Wells Fargo & Co. is looking to fill some cracks in its investment businesses with resources culled from its acquisition of First Interstate Bancorp.
The two California banking companies aren't expected to merge until the second quarter, but observers close to the scene say Wells Fargo executives have already held several meetings in the last two weeks to size up First Interstate's investment capabilities.
"Wells is taking a very hard look at all the investment businesses, and I don't think that it'll take them very long to make the decision about what to keep," said James H. McKenzie, consulting director for the Spectrem Group, San Francisco.
Sources said that San Francisco-based Wells Fargo is keenly eyeing First Interstate's 401(k) retirement products and is looking at ways to integrate the two companies' mutual fund portfolio management - key areas that have suffered since Wells sold its Wells Fargo Nikko Investment Advisors unit to Barclays PLC on Dec. 31.
Wells earned $163 million from the sale of Wells Fargo Nikko - now known as BZW Barclays - and observers say that money helped to fuel Wells' bid for First Interstate.
But in the process Wells lost nearly all of its portfolio managers. The banking company now pays BZW Barclays to continue managing $2.5 billion of its $5.7 billion in long-term mutual fund assets, including many of Wells' Stagecoach Funds and all of the company's popular LifePath Funds.
"Wells is hungry to build its internal capability again," said a source familiar with Wells' merger plans.
BZW Barclays kept the MasterWorks 401(k) product and left Wells with nothing to market to small and midsize companies - the fastest growing portion of the retirement-plan market. MasterWorks is the third largest 401(k) plan provider, behind Fidelity Investments and the Vanguard Group.
While First Interstate's ChoiceMaster 401(k) product has a minuscule market presence compared with MasterWorks, some observers say it might be Wells' ticket back into the retirement-plan sector.
"First Interstate has the ability to offer a wider range of funds in its 401(k) bundled product," said Carolyn Spitz, senior consultant with the Spectrem Group. "There is a potential there to have an upscale bundled 401(k) product."
First Interstate also has eight portfolio managers who oversee more than $4.4 billion of mutual fund assets in its proprietary Pacifica Funds. However, only $254 million is long-term mutual fund assets, and many of the portfolio managers have been with First Interstate for less than two years, the bank confirmed.
"Whether all of First Interstate's talent will be utilized is anyone's guess," the source said. "I think most people at Interstate are probably wondering if they're going to have a job."
It's estimated that between 8,000 and 9,000 jobs will be lost during the consolidation of the two banking companies. And sources said it's almost certain that Wells will shutter First Interstate's Scottsdale, Ariz., operation, which houses the First Interstate Capital Management unit.
While the number of bank branch closings has yet to be announced, experts say it's clear that Wells sees an opportunity to expand its proprietary mutual funds and annuities sales beyond the California market.
"There are clearly facilities at First Interstate that Wells will be better able to leverage," including 210 brokers in bank branches stretching from Arizona to Oregon, said Geoffrey H. Bobroff, a mutual fund consultant based in East Greenwich, R.I.