JPMorgan Eyes the True Prize in First Republic Deal: Wealthy Customers

“The branches that we are acquiring from First Republic are in attractive locations and affluent markets, which is an opportunity to accelerate our wealth strategy,” JPMorgan Chief Financial Officer Jeremy Barnum said on a conference call with analysts Monday, adding that certain First Republic branches will be converted into JPMorgan “wealth centers.”

“This gives us a kind of an opportunity to look at how we deal with high-net-worth clients,” said Chief Executive Jamie Dimon on the same call. “We hope to learn a lot from them.”

Banks like the wealth-management business because it provides a stream of income that is often more stable than other highly cyclical businesses. A bank might charge a client an annual fee that is a small percentage of their assets under management, plus incidental fees for trades or other transactions it helps the client with. Morgan Stanley has won plaudits from investors for its transition since the financial crisis into a wealth-management powerhouse, providing its quarterly earnings with a steady ballast. 

This client base is also ripe for cross-selling other services. A wealthy entrepreneur might need help financing a business or taking it public. Conversely, a windfall from a business listing or sale could provide a bounty that needs a home with a wealth adviser. 

One thing JPMorgan isn’t interested in is making ultracheap mortgage loans to wealthy clients, a First Republic specialty that helped land it in trouble. Mr. Dimon made this clear on Monday, saying that “the low-cost-lending business is not what JPMorgan does.”

But there are many more ways than one to make money from a rich banking customer. JPMorgan, with its broad offering of first-class brokerage, asset management and investment-banking services, looks well-positioned to do so. 

At the end of the first quarter, JPMorgan had $2.59 trillion in client wealth-management assets. That puts it well behind Morgan Stanley with $4.56 trillion and Bank of America with $3.52 trillion. Intriguingly, these two wealth-management franchises were built in significant part from financial-crisis-era acquisitions: Bank of America scooped up Merrill Lynch in 2008, and Morgan Stanley acquired a controlling interest from Citigroup in the Smith Barney brokerage in 2009, eventually taking full ownership.  

First Republic had almost $290 billion in wealth client assets at the end of the first quarter—enough to make a significant dent in, though not nearly close, the gap with JPMorgan’s biggest bank competitors. Notably, that represents more than 2.7 times First Republic’s total deposits at the time, illustrating just how appealing this client base is to a bank with wealth-management services to offer. That compares with a ratio of 1.1 times for JPMorgan and 1.8 times for Bank of America. These assets delivered $223 million of revenue to First Republic in the first quarter.

Of course, not all that money will stay with JPMorgan following the transaction. Individual wealth advisers could decide to go elsewhere, bringing their clients’ money with them. Or customers could decide on their own to walk, for whatever reason. 

This helps explain why Mr. Dimon took time on Monday’s call to personally make a pitch to First Republic wealth advisers. “If you were an adviser and you’re listening to me, we have the best research, best equity, best debt, best munis.” He went on, “We have concierge services. We take care of people. We’ve got excellent compensation plans. We’re very steady. We’ve got unbelievable banking products. We have unbelievable products for your business banking clients, your middle-market clients, your corporate clients. We have huge capability we can bring to help them do a great job for their clients.”

Talk about cross-selling. Even allowing for some loss of client money, plugging First Republic’s customer base into JPMorgan’s panoply of commercial and investment-banking services could be a home run. Crises really can be opportunities.

Write to Aaron Back at [email protected]

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