Northern Trust sees room for old firms in new world

Steven Fradkin, CEO of Northern Trust’s wealth management business, is a strong believer in learning from history. “We have been around for 125 years,” he says, after his recent appointment as boss of the US-centred franchise specialising in managing assets for the world’s wealthiest families. Northern Trust serves  more than 20 per cent of the Forbes 400 Most Affluent Americans list, managing $225bn (€212bn) in client assets. “There are a lot of great names in financial services which have not made it that far.”

Successful firms, he believes, have been those best able to adapt to a fast pace of change in private banking, particularly in the realm of technology. “Change is a necessity,” he says, for clients facing increasing complexity but demanding higher service levels.

While not denigrating the increasing numbers of “start-up” boutiques populating the expanding wealth management industry, there is a strong advantage for the long-established players, believes Mr Fradkin. 

“It is easier to talk to a client if you have been doing this for generations,” he says, enjoying the fundamental advantage that comes from working through a series of economic cycles. “If you don’t have that experience, you might have a good asset allocation, but that is only a piece of helping clients manage their wealth.”

Older firms have also had the opportunity to enhance and improve their client offer, he says, tucking into a working breakfast of yoghurt and fresh, exotic fruits at Northern Trust’s New York office on West 57th Street, close to Central Park.  

“Having been around so long gives us a broadened set of capabilities, including expertise in oil and gas, financing the jet and running the family business. We are not just about creating an asset allocation and providing trust administration.”

He admits that newer, leaner operations can avoid damaging legacy business and obsolete business models. “The new boutiques don’t have the baggage, but they also don’t have the breadth, depth or capacity of firms doing things for a long time. These are the trade-offs.”

He takes the helm of a company fast adapting its mindset, not to just service the wealthiest families, but to address those individuals whose wealth is rising through single digit millions, through sales of family businesses, until it surges beyond the $50m mark. “Whether you have $10m or $50m, we have a full suite of capabilities to cover your needs,” he says, offering the services of Northern Trust’s more than 60 offices “from coast to coast” across the US.

The bank must beat off “a very diffuse competitive set” of both domestic and global firms in order to win clients’ custom, he says, sparring with mutual fund houses, independent advisers and bank trust companies.

The higher a client climbs through the wealth continuum, the more important it becomes that the provider can offer an integrated wealth platform, he believes.

“As people accumulate assets, their interests tend to become more complicated and there are fewer firms which can think on an integrated basis across your financial affairs than there are managers who can manage your assets,” says Mr Fradkin, citing risk profiles, investments, savings, tax and inheritance planning as among the factors which wealth managers must accommodate.

“Most clients are talking about asset management in the context of their financial affairs, not as an activity out on its own,” he says. “That’s where we have an advantage. There is competition out there, but as needs become more complex, the number of providers with the credibility to navigate across clients’ needs becomes more limited.”

He appreciates that much of the innovation currently taking place in wealth management – including the development of “robo” advisers, comes from the technology angle, rather than banking or investment sources. But he believes Northern Trust’s capacity and connections in the tech-led custody world places the firm well for advancement.

“The competitors of yesterday are not the competitors of today or tomorrow,” he says, anticipating that the fastest moving developments will come from processing and technology companies in “adjacencies” to our wealth management space rather than core private banking players. “We need to understand what is going on in the industry as a whole, not just in our space. We need to understand where the competition will come from in the future and how to make ourselves more competitive.”

To achieve this, Mr Fradkin wants to make increasing use of his company’s “other half”, consisting of corporate and institutional services including asset management and custody, which makes up the other 50 per cent of revenues to counterbalance wealth management. “Some of our best, cutting edge ideas start from the institutional side and move to the private side. We benefit from this,” he says.    

Yet the degree of technological advancement has its bounds at the highest level of wealth management, if not within the mass affluent tiers, where deposits through mobile apps now easily exceed the funds being deposited by Northern’s clients in person. 

“Unlike our parents, who liked to drive up to the bank and chat to the teller, our younger generation does not know how to go into a bank and make a deposit,” he says, demonstrating the importance of digital apps for this particular demographic.

“Digital technology will continue to be important, particularly at the retail level. But as people accumulate more substantial sums, it becomes more difficult to tell them to put it in an algorithmic model and that they don’t need advice,” he says. “Having people on the other side of the table, whether they are face timing or skyping you – is still important in servicing more significant levels of wealth.”

Clients will self-select their wealth managers – most spreading their assets across a small range of players – in order to match their communication needs and the style of organisation they are comfortable with.

“Some don’t care about intimacy and prefer product shops,” he says about customers happy to give their money a high-tech home with a minimum of personal contact. “Others value advice, intimacy and experience and gravitate to a more client-centric model. In either scenario, technology is vital. You need infrastructure, tools and data to build a platform and work stations to provide intimate advice.”

Innovation on the investment side is just as important as the digital revolution, believes Mr Fradkin. “We are harnessing low-cost investment vehicles such as ETFs and alternatives,” he says. “When I came into the wealth world, it was all about a 60/40 US stocks to bonds investment profile. Now clients want to be in timber or global macro strategies. They are slicing up their investment strategies and allocations.”

Very few US banks have the ability to concentrate on wealth management as their core business and make major technological investments into their services, he believes.

“One of our advantages is that this is our business,” he says. “For a subset of our competitors, it really isn’t theirs. For many banks in America, it is not their core or growth business or where their management team comes from. We would never have the debate of whether to stay in wealth or get out of it, as this is 50 per cent of our earnings. In a very large institution, it is not the priority of the CEO.”

Northern Trust is clearly a conservative institution. It has often been criticised for claiming to be global, while being dominated by a very parochial, custody-led mentality.

While Mr Fradkin disputes this, he does not deny that his priorities lie domestically. “We have grown very nicely outside the US, but it is still a smaller piece of what we do,” he says. “Outside the US, we have chosen to only focus on the ultra high net worth sector. Here in the US, we have a long history and investment infrastructure.”

The lack of regional penetration in distinct European markets makes it impossible for Northern Trust to have a deeper imprint there, he says. “If someone lives in the Midlands in the UK and has £5m (€7m) to invest, we would love to have them as a client, but others are already catering to this market for many years, and our experience there is not sufficiently distinctive.”

The needs of “ultra affluent” families however, “whether in Riyad, London or New York are very similar,” he says. “We feel we have a distinct competitive advantage in this global family office space.”