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Wealth Management Continues Its Growth

Generational transfer by retiring boomers is a bigger factor than the economy or tax cuts

By Greg Paeth

strong economy, federal and state tax cuts and the transfer of wealth from baby boomers to their children and grandchildren have combined to make it a good time to be in the wealth management business in Kentucky.

There’s been no overnight boom in “wealth management,” a field with fuzzy boundaries, and its growth does not link with absolute certainty to any one of those factors just cited, although news about the economy has been resoundingly positive.

People who know money and how to make it are seeing the entire financial advising business segment trend upward like their investment in a “blue chip” that’s growing substantially, gradually and consistently.

Dean Dorton, headquartered in Lexington and one of the state’s largest accounting firms, unveiled its wealth-management subsidiary in mid-September after several years of in-house discussion and planning, according to David A. Parks, a CPA who is a company board member and its senior wealth adviser.

“With the tax cuts that have occurred, it should put more money in people’s pockets and they’re going to have more to invest, all other things being equal,” Parks said. “So, yes, the strong economy as well as the tax cuts have probably, in one sense, created a buzz about financial matters that sort
of heightens people’s (interest in wealth management) … A lot of people
have more money in their pockets and they are interested in investing that and taking advantage of the strong markets that do exist.”

But Parks said the economy and tax cuts were not the only factors considered before launching Dean Dorton Wealth Management. Over the years, he said, Dean Dorton had fielded frequent requests for financial services that most accounting firms don’t offer.

“Some of it (wealth management demand) may also be due to overall changes in how financial services are currently delivered. We have noticed there is more demand for ‘one-stop’ shopping, and clients can often benefit from having more than one financial service performed by the same provider,” Parks said by email. “Having a primary ‘financial quarterback’ can help ensure that all aspects of a client’s situation are being considered, and can lead to efficiencies in the delivery of service,” said Parks, who is working in the subsidiary with Dean Dorton President and CEO David Bundy. “Years ago, banks did banking, insurance companies focused exclusively on insurance, investment managers dealt almost exclusively with asset management, etc., but now most of these service providers offer a variety of financial services. We have always done retirement planning for clients in a general way, but in terms of investment consulting and portfolio management, we have not offered those services in the past.”

Minimum required for management

Dean Dorton Wealth Management services include financial and retirement planning, investment consulting, portfolio management and other financial services, which is generally in line with how other institutions describe their wealth management roles. PNC Bank, one of the country’s largest financial institutions and Kentucky’s largest by deposit market share with some 90 commonwealth locations and 2,300 elsewhere in the country, includes what it calls “private banking” and trust and estate services in its wealth management package.

Typically speaking, such services are offered to affluent clients who have at least $250,000 to invest and pay a set fee.

Central Bank & Trust in Lexington has a minimum charge of $1,500 and attempts to keep its fees at or near 1 percent of the amount that will be managed, said Senior Vice President Barry Hickey, who oversees the wealth management group.

PNC works with clients who have $1 million or more in “investable assets,” according to Laurie Beth Baird, a vice president and senior wealth strategist with PNC Wealth Management. PNC didn’t provide specifics about its fees, but did say they fluctuate based on the amount invested.

At Hilliard Lyons, considered the largest Kentucky-based wealth management firm, Alan Newman said the “$250,000 range” of investable cash is a pretty good starting point for his firm, which has its headquarters in Louisville and operates in 11 states. It’s not uncommon for existing clients to open smaller accounts for children or grandchildren, said Newman, executive vice president and executive director of the private wealth division for a firm that traces its roots to a storefront office in 1854.

Newman is among the finance professionals who said the strong economy and tax cuts are, indeed, contributing to more demand for wealth management services, but wealth transfer from one generation to the next is the single most important factor fueling the field.

“First of all, I think wealth management is growing and growing robustly – not only in Kentucky but throughout our footprint,” said Newman, whose company manages about $50 billion in assets, of which $40 billion is in its wealth management department. “That’s predicated on what is gearing up to be the largest wealth transference in history – the last number I saw was 10,000 baby boomers are turning 65 each day. With that in mind, we are finding people who say they need more help and more advice than ever. I think that is one of the things that is really fueling this growth. This is no longer the stock brokerage firm that I joined 38 years ago, but we are now somewhat the real deal in wealth management.”

For the fiscal year that ended Sept. 30, Newman said Hilliard Lyons saw a “10 percent uptick in gross new assets” when measured against all of the investments the company oversees. During the 12 months, the company added about 20 advisers and now has 385 advisers on staff.

More wealth means more advisers

Although Kentucky doesn’t have any registration process in place for wealth managers, state regulators consider broker-dealer agents who sell stocks and other securities and investment advisers who manage portfolios to be part of the wealth management business, according to Marni Gibson, the director of the Securities Division inside the Kentucky Department of Financial Institutions. It’s not unusual for people to be registered as both broker dealers and as investment advisers, she said.

“Kentucky has seen an increase in the number of investment advisers and broker-dealer agents over the last several years, and while the numbers vary across the years, there is an increase generally,” said Gibson. There “seems to be constant growth in the industry.”

At the end of last year, the number of broker dealers in the state – 1,434 – was nearly unchanged from a year earlier while the number of registered agents for those broker dealers had increased by about 4,000 to nearly 124,000, according to the annual report of the Department of Financial Institutions.

While there were about 130,000 registered agents at the end of August, Gibson said because of high turnover “our end-of-the-year number could be significantly less.”

The number of investment advisers with state credentials (190) and federal registrations (1,110) increased slightly from 2016 to 2017 as did the number of representatives (5,653) who work for those advisers.

“The wealth management field in Kentucky is growing for several reasons,” Gibson said. “There is a tremendous growth in the economy with a labor force of 2 million in Kentucky and the transition of wealth: baby boomers are passing on wealth to younger people. And frankly, just the wealth across the country has grown, and a lot of people just don’t know what to do with this money that they suddenly have.”

PNC’s Baird and Bruce Hanks, president and CEO of Wealth Management of Kentucky in Lexington, acknowledged that the economic growth has helped fuel the demand for wealth management services. Baird agreed wholeheartedly with Gibson about the substantial impact of the transfer of baby-boomer wealth.

But given the sustained and record-setting run in the stock market, Baird and Hanks said some investors are bracing for a downturn that would mirror what’s happened in the past when the market peaks.

“They’re saying ‘protect my wealth’ ”

“I think the demand for wealth management services is increasing across the industry just because of the baby boomer generation … more than the economy,” Baird said. “I do think because of the strong economy (and) the tax cuts … (there is) apprehension people are feeling due to the long-term (upward) run in the economy. We are getting more questions and people want to have more discussions about our long-term outlook and how we’re positioning them in the event of any recession or pullback in the market.

“People have a higher anxiety level because of the economic factors, but I would say any increase I’ve seen in the number of people seeking wealth management services is simply due to our aging population.”

Hanks, who runs a three-person firm founded in 2002, also said some investors are getting nervous.

“Clients are making more money. They’re feeling more comfortable; they’re excited that their 401(k)s are up, their personal brokerage accounts are up,” Hanks said. “But what I’m seeing right now with people who are coming to us is they’re more concerned because the market is at an all-time high. They’re concerned not only (whether) will this continue, but (whether) at some point in time there’s going to be a substantial correction.”

“They’re saying ‘protect my wealth,’” Hanks said. “It’s great that you’re creating more wealth, but at this point in time I’m more interested in protecting and preserving my wealth than going back to a point where we were in 2007 and 2008 when people were losing 40, 50, 60 percent out of their 401(k)s and their investment accounts.”

Hanks estimates the dollar value of assets under management has increased about 20 percent this year, a volume of business that can be handled by the small team that he has in place.

At Central Bank, Hickey said the wealth management group that he manages realizes that the demographics of their clients are changing.

Younger advisers for younger clients

“We have made a conscious decision to hire younger. Three people who are trust administrators are in their thirties in order to handle that generational change in money that’s going to happen with the baby boomers,” said Hickey, who agreed with PNC’s Baird and the state’s Gibson about the impact boomers are having on the wealth management business.

Hickey is convinced the generational transfer of wealth has stimulated more business than the strong economy or tax cuts. His department has added seven people to its wealth management department in the last three years and now has a staff of 24 handling about $1.7 billion in assets.

“We really haven’t seen any additional demand, and the reason for that is because we build our book on relationships. It’s really more the brand that brings customers in rather than the economy,” Hickey said.

“I know there are more banks getting involved in the wealth management business, and I assume that that (the strong economy) is the reason they’re getting involved,” said Ballard Cassady, president and CEO of the Kentucky Bankers Association in Louisville.

Like other financial professionals interviewed for this story, Cassady said much of his information about the growth of the wealth management business is anecdotal, based on conversations he’s had with bankers.

There’s no single source of information about the number of people who might be working in wealth management in Kentucky, he and others interviewed said.

Like Dean Dorton’s Parks, Cassady said many clients may be looking for a single source for financial services and banks thus may be offering professional wealth management so they don’t lose a customer to a “one-stop shop” that provides a more comprehensive menu of services.

“They are probably taking the opportunity to say to their customer base, ‘We’re here to take care of your full financial needs more so than (offering) any new products that they might have.’ You don’t purposefully send someone to another bank,” Cassady said.

Younger people who likely have given little thought to retirement also seem to be seeking more advice from wealth managers.

“What you’re starting to see is those (younger) people moving toward (the position that) we need to start preparing ourselves for retirement. … We need to start saving money, and we need to ask professionals for the best way to do that. I think that’s what’s driving a good portion of it (growth), and the tax bill that went through is driving a portion of it, and the combination of those things is probably the fuel behind it,” Cassady said.

Financial professionals who commented for this story say they are not aware of any new products or services being employed by wealth managers.

“There are no new magic pills. What we do, we feel like we do very well, and it’s based on managing that client’s risk and objectives to meet their goals over the long term,” Central Bank’s Hickey said.

“It’s really not about the hot product of the day. Those days are long since past in our view,” said Newman, of Hilliard Lyons. “I’m a believer that tried and true quality investing stands the test of time, but that’s not to say that there aren’t some tweaks that make existing products better.”

Greg Paeth is a correspondent for The Lane ReportHe can be reached at [email protected].