First Republic's cloudy future puts wealth management on notice

The surging growth in First Republic Bank's wealth management unit over the past dozen years will clearly be stymied in coming weeks and months as the bank deals with the fallout from the 66% drop in its stock price last week, the attempts to avert a run on the bank of the kind that pushed Silicon Valley Bank into bankruptcy last week, and increasing speculation about a sale of the company.

First Republic Bank's stock opened at $27.74 per share on Friday, hours after a group of giant banks got together to announce they were infusing $30 billion of uninsured deposits into the lender. A few days earlier, the bank had said it had access to additional liquidity from the Federal Reserve Bank and JPMorgan Chase & Co.

"First Republic wealth management is a great franchise, and there have been discussions this week about the bank being acquired by a larger institution," said Robert "RJ" Moore, a veteran industry executive and former CEO of Cetera Financial Group. "It would make sense on a lot of different levels for someone to take a look at them on the acquisition level."

The bank has two significant business lines, commercial banking and wealth management.

Over the past decade, the bank has been a significant destination for wirehouse advisers looking to leave Wall Street for a smaller firm while getting paid a significant bonus to do so. First Republic has been known to pay at the high end of bonuses for financial advisors in regions it is looking to expand.

First Republic's results show the bank's focus on wealth management. In 2010, wealth management accounted for 5% of its total revenues, according to the company. Jump forward a dozen years, and in 2022, wealth management generated 15% of total revenue, with $271.2 billion in total wealth management assets at the end of last year.

First Republic's wealth management business, with about 200 financial advisors, is much more significant than that of Silicon Valley Bank, which has $17 billion in wealth management assets. There's little doubt that First Republic will have trouble hiring more financial advisors from large competitors in the coming weeks and months as it works to stabilize its base of customer deposits.

Speculation Friday that First Republic Bank was headed towards a sale would only further restrict, at least in the short term, the bank's wealth management growth.

“Recruiting in the immediate term has paused,” said Danny Sarch, a veteran industry recruiter. “What advisor will be able to tell the clients it’s better for them right now, even though First Republic does clear with Pershing, so the assets are not at risk.”

“And for financial advisors who are there, it’s been too short a time since this started for teams to flee,” Sarch said. “A few months from now, we may see financial advisor defections, but the teams are too complicated and sophisticated to make an easy move.”  

He added that there were other unknowns for the wealth management business, including whether the $30 billion bailout came with some type of restrictions on First Republic's recruiting advisors from the rivals making deposits and the terms of the long-term notes paid to advisors to join the bank’s wealth management group.

“With all that said, morale there must be challenging,” Sarch noted.

The collapse last Friday of SVB Group, the holding company for Silicon Valley Bank, and Sunday's closing of Signature Bank have spread panic across the banking sector, leading to fear that another bank might be shut by regulators or sold, analysts and market source said. San Francisco-based First Republic's proximity to Silicon Valley also created anxiety for the bank's clients and investors, those sources said.

"Unfortunately, this fear has moved to First Republic Bank, with numerous reports indicating that clients are frantically looking to withdraw deposits," Alexander Yokum, equity analyst with CFRA, wrote Tuesday. "Although First Republic is a resilient bank, we still expect margins to be pressured as many wealthy individuals, a large portion of the deposit base, will likely move deposits in upcoming days to large mega banks."

A First Republic spokesperson did not return a phone call Friday morning to comment.

First Republic Bank was part of Merrill Lynch when Bank of America Corp. took over the firm during the credit crisis in 2010; Bank of America later sold First Republic to a group of private investors, which then took it public.