But the failure of the California bank was a home run for Morgan Stanley.
Depositors and shareholders weren’t the only ones fleeing San Francisco-based First Republic Bank before it was seized by regulators and sold to JPMorgan. As a crisis of confidence enveloped regional and specialized U.S. banks, especially those with significant levels of uninsured deposits, First Republic’s wealth-management advisors also headed for the exits.
More than 40% of the struggling bank’s advisors left between the end of February and May 15, data from the Financial Industry Regulatory Authority show. One place those departees didn’t go en masse: JPMorgan Chase, the nation’s largest bank, which on May 1 bought most of First Republic’s assets, including the wealth management operation, for $10.6 billion in a transaction arranged by the Federal Deposit Insurance Corp.
Analysts and J.P. Morgan have touted First Republic’s $290 billion in wealth management assets as a selling point for the deal. But the advisor exodus suggests the big bank may retain fewer of those assets than widely believed, since wealthy investors tend to follow advisors when they jump ship.
Using Finra’s BrokerCheck service, Forbes counted up the advisors who left First Republic and registered with another firm between the end of February and May 15th. We first searched for advisors who are now, or were previously, registered with or employed by First Republic. We then manually reviewed hundreds of individual profiles and respective registration records to see when advisors had switched firms.
Of the 152 we identified as leaving during the time period we targeted, 28 went to Rockefeller Capital Management (an offshoot of the wealthy family’s own investment management office) and 19 went to Royal Bank of Canada’s wealth management arm. But the big winner was Morgan Stanley, which picked up 49. Only 11 First Republic advisors had moved to JPMorgan before the deal, according to Finra filings.
The bulk of the 152 departures happened before May 1, but about 40 First Republic advisors registered with new firms in the following two weeks. Since there is a lag in postings to BrokerCheck, it’s likely most of those 40 departures were in the works before the May 1 announcement of the J.P. Morgan deal. It remains to be seen how many of the First Republic advisors who haven’t left already (220, according to J.P. Morgan’s most recent estimate on May 3) will stay at the bank for the long run.
JPMorgan surely realized that such an exodus was taking place and would have adjusted its bid accordingly. Still, after the acquisition, JPMorgan CFO Jeremy Barnum said one of its benefits was “accelerating some of our key growth opportunities, particularly in wealth management.”
Similarly, the purchase was considered a smart deal on Wall Street in part because First Republic’s high-net-worth client base meshed with the big bank’s ambitions to expand its own wealth-management business. Wedbush analyst David Chiaverini described First Republic as “the diamond of the season of the FDIC-assisted deals over the past two months,” because of its high-net-worth client base, the kind of operation that “is increasingly being sought after by other banks and wealth managers.”
S&P Global estimated First Republic’s assets could add 11% to JPMorgan’s existing wealth management operation. “Assuming JPMorgan is able to retain the bulk of FRC’s [remaining] wealth advisers, we believe this should generate consistent recurring revenue,” S&P analysts wrote on May 2.
In fairness, part of the reason that JPMorgan received so few of the departing brokers may be its own restraint. As First Republic’s deposits and stock price spiraled lower, JPMorgan sent out an internal memo warning executives not to actively recruit First Republic advisors. “We directed our managers to never exploit a situation of stress or uncertainty,” a JPMorgan spokesperson told Forbes.
Citicorp and Bank of America issued similar cautions, according to Reuters. Morgan Stanley did not respond to repeated requests to say whether it had distributed similar instructions.
But there are other reasons, too–including culture and compensation–that the brokers may have favored Morgan Stanley over the big banks. Morgan Stanley was created after Congress, in the 1933 Glass-Steagall Act, required that commercial banking and investment banking be split. (One of Morgan Stanley’s founders was the grandson of JPMorgan’s founder.) While the separation of investment and commercial banking was repealed more than two decades ago, the biggest commercial banks still struggle to attract some of the richer wealth management clients.
“The fact that many of these wealth advisors were with First Republic and not one of the other large banks in the first place suggests that there could be some adverse selection from JPMorgan’s perspective,” notes Eric Compton, a senior analyst at Morningstar. “Meaning, these are advisors that might be more likely to leave over time to go back to the non-mega bank set up and/or culture.”
What the advisors do is critical, because an advisor that moves from one firm to another typically takes roughly 75% of their client assets with them, according to research firm Cerulli Associates.
But Compton figures JPMorgan structured the deal to be profitable even without the advisors who had already departed. Just acquiring First Republic’s commercial banking business, which accounted for 82% of the bank’s more than $1.6 billion in net income last year, according to filings, would leave JPMorgan with good returns, he says. (At an investor presentation Monday, JPMorgan predicted the acquisition would raise its net interest income for 2023 by $3 billion to $84 billion.)
“Any ability to keep any of the additional value of First Republic (wealth clients, wealth advisors, private bankers, etc.) would be extra optionality on top of that, which is the smart way to do it,” Compton wrote in an email exchange with Forbes, adding, “by structuring it the way they did, JPMorgan minimized those risks financially, and made sure the deal made sense under multiple scenarios.”
“There will definitely be some distractions throughout the integration process and it’s pretty hard to know if most clients and advisers stick around,” an Evercore ISI analysts group led by Glenn Schorr wrote after the deal, though they added that it certainly “accelerates” JPMorgan’s U.S. wealth strategy.
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everal advisors interviewed by Forbes who asked to remain anonymous predicted there will be a cultural adjustment for many of the former First Republic advisors who stay at JPMorgan. Some will certainly enjoy the stability provided by being at a bigger institution, but many others could have a hard time adjusting to the more rigid structure. One example: First Republic was able to offer loans to clients on attractive terms JPMorgan is unlikely to replicate.
Another key consideration is compensation structure and what kind of payouts First Republic advisors will get. As an aggressive recruiter of wealth advisors over the last few years, First Republic offered a variety of significant bonuses to attract talent. Now, those advisors will have to adjust to a new reality at JPMorgan, which like many of the other big wirehouses, promotes a team compensation model, rather than outsized awards for the stars, insiders say.
Still, the bank has made aggressive efforts to persuade First Republic advisors to stay, with CEO Jamie Dimon and other executives pitching on conference calls the company’s resources and offerings for clients. JPMorgan will almost certainly be targeting certain advisors (especially those with big client assets on their books) in its retention efforts. First Republic’s strong roster of wealthy clients in coastal cities such as San Francisco and New York is, after all, the heart of this prize.
“There are many tools at JPMorgan’s disposal to manage retention risk, such as compensation and incentive structures, or things like additional autonomy within JPMorgan’s overall management structure,” notes Compton.
Why did Morgan Stanley receive so many of the departing wealth managers? A spokesperson for the firm insisted they didn’t solicit any of the hires. But a source familiar with the company’s operations says that Morgan Stanley did actively recruit at least some of the advisors who signed up with it.
Even if the firm’s recruitment was low key, departing advisers showed a clear preference for going to Morgan Stanley and less interest in JPMorgan.
“The good news is that these advisors are going from one strong brand to another strong brand,” says Rob Sechan, CEO of NewEdge Wealth, an investment advisory firm with more than $30 billion in assets under management. He predicts most advisors and their clients will welcome the stability of a bank that is not reliant on uninsured deposits to support its assets. What’s more, he points out, many of the advisors who were on long-term contracts at First Republic are more likely to stay put now in order to get their full payouts.
“Clients will certainly like JPMorgan’s stability better than First Republic, but a lot might consider other options in finding their own preferred new advisor,” says James Stack, president of Investech Research and Stack Financial Management. “If clients start leaving JPMorgan, the advisors will leave.” And vice versa, of course.
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