NAB's search for broking business ends near home

THERE'S a calculated gamble in Goldman Sachs JBWere's decision to sell 80 per cent of its private client broking business, JBWere, to NAB. For it to work for them both, NAB has to persuade JBWere's customers not to jump ship, even though the deal marks the end of an era.

The same people inside JBWere will be running the private broker if retention bonuses work as planned, and Goldman Sachs JBWere (GSJBW) will continue to have exclusive access to the private client network.

But JBWere managing director Paul Heath will be reporting to the man who runs MLC and other wealth management businesses for NAB, Steve Tucker, and JBWere will be a NAB brand.

In time, GSJBW will find a different name (and perhaps higher Goldman ownership) as NAB guards a broking name that traces its origins right back to 1840, when Jonathan Binns Were opened his doors in Melbourne.

There was a family connection at the top of the house of Were until J.B. Were's great grandson, Staniforth Ricketson, passed the reins to J. Campbell Johnston in the late 1960s, and under the successive leadership of Ricketson, Johnston, Bruce Teele and Terry Campbell the firm bestrode the market like a colossus.

Were's specialty was underwriting company floats and company share issues, and its impeccable private client list (what these days is called a wealth management franchise) gave it an edge when it sought mandates.

The buying power its clients delivered meant that it could offer companies a high degree of confidence that the funds they sought would be be delivered by clients who trusted Were's advice that they should buy, with good reason. In this market, Potter Partners was similarly organised, and Were's main competition.

The private client network was a slightly faded jewel in Were's crown by the time Goldman Sachs acquired a 45 per cent interest and the firm became GSJBW in 2003.

In its home market, Goldman was (and is) as storied as Were. But by the time it bought into the Australian firm it was a complicated animal, built on the back of a similar relationship ethos, but more reliant on the in-house trading that Were had traditionally spurned as a conflict of interest, and more intensively focused on wholesale broking.

One risk was that the private client relationships that Were had patiently built up over decades would struggle for oxygen in the aggressive Goldman environment. And while GSJBW is actually a more complete investment bank, with a much bigger presence in the capital markets and mergers advice, for example, in the private client area that is to an extent what happened.

Were was not dragged to the altar in 2003. Its ability to compete was being compromised because its balance sheet was dwarfed by Goldman and the other global investment banks, and it was tending to be confined to the retail shareholder side of big issues and floats. The common view was that it faced a future as a niche player if it remained totally independent.

But tensions surfaced in late 2007, when there was a series of defections from the private client arm: these were in effect a mutiny by part of the old Were crew against the Goldman style, which had been making its presence felt in a cull of lower-value private clients, and more aggressive marketing of Goldman-branded investment funds.

Some of those who left joined former Were private client boss David Evans at a new start-up, Evans & Partners, which aims to replicate the old Were on a new information technology base, and now employs 55 people, about 70 per cent of whom are former Were employees. The new firm is sponsoring brokerage accounts worth about $3 billion and hopes to build further as Were's private client network migrates to NAB.

The key to this deal is not in the ownership split: NAB wanted the entire business, Were wanted to sell less, and the 80.1 per cent-19.9 per cent division is at least partly driven by a desire to keep Goldman's ownership below the level that triggers intrusive Federal Reserve supervision.

More important arguably for JBWere's future are underlying relationship agreements that preserve JBWere's access to all GSJBW's research and Goldman's global research, and preserve GSJBW's exclusive access to the private client network. If GSJBW bids for the job of running a share issue or a float, for example, it will do so knowing that it and it alone has the ability to tap the buying power of JBWere's private clients.

The risk is that over time the private client network will become less valuable, to both NAB and GSJBW.

It is larger than yesterday's $99 million base sale price implies, with more than 22,000 clients and assets under advice of $38 billion (roughly the same as in 2007 when the advisers defected). The average portfolio size has risen from about $2 million to $2.5 million since the cull began.

History tells us, however, that banks are not natural owners of broking businesses, and firms such as Evans & Partners exist because there is a perception that bank-owned networks are less independent and are more likely to offer equity and debt sourced from the parent.

The difficult task for NAB is to convince the JBWere clients that this time it is different: that the relationship will not be devalued. One element in that effort of persuasion is the replacement of Were's antiquated client management database, which does not offer live updates. That could cost as much as $20 million on some estimates yesterday, but it will deliver a service improvement that could be critical to NAB's marketing task.