Dark clouds over the valley of the sun

Normally, blazing sunshine and bright blue skies are the order of the day in the vast suburban sprawl of greater Phoenix, and until recently, economic prospects for the region’s wealth management market were equally bright.

Since 2000, the Valley of the Sun has experienced a nonstop influx of people and assets, which has given rise to a slew of thriving independent-advisory firms requiring that clients have at least $1 million in investible assets.

More than 700,000 retirees and other transplants have flocked to the vicinity, according to the U.S. Census Bureau, and the population has skyrocketed nearly 30% since 2000, making Phoenix the fastest-growing metropolitan area in the country. With more than 4 million people, it is the fifth-largest metropolitan area in the United States.

Despite favorable demographics, the financial crisis and stock market collapse that began in the fall have cast a very large shadow over wealth management firms in the region. Because nearly all of a wealth management’s firm’s revenue stems from charging clients a fee of up to 1% of assets under management, profitability has plummeted as a result of steep asset losses.

“They’re all hurting; everybody’s losing sleep,” said Leslie Dashew, a veteran market observer who advises wealthy families in the Phoenix area as president of Human Side of Enterprise LLC, a Scottsdale, Ariz., consulting firm.

“If assets are down 25%, that’s all of your profit. It’s not the end of the world to be at break-even, but it means you work twice as hard for minimal or no profit,” said Dennis Miller, president of Miller/Russell & Associates Inc. in Phoenix, which has about $1 billion in assets under management, down from $1.5 billion a year earlier.

Adviser Timothy Rowland, chairman of Rowland Carmichael Advisors Inc. in Scottsdale, feels similarly.

“Our expenses are fixed, and to the extent that you don’t reduce expenses, it comes out of distribution to the principals, so the principals are financing the reductions,” he said.

The firm had $315 million in assets under management at yearend 2008, compared with $446 million a year earlier.

A number of Phoenix firms have cut costs, primarily by laying off a small number of back-office workers and cutting back on outside expenses such as marketing and public relations.

Wealth managers said that they have been able to retain most of their clients. But they acknowledged deep-rooted client concern about the financial markets and the financial services business.

“All our clients are asking really hard questions that are very appropriate, and they’re asking if there is a better solution,” said Mark Feldman, chairman of the Phoenix office of GenSpring Family Offices LLC of Palm Beach Gardens, Fla. GenSpring’s Phoenix office manages about $1.7 billion in assets.

After news of the scandal involving money manager Bernard Madoff and Bernard L. Madoff Investment Securities LLC of New York, Mr. Rowland said, his office received “more calls than any time in the last 30 years.”

As a result of the scandals and market meltdown, wealth managers face “a real credibility gap. In a tsunami, everybody gets wiped out,” said Michael Casey, financial principal in the Scottsdale office of Minneapolis-based Lowry Hill Private Asset Management, which has about $500 million in assets.

MIGRATION FROM WIREHOUSES

Nonetheless, wealth managers remain optimistic about the Phoenix market’s long-term prospects. They said that client dissatisfaction from troubled wirehouses has been a steady source of business.

“Most of our clients are coming from brokerage houses,” said Paul Ahern, a principal of Scottsdale-based WealthTrust Arizona LLC, which has about $450 million in assets under management and is owned by WealthTrust LLC in Nashville, Tenn.

“There’s no question that high-net-worth assets are moving from brokerage firms,” said Randy Oldenburg, founder and principal of Camden Financial Management in Scottsdale, which manages $120 million.

According to adviser David Highmark, “clients are nervous and seeking more-stable providers.” He is chief executive of the Southwest region for Chicago-based Northern Trust Corp., which has $7 billion in assets in Arizona.

“We expect that the difficulties experienced by many of our competitors will continue for the foreseeable future, and our expectations of growth are high for the next several years,” Mr. Highmark added.

Unhappy brokers are also flooding the market and looking for jobs.

“I’m getting a lot of résumés,” Mr. Feldman said.

WealthTrust plans to capitalize on the supply of available professional talent by hiring brokers to open up offices in Sedona and Tucson in Arizona later this year, according to Mr. Ahern.

But some wealth managers worry about brokers’ making the transition to a fee-based culture.

“They can bring assets, but we found that often it is simply not a good fit, because they’re used to a transactional-based environment,” Mr. Miller said.

The fallout from the problems of large brokerage firms such as New York-based Merrill Lynch & Co. Inc. may also, however, mean more competition, as a number of local brokers are expected to leave larger firms to open up their own firms in the coming months.

“We are starting to hear about breakaway brokers’ setting up shop,” Mr. Rowland said. “Ultimately, clients will be voting with their dollars.”

“The barrier to entry is not as high as other markets’,” said Creg Ostler, managing partner of Stoker Ostler Wealth Advisors in Scottsdale, which has approximately $600 million in assets under management..

Local independent wealth managers also said they are constantly getting calls from larger firms in other states who are looking to expand into Phoenix.

At least two local firms received calls this month from a wealth management firm in Southern California interested in expanding into Phoenix by acquisition.

“We get an inquiry every few weeks,” said Philip Stoker, Stoker Ostler’s other managing partner. “They come from roll-up firms, banks and larger wealth managers.”

“It’s comforting to us because it shows that Phoenix is still seen as a market of growth,” Mr. Ostler said.

Surprisingly, Phoenix has not been considered “one of the elite markets in the nation for the wealth management business,” according to Mr. Highmark. It’s a very good one, though, he added.

Phoenix has even been considered “a bit of a backwater,” said Thomas Connelly, president and chief investment officer of Versant Capital Management Inc. in Phoenix, which has about $200 million in assets.

“The level of competition is less than you’d find in a mature market,” said Lowry Hill’s Mr. Casey. “Phoenix is still young, and really a big town. No one has exploited any one niche exceptionally well.”

Large wirehouses such as Merrill Lynch, Morgan Stanley and UBS Financial Services Inc. traditionally have been major players in the Phoenix wealth marketplace.

“Brand-name wirehouses have always done well here,” Mr. Miller said.

But dozens of independent boutiques have successfully staked out healthy market shares in Phoenix over the past 20 years, and while there has been some talk of consolidation, most are confident that they can weather the current financial storm.

Northern Trust is considered among the best-established national firms in the market, especially for the high end, followed by Harris Private Bank, a unit of Harris Bankcorp Inc. of Chicago and GenSpring, which bought Inlign Wealth Management LLC of Phoenix from Mr. Feldman and his partners in 2007.

Lowry Hill, which has a minimum of $10 million in investible assets for new clients, is owned by San Francisco-based Wells Fargo & Co.

But Northern Trust’s Mr. Highmark does not foresee more big national players entering the market anytime soon.

“Given the scarcity of capital today, I would be surprised to see them expand into Arizona in the foreseeable future,” he said.

E-mail Charles Paikert at [email protected].

Related Topics: Wealth Management Market Report