Mellon’s high-worth net getting wider, deeper

Mellon Financial Corp. is the latest banking company to expand into new areas in its hunt for a mother lode of wealthy investors.

Its private asset management unit, which manages $55 billion and administers $33 billion for the Pittsburgh bank, is slated to open offices in Cleveland and Washington within the next six months. After that, it plans to expand into the Pacific Northwest and the fast-growing Southwest.

The unit, which takes customers who have at least $1 million to invest, also might acquire a hedge fund or other kind of alternative investment firm this year.

“We want to grow the business intelligently in the states we’re in and expand to new markets and broaden the array of capabilities we have for clients,” says David Lamere, 39, president of the asset management unit.

The strategy is part of Mellon’s long-running effort to boost its investment management business, an area in which it made significant strides by acquiring Boston Co. in 1993 and Dreyfus Corp. in 1994. At the same time, it is trying to pull out of slower-growing businesses. Last year it shed its mortgage, credit card and transaction services arms and, symbolically, dropped the word “bank” from its name.The company is on the offensive primarily because virtually every major bank in the country — including Wells Fargo & Co., Wachovia Corp. and Northern Trust Corp. –is redoubling its efforts to capture the wealthy.

Newcomers are attacking the market as well, most notably Charles Schwab Corp., which made a deal to acquire U.S. Trust Corp. last month for $2.7 billion.

“It’s very competitive,” says James Schutz, an analyst in Oakbrook Terrace, Ill., for Stephens Inc. To cater to the rich, “you have put a distribution system in place and you have to have a track record. You’re competing with private asset managers and a lot of the brokerages.”

Mr. Lamere acknowledges that the competition is formidable, citing in particular the combination of Schwab and U.S. Trust.

That deal “keeps the bar high for the people who want to be successful in the business,” he says. “This is the powerful combination of two very good organizations.”

Mellon has been successful in squeezing out more fees from the niche of the rich. The private asset manager racked up $292 million in investment management fees for 1999, up 29.7% for the previous year.

core of mellon wealth arm

The unit, formed last year, is the core of Mellon’s wealth management arm, which also offers jumbo mortgages and private banking. Through Sept. 30, the wealth arm contributed $349 million in revenues — 11.4% of the bank’s revenues for the period — about two-thirds of which came from private asset management.

“Mellon considers it very important as part of their integrated money management strategy,” says Michael L. Mayo, an analyst for Credit Suisse First Boston in New York.

“This is a targeted growth area for them,” says Joseph Duwan, an analyst for Keefe Bruyette & Woods in New York. Mellon’s wealth management unit posted a pre-tax operating margin of 50% for the first three quarters of 1999, outstripping Northern Trust, which had 40%, and U.S. Trust, which reported 24%, Mr. Duwan says.

By moving into Washington and Cleveland, the bank is trying to extend its stronghold in the Northeast into contiguous markets where the Mellon name already is known.

Mellon also is trying to beef up its presence in California and Florida, two states it entered several years ago through acquisition. In December, the asset manager opened an office in Boca Raton, its third in southern Florida; it will “probably” add to its three offices in California this year as well, Mr. Lamere says. It has locations in Los Angeles, Newport Beach and San Francisco.

Mellon also is targeting the Northwest, which is percolating with newly minted high-tech millionaires as well as fast-growing Arizona and New Mexico for further expansion. It’s weighing the best way to crack into those markets.

“Our first choice would to be to go in via acquisition,” Mr. Lamere says. “We like to associate with individuals who are local to that community. The whole Southwest is a great opportunity. We’re trying to determine the best way to transition into there, whether it be through acquisition or expansion of the California” practice.

To go with its territorial designs, Mellon is planning to increase its 50-strong sales force by at least 25%, Mr. Lamere says.

It also is looking inward for new prospects. For 18 months it has been mining the data of Dreyfus mutual fund shareholders for potential clients.

a different way

“A large number of clients have taken us up on the opportunity to be asset management clients, to manage money a little differently,” Mr. Lamere says. “It’s a way to serve more of their assets than we have in the past.”

The asset manager is looking to add services as well as clients. For instance, it is upgrading its web page this year so that clients can do more on it as well as hoping to roll out alternative investments, like hedge funds and private placements, possibly from new acquisitions or alliances.

“We’re looking at building capabilities in the hedge fund area and single- purpose funds,” Mr. Lamere says. “We’ve found more and more clients have an interest in that opportunity.”

If Mellon can succeed in this, Mr. Lamere says, it has a solid future.

“We continually need to be forward moving in terms of broadening the capabilities we have, broadening the markets we serve, and adding more good people,” he says. “We come from a position of successfully doing this for a long time and having a powerful market position.”