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This story originally appeared in Family Wealth Report and is republished here with permission.For most financial services firms in the wealth business, targeting prospects with investable assets of $5 million is hardly going “down-market.”
But JP Morgan Private Bank isn’t like most financial services firms.
It is, arguably, the premier private bank in the US. It is part of one of the country’s (and world’s) biggest, and most successful, banks.
And its client roster, assets under management ($852 billion globally; $530 billion in the US) and investment track record are the envy of the industry.
JP Morgan isn’t perfect. Its enormous size cuts both ways when it comes to competing against boutique competitors for the business of the ultra-wealthy accustomed to being coddled.
Its reputation for emphasising proprietary products rubs many the wrong way. And it’s never a good thing when your parent company loses billions of dollars in a widely publicized trading scandal.
Still, most competitors in the high and ultra high net worth market would trade places with JP Morgan in a heartbeat.
And next year, they may have even more reason to do so: the private bank is going to be making a major push to capture more market share on the lower end of the wealth management spectrum (by private bank and family office standards), targeting individuals and families with $5 million to $30 million in investable assets.
HNW market “underserved”
“The HNW business, which we define as between $5 million and $30 million, is very important,” said John Duffy, the chief executive of JP Morgan’s US Private Bank. “We think it has been underserved for a long period of time, and with around 1.5 million households and $5 trillion in net worth, we think it’s a spectacular growth opportunity.”
The way Duffy sees it, the stars are perfectly aligned for the strategic expansion of the private bank’s business: he’s convinced the American economy is well on its way to a full-throttled recovery (“things are better than most people believe”), which will lead to a further expansion of successful entrepreneurs and business owners and executives, who in turn will have the liquidity to become HNW clients and grow the market.
And who better to serve those newly minted millionaires than JP Morgan? The private bank, which currently has 75 offices in the US, is targeting California and Florida for expansion next year, Duffy said, in addition to beefing up its presence in the Midwest, Texas and the Northeast – alongside the growth of the “entire bank’s” national footprint.
“We can serve that segment as never before,” Duffy declared.
Industry analysts agree, pointing out that the fine-tuned JP Morgan Chase machine is well-equipped to handle the products, capacity and scale that such an expansion of its target market requires.
“They already have the product set on their investment management platform,” said Dennis Dolego, director of research for Optima Group, an industry consulting and research firm based in Fairfield, CT. “There’s not all that much they have to do differently.”
Alois Pirker, research director for Boston-based Aite Group, points out that by expanding the private bank’s market focus to prospects with $5 million in investable assets, JP Morgan seamlessly closes the gap between it and Chase Private Client service, which markets its services for clients who have up to $5 million.
“I think JP Morgan can pull it off,” Pirker said. “Their key proposition is investment management, and that’s something that’s scalable. I’m sure they can offer products that have less customisation than those they offer to the higher end of their market.”
Investment management prowess: double-edged sword?
While few would argue that investment management is indeed one of JP Morgan Private Bank’s great strengths, it can also be seen as a double-edged sword.
To be sure, both competitors and industry analysts give JP Morgan high marks for its investment prowess. “Investment management is their core strength, and they stress that proposition much more than other firms do,” Pirker said. “Right now, it’s working because they’re very good at it, and no one else can rival them.”
But industry observers – and certainly competitors – argue that JP Morgan’s product prowess comes with a price. “They are challenged by reports of selling product over advice,” said Jamie McLaughlin, a Darien, CT-based industry consultant. “They are too often trying to navigate the delicate position of being both a manufacturer and an advisor.”
A competitor who runs an independent wealth management firm calls JP Morgan a “quality competitor for those seeking safety in large numbers” with a “great brand,” that includes a global reach and top notch trust, custodial and lending services.
Nonetheless, the executive, who declined to be named, added, “We don’t mind competing with JP Morgan. They have a very complicated product offering with a mix of proprietary products, feeder funds and open architecture. It is extremely difficult for clients to understand their fees. Their big bank/broker platform is a plus for some clients but for others it becomes a very complicated offering.”
Investment decisions: “No regard for JP Morgan product”
Not surprisingly, JP Morgan’s Duffy couldn’t disagree more.
When it comes to clients’ investments, Duffy maintained, recommendations are made “at the intersection of client need and strategy call…with no regard for JP Morgan product.”
He estimated clients split their investments roughly equally between outside offerings and JP Morgan products.
Wealthy clients are drawn to JP Morgan not for its products, Duffy asserted, but rather for the private bank’s ability to solve their problems. Even open architecture is not enough, he said. “Anyone can make the best manager available,” according to Duffy. “We want to provide a guided choice driven by a fiduciary obligation and a strategic team decision.”
He cited the aftermath of the 2008 financial crisis, when JP Morgan worked closely with leading asset managers such as Blackstone to offer clients co-branded investment products to take advantage of market opportunities in areas like commercial mortgage-backed securities.
“It wasn’t a matter of a ‘JP Morgan product,'” Duffy said. “It was a JP Morgan strategy idea in collaboration with a top money manager.”
Dodging a bullet – this time
Duffy, a 30-year company veteran who became chief executive of the US private bank last year, also sees JP Morgan’s status as part of one of the world’s top banks as a major lure for ultra high net worth clients. Families with multiple residences around the world are increasingly impacted by currency exchange rates and fluctuating interest rates in various countries. “Wealthy families now have complex balance sheets,” he said, “and we can bring institutional level sophistication to personal financial matters.”
But when an institution as large as JP Morgan Chase makes a mistake, it has the potential to be catastrophic, as was evidenced by the casualties of the financial crisis. And while JP Morgan emerged with a reputation as the best run of the mega US banks, its multi-billion trading loss in London earlier this year was a stark reminder that the bank is hardly immune from flirting with disaster.
Duffy said there were no net cash outflows as a result of the trading scandal and that the private bank’s clients stayed put. However, he acknowledges that clients were “disappointed” by what he called the bank’s “risk management failure.”
Chase dodged the bullet (this time), and the scandal is, remarkably, nearly forgotten. But critics warn the bank may not be so lucky next time and competitors have not been shy about reminding prospects that bad things can happen at big banks.
Top talent: biggest challenge
Duffy, who reports to Phil Dilorio, the bank’s head of global wealth management, sees his biggest immediate challenge as being able to maintain JP Morgan’s reputation for elite talent. Indeed, McLaughlin described the private bank’s senior client-facing team as “the best set of mid-career professionals in the business.”
JP Morgan plans to hire around 200 advisors next year, Duffy said, drawing from a blend of internally trained analysts, business school graduates and professionals at other firms, including money managers who want to make a lateral move.
“We’re looking for people who feel their paths are blocked and are looking for a breakout strategy,” Duffy said. But, he added, JP Morgan won’t be competing for the much-publicized breakaway brokers and their coveted books of business.
“There’s great wirehouse talent out there, and they’re going to get offers to monetise their book of business,” Duffy said. “We’re not looking to buy business. We’re looking to attract great talent to do great client work.”
This year JP Morgan snagged two senior executives from rival top-tier banks to direct important competitive growth markets for the firm.
Doug Regan, the former head of wealth management for Northern Trust, now heads JP Morgan’s Midwest region from Chicago, and Ethan Morgan, a Wells Fargo banker, is Duffy’s point man in Orange County, CA, a market that is one of the private bank’s top priorities for 2013.
Regan and Morgan epitomize the kind of talent JP Morgan is looking for, Duffy said, and he expects to add more to his roster as he plots to duplicate “another record year.”
For now, industry observers aren’t betting against JP Morgan achieving just that. “At the moment, they’re firing on all cylinders,” Pirker said.