Post-collapse, here's what's next for Silicon Valley Bank's wealth management business

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Thousands of private wealth clients at imploded Silicon Valley Bank will get all of their money back, a surprising and unusual outcome in the collapse of a U.S. financial institution.

Under Federal Deposit Insurance Corporation rules, bank depositors are insured to $250,000, with amounts over that amount almost never recoverable — a serious worry for the failed bank’s affluent customer base. But late Sunday, the Treasury Department, FDIC and Federal Reserve took the unusual step of announcing that depositors from individuals to businesses would recoup 100% of their money.

“Depositors will have access to all of their money starting Monday, March 13,” a joint release said. FDIC insurance covers checking and savings accounts, money market accounts and certificates of deposit.

The highly unusual relief came as regulators scrambled to stave off financial contagion after SVB Financial Group, Silicon Valley Bank’s parent in Santa Clara, California, was seized March 10 by regulators. The shock receivership came just one day after spooked depositors yanked more than $40 billion in cash and only 48 hours after the bank announced a surprise sale of bonds and plans to issue new shares to shore up its balance sheet. 

Depositors can now breathe a sigh of relief. So can companies like streaming service Roku, which said March 10 in a securities filing that about 26% of its $1.9 billion in cash and cash equivalents as of March 10, roughly $487 million, was at Silicon Valley Bank.

But despite Sunday’s sudden move by regulators, the cratering of the nation’s 16th-largest bank  leaves several shoes still to drop. 

Specifically, the collapse has raised questions over whether SVB and its wealth management units will find a buyer. It has also ignited a scramble by financial advisors to find new jobs, industry insiders say. 

Regulators started an auction for SVB Financial on Sunday afternoon, with final bids due by March 13, Bloomberg reported, citing people familiar with the matter. The bank had $209 billion in assets and $175 billion in deposits at the end of last year

Money, money, money
The failed $200 billion lender to technology companies and venture capital firms had three affiliated asset managers and one broker-dealer: SVB Asset Management and SVB Wealth LLC, both SEC-registered investment advisors, and bank and broker-dealer SVB Investment Services, which also functions as a registered investment advisor. 

Many wealth management clients appear to be founders and managers of tech startups and private investment funds who use the bank’s family office, estate planning and “personalized financial planning” and “custom portfolio management” services.

More than 3,000 individual clients of SVB Wealth had a collective $14.4 billion in assets as of last October, the unit’s most recent regulatory filing shows. The bulk of the money, $13.8 billion, was held by 2,019 high net worth persons, while over $618 million belonged to 1,106 individual investors, according to the Form ADV filed filing. 

More than 500 clients at SVB Investment Services had nearly $1.4 billion in assets, including $1.3 billion owned by high net worth individuals. It also managed $63 million for endowments.

SVB Asset Management managed more than $85 billion, mostly for corporations and other businesses.

Cash sweeps
Concern ran high for clients at the bank’s affiliated wealth managers and broker-dealer because those entities appear to have had the option of sweeping clients’ cash balances in checking, interest-bearing savings and money market accounts to Silicon Valley Bank, rather than to a third-party custodian, law firm Morgan Lewis wrote in March 11 note.

Securities regulators define a high net worth investor as having at least $750,000 managed by an advisor or a net worth exceeding $1.5 million, levels that far exceed what a wealth management client might have kept in cash at the bank. 

Peter Nesvold, a New York-based investment banker and partner at Republic Capital Group in Houston, said March 13 that there was “an unusually high percentage of cash balances that are unsecured and uninsured at Silicon Valley Bank.” 

One advisory unit, SVB Wealth, managed nearly $16 billion in client assets as of last October, with the bulk, $13.8 billion, for high net worth individuals, according to its most recent Form ADV securities filing. SVB Asset Management oversaw more than $85 billion, mostly for corporate and other business entities. SVB Investment Services had roughly $1.5 billion in client assets, of which $1.3 billion were for high net worth individuals.

Genevieve Roch-Decter, a chartered financial analyst, said in a tweet on March 10 that “only 2.7% of SVB deposits are less than $250,000. Meaning, 97.3% aren’t FDIC insured.” But depositors will get their money back.

FDIC rules say that the first people to get reimbursed when a bank bellies up are those with secured claims, meaning they’ve lent the bank money, with bank property as collateral. 

Next up are the FDIC’s administrative expenses for sorting out the blow up, followed by consumers with insured deposits, covered up to $250,000 per investor. Then come consumers with uninsured deposits, followed by general creditors and stockholders. The latter two groups typically recoup little, if anything.

The FDIC originally said it would give Silicon Valley Bank’s insured depositors access to their insured deposits no later than Monday morning, March 13. Meanwhile, uninsured depositors would receive an “advance dividend” of unknown size within a week and a “receivership certificate” for the remaining amount of their uninsured funds. Now all depositors will recoup everything.

Any takers?
Silicon Valley Bank fell apart as higher interest rates eroded the value of its bonds and startups drew down their balances when venture capital funding dried up in the pandemic economy. It’s the biggest bank implosion since Washington Mutual bellied up in 2008 during the financial crisis. 

Amid the run up to the implosion, SVB was without a chief risk officer for much of 2022, a March 10 post on Substack’s “Nongaap Investing” said.

Concerns about collateral damage grew as the bank’s tech startup clients worried about meeting payroll this week and online sellers at platforms like Etsy feared their payments wouldn’t be processed. The joint statement on Sunday said that regulators and officials had considered the implosion a matter of “systemic risk” to the U.S. financial system. 

Now, regulators’ efforts to offload the bank could be a tough sell, Nesvold said. Bank regulators typically want things to go to one buyer, not piecemeal, which means that whoever might want the wealth management units would also have to take the failed bank. 

“I think given the sense of urgency to stabilize the financial system, the FDIC is really going to make sure this (SVB) goes to one buyer, not buyers,” he said.

Advisors scramble
Meanwhile, SVB Wealth’s 25 brokers and 108 advisors are pounding the pavement in search of new jobs, Nesvold said. So are the 88 employees at SVB Asset Management who perform investment advisory functions, including research.

“I’m hearing in the market that there’s a ton of recruiting activity going on,” Nesvold said. “So if wealth management firms can’t acquire (just) the Boston Private Bank asset” — a crown jewel in SVB — or other RIAs or the broker-dealer, “maybe they can hire away some of the talent during this period of instability.” 

Silicon Valley Bank bought Boston Private Bank in January 2021, a move that jump started its private banking operations in Boston, Los Angeles, Miami, New York and San Francisco. At the time, SVB president and CEO Gregory Becker said the company aimed to rope in $630 billion in wealth management assets, including $250 million among its existing commercial customers, in the coming year.

Meanwhile, investment funds that use SVB as a custodian will likely be looking for new providers.

A 46-page list of mostly obscure venture capital and private equity funds for which Silicon Valley Bank is custodian and that was obtained by Financial Planning shows hundreds of nine- and 10-figure private funds. The list was compiled by Castle Hall, a database company headquartered in Montreal for the global investment industry, from Form ADV filings. Nine funds run by private equity firm Banyan Capital Partners used the bank as custodian, one with $6.6 billion in assets as of June 2022, the largest fund in the list.