September 14, 2013
By Chana R. Schoenberger
City National Bank in Los Angeles has become, over decades, the go-to financial advisor and asset manager for show-business heavyweights.
Where do Hollywood's and Broadway's wealthy stars get their financial advice? More often than not, they find a hand-caressing banker at City National Bank in Los Angeles, which for decades has quietly earned a reputation for managing celebrities' money.
Bob Philpott is the managing partner of the Encino, Calif., entertainment business- management firm Philpott Bills Stoll & Meeks. The company represents 120 Hollywood directors, producers, and actors, including actor Michael J. Fox and the producers Jerry Bruckheimer and Dick Wolf. Philpott has parked his clients' money with City National for 35 years. Why? Philpott's firm regularly taps City National for client loans; an actor might quickly need $5 million to buy a piece of art, for instance. The funds materialize unusually rapidly.
"The money is faster than the paperwork," claims Philpott. "It shows a lot of faith in our relationship and our clients."
On such service -- and knowing your customers -- a bank's reputation is built. It helps that City National's CEO, Russell Goldsmith, formerly ran Republic Pictures and is a show-biz veteran himself. "With his film background, he got what we were talking about, and he understood when we said we needed to borrow some money for something," says Philpott.
Despite the occasional tabloid headlines of film stars and musicians running financially amok -- remember the animal-buying sprees of Michael Jackson? -- most folks in the entertainment industry are conservative when it comes to their investment portfolios. It's common sense, really. If your intellectual capital is built on quicksand, you want stable financial assets to back you up. A celebrity's financial portfolio essentially needs to counter the unpredictable nature of a star's cash flow, and guard against the inevitable day when top acting roles or choice directing gigs no longer pour in.
Enter City National. "We understand the vagaries, how someone can be a giant star but go two years without making a movie," says Goldsmith.
The bank has been a fixture in L.A. since Goldsmith's grandfather helped found City National nearly 60 years ago. In our annual list of the Top 40 Wealth-Management Firms, measuring assets under management for accounts in excess of $5 million, the West Coast bank is ranked 23rd, up from its 29th position of last year, with $18.7 billion in assets. (See "Top 40 Wealth -Management Firms in America.")
City National's downtown building sits across the street from the old-line California Club. Over Goldsmith's desk hang two works by L.A. artist Ed Ruscha, whose art also festoons a new branch of the bank in midtown Manhattan, close to the offices of its Broadway-show clients, including the production companies behind The Book of Mormon, Mamma Mia, and Kinky Boots. The bank targets business owners and professionals as well, of course, but its powerful and lucrative entertainment-industry clients make up some 10% to 20% of its business, Goldsmith says.
City National's history with celebrities goes back some years. According to the official version of a frequently told story, Frank Sinatra was close friends with Al Hart, the bank's first CEO. In the late 1960s, the crooner's son, Frank Jr., was kidnapped. When Sinatra called Hart for help, the banker went in over the weekend and took the $240,000 in ransom money out of the vault -- in marked bills. Sinatra's son was returned, and the marked money helped the police catch the kidnappers.
The grateful singer told all of his Hollywood pals to bring City National their business, establishing the bank's foothold in the entertainment industry. Goldsmith claims that 24 of the top 25 celebrity business managers on today's Hollywood Reporter annual ranking are currently the bank's clients.
What do they invest in? When Goldsmith joined the bank's board in 1978, nearly all of the clients held bonds. Today, bonds are more volatile, and clients' investment appetites more varied, he says. For a snapshot of the bank's current model portfolio, see the table below.
Celebrity clients are generally too focused on maintaining their position in their industry to micromanage their investments. Clients simply want their bankers to "make sure they have a plan," Goldsmith says, and, one assumes, execute the plan well. Hopefully, the clients also learn how to mind the minders. The tabloids periodically run painful stories about managers running off with their famous clients' money, as singer-poet Leonard Cohen claimed happened to him, or the gory details of celebrities getting ensnared by the likes of Bernie Madoff, as happened to actors Kyra Sedgwick and Kevin Bacon.
Richard Sherman, a songwriter, is a typical City National client. Sherman hit it big in Hollywood in the late 1960s, composing the Disney-ride theme It's a Small World and hit songs for Mary Poppins and The Jungle Book. He has won Academy Awards.
He was financially naive -- at first. After he earned money from an album, he took a friend's advice and borrowed money to buy convertible debentures. He had neither a private banker nor a business manager to talk him out of the move. When the stock market fell, Sherman suddenly found himself with assets worth less than what he'd counted on, and a huge bill to service the loan he'd used to buy the debentures.
I was in a panic. I was going to lose my house," remembers Sherman, now 85, who lives in Beverly Hills. He found a business manager to take him on, and over several years, they got the debt under control. Crucially, his new manager placed Sherman's money with City National and had the bank buy tax-free municipal bonds. Sherman has followed this conservative strategy ever since. Periodically, he asks his team of bankers what he should do with his major holding -- a stake in Disney. They've recommended he keep the stock. "I've had some good advice," Sherman says.
The bank is somewhat of a family business. Goldsmith, a graduate of Harvard College and the Harvard Law School, became CEO in 1995. His father, Bram Goldsmith, remains the chairman, and the family collectively owns some 15% of City National's shares. Father and son have continued to expand the bank's reach across the country, turning $10 billion in wealth- management assets in 1995 into $60 billion in assets managed and administered today. The bank's expansion has spawned a few lawsuits, mainly over lending to real-estate developers.
Meanwhile, City National's private-banking division works with clients who have a minimum of $5 million to invest or $10 million of net worth; account sizes range from $1 million to $150 million. Fees run from 0.3% to 1% of assets under management, depending on how much the firm is managing for a client. The bank says that all fees are disclosed, and there are no additional markups, commissions, or loads on products it sells. Clients can buy outside products, or customized products that City National develops. Alternative investments, like hedge funds or private-equity funds, come with the usual additional fees.
Goldsmith is not averse to making strategic acquisitions. In 2007, City National bought Convergent Wealth Advisors, which manages money for clients and family offices with $10 million or more to invest; a separate division, Independence by Convergent, offers financial- advisory services for clients with $1 million to invest. Last year, the bank acquired Rochdale Investment Management, which it combined with its own asset-management group to form City National Rochdale, a registered investment advisor. The division works with advisors and bankers within City National, as well as independent advisors outside the bank, to manage clients' money.
The advice they give is tailored to individual clients, of course, but much of it also applies to high-net-worth investors who aren't celebrities. One growing area of focus is real estate. Over the past four years, City National's private-banking clients have started buying commercial real estate, which offers rental income. They also took advantage of the housing bubble's pop to buy single-family homes, which they rent out. For L.A.-based clients, popular buy-to-rent locations are California's San Fernando Valley, Hollywood, Westside, and lofts in downtown L.A. They zero in on a specific house, then hire a property manager to handle finding renters and dealing with landlord responsibilities. A well-managed San Fernando property will currently earn a cash return of 4% to 7%.
Martha Henderson, executive vice president and head of the entertainment division at City National, is also helping clients interested in transferring wealth by buying homes for their children, either as a gift or to rent to them. One client recently bought a house so he could become his child's landlord. "It's a nice way to put your kids in a first house," she said.
City National's wealthy clients may owe nothing on their homes, and have the means to buy a house for cash, but the bank is seeing an uptick in clients taking money back out of real estate -- say a $1 million mortgage on a previously paid-off $5 million estate -- to invest back in stocks, bonds, and hedge funds. With today's low mortgage rates, borrowers can pay south of 4% even on a second home; if an investor believes he could earn more than 5% over time in a different investment, the leverage play is well worth it.
Some clients are so interested in real-estate investing that they have considered making it a full-time job. Recently, three separate clients approached the bank with plans to switch careers and put all of their future money and efforts into real-estate investments -- a field in which none of them had any serious experience.
Not wise. Michael Pagano, executive vice president and manager of the bank's private-client services, and his team were able to persuade two of these clients not to drop everything and move into real estate; they suggested a more measured approach. "We talk our clients out of ideas," he says. For all of those real-estate plays, Henderson says her clients, regardless of net worth, are frugal enough that they typically don't buy more than two homes for themselves. The home in which they live, plus a vacation place, is enough, "unless you're the very wealthy at the top," she says.
Being famous connotes living like a rock star, but very few Hollywood types or their cohorts in the music industry actually live that way, despite media accounts to the contrary, claim the City National bankers. "Fewer and fewer people are buying their own planes," Henderson says, because fractional jet ownership -- or just flying first class -- is a far better financial deal. There's such a glut in planes that the wealthy are offloading; in fact, an aircraft one of Henderson's clients was trying to sell was recently appraised for considerably less than he expected.
Clients are also continuing to move toward alternative investments, now that the fixed-income markets are unsteady, looking to diversify their portfolios and bring in more stability. An increasingly popular play involves joining a group of investors buying up music-publishing catalogs. Over the past five years, high-net-worth clients have flocked to this strategy, partly because they understand the business and partly because the cash flows are predictable. Music catalogs can be valued partly on the type of music in the mix. Pop music is the most lucrative, and jazz is less so, Henderson says. Music rights that have sold recently included the works of rapper Coolio, Motown's Norman Whitfield, and reggae's Jimmy Cliff. City National doesn't package the deals but willingly provides the financing for the Hollywood heavies buying up such music rights.
And that is music to every client's ears.
CHANA R. SCHOENBERGER is a business journalist based in New York City.
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