to take money out, buy an RV [recreational vehicle], roll the policy over, get a higher death benefit and not pay any higher premium. We look at the whole package. We love Janney because they do not have their own product. We do not offer insurance from Janney; we do not offer the mutual fund of the month. It is very low pressure, which is the way we like it.” For them, marketing also is low key, through personal referrals and volunteer community service.
Marketing of wealth management services is intense and varied, aimed at residents and second-home owners. Albert Makkay of Janney Montgomery Scott in Osterville reaches upscale, educated viewers with cable television advertising on channels such as The History Channel. Pearson of Pearson Financial Services in Dennis and other financial advisers offer free seminars. Merrill Lynch hosts 24 seminars a year, in locations such as the Cape Cod Museum of Natural History and Cape Cod Museum of Art.
Others companies use direct mail, referrals and professional contacts to target Cape Codders with portfolios of $1 million, $500,000, $100,000, $50,000 or in some cases as little as $10,000. For the not yet wealthy, the Cape’s largest credit union, First Citizens Federal Credit Union, is marketing a package of services called the Financial Makeover.
Investors have the option to buy fee-only advice, purchase investments for a commission or obtain professional management of an entire portfolio for an annual percentage of assets under management. Portfolio management can be discretionary, with managers making decisions without prior consent of the investor, or non-discretionary where the investor maintains control.
Managed accounts
Since relaxation of the historic Glass-Steagall Act that put a wall between banking and securities after the Great Depression, most banks, brokerage houses and boutique firms now package multiple investment services under one roof. Many employ staff who are trained and licensed in securities, insurance and law. Most use sophisticated financial planning software.
Services can be bundled in wrap accounts (including brokerage, advisory, research, consulting, management and others). Wrap fees can range up to 3 percent of total assets, but competition is driving down fees on large portfolios to about 1 percent of overall assets. That could mean an annual fee as low as $10,000 for a $1 million portfolio. Usually paid quarterly, wrap fees are fixed and predictable, rather than based on the number of commissioned transactions that are generated. Separately managed accounts may include a portfolio of stocks, bonds, mutual funds and commodities targeted to the client’s investment style.
Regardless of size or structure, wealth advisers say they stress personal service to the client, assess his or her overall income needs, make recommendations and call upon experts to provide specific services. Independents say they put the best interests of the clients first and do not sell preferred company products or services. The financial giants promote their vast in-house expertise, global research, investment tools and company longevity. Traditional banks emphasize hometown roots and support for local community causes.
In a law firm setting, J. Christopher Boyd established Asset Management Resources to complement the family’s Boyd & Boyd law firm in Centerville. “The products and services in many ways are a commodity today,” he said. “What is differentiating is the level of service. Will it be the same person that the client is dealing with next month or next year? My client gets my personal expertise.”
If not all services are located in-house, advisers have access to financial partners, third party affiliates or other sources to purchase up to 30,000 worldwide stocks, 8,000 U.S. mutual funds, government or corporate bonds, annuities and insurance policies or to provide guidance on legal and tax matters. Investors still must consult a private attorney to prepare documents such as wills and trusts.
In all, the growing Cape Cod financial sector employs about 5,000 people. More than 600 financial establishments, planning consultants, financial service firms, banks, stock and bond brokers and others do business on the Cape.
Assessing investment products and services
Amid so many products and providers, a common thread emerges. Depending on age, financial goals and risk tolerance, investors are advised to balance a portfolio with at least some portion in U.S. stocks. Over long periods, planners note that earnings from equities (though volatile in recent years) have outpaced fixed income instruments such as bonds, as well as cash holdings. Investors now have life expectancies into their 80s and 90s, and they should plan for investment growth and income to cover up to 30 years of retirement. Retirees also need growth to cover future inflation.
Purchases of individual stocks are not often recommended for individual investors, unless well diversified. Advisers point out that investors can participate in the market by owning shares of stock mutual funds, though mutual funds vary enormously in fees, expenses and performance.
Many mutual funds turn in less than average performance, and most underperform compared to the stock markets as a whole. Nonprofit fund families Vanguard and TIAA-CREF are said to carry the lowest fee structure. Depending on client age and risk tolerance, the ratio of equity to fixed income assets could be 80/20, 50/50, 20/80 or other combination. A Rule of 100 subtracts your age from 100, indicating an 80-year-old would invest 20 percent in stock funds and a 60-year-old would hold 40 percent.
An alternative avenue into the stock market is a wide variety of exchange traded funds. First introduced on the Toronto exchange in 1989, ETFs are baskets of stocks that mimic the markets or particular sectors of the market. Though some are more risky than others, low-fee exchange-traded funds have advantages of cost efficiency and tax efficiency. Usually linked to a particular stock market index, there is little buying or selling of stocks within a specific fund. So, fees are low and annual tax consequences are small. Because they are purchased on exchanges like stocks, however, exchange-traded funds do require payment of a commission, unless included in a wrap account.
For the fixed income side of a portfolio, brokers also can arrange for the purchase of corporate, municipal and U.S. government bonds. Investors can have access to Treasury bills, notes and bonds through the government’s TreasuryDirect Web site (www.treasurydirect.gov). The U.S. Treasury also sells inflation protected securities or TIPS, with rates that increase with inflation.
Also, an alphabet soup of tax-advantaged investments, such as IRAs, SEPs and 401(k)s, is available for working investors who are still generating earnings income, which can be partially sheltered from taxation – and therefore can grow faster – until withdrawn after retirement.
Due diligence
Before investing, you may want to check out your adviser and ask how he or she is compensated. The National Association of Securities Dealers recommends consulting its website to help make informed financial decisions. It includes a Mutual Fund Expense Analyzer, Investor Alerts, an NASD Broker Check and a Complaint Center. Go to www.nasd.com/InvestorInformation/index.htm.
The U.S. government’s Securities and Exchange Commission invites investors to check out brokers and investment advisers. Go to www.sec.gov/investor/brokers.htm.
Investors can view comparative analysis of stock fund performance compiled by firms such as Morningstar. Mutual fund rankings also can be found at free Web services such as YahooFinance.com.
Originally published in the Sept/Oct 2006 issue of Cape Business.
Joseph Santangelo Joseph Santangelo has been a statehouse bureau chief, a corporate executive and currently works for the Connecticut Legislature. 
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