23 July 2019

Regulation of Public Pension Advising Has Tightened

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Bank of America Corp.’s Merrill Lynch looked at the business of advising public pension funds and saw no future in it. That meant Brian and Timothy Brice’s future would be with another brokerage. The brothers run a Birmingham, Mich.-based practice that had been with Merrill Lynch since its founding by their father in 1967. They managed $4.5 billion in client assets, much of it money in pension funds, and took that business this fall to Morgan Stanley’s institutional consulting arm, Graystone Consulting.

The move underscores the contrasting visions of the rival banks regarding a specialized and lucrative niche in the advisory business, with Merrill Lynch believing tightened regulation of public-pension advising poses too much trouble, and Morgan Stanley confident it can profitably manage those risks. Some $3 trillion in assets are held by pension funds, and Morgan Stanley says it is happy to take over at least part of the field ceded by Merrill.

In 2011, Merrill Lynch first told its advisers to stop taking on public pension funds as new clients. Then the company announced last year that it was largely shutting down its services to the funds. This year, however, the company made clear the Brices would have to shed a serious portion of their business by September.

Merrill’s retreat from advising public pension funds affected less than a dozen advisers, people familiar with the matter said. Merrill declined to disclose how much in assets it was giving up overall, but it had been seen as a perennial competitor to Graystone, which says it manages roughly $14 billion in assets from public pension funds.

The shift didn’t affect Merrill Lynch’s work with other institutional clients, including private pension funds, endowments and foundations. And the company wants to expand its business in areas such as advising on institutional retirement services, including 401ks, health savings accounts and equity plans, she added.

Morgan Stanley took over Graystone in its acquisition of the Smith Barney brokerage from Citigroup Inc., which was completed last year. Graystone has about 50 financial adviser teams who consult on more than $200 billion in institutional client assets, including pension funds, endowments and foundations. The $14 billion in public-pension assets represents about 7% of that total, and Graystone would like more of them.

The Brices’ business was the biggest recent win in terms of assets, and a couple more practices are moving over in the coming months. Overall, Graystone’s assets under management have grown by nearly 75% between 2010 and 2013.

There aren’t that many available practices that have expertise in advising public pension funds. The activity requires special certifications and, to be compliant with the recently enacted Municipal Advisor Registration Rule, both advisers and their broker-dealers must register with the Securities and Exchange Commission. Governments have tightened up on the business, including tighter restriction of political contributions designed to curb “pay to play” tactics.

Morgan Stanley’s other two largest competitors, UBS Wealth Management Americas and Wells Fargo Advisors, also have institutional consulting units that continue to advise public pension fund clients. Both are smaller in terms of total assets under management. UBS spokesman Gregg Rosenberg said the firm has “many” municipal clients and plans to add more in a “selective manner.”

There is also competition from investment consulting firms such as Cambridge Associates LLC and NEPC LLC, which already advise many public pension funds.

The Brices said their move to Morgan Stanley has gone smoothly, with nearly all their clients already having made the transition with them. It helped to see familiar faces among their new employers, Brian Brice said.

Click here to access the full article on The Wall Street Journal. 

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