CORAL GABLES TRUST PARTICIPANT IN THE FIFTH ANNUAL WEALTH MANAGEMENT ROUNDTABLE HOSTED BY THE DAILY BUSINESS REVIEW

International investments and hedge funds are just two of the vehicles on the table for wealth managers, who must advise on attractive yet acceptable risk for their affluent clients.

Philanthropy has been part of the asset management picture for decades, and teaching the art of giving can begin when the children of the rich are as young as 12. Guidance given to the youngest in the families, feedback to clients and account loads may determine whether the next generation keeps the same advisers.

The Daily Business Review assembled a panel of South Florida wealth managers for a wide-ranging discussion on the state of the industry.

Participants in the fifth annual Wealth Management Roundtable were Gonzalo Acevedo, senior vice president and manager of HSBC Private Bank in Miami; Richard Ganter, regional director of Deutsche Bank Florida private wealth management in Palm Beach; Dean C. Klevan, president and chief executive officer of Coral Gables Trust; Mark Stevens, Southeast regional chief executive officer of U.S. Trust in Palm Beach; and William VanDresser, regional director of Lydian Wealth Management in Palm Beach.

The panel was interviewed by executive editor Eddie Dominguez, business editor Catherine Wilson, and banking and finance reporter Jaime Hernandez on Oct. 5 for this special report. A condensed version of the discussion follows.

Wilson: Give us an overview of your part of the wealth management business.

Ganter: Deutsche Bank serves the ultra high-net worth category, and that is $10 million and up in investable assets. My focus is families, individuals and institutions.

Stevens: U.S. Trust Co. is a 153-year-old institution devoted to family wealth, private banking for individuals with $5 million in investable assets. We operate out of six offices in Florida and 35 offices across the country.

Klevan: We are a relatively new, independent trust company obviously located in Coral Gables. Our focus is on families, individuals, foundations, endowments, pension plans and small businesses. We are more for the affluent client than the ultra high-net worth client. We were set up to look at clients from $500,000 to $3 million.

Acevedo: Our target-market client is that individual and family that has $5 million in investable assets, $25 million in net worth. We provide banking, credit, investment management, brokerage, trust and estate planning, and advisory services.

VanDresser: Our focus is really $5 million-plus in terms of the target market. We deal with probably 300 families across the country and have about $7 billion under management.

Asset allocation

Wilson: A Merrill Lynch survey of high-net worth individuals in the U.S. said they allocate three-quarters of their wealth to domestic holdings, primarily stocks. Given higher interest in foreign investment, what do you advise your clients to do about investments that are attractive but acceptable risk to them.

Klevan: Unlike the European investor, is much more comfortable investing in U.S. markets. Sitting in Florida, we have 40 percent allocated to the international market. It’s probably too much for our clients to bear to be honest with you.

Stevens: Core activity is still around stock and bonds. There is a greater interest in diversification, alternative asset classes. It’s not just international. It’s hedge funds, structured investments, it’s real estate, it could be hard assets other than real estate like commodities. All of that sounds like risk and, in fact, it’s quite the opposite.

Ganter: We look at the alternatives, whether it’s international, hedge funds, structured or alternative products within the core allocation of the assets. There are certain replacements for the traditional asset allocation that actually lower your risk and improves return.

Acevedo: Every client is different in their appetite for risk and what they want to achieve. We sit down with each client and analyze where they are today and where they want to be, how much risk they want to take, what sort of asset allocation is achievable, and if it is appropriate for what they want to do.

VanDresser: There are some excellent managers out there that you can only access through hedge funds. With Amaranth and KL Financial years ago, bad things do happen. But it’s our job to find legitimate hedge funds and make sure that we are reducing risk and educating the client.

Philanthropy

Wilson: Have big-splash philanthropical commitments by Bill Gates, Warren Buffett and Richard Branson generated more calls from your clients?

Stevens: We are in an intergenerational transfer of wealth that’s unprecedented in our history. So what’s happening is philanthropy, and passing on to the next generation is absolutely the key theme and initiative in our client base. Bill Gates, I think, is symptomatic of what is going on.

Klevan: The larger families and foundations perform an important role of bringing the kids into the mark that that family is going to leave on the community.

Stevens: Last night, I had dinner out on the beach, and so I passed the new performing arts center. It’s interesting that it’s named the Carnival Center, and right next to it is the Sanford and Dolores Ziff Ballet Opera House. It’s a combination of corporate and family philanthropy. You don’t have to look very far to see it in action.

VanDresser: Philanthropy has been around since money started moving to South Florida. I don’t think Bill Gates and some of those recent events have made any difference to the foundations that exist here. It’s just our responsibility to make sure that those foundations last for a very long time.

Getting kids involved

Hernandez: What do you do to try to keep the kids involved in your firm as opposed to taking the family’s wealth and going somewhere else.

Klevan: A family foundation has to give away a certain amount each year, and everyone has to write a request for money. So the 12-year-old gets up in front of all the family members and comes with up with a favorite charity that he wants to give $5,000 to.

You do that year after year, and that tradition of giving becomes part of the family.

VanDresser: You have got to educate those kids and get them involved in giving money away and understanding the impacts of it.

Hernandez: How do you harness interest, because we’re talking about teenagers and young adults?

Ganter: We’ve created family meetings. We ask individuals to come into the office, sit down and be inclusive as opposed to exclusive. If you conduct those family meetings and educate them through the process, a lot of things that we are talking about just become second nature to them. And that’s critical for us.

Acevedo: Thunderbird University is our own legacy program to teach the next generation about investments, wealth planning, taxation and the impact of money. It’s something that we are a big believer in. We want to stay close to the family for generations to come.

Stevens: As an institution, we’ve evolved from being an asset manager or financial planner. We facilitate dialog around investments or financial planning around charitable giving. We help organize and accomplish those goals. It is as important of an aspect of managing wealth today as investing.

Client retention

Wilson: I have seen numbers that up to 90 percent of the next generation will change their advisers. How do you work on retention? Do you cherry-pick other people’s clients, or is it a hands-off thing where you let people come to you?

Stevens: Don’t we look like a hands-off group? I’ve seen those same statistics. Nobody in this business has a commanding margin. It is a phenomenon of the wealth management business unlike the institutional side of the business that everyone seems to carve a niche.

So as to my corner of the world, with my niche, that’s not my experience.

Acevedo: The industry is very fragmented in wealth management, and private banking is no different. In terms of servicing the next generation and generations to come, you want to have an institution that is perceived as trustworthy, that will be there for future generations, that is strong, that will survive the test of time. But the challenge is how do you gain the client’s trust and how do you retain that trust through generations. That’s what we all work for.

VanDresser: Our focus is trying to be the quarterback of all the different advisers: the attorney, the accountant. It’s our responsibility to make sure there are different members of the team that can liaise across the generations.

Dominguez: How do you reach the next generation? Teenagers who are into artists such as P Diddy, Jay-Z and Madonna, and have them look at you and say, “Yes, this is my banker.”

Ganter: It could be defined pretty simply as being proactive versus reactive. The moment you’re not on top of this relationship is the moment the client is going to start beginning to wonder if you really are on top of what it is that they are trying to achieve.

Stevens: Certainly younger generations are going to have a different appetite for risk, different interests in perhaps more diverse investments. You have to have investment expertise, either in house or you have to have the access to it. And if you have access to it, you better well have the ability to monitor, gauge and evaluate who’s good and who’s bad.

Klevan: We encourage our clients to open an account for their children. As the child gets older, we start to have independent meetings with them. Make sure they understand the importance of the small things, matching a 401(k) with their employer, maximizing their IRA contributions, explaining to them the importance of after-tax returns, the importance of compounding over time. These are relatively small accounts, but that’s how you’re going to have that client base.

Affluence in South Florida

Wilson: Do South Florida clients differ from clients elsewhere?

Stevens: Better suntans.

Acevedo: You find more entrepreneurs than you do CEOs or executives. Here in South Florida, and Miami specifically, you find entrepreneurs that started a business, maybe middle-market, small, family-type business and created wealth and expanded the wealth. Also, the international aspect. There’s a lot of wealth coming from abroad to Miami, and I think the institution that can service those clients will succeed.

Stevens: I’ve done business in Miami, Palm Beach and in Chicago. I would have to say that the differences are all to too subtle to even identify. Clients are much more alike than different.

Real Estate

Dominguez: How are changes in the real estate market affecting your clients’ investments.

Klevan: One of my biggest competitors is real estate because the clients have just gotten so used to these phenomenal returns, both in commercial and residential real estate. With the changes in the market, they are going to have to go back to a more traditional asset allocation. We are seeing it much more on the residential side. Commercial real estate is still very strong.

VanDresser: There are some opportunities, but a lot of them are just holding the cash for the to come up.

Acevedo: Those individuals that have been investing in real estate have done very well.

As a private bank doing business in Miami and as a bank in general doing commercial real estate lending and middle market lending, we’ve thrived under this environment, but we are starting to see a shift. And we need to acknowledge it and be in place to advise on it.

Latin American clients

Wilson: What’s the state of dealing with Latin American clients? We had one panelist last year who said they were actively dropping clients because of Bank Secrecy Act and USA Patriot Act implications. What’s your status?

Stevens: I will say it just as simply as it can be. The issues with respect to international clients are no different than the issues with our domestic clients. It’s about know-your-client. As long as you go through the due diligence and know your client, then you’re not taking any more risk on international business.

VanDresser: If there’s something that you don’t know that the regulators are requiring, then you’re not doing your job if you want to be the best adviser.

Ganter: We are in a different world now. If you want to do business in the financial markets now, there are things that you have to abide by. When you look at operating expenses, the most expensive thing in any private bank is compliance controls and technology.

Stevens: The regulatory environment, I think, ebbs and flows. There have certainly been times where it’s been more onerous than it is today, at least in my perspective. But it is a reality of business, in this business particularly. It is probably a field where maybe the number of players is dwindling or contracting.

Klevan: When you get into wealth management, you absolutely know who that client is, so it’s not an issue for us.

VanDresser: When it’s a client that’s not giving you the information, then they’re not going to be a client. We’re a very small bank. We’re completely bilingual. We reflect the reality of Miami.

Acevedo: Whether you’re domestic or international in the way you conduct your business, you’re going to have international clients. They may reside in Miami, they may be citizens of the United States, but they do business abroad. An institution that wants to take on clients at this level in the South Florida marketplace has to have an understanding of the international flavor here.

Account reporting

Wilson: What do you report to clients on the back end? There are some who want a real simple, easy-to-read report; others who may want more detailed, exhaustive information. Do you tailor your reports? What do you do?

Stevens: Through technology, everyone is bombarded with financial information. Fortunately, that same level of technology has allowed institutions to invest in systems and platforms and capability. There’s a phenomenal ability to generate customized reports, generate daily reports or not even generate paper — just everything going online.

Acevedo: Technology is extremely important. It’s a driver of growth for us. Access to information, clients are demanding more and more. And we certainly want to provide that. But we invest in people a lot, too. Nothing takes the place of the relationship between the client and the individual relationship manager or the team that you put together to face the client. They’re very savvy. They want information, and they want it right away.

Account loads

Wilson: At some point your rates for services may start to look pretty similar from one institution to the next. How you differentiate yourselves, and can you address your account loads?

Stevens: The differentiation is around service, and service is defined as front-line people backed by capability, expertise, track record and last, performance. That in the final analysis will determine whether you keep a client for a generation or multiple generations. We work about 50 families. Accounts within that can be quite a few. Usually you say there are probably 2½ to three accounts per family. Larger families are multiple accounts — 40, 50 accounts.

Ganter: The account loads we try to keep to a controllable level so that the service level remains high. If you look at differentiating factors, we all have different things that we do, and it’s different segments of the market that we want to focus on. For us, it’s global reach, and we have got trading desks in multiple countries. It then comes back to the execution.

Klevan: As a new institution, differentiation is vital to us. We’ve set up what we would call a conflict-free independent investment process. We do not have any internal products. We spend our money on the technology in order to be able to evaluate the best independent managers for mutual funds and select those for our clients. The second thing we try to do is be completely transparent in terms of our fee structure. And so it’s very simple. We charge the client a flat fee.

Acevedo: We are constantly trying to bring from other parts of HSBC — from the world of investments, emerging markets, hedge funds, alternative investments private equity — products that you won’t find at other institutions. You’ll find like products, but there’s something that differentiates ours from everyone else’s. Service is a big differentiator, the way we treat our clients. That’s what makes them stick.

Wilson: And on account loads?

Ganter: We’ll probably be around 35 to 40 families.

Klevan: When you start talking 50 families, you’re talking about maybe a quarter billion dollars of assets. We are not yet a quarter billion dollars of assets, so it’s not even an issue.

Acevedo: We have a team concept. We don’t really have account loads. We have a relationship manager, a relationship officer, service officers. All of us know the minute service is impacted. That’s when we say let’s bring in another relationship management team.

VanDresser: We really started our roots as an open architecture firm back in the ’90s. We very early developed the ability to report on all assets because typically a family doesn’t have everything at one institution. Because we don’t have any proprietary product, we can sit on the same side of the table. In terms of the client load, typically it’s probably 25 to 35 relationships or families per team. But that’s always going to vary depending on the size.