3 Schools of Thought on Wealth Management
Paul Sullivan
Wednesday, January 5, 2011
financial-advisors
As portfolios tick up after the vast losses of two years ago, many investors remain wary. The latest whiz-bang product is more likely to inspire skepticism than desire. Promises of steady returns do not inspire confidence, either.
While in boom times it seemed easy to make money, investors have learned that it is even easier to lose money.
In this climate, advisers face a challenge, and, once again, they have had to develop new ways of presenting their services. Speaking broadly, three approaches seem to have emerged: the caring, the technical and the retirement-focused.
The emergence of different approaches also shows the resilience of the wealth-management industry — and this is not the first time the industry has changed how it describes itself.
“They said ‘trust us,’ but they leave off the rest of the sentence: ‘to get you out of the hole we dug for you,'” said Mark Stevens, chief executive of MSCO, a marketing firm that has done work for wealth-management companies. “Why are they able to resurrect themselves? People want them to. What’s your other option?”
Understanding the differences among the three approaches and choosing the right adviser may at least help investors sleep better at night.
THE CARING APPROACH Advisers in this camp say they manage money as if it were their own. Their approach is less flashy by design than others, and they go beyond the issue of fiduciary responsibility of registered investment advisers, they say.
One large firm using this approach is Stephens Inc., a privately held bank run by Warren Stephens, founded by his uncle in 1933 and later run by his father. The firm’s claim to fame is having brought Wal-Mart public in 1970; it added the wealth-management division in 2001.
In the last three years, Mr. Stephens says, he has added 25 advisers, for a total of 107, and with them clients who fit the Stephens ethos: people who want stability with steady growth. “We’re not immune to our clients’ portfolios being down somewhat,” Mr. Stephens said. “We’ve benefited from the real and perceived stability of our firm.”
The wealth management division now manages $7 billion, the same amount it managed before the recession.
The relatively small number of advisers, given how much money they manage, has created a culture that prides itself on continually checking where it has invested its clients’ money.
In one instance, Mr. Stephens said, the firm found that a money market account it had used for years added more securities beyond ultrasafe Treasury bonds. Stephens contacted its clients and sought their permission to move that money to a money market account more focused on Treasuries.
“We had several clients say, ‘You’re looking out for my money; that’s a really good call,’ ” Mr. Stephens said, noting one client deposited an additional $5 million in his account.
In a different approach to caring, Ben Marks, president and chief investment officer of Marks Group Wealth Management in Minnetonka, Minn., is investing clients’ money more locally than globally, bucking the trend to look abroad.
“The proximity is important to investors,” Mr. Marks said. “They like the proximity of who is making the investment decisions — that’s us — and secondly the proximity of the actual investments themselves.”
In this strategy, Mr. Marks said, the qualitative side of investing is winning out over the quantitative approach. This was not so important in 2006 when portfolios were all rising, he said, but has become so, and having a connection to the companies is one such driver.
“There is a sense of patriotism in investing in your local community,” Mr. Marks said. “When people are investing overseas, it’s almost conceptual — I should invest in Brazil or China — but they don’t have the level of detail of what they should know.”
At the Harbor Lights Financial Group, which manages $250 million from its base on the New Jersey shore, the notion of a small, caring firm goes a step further to include “lifestyle concierge services” for clients with $1 million or more. This includes help negotiating the price of a new car or securing hard-to-get theater tickets or restaurant reservations.
This may seem labor-intensive for a small firm, but Doug Lockwood, a partner, said the good will that accrues more than offsets the labor, particularly because clients do not use the services frequently.
“We could only control so much of the performance with the markets, so we decided to create this program,” he said. “Our top clients are referring us all these people, so we try to overimpress them.”
He says his firm recently saved a client $5,000 on a luxury car, something he believes clients are more likely to talk about at a dinner party than their rate of return.
“Some of the largest wealth management firms have been doing this for years,” he said. “Our referrals have gone up at least 25 percent in 2009 and 2010.”
THE TECHNICAL APPROACH Advisers in this category say it is a way to talk about returns and expectations without dwelling on the numbers themselves. Doing that requires them to ask different questions.
Mitch Cox, head of global investments and research at Barclays Wealth, said the first question to ask clients should be “how much am I financially and mentally prepared to lose?” While talking about potential losses, Mr. Cox said his firm speaks to clients about opportunities across nine asset classes that span the globe.
The reasoning is that moving into cash and bonds may allow investors to sleep at night, but it may also let them fall behind the rate of inflation. In direct contrast to Mr. Marks’s invest-local focus, Mr. Cox suggested: “Think of the global economy as an air mattress. If you’re pushing down on one part, chances are there is going to be a positive effect someplace else.”
Finding the right mix of investments depends on a person’s emotional makeup, he said, but one thing is consistent: “They want returns that are unsurprising and sustainable.”
The other distinctive element of the technical approach is an emphasis on lower costs and fees, which translates to a higher return.
That high costs eat up returns is something investors in index funds have been pointing out for decades. HighTower Advisors of Chicago says it has a fresh approach.
Started two years ago with backing from a group led by Philip J. Purcell, the former chief executive of Morgan Stanley, HighTower raised $165 million that it is using for two goals: to build a technology and infrastructure platform that aims to lower the costs on everything, including bonds and fees paid to third-party custodian firms, and to hire top teams from other firms.
“The fundamental difference is we’ve converted financial advisers from being the last node of a manufacturing and distribution business into becoming a buyer of Wall Street products, and that makes Wall Street compete for the business,” said Elliot S. Weissbluth, chief executive of HighTower.
The firm now manages $16 billion. Beyond performance numbers, it emphasizes to clients that it has more freedom and can lower their costs — something all registered investment advisers tell their clients, of course.
But HighTower goes a step further. When it wants to buy a bond on behalf of a client, for example, HighTower solicits bids from up to 50 firms to get the best price. The same holds true with the custodians who actually hold the money the firm’s advisers are managing: HighTower works with seven, as opposed to one or two, so the client benefits from shopping around.
“If nothing else, you’re paying less,” Mr. Weissbluth said. “And driving down the costs helps performance.”
RETIREMENT-FOCUSED This approach educates clients about their portfolios and tries to persuade them to keep the long term in mind. By extension, this means trying to ignore the short-term peaks and valleys in their portfolios.
A cynical view of this is that firms need clients to forget the losses of the last three years, as Mr. Stevens of MSCO pointed out, and think decades down the road. This can work, unless a client had planned to retire next year.
The more generous view is that people should have been thinking long-term all along and that being concerned with short-term market gyrations at this point is not going to help them.
“We’ve been very visible in the public with educational seminars,” said Lyle LaMothe, head of wealth management in the United States for Merrill Lynch Global Wealth Management. “They all have something to do with retirement or income protection.”
Last year, “there was a clear need that was percolating,” he said. Merrill Lynch has added 15,000 accounts with more than $250,000 in each so far in 2010. Claire Huang, head of marketing for Bank of America Global Wealth Management and Investment Management, which includes Merrill, said their campaigns were emphasizing retirement goals and steering people away from thinking about the absolute amount of money they have.
“People who talk about the number are missing the point,” she said. “People want help based on their needs. They want little steps, and over time they’ll hit that number.”
David B. Armstrong, a managing director of Monument Wealth Management, outside of Washington, employs a similar approach on a smaller level. Advocating “personal pension planning,” he tells clients to look at retirement as any other liability.
“If I want to live off of $150,000 a year when I retire, that’s a liability,” he said. “What we do is a simple net present value calculation — what does an asset have to be worth today to be worth what they need it to be worth in the future?”
Retirement may still be the goal, but for many people the timeline for it has changed, and that has altered the planning process, said Renee Brown, director of wealth, brokerage and retirement for Wells Fargo.
“They’re less concerned about getting to retirement; they think it’s going to happen later,” Ms. Brown said. “Their concern now is, will their money last through retirement?”
It’s essential to remember that the three schools of thought are not broken down by wealth levels but by personality traits. A person with $30 million could be happy fishing and golfing his days away in retirement, while someone with $5 million would rather take the caring approach while he sat on boards or consulted.
Most important in choosing an adviser is for people to ask: what kind of investor am I?
Categories: Retirement & Savings