During the first 100 years or so after gaining its independence, the U.S. had a very small private banking system that provided most of the legal tender (money) in circulation at the time. Then a country of small-scale farming, the U.S. had many assets tied up in the value of its land, and there was a general prejudice against mortgages and debt of any sort, which represented a threat of land loss if not paid. Bankers who could repossess land were seen as suspicious characters. Attempts to foster a federally chartered bank became a campaign issue under President Andrew Jackson in 1829, who led a populist movement claiming that federal banking was illegal under the U.S. Constitution. The financial system fostered under such hostility was then made up of small, state-chartered banks that issued bank notes. Since these lacked liquidity, they were subject to various panics and bank failures, making banking a more risky proposition than it is today. Consequently, most investment was made in land since the country’s economy was largely agrarian.
It wasn’t until the start of the Civil War in 1861 that the U.S. began to develop the rudiments of a modern banking system. Maintaining large modern armies required unprecedented amounts of money. The Union increasingly turned to modern methods of financing, including massive printing of paper money and issuing long-term debt with the help of financier Jay Cooke. Cooke sold more than $1.3 billion in federal bonds to help finance the war, and his agents penetrated even the smallest towns across the country, selling not just an investment return from the bonds, but banking as a patriotic institution. Together with the National Banking Act of 1863, the bonds provided the basis for a national banking system and established a national currency.
The Gilded Age
The new banking system helped foster rapid industrial transformation in the U.S. during the latter half of the 19th century. With increased industrialization and liquidity came increased concentrations of paper money in individual hands, often known as wealth. Unlike land, handling paper wealth requires private wealth managers. With increasing confidence in the banking system, more and more wealthy people turned to professionals, who worked either for banks or for brokerage firms, helping clients invest and protect their capital.
Ironically, a further boost to confidence in financial markets came in 1871 via the Great Chicago Fire. Though a number of insurance companies failed to pay clients in full, the largest and most notable firms from Hartford, Connecticut (the Hartford, Phoenix Mutual, and Aetna), promptly paid all claims, allowing the city to rebuild with a better modern design than it had prior to the fire.
Additionally, in the latter half of the 19th century, laws governing the creation of corporations were liberalized, making it easier to set these up and maintain them. As a result, wealth became more liquid and prevalent. The late 19th century and early 20th century saw unprecedented growth in the number of millionaires. Money, or paper wealth, became admirable as well as respectable. This was the time of Horatio Alger and the "strive-and-succeed" stories that bred the hero-worship of industry captains like Cornelius Vanderbilt, John D. Rockefeller, and Henry Huttleston Rogers. These men are now regarded as robber barons, because of their perceived rapacious business tactics and lack of ethical conduct.
The Great Depression and Reform
The central banking system of that time stayed in place with minor modifications (such as the Federal Reserve Act of 1913, which created the Federal Reserve) until the stock market crash in 1929. Many attributed the crash to speculative excesses by banks and brokerage firms that let clients borrow money to buy stock without the proper means to leverage their investments and beyond their capacity to repay their debt. Others blamed easy credit terms that allowed consumers to fall deeper and deeper into debt.
The federal government enacted legislation to address these and various other investment concerns. In 1932, the first of the Glass-Steagall Acts was passed, allowing the Federal Reserve to better control the money supply. A year later, the second half passed, separating the activities of brokerage firms and banks. The 1933 act also prohibited banks from owning brokerage firms, and required that specific financial data be disclosed to investors when registering a new issue of securities. Later, the Securities Act of 1934 was passed, regulating financial markets, such as stock and bond markets, and creating the Securities and Exchange Commission.
The end result, with respect to the wealth management industry, was that private banking or private wealth management remained fragmented. Banks, for instance, offered the types of services, like trusts and managed accounts, important to wealthy clients that brokerage firms didn’t. Brokerage firms offered insurance products and management of individual stock purchases that banks couldn’t. A lack of competition among banks and brokerages for various types of business diminished their incentive to innovate, or provide imaginative solutions to clients’ problems. This led to private wealth management, for many years, becoming a stodgy, stifling business.
The Roaring Nineties
From 1990 through 1999, the Dow Jones Industrial Average rose from nearly 2,500 to more than 11,000 points. With the markets growing significantly each year, even stodgy, naturally risk-adverse bankers began to calculate the profits they were missing out on by not participating in one of history’s great bull runs. Accordingly, banks devised a number of strategies to circumvent Glass-Steagall to offer a full range of investment services. Lease agreements with specialized broker/dealers that only serviced banks became common, allowing the banks to lease brokerage employees. Instead of owning a brokerage they offered services through these leased employees. Brokerage firm investors realized that if banks could buy brokerage firms, the firms’ share prices would rise because prices go up when there are more buyers. Brokerage firms would also benefit by gaining access to investors that previously only dealt in bank-issued and insured certificates of deposit.
Modifications were slowly made to the Act until 1999, when the Gramm-Leach-Bliley Financial Services Modernization Act repealed Glass-Steagall altogether, resulting in the modern financial services industry, which combines retail and commercial banking, insurance services, and brokerage into one unit, with private wealth management departments serving the richest and often choicest private clients.
The Great Recession and Recovery
The banking and wealth management industries enjoyed strong growth until 2007, when the United States began to suffer through a financial crisis that many economists believe was the worst since the Great Depression. During the crisis, which lasted from December 2007 to June 2009 and has become known as the Great Recession, the S&P 500 plummeted in value (especially in 2008), the U.S. housing market crashed, many people who had taken out subprime mortgages lost their homes, and interbank credit markets dried up, causing the failure of many banks and businesses. The end result: investors became very cautious with their money, and the wealth management sector and the overall financial services industry faced tough times.
In response to the crisis, the federal government stepped in to ensure the continued operation of some financial institutions (such as mortgage giants Fannie Mae and Freddie Mac) that were deemed “too big to fail.” Congress approved a $700 billion rescue package for the financial sector, and the U.S. Department of the Treasury required even healthy banks to accept Troubled Asset Relief Program (TARP) funds to help encourage confidence in the banking sector. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which increased regulation of the financial industry and protections to consumers. Many Dodd-Frank provisions and other financial regulations have since been rolled back or reduced to make it easier for companies to do business. In 2017, Congress passed the Tax Cuts and Jobs Act, a tax reform bill that experts believed would increase revenues at companies as a result of the reduction of the corporate tax rate from 35 percent to 21 percent. Investment management firms also benefitted from the reduced tax rate. Wealthy individuals will pay lower taxes and benefit from other provisions of the law, suggesting that there will be more demand for skilled wealth managers to help them invest increased earnings.
Today, the wealth management sector has rebounded strongly. Total assets under management (AUM) at the world’s 500 largest asset managers reached $104.4 trillion in 2019, according to Willis Towers Watson and Pensions & Investments. This was a significant increase from $84.9 trillion in 2016. Global assets under management are expected to increase to $145.4 trillion by 2025.
The COVID-19 pandemic, which started in China in 2019, caused tens of millions of infections, more than a million deaths, and massive business closures and job losses worldwide. In early 2020, the economic effects of the pandemic caused stock markets to crash and a global recession to occur. More than $18 trillion was erased from global financial markets in February and March 2020, according to the World Federation of Exchanges. By early September, the U.S. stock market and other financial markets had rebounded—although performance still lagged behind 2019 highs. In the long term, the outlook for the investment industry is strong. Global assets under management are expected to increase from $104.4 trillion in 2019 to $145.4 trillion by 2025, according to the professional services firm PwC.
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