Money managers owned by big Wall Street brokerage and investment banking firms increasingly are contributing to their parents' bottom lines, while underwriting and brokerage activities slow down.
With distribution channels and sophisticated financial technology already in place, money management seems a natural fit for these firms, as they diversify from transaction-based businesses and into fee-based ones.
Fees from money management comprise 10% to 20% of the net revenues after interest expense among large publicly traded brokerage firms, such as Salomon Brothers Inc., Merrill Lynch & Co., Prudential Securities Inc., PaineWebber Group Inc., Dean Witter Reynolds Inc. and Smith Barney Inc. And, that revenue stream is growing rapidly, said Glen Casey, a consultant with Cerulli Associates, Boston.
Examples of money management revenue growth include:
Salomon Brothers, parent of Salomon Brothers Asset Management, a 5-year-old operation with $12.4 billion in assets, has seen its asset management revenue increase 269% from $26 million in 1990 to $96 million in 1993, while total revenue for the whole company increased 78% during the same period, from $2.32 billion to $4.14 billion.
Morgan Stanley Group Inc., whose Morgan Stanley Asset Management subsidiary manages $42.7 billion, showed an increase of 47% in money management revenue for the six months ended July 31. Revenue climbed to $170 million from $116 million.
During the same period, revenue for Morgan Stanley as a whole - including investment banking and trading operations -actually dropped slightly, to $4.56 billion from $4.68 billion.
Merrill Lynch's asset management revenue increased 21% between 1992 to 1993, Mr. Casey said.
Among Wall Street firms, Merrill Lynch is a clear leader in asset management capability, said Mr. Casey. Last year, the firm had more than $700 million in revenue on assets of $160 billion among mutual funds and institutionally managed separate accounts. By contrast, Smith Barney had about $75 billion in total assets under management, including $55 billion in mutual funds, and Dean Witter had total assets of approximately $71 billion.
Merrill's growth is partly a result of its success in the 401(k) market, where it has won such high-profile clients as Mobil Corp.'s 401(k) plan.
Smith Barney has had success among individual investors with its TRACK wrap fee product, he added.
Still, everyone's getting into the game.
"I don't know of any sizable brokerage or financial services firm that doesn't want to grow in the investment management business. They're a natural partner," said Chas Burkhart, president of Investment Counseling Inc., West Conshohocken, Pa.
"It's a good, symbiotic relationship in which both feed off each other, as long as the compensation and profitability margins are substantial for both."
Wall Street's interest is showing in new acquisitions as well. Securities firms were the fifth most frequent acquirers of money managers in 1993, a survey by Berkshire Capital Corp., New York, showed. They were the buyers in five of 53 acquisitions announced during that year.
Smoothing ups and downs
Securities firms are committing to money management to smooth the ups and downs of the market.
Observers point out the revenue streams from money management are less volatile than those based on investment banking or brokerage.
Meanwhile, investment banking firms have been hurt by the softness in the bond market, which makes issuing new debt less attractive, said Cerulli's Mr. Casey. Plus, the equity market is overheated and can't absorb as much new equity as it had in the past, so underwriting has been hurt accordingly, he said.
The traditional business of large securities firms has a large fixed-cost component associated with it, so downturns in the markets will cause drops in revenue without a corresponding drop in expenses, said Mr. Casey.
That isn't true for money management.
"When the stock and bond markets slow down, the asset management business remains consistent ...," said George Grune, president of Kidder Peabody Asset Management, New York, which manages $20 billion.
Mr. Grune said Kidder Peabody has been emphasizing asset management since 1990, focusing on building three areas: high net-worth individuals and small institutions; larger U.S. institutions; and international customers. Kidder has built up its investment management and marketing staffs - including four new institutional marketers in the last 15 months - and added four groups: mortgage; structured finance; credit union advisory; and global fixed income.
As a result of the increased emphasis on money management, assets under management doubled since 1990, and operating results have improved noticeably, said Mr. Grune. He did not specify how the numbers had changed. KPAM, as a subsidiary of Kidder Peabody Group, which itself is 100% owned by General Electric Capital Services Corp., does not report results separately.
The distribution, technology and research wherewithal of their parents give Wall Street firms an edge over independent money managers. But, they're also at a disadvantage in valuation - they are not worth as much without the parent's distribution network. Also, most are relative newcomers to the institutional market, which puts them at a disadvantage in attracting clients.
"They have good relationships with institutions and individuals from their other products outside of asset management. That's how a company like a Goldman (Sachs) and a Kidder and a Smith Barney can grow as quickly as they do," said Mr. Burkhart."Those companies would be hard-pressed to be divorced from their namesakes."
Market crash was impetus
Wall Street firms began their move into money management in a big way in the mid- to late 1980s.
The stock market crash of 1987 made firms realize how volatile the market could be, and that knowledge, coupled with the realization that distribution was key to gaining business, led many of them into money management, said Brad Hearsh, managing director of PaineWebber. "The brokerage firms said: 'My goodness, we're getting the raw end of the bargain. We're renting out our sales force ... The real money is being made by the money management organizations,'" he said.
A money management firm that's part of a bigger Wall Street operation can get the parent to send its brokers out to push the asset management subsidiary's products, which independent money managers can't do.
At the same time, though, brokers could be skeptical of a product they are being asked to push - sometimes more so if it's their own company's product - and even brokers that are part of a system may feel more beholden to their clients than to the company.
Furthermore, on the institutional side, the distribution advantage may be even further diluted by the importance of relationships and the fiduciary considerations of pension plans, he added.
"I don't think (sales drive) makes a difference at all in the institutional market. I think those markets are even more driven by investment decisions," said Mr. Hearsh. "Those customers will do what they think is right from an investment perspective, not because a company is pushing hard on its sales force."
In fact, securities firms tend to have more of a track record on the retail side than the institutional side, he said.
"I think it's difficult for brokerage firms to make good on the institutional side. A lot of these firms ... they're retail oriented, their history is retail oriented," said Mr. Hearsh. "It's more difficult for them to build an institutional business than for independent managers that don't have retail (history)."
Distribution also can be a disadvantage in achieving a proper valuation for the money management arm.
Investment Counseling's Mr. Burkhart points out it would be nearly impossible to divorce an asset management unit from its parent, given the money manager's dependence on the parent for distribution, name recognition and client relationships. Moves such as Ark Asset Management's 1989 management buy-out from parent Shearson Lehman Brothers or Alliance Capital Management's 1987 separation from Donaldson Lufkin Jenrette are rarities in the business, he said.
"Goldman Sachs probably had a bit to do with Goldman Sachs Asset Management increasing their assets from about $13 billion to $50 billion over the last five years or so," said Mr. Burkhart.