Under Bergmann's direction, AMG created its first hedge-fund fund of funds in 1998. On its limited partnerships, AMG serves as a general partner of convenience, charging a 1% administrative fee. Multifamily real estate partnerships formed since 1987 have generated after-tax returns averaging in excess of 14%, while commercial partnerships have generated returns averaging about 20%. Speaking at a Chicago conference on alternative investments in late June, Wright noted that some of the firm's best investments came from limited partnerships and went sour, prompting AMG to fire the general partners.
The private-equity investments the firm has created have generated between four to six times return on investment. A derivative product created by AMG in 1997 to reduce the risk of international equity investing while maximizing upside participation was liquidated in early 2000 and provided a cumulative return of 78% compared with 45% for the Morgan Stanley EAFE Index over the same period. The firm's alternative-investment department also does due diligence on investments in which clients have interests.
Although such services may seem outside the mandate of an average advisory firm, Wright says they're an integral part of the overall package AMG has developed to provide full service to clients, which will allow them to compete and grow in the coming decade. AMG allows investors to participate with as little as $250,000, rather than the millions hedge funds often require.
Equally integral are the custodial and trust services that AMG expects will go live by the end of the year. The firm, which currently custodies its client assets at Charles Schwab & Co., will have the option of taking control.
It's an option the firm is considering, Wright says. "The fact is, as an industry, advisors have done the R and D. Our business model is successful. And now, the big boys are coming after us. Now, instead of the Schwabs of the world helping us grow our businesses, they're going to be in direct competition with us."
The two-to-three planner shops will be particularly hard-hit and have the biggest decision to make, Wright says. Do they stay with Schwab and take advantage of its services or move clients to a less-competitive broker-dealer? "I've said to Schwab executives: 'You've been using advisors as your reps, which was great for you because you're not paying us,'" Bergmann says. "They were offended. They didn't understand I thought it was a brilliant strategy. But for planners, it's a business decision. Do you keep feeding your business to a partner becoming a competitor? Do you keep feeding them profits? It's hard to say, but clearly the big brokerage firms are after our market."
And advisors know it. As Financial Advisor went to press, several groups of advisors were meeting with AMG executives to find out if its custodial, trust and alternative-investment programs could be made available to their firms. "It's not the reason we created the programs," says Wright thoughtfully, "but it's a strategy we're carefully considering."
Of course, if AMG pursues that strategy and keeps expanding by entering new markets and grows tenfold, it could some day find itself in the same position that Schwab is in today, one in which there is no way to grow without competing with its own clients. For now, though, that's far down the road. It'll be a long time before Earl becomes Chuck.
A Dose of Realism
Competing against giant planning entrants that all are angling for the same elite clientele won't be a cakewalk over the next five years. Still, AMG Guaranty Trust President Earl Wright, who has created a $1 billion plus firm, plans to control his company's destiny with the recent addition of trust and custodial services. Here are his tips for confronting the future: