Can Schwab Hang On To Its Heavy Hitters?

Buying U.S. Trust is a gambit to keep them in the fold

They say a rising tide lifts all boats. Now, nine years into the longest economic expansion in the nation's history, it also seems clear that, over time, it can turn some rowboats into yachts. Thanks to a long-lasting bull market, more than 3.3 million households have more than $1 million in investable assets. And--thanks in part to baby boomers coming into their inheritances--that figure is expected to increase by about 15% this year.

So hundreds of thousands of folks who started out as average middle-class investors have turned into high-net-worth individuals--with an appetite for the kind of estate planning, tax planning, and other services that the wealthy have traditionally gotten from private banking and trust departments. To get them, these newly loaded investors have been moving their money out of their usual brokerage accounts and into private banks--an outflow that has reached $5 billion a year in assets from Charles Schwab & Co., says its president, David S. Pottruck.

On Jan. 13, Pottruck put his finger in the dike by agreeing to buy U.S. Trust Corp.--a 147-year-old asset-management firm that caters to the very wealthy--for $2.7 billion. "We were losing money to trust companies," says Pottruck. Now, U.S. Trust, whose average account is $7 million, will allow Schwab to hold on to its newly wealthy customers. "Do-it-yourself clients won't have to `graduate' to a full-service broker when their portfolio gets so large that they're nervous about running it themselves," says Cerulli Associates Inc. consultant Dennis Gallant.

Acquiring U.S. Trust is certainly a new twist for Schwab, which brought millions of middle-class investors into the market. Pottruck makes clear that Schwab isn't abandoning its bread-and-butter clients, who on average have investable assets of $180,000, half in a Schwab account. "We're still a populist firm," he says.

But Schwab has about 175,000 customers--out of 6.6 million accounts--with investable assets of more than $1 million, and about 25,000 with assets of more than $5 million. That reflects the massive wealth minted by the bull market and the generational shift of wealth to baby boomers from their parents. Plus Americans are keeping a larger share of their wealth on Wall Street: 40.6% of family assets were bank accounts, bonds, stocks, mutual funds, etc., up from 36.6% in 1995, according to a Federal Reserve survey released Jan. 18. Almost one-fifth of families-a record 19.2%--own stocks directly.

MORE MERGERS. Schwab isn't the only firm trying to keep the newly rich and the average investor under the same roof. The latest deal is also part of the convergence of financial services, as other big banks and brokerages position themselves to offer both full-service advice and money management alongside online investing.

Bank and online broker Wachovia Corp., for instance, recently acquired Offitbank Holdings Inc., a trust company. And Merrill Lynch & Co. executives have spoken publicly about acquiring a trust to boost the company's existing services to the wealthy. Meanwhile, it has started to offer business owners "valuation services," to better help them figure out how much their business would fetch. Even Teachers Insurance & Annuity Association-College Retirement Equities Fund has since 1998 expanded its offerings to include trust services and estate planning, to cater to the 32,000 millionaires among its two million clients.

Congress' recent dismantling of the Glass-Steagall Act, which since the Depression had kept brokerage and banking businesses separate, could unleash a wave of deals similar to Schwab's. If that happens, Pottruck could lose some of the wind from his sails.

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