How former planners found a way to bring their asset management model to 1,200 advisors in less than a decade.
Like many successful ideas, AssetMark was a company
born out of challenge and opportunity. Back in 1989, three financial
planners who had worked together for a decade found that the world was
changing and to find their place in it, they had to act fast.
Brian O'Toole, Richard Steiny and Ronald Cordes, all University of California at Berkeley alums, had been working successfully together as planners since joining the firm of Richard O'Toole, Brian's dad, back in the early 1980s. But the planning firm model was evolving, and the partners found themselves determined to not just compete but to be the best of breed.
At that time the firm decided that conversion from commissions to fees was not only essential but also desirable. Charles Schwab was launching the first version of its financial advisor services platform, offering advisors a supermarket of no-load funds. "One of their reps came by and said, 'Hey, look what we're doing.' And we said, "Wow, that's great, but we kind of view you as the competition," says Brian O'Toole, AssetMark's CEO.
The partners wanted ease, and they wanted the consolidated statements that Schwab and Datalynx had begun to offer. But they thought there was a better model and decided to create it themselves. "We believed that the way to do it was to build an asset allocation model using an institutional approach to money," says Cordes, AssetMark's chairman. "And we believed there were more capable folks out there than us doing the actual investment management, so we decided to find them."
The result was the creation of the first no-load wrap mutual fund account in the country, the product of a partnership between the planners and an Atlanta-based pension money manager by the name of Lowry Consulting Group. They called it the ADAM Network, an acronym for "approach to disciplined asset management." It was the precursor of AssetMark.
They introduced ADAM to clients in 1990. "Word just spread," Cordes says. "Quickly other advisors who were hungry to move from commissions to fees came to us and wanted to offer ADAM, too."
Their money manager, Lowry, bought a booth at a July 1990 International Association for Financial Planning conference (a predecessor to the Financial Planning Association) in New Orleans and invited their partners in the ADAM Network to man the booth. For two-and-a-half days, Brian and Richard O'Toole and Richard Steiny fielded questions from planners who stood five deep at the exhibition, clamoring for information about the new network. "We were advisors having conversations with other advisors about how to transition their practice from transactions to fees. We left the conference with a list of 175 planners who said, 'How fast can you come see me, because I'm exactly where you were.' In building a solution for our firm, we wound up building a solution for many advisors," O'Toole says.
The concept also seized on the notion that outsourcing wealth management would give planners the time they needed to gather assets and work with clients-tasks where they could really add value.
The advisory industry, which had been roiled by the crash of real estate and oil and gas limited partnerships in 1987, was ready for a more evolved and disciplined approach to investing, especially one that was available on a fee basis and would free up practitioners to concentrate on clients. ADAM offered five different portfolios based on investor risk tolerance.
"We asked attendees at the conference the same questions we asked ourselves before launching the wrap program," says O'Toole. "Are we best prepared to make asset allocation decisions for our clients? How does our stock-to-bond weighting look? How about value versus growth? International versus domestic?' Those are tough questions day in and day out. The reality is, although we thought we were good planners, we weren't CFAs (chartered financial analysts) and these things weren't our specialty, even though we had been using portfolio optimization software since 1983."
The partners were so bowled over by advisor interest in joining the network that they decided to sell their planning firm and concentrate on marketing the portfolios. By 1994, ADAM hit the $1 billion mark and had a network of 300 advisors. The partners would have been enthralled, if it wasn't for one nagging problem.
"Actually, it was a fundamental flaw," says Cordes. "The Lowry Group had only one discipline and their asset allocation was very defensive. This was a time when the market was rising dramatically and the ADAM portfolios were trailing. Advisors said, 'We love you guys. You helped us make a sea change in our practices, but you're limiting us to one investment strategy and we're getting significant push back from our clients.'"
But their $1 billion splash in the third-party asset management provider (TAMP) market did not go unnoticed. SEI entered the TAMP business along with RWB Investment Management (now Assante) and Meridian Group, among others. It was becoming not uncommon for seasoned advisors to have money with three to five different platforms, although that raised its own set of back-office problems for practitioners, who were once again faced with a the challenge of worrying about consolidating reporting on their own.
The partners' five-year contract was up with Lowry and they decided not to renew. Instead, they went back to the drawing board. "In 1995, the light bulb went off again and we realized that the next generation of programs had to be a platform offering a multitude of managers. It needed to be objective and not beholden to any investment approach," Cordes said.
The upshot of their struggles and the feedback they continued to get from advisors? The partners wound up creating the first multistrategy asset management platform for fee-based advisors in history. This was before Boston-based Cerulli Associates or others had even begun to track fee-based advisory services. For assistance in determining which money management firms they should hire, the partners contracted the consulting firm of Watson Wyatt.
Armed with little more than a Powerpoint presentation and their own belief that they were creating the platform of the future, the partners walked into meetings with executives at Goldman Sachs, UBS, Standard & Poor's and Litman/Gregory Asset Management (all of whom were impressed enough to join the platform and are still core separate account and/or mutual fund managers today). "We said, 'This is the direction the industry is going in and we want you to be part of it,'" says Cordes.
The partners' new firm, called AssetMark, launched its platform in September 1996, offering risk-adjusted asset allocation models and investments options from seven nationally and internationally known institutional asset managers-all with different specialties, including defensive, aggressive, domestic, global, indexed and active management. Manager selection is done by Wilshire Associates, which chooses managers based on its "Best of Class" rankings.
AssetMark's marketing strategy was simple. They told advisors they knew how painful it was to work with three or four different managers and struggle to oversee asset allocation and consolidated reporting across managers and platforms. "We said, "We're set up to make your life easier. We'll give you superior managers. You can use one fee schedule, take advantage of cohesive marketing and diversify as you like, and we'll roll up the back end for you and do consolidated reporting.'" Cordes says. "By 1999 we hit $1 billion in assets, much of it coming from advisors who had been with the ADAM Network."
Two years later, AssetMark doubled its assets under management to $2 billion, and last year grew assets by $2 billion. Executives are expecting to do at least as well in 2005 (they've already added more than $1 billion year-to-date) reaching $6 billion at present. They expect to hit the $10 billion mark in the next 24 months.
Hitting that goal mark got easier in May, when FISERV Investment Support Services, including Datalynx, announced they are making AssetMark's "Best of Class" platform available to the thousands of advisors they work with.
Cerulli Senior Analyst Billy Hayes says third-party management programs already control more than 9% of the total investable assets in the industry and have a head of steam when it comes to gathering more. Assets grew by some 24% last year and are expected perform at least as well in 2005, Hayes says.
Today the AssetMark platform allows advisors to create literally thousands of portfolios. Investment options include mutual funds, variable annuities, exchange-traded funds and privately-managed accounts. The platform works with nine investment management firms that also serve as portfolio strategists, using proprietary asset allocation models to create portfolios representing optimal combinations of managers designed to meet the risk and return objectives of each client.
"We've done well capturing or exceeding the market with most of our models," says Richard Steiny, AssetMark's president. Adding investment ease and success is part of the three value propositions AssetMark has identified as critical to doing business with advisors. "We joke in our office that if you look at advisors deepest and most subliminal needs, they are to: benefit clients, keep their business lives somewhat simple and make their businesses successful."
Advisors who work with the company say that for the most part, AssetMark keeps its part of the bargain. John Payne, an advisor and partner in Houston-based Houston Asset Management, says his firm started doing business with AssetMark in January 2003. Currently, they have $100 million with the platform, but are moving more of the overall $500 million they manage to AssetMark, Payne says.
"I like the way they do things, and the fact that they offer a total platform. I also like their mentality. It's clients first, advisors second. And I like the way they do asset allocation. They don't just look for the top ten managers," he adds. The selection and monitoring of managers "was killing me before," Payne says.
In a sign that fees have yet to come down, Payne also says the total fees, which can range from 1.75% to 2.25%, give him an advantage when he's trying to win over prospective clients who are searching competitors. "I love to go up against wirehouses with this program."
While a number of advisors still believe they can either beat institutional managers or that their clients will wonder what they're paying for if they're not buying and selling investments themselves, Payne says that hasn't been the case in his practice. "My clients are much more comfortable knowing they have people who are monitoring the market full time for them. And frankly, I have more time to work with clients. Everyone in our business thinks they're the best when it comes to picking investments. They're not. They're not better than Goldman Sachs. When you transfer this to someone else, you have to admit you're not the best. But frankly, your clients get the advantage of that change."
Peter Burton, a principal in Burton/Enright Group, in Walnut Creek, Calif., worked with the AssetMark partners when they launched their original ADAM Network 15 years ago. Burton, who manages $150 million overall, has about $30 million invested with AssetMark, but says more dollars are heading to the platform, slowly but surely.
"I always like to diversify among platforms, but what's unique is you really could have every bit of your fee-based business with them and do a great service for clients," Burton says. "Frankly, third-party management is clearly becoming more of a commodity with clients, so you have to make sure you have the sharpest sword. The way to do that, I believe, is let clients know you're on the job for them customizing their financial plan. How can I do that if I have to develop a global tactical allocation model? My clients want both wealth management services and they want you to make them money."
Burton believes that advisors who try to do it all themselves lack another important tool those using a third-party have-the ability or will to fire themselves. "Even if you're doing an average job, are you going to say, 'You can do better elsewhere, you should fire me?'"
Of course, not every third-party asset management platform is created equal. Karen McGarvey, principal of Financial Advisory Network in East Alton, Ill., found that out the hard way. She joined AssetMark's platform about three years ago, but before that had been with another TAMP for four years. "I can't tell you how unhappy I was with back-office administration. It was a total nightmare," McGarvey says. "One of my clients got four corrected 1099 forms. That was on just one account. And that's just one example."
When McGarvey requested that all of her accounts be audited, she discovered transaction errors in almost every one. Worse, the platform took more than a year to correct them. At that point, she began shopping for another platform and liked the votes of confidence AssetMark got from other advisors. "I heard they did things right the first time, and I need that. Changing over has allowed me to get my life back. It gives me more time to spend with clients and family," says the planner, who manages $70 million.
Another added value for advisors? The fact that AssetMark's principals were advisors themselves for more than a decade. To make sure they keep abreast of advisor needs and concerns, they created the Mastery Series in 2001, a series of one-day seminars for advisors that bring Steiny and O'Toole out into the field for more than 340 curriculum hours each year. In addition, the platform's "Premier" group of advisors, who usually have $5 million or more invested with AssetMark, meets with executives and industry experts quarterly to discuss new product and practice management developments.
"AssetMark people are out there in the trenches, eyeball-to-eyeball with advisors," says Burton. "It's one of the few firms where you'll get that many hours with principals."
To make sure all 1,200 of the advisors who use the platform get to maximize and customize its benefit, the firm has 18 regional consultants in place whose job it is to consult with advisors and see what they need that they're not getting.
McGarvey says the assistance and seamless marketing and back-office operations she receives allow her to work four-day workweeks and take six weeks of vacation a year.
Jeff Figler, who heads up AssetMarks' IT division, says advisors should prepare for more ease and efficiency. The company increased its trading and rebalancing efficiency 95% last year. Already paperless, AssetMark is now taking that approach with custodians. "By year-end, we expect to be able to do these 60- or 80-page documents completely online. We're also moving very quickly this year so all account change forms are submitted online."
Maybe it really is a matter of finding the right folks to work with. "We've been in this together for almost 25 years," says Cordes, who says the firm is on target to hit the $10 billion mark by 2007. "Things are only getting better."