Win Smith sees big financial firms getting bigger

By John McCrank

TORONTO (BestGrowthStock) – The consolidation of the U.S. financial industry is far from over, with big, cash-rich banks still eyeing regional players as attractive targets, industry veteran Winthrop Smith said on Wednesday.

But as the big firms get bigger, there is likely to be more space for new boutique firms in both wealth management and private banking, he told Reuters in an interview.

“There’s an evolution going on in financial services right now,” said Smith, who was in Toronto for meetings at wealth manager Richardson GMP, where he is the incoming chairman.

“There is change, there is consolidation and there is the migration to the larger national or global firms, but I also think there is an opportunity for boutiques.”

Smith, who’s father was a founding partner of Merrill Lynch, Pierce, Fenner & Smith, worked at Merrill for almost 30 years, leaving in 2001 when Stanley O’Neal took the helm.

Under O’Neal, Merrill moved toward more lucrative but riskier practices, and eventually ended up a casualty of the financial crisis, as steep losses forced it to merge with Bank of America (BAC.N: ).

Smith said the results of the merger have been mixed.

“On the wealth management side, it’s actually going pretty well. I think it’s because they’ve let Merrill Lynch be Merrill Lynch,” he said. They’ve kept the brand, and they haven’t really interfered.”

“The institutional side has been more challenging, and I think it’s going to be a question of, can Bank of America Merrill Lynch be as strong as Merrill Lynch was in 2000, 2001, where it was very competitive globally with Morgan Stanley (MS.N: ) (Read more about the money market today. ) and Goldman Sachs (GS.N: )?”


The competitive landscape may get tougher, Smith said.

“The big banks have been strengthened, they’ve got capital positions back,” he said, pointing to BofA, Wells Fargo (WFC.N: ) and Citigroup (C.N: ). “I think that they ultimately will have the strength to continue to be consolidators.”

The big Canadian banks, which escaped the financial crisis relatively unscathed due to the country’s more conservative regulatory regime, have also been on the acquisition hunt, following a recent loosening of capital limits.

“Given the strength that they have and the absence and the void of problem loans and of sub-prime and CDOs, (Canadian banks) have the ability to expand overseas,” Smith said.

As to the likely acquisition targets, he pointed to U.S. regional banks, many of which have largely flown under the radar, but have been hurt by bad debt and bad investments.

Mid-sized asset management firms are also likely targets.

“Expenses are up, fees are down, they don’t have the embedded distribution, so you are likely to see more consolidation in asset management.”

On the flip side to the growth of large banks, Smith said he thinks there is going to be real opportunity for boutiques to open, both in wealth management and in investment banking.

“To do that today, it doesn’t require as much capital. You can outsource a lot and a lot of professionals don’t want to be part of amorphous institutions,” he said. “You haven’t seen it yet because of the crisis, but I think you will see more boutiques forming.”


One of the big risks Smith said he sees on the U.S. horizon is the big push toward increased regulation. He said he’s concerned that it could go from one extreme to the other, from being too loose to too tight.

“We saw that in the crash of ’29, and it took almost 50 years to get a regulatory framework that was more client-centric, and there is the risk that that could happen today.”

The Dodd-Frank U.S. financial regulatory overhaul bill, the most significant in generations, was signed into law in July with the aim of closing some of the gaps in oversight exposed after the U.S. housing bubble burst in 2007.

“The regulatory bill is 1,200 pages long — people haven’t digested it and there is still a lot of administrative ruling,” said Smith. “So the problem people have right now is that they’re really not sure of what the rules are and that’s the worst you can have — no road map.”

(Reporting by John McCrank; Editing by Frank McGurty)

Win Smith sees big financial firms getting bigger