Catering To The Near Wealthy

If the bull market, stock options, an inheritance, or plain old thrift has transformed you from an average investor into a millionaire, you probably need to do more with your money than just stick it in mutual funds. Incredible as it seems, however, $1 million no longer gives you entree into many of the most exclusive trust companies and private banks that cater to the very rich. But you needn't despair. Financial-services firms that target the mass market--and a few upper-crust banks--are introducing customized products designed to appeal to the "near-wealthy"--those with nest eggs of $500,000 to $1 million who for the first time may be faced with a need for help.

Those ranks are growing fast. Spectrem Group, a San Francisco consulting firm, estimates there are now 2.9 million U.S. households with net worths of $1 million or more, excluding primary residences. That's double the figure for 1990. An additional 14.5 million households have net worths of $500,000 to $1 million. To serve these savers, large fund companies, including Fidelity Investments and Vanguard, have set up trust departments, estate-planning services, and divisions to manage individually tailored accounts.

Even J.P. Morgan's private bank is moving in on the business. It recently sent a mailing to potential clients in the New York area, in part to spread the word that $1 million can be enough to gain admittance. At U.S. Trust, meanwhile, a special unit accepts mutual fund accounts as low as $250,000, compared with the $1 million needed for one of the bank's individually managed portfolios. "Everyone is going where the money is," says Jamie Moldafsky, senior vice-president at discount broker Charles Schwab, whose Signature Services gives perks to customers with accounts of at least $100,000. The extras include Wall Street research and conference calls and online discussions with chief executives, including Intel's Chairman Andrew Grove.

SWISS MODEL. In pursuing the near-wealthy, many companies want to emulate the old-fashioned Swiss private bank, says Kurt Reisenberg, practice manager at the VIP Forum, an organization for financial institutions serving the affluent. That means offering wealth management, which combines investment supervision, insurance, brokerage, loans, trusts, tax advice, and other services. While most firms still can't provide true one-stop shopping, several are equipped to help clients find products they don't offer. For example, Schwab offers referrals for clients who need tax and some other services it does not supply. Through its AdvisorSource program, the broker will put investors with accounts worth $100,000 or more in touch with money managers it has vetted. You pay the adviser a fee averaging 1% of assets annually.

The more money you bring to the table, the more hand-holding you can expect. Say you have a Schwab account worth $500,000. You'll be assigned a team of 8 to 12 employees who respond to questions and problems, mostly by phone or E-mail. Though less personal than the one-on-one attention available at many private banks, the teams make suggestions if they notice potential problems, such as a lack of diversification or the need for an estate plan, Moldafsky says.

At Vanguard, once your account reaches $1 million, you get to deal with a single representative. "We will hop on a plane to see some of our bigger clients," says Richard Stevens, principal in charge of trust and money management. But Vanguard's real target is "the person who needs an adviser and is willing to work with someone over the phone, through the mail, or electronically--recognizing that by doing it that way it will be cheaper," Stevens says.

Indeed, firms such as Vanguard and giant pension-fund manager TIAA-CREF, which have made their names hawking low-cost mutual funds, are betting they can establish similar niches in the market to serve the affluent. At Vanguard, trust and money-management fees start at 0.65% and 0.50%, respectively, for the minimum account balance of $500,000. For a $500,000 trust, CREF charges only 0.20% for custodial services, such as record-keeping. For 0.90%, it performs hands-on money management. "We work with clients along a spectrum of situations--from taking direction for all decisions, to giving suggestions but not making decisions without the client's O.K., to making all the investment decisions," says Joseph Gazzoli, president of TIAA-CREF Trust, which was launched last summer. At Vanguard and CREF, fees decline as balances grow.

NEGOTIABLE. The low fees at both companies are an indication of how competitive the business of catering to the near-wealthy is becoming--and how costs still have a ways to fall. Cerulli Associates, a financial research and consulting firm in Boston, estimates that the annual fee for managing private-banking assets averages roughly 1.5%, while related services can add an additional 0.75%. But "fees are becoming more negotiable," says Cerulli consultant Dennis Gallant.

Private banks and full-service brokerage firms, such as J.P. Morgan and Merrill Lynch, charge more than some competitors. But they maintain that they give their clients access to a wider array of services, in addition to something more personal than a long-distance relationship. At J.P. Morgan, for example, private banking customers can get into exclusive investment vehicles, including private equity funds and initial public offerings. The firm, which declines to reveal its fees, also offers integrated financial planning that encompasses banking, brokerage, and trust services such as money management, trade execution, lines of credit, and tax planning.

If your net worth is at least $5 million, accounting giant Arthur Andersen will handle your trust, estate, and tax work for hourly fees that range from $150 to $450. Andersen also will research other services that it doesn't normally provide--for example, life insurance or money management options, says Joseph Toce, partner in charge of the private client services practice in New York.

If you need help with your suddenly substantial nest egg, your first order of business is to find a financial planner to assess your objectives and risk tolerance and formulate a comprehensive long-range plan that minimizes taxes. While every firm in the business maintains that this is their cornerstone, keep in mind that in implementing plans, big companies such as Vanguard and Merrill Lynch have a vested interest in using their own products or those they get a commission for selling. More objective are fee-only financial planners, several of whom specialize in wealth management. For a listing of planners in your state, contact the National Association of Personal Financial Advisors at 888 FEE-ONLY or

EGO TRIP? Before you sign up, make sure you're not buying something that serves your ego more than your wallet. For instance, while there's no question that most millionaires need estate plans, the argument for private money management is less clear-cut. Even accounts as large as $500,000 can benefit from the diversification that mutual funds can offer. And if you already have a large portfolio of funds, selling them to purchase individual stocks can trigger huge capital gains and taxes. Putting a money manager in charge of a fund portfolio will also subject you to two sets of fees, one to mutual-fund companies and the other to your new adviser.

These are probably issues you never thought you would have to deal with. But if you want to preserve and further expand that nest egg, don't just assume the do-it-yourself approach that has gotten you this far will always make the best financial sense.

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