Five years ago Charlie Haines looked at the direction the financial planning profession was heading and decided he wanted to go somewhere else. So he started to explore moving his practice away from what he calls the "asset management/mutual fund flipping" model that was gaining widespread acceptance within the advisory community and beyond.
At that time, he also asked himself a couple of questions that he would soon start asking clients. The first question-when is the last time you spent a lot of time with your best friends- seemed harmless enough. "It makes you think who are your best friends," he explains. The second question-what is your spending teaching your children about who you are and what you value-was far more threatening. "When I asked myself that question, I didn't like the answer," Haines recalls.
But it was his answers to questions such as those that made Haines realize he wanted his firm to provide something different. Like many financial advisors, Haines' firm had finally become financially successful in the late '90s after years of struggling to build a practice. Many of his contemporaries were finally kicking back and letting the good times roll. Haines wasn't. Instead, he spent several years reinventing his practice as a multi-client family office replete with services few advisors have ever contemplated.
His Birmingham, Ala.-based firm, Charles D. Haines & Co., now encompasses a philanthropy center, a corporate governance expert, an alternative investments operation and a clinical social worker/financial psychologist, in addition to the financial planning and asset management departments found at most firms. This panoply of services permits the firm to enter into far more involved client engagements than most rivals, and to build deeper relationships that can withstand the stress of bear markets and changing circumstances.
The firm's client list includes five members of families in either the Forbes 400 or the Forbes list of America's largest private companies. Early on, Haines recognized that simply because people excelled at accumulating wealth didn't mean they were free from financial problems. Their issues were just more complex.
Tapping into this opportunity involved creating a firm that could address problems beyond clients' portfolios. Treading where few advisors have ever gone, Haines is designing a firm with services many family offices don't offer. Haines' financials reveal little about the firm, which recently raised more than $1 million in capital from outside investors. On the surface, its 250 clients and $300 million in assets under management approximate many successful advisory shops. But those statistics are deceiving. Far more illuminating is the firm's top line, which climbed 19% between the first and second quarters of 2002, revealing its declining dependence on asset management. Haines has one of the very few firms to experience rising revenues this year, and he expects all fees to climb from $1.9 million in 2001 to the $2.7-3.0 million area this year.
This is starting to catch the attention of his peers. The firm has received preliminary merger feelers from about 10 advisory shops, many of which see the potential for leveraging Haines' services with their high-net-worth clients.
Mike Baker, a former private banker and head of wealth management services at AmSouth Bank now working as a consultant, was hired to provide Haines with critical feedback on the business model before the firm started raising outside capital. After studying it, Baker decided to become an investor himself. "It's a model that I had not seen before, and it addresses the needs of this kind of clientele, going beyond investment management and the high level of responsiveness found in private bank divisions," Baker says. "If you talk to Charlie's clients, you'll find their needs go well beyond wealth preservation and capital growth."
Haines came into the advisory business from a different background and set of expectations than many. He began investing in the fourth grade. Born close enough to great wealth, he possessed rare insights into the problems faced by the affluent, and recognized how the single-minded pursuit of success caused many affluent individuals to give short shrift to things that were really important in life. His father served as editor and publisher of a regional newspaper called The Long Islander in Huntington, N.Y. According to Haines, he was "a better editor than a publisher, and he always told me that money can't buy you happiness."
Seventy years before Michael Dell was the big wheel in Austin, Texas, those shoes were filled by Haines' step-grandfather, Charles Marsh, a towering figure and legendary Texas businessman with far-flung interests in newspapers, banking, real estate and oil. Marsh possessed a generous, magnanimous streak and often "gave sweat equity to editors." When a young wildcatter named Sid Richardson couldn't get loans from any other bank in the 1930s, he turned to Marsh, who helped Richardson create the oil business that financed the Bass brothers' empire.
Marsh also was active in politics and, together with his wife, left a charitable foundation that now has $450 million in assets. Robert Caro's Pulitzer Prize-winning biography of former President Lyndon Johnson opens with the spellbinding story of Johnson and several other Texans spending a week at The Greenbrier in West Virginia in the late 1930s, courtesy of Marsh, who thought Johnson was the most gifted young politician he'd ever met. At that time, Johnson was desperately poor and desperately eager not to be. So Texans like George Brown of Houston, younger brother of the Herman Brown who would run a company that became Halliburton's largest division, couldn't understand why Johnson was refusing to take Marsh up on his offer to sell Johnson a lucrative oil well for peanuts and liberate him from poverty.
Ethical concerns were hardly LBJ's problem. "It would kill me politically," Johnson kept telling Brown, who was dumbfounded since almost every senator and governor of Texas had an oil well or three in those days. Only after several days would it dawn on Brown that young LBJ's ambitions were a whole lot bigger than the state of Texas.
Like House Speaker Sam Rayburn, Marsh remained a trusted senior advisor to Johnson for decades. The night Johnson became president following the assassination of John F. Kennedy, his first stop after Air Force One landed in Washington, D.C., is reported to have been Marsh's house.
With a friendly modest demeanor, the soft-spoken Haines doesn't possess the imposing, imperious presence of his step-grandfather. He exhibits none of the arrogance that sometimes characterizes those who attended elite schools, in his case, Groton, Williams College and the University of Virginia's Colgate Darden School of Business. But despite his unassuming manner, Haines' ambitions for his firm are a whole lot bigger than his adopted city of Birmingham, Ala., or most financial advisors anywhere in America.
How Haines came to Birmingham is a story in itself. As a child growing up in New York's Long Island suburbs, Haines admits he was something of a Northeastern provincial. "When my family moved to Washington, D.C., when I was 19, I thought it was a redneck city," the Alabaman recalls.
Several years after graduating from business school in the mid-1980s, Haines went to work for two of the nation's top planners, Lynn Hopewell and Don Rembert, who at the time were partners in Falls Church, Va. While working for these two pioneers of the profession, he displayed a revealing interest in complex models and developed spreadsheets that eventually became a template for many retirement planning software programs.
"The model had so many characters and variables that Excel couldn't run it," Haines recalls. "Microsoft said they had never run into a model like that, and they changed Excel. That gave me a great deal of satisfaction even though it wasn't monetary."
After a few years working for Hopewell and Rembert, Haines struck out on his own in late 1986. "We left the area, not the firm," he says. After investigating cities from Baltimore to Birmingham, he and his wife settled on Birmingham, which was his wife's hometown and seemed like a great place to raise a family.
That it was, but as a young practitioner who was new in town, the phone wasn't exactly ringing off the hook. Haines struggled. "I didn't make any money for three years; all the money went back in the business," he recalls.
Cultivating potential referral sources, Haines called all of the estate planning attorneys in Birmingham and kept meeting with them. Eventually they would become one of his top referral sources.
"A friend of mine who manages a sales force says that when you are selling trust, competence and confidentiality, it takes awhile to gain credibility," he says.
In meetings with prospects and other professionals, Haines continuously espoused the virtues of mean-variance analysis and modern portfolio theory. Then just as his business was gaining traction, a fortuitous break occurred. In 1990, Harry Markowitz, William Sharpe and Merton Miller were awarded the Nobel Prize. "People knew they had heard about modern portfolio theory before, and they remembered me," he says.
Haines also made his fair share of mistakes. His first mistake was a classic-failing to hire a full-time person soon enough. His wife worked with him at the start, but after their third and fourth children, who are twins, came along 12 years ago, she became "pretty much a full-time mother."
Within a few years, the firm went from famine to feast. "We were attracting millionaires who were either do-it-yourselfers or brokerage clients who wanted comprehensive financial planning," Haines explains.
With new prospects filling the lobby of his office, many advisors would have assumed that their mousetrap was working like a magic silver bullet. Haines didn't. Maybe it was natural curiosity. Or his desire to be an innovator. Or his realization that affluent clients had complex financial problems that the classic fee-only, asset management/financial planning failed to address.
Around this time, Haines was developing an interest in the psychology of money. When Marty Carter, a self-described "money shrink," moved from Minneapolis to Birmingham, she started getting voice mails from Haines asking her for a meeting. "Since he said he was a financial planner, I thought he was trying to sell me insurance, so I didn't return the calls," she says.
Trained as a biochemist, Carter had worked at St. Jude's Children's Hospital in Memphis and soon realized the hospital had no counseling program for families with dying children. This prompted her to get a degree in clinical social work, and she ended up specializing in marriage and family therapy.
Today she no longer practices therapy, acting instead as a communications coach and serving as the firm's family legacy advisor. She began working as a consultant to the firm and eventually became a full-time partner in 2000.
Integrating psychology into the firm wasn't easy. For several years, Carter was kept in the background. "You have to learn how to do this without sending the message that we think you're mentally ill," Haines explains. "It's important to have the meeting about family dynamics in your office, not the therapist's. Don't overestimate your ability to work in these areas of psychology. You can really make some serious mistakes."
However, the rewards can be exhilarating. "Helping a father and daughter who have been estranged for 10 years get back together can be a lot more rewarding than beating the Standard & Poor's 500 by 25 basis points," he says. "In the past, we weren't qualified to do that. But now we can talk about things besides money and business with clients."
Today, financial psychology is an integral part of the firm's financial planning process. "At most financial planning firms, counseling is intuitive," observes consultant Mark Tibergien, head of the financial services practice at Moss Adams in Seattle. "Charlie has ratcheted it up a notch."
Carter typically meets new clients when they are about three-quarters of the way through the financial planning process at the point shortly after they receive a draft of the financial plan and the investment recommendations. "I check it out and see if the couple is in agreement and try to get an understanding of their relationship to money," she says. "Most families don't know how to talk about money."
For many individuals, it is viewed as a crass topic of conversation. Such attitudes can make families dysfunctional and cause financial problems and misunderstandings to infect entire relationships. One of Carter's first goals is to figure out what were the money messages clients received as children. She also conducts mini-programs for clients' children and, for high-net-worth clients, spends time preparing twenty-somethings on how to be responsible.
Carter also had an old colleague from Minneapolis, Glenn Ayres, who Haines describes as "a recovering attorney and one of the world's five leading experts on corporate governance." A partner in the Minneapolis law firm of Frederickson & Byron, Ayres specializes in estate planning for family businesses and serves as a consultant to Charles D. Haines.
The approach Ayres uses is far more sophisticated than the "buy survivorship insurance and give the kids the business" strategy advocated by some folks seeking big insurance commissions. When a business is passed from the founder to either the next generation or a professional management team, it requires a greater separation of ownership and management. "One of the things we focus on is creating a culture of merit," he says. Few moves tend to drive talented professional managers out of a company faster than promoting an incompetent child over them. And in businesses with low barriers to entry, those managers can quickly turn into competitors with intimate knowledge of all the strengths and weaknesses of the family company.
Ideally, Ayres likes to "get to the families early enough while they still have time to sort things out." Sometimes the founder may have skilled independent children who are successful professionals in their own right. But in almost all cases, he finds the children have a strong emotional attachment to the company even if they don't work for it. "The idea of selling it is usually very difficult for the children," Ayres says.
As strong as those attachments tend to be, they pale in comparison to the founder, who typically has forgotten what it's like to not control the company. So Ayres and Carter are faced with the unenviable task of helping the senior generation decide what life will look like after widgets. Golf and grandchildren are rarely enough. "They need to have passion," Ayres says. Sometimes that can be another, less stressful job in the business, a move that can serve as a halfway house on the road to retirement.
Small privately owned companies not only require a culture of merit to make a successful transition from the founding father; they also may need creative financial engineering to provide incentives to non-family management and enable family to liquefy some of their equity. "It's almost axiomatic that if you take all the equity build-up out of the business, there won't be a business," Ayres says. "The fatal flaw often is that owners think they can dip in and do whatever they want and keep taking money out of the cookie jar."
Early on, Haines realized that his own firm's growth potential would be limited if he didn't start delegating responsibility and building a strong, deep staff that complemented his own skill set. To do this, he had to recognize his own strengths and weaknesses. While all his partners and colleagues describe him as a visionary, Haines is the first to admit that administrative detail isn't his strong suit.
In 1996, he found his opposite number in Don Lutomski, then a manager for national claims reimbursement at Blue Cross/Blue Shield. Lutomski was responsible for $150 million in revenues but, as he puts it, "we were zoo-fed." He joined the firm to go into the investment side and successfully obtained his Chartered Financial Analyst designation. The firm has offered alternative investments via hedge funds, venture capital and real estate for several years now. Its principals remain agnostic between mutual funds and separate accounts, though at the moment Haines is somewhat partial to mutual funds because of the tax advantages from their embedded losses.
It quickly became apparent that Lutomski's experience in a large organization was invaluable to a small, fast-growing advisory practice. "As a small-business owner, letting go was hard to do. But now it feels great," Haines says. "It gives you the opportunity to do what you do best."
Today, Lutomski still works with clients. However, as chief operating officer, management responsibilities are taking up more of his time. The management policies that he and Haines are embracing include more decentralized decision-making designed to give employees more input, incentive programs to reward individual contributions, open-book management and ongoing performance evaluations to keep people happy and channel the firm's human resources to areas where they are most productive.
Open-book management keeps "everyone in the loop," Lutomski says, and virtually all financial information except salaries is shared. "Happy people are productive people," he explains. "In this business, there are not a lot of firms with a structure beyond the entrepreneur."
If there is a common thread among Charles D. Haines' myriad services, it is their connection to financial planning. When equities soared for almost an eternity in the late '90s, management actively sought to avoid becoming dependent on investment performance.
Lutomski claims the firm has never lost a client because of performance issues. If so, the de-emphasis on returns undoubtedly played a bigger role than spectacular results. "I'll tell clients I'll arm-wrestle you, but in the end it's your money, and you can do what you want," Lutomski explains.
Though a handful of the firm's clients are the pentamillionaires who would expect family-office style services, most clients don't look that different from the rest of the profession's. Many are small business owners who can benefit from the corporate governance and business succession issues, and 24% are physicians. They may not be worried about the grocery bills, but they aren't tied up managing their own foundation, either.
"A typical client could be an executive trying to make a big decision, such as: Can I retire? How much do I need? Or, how do I make my goals a reality?" explains Patti Black, director of the firm's financial planning department.
Early in the engagement, Black tries to ascertain how well-suited a client is for the firm. Is the client likely to be afflicted by market fever? Do they have unrealistic expectations about spending? "Our job is to be their partner," she says. "We want long-term clients, so we try to find potential sources of conflict early, because there may not be much we can do to help them." If they don't want to change, Black is quick to tell them "we're not magicians."
One of the most common problems Black encounters, a point echoed by Carter, is convincing couples to agree on goals. "What does retirement mean? Traveling, working part time. There aren't right or wrong answers. There are many choices," Black says. "We force those issues to come out and give clients time to give serious thought to them."
No division of the company is more personally rewarding to Haines than the center for philanthropy. It has consumed much of his time in recent years as he has studied the foundation world and negotiated service-sharing agreements with members of the Rockefeller family.
The Haines Center For Philanthropy is headed by Leslie Kelly, a former investment specialist. She had worked for more than a decade for the Harbert family of Birmingham, a Forbes 400 family that had once owned an international construction company, sold that business, kept its real estate and energy concerns and converted them to an asset management business. "I'd been thinking of moving into the nonprofit sector and Raymond Harbert was very supportive," she says. "I went out, talked with people in the community and a friend told me Charlie Haines was looking at doing the same thing, so we got together."
Kelly joined the firm in July 2000 and hit the ground running. She conducts bi-weekly seminars for family foundation members on issues ranging from special needs to women-only charitable issues. In many cases, Kelly tries to convince clients to become more focused in their giving so they can "make a greater difference."
One way to get clients to focus is to ask them what was important to them when they grew up. Someone who gives $100,000 a year to 15 charities isn't likely to have the same impact as someone who gives $100,000 and some serious time to three charities. "Once they have a clear picture of what they want to do, they find it easier to say no," Kelly says. "Fulfillment goes beyond licking stamps."
While a lot of her time is spent with the firm's wealthiest clients, others avail themselves of her services. "We have developed a lighter version of what we do in way that is cost-effective so that more clients can still benefit from Leslie," Haines says. "A retired doctor spent several hours with her and was able to focus and involve their children. Another looked at what he was doing and realized his charitable giving was more reflective of who his friends are rather than who he is."
Charitable activities are a great way to involve entire families and bring them together. Haines himself expects to direct most of the wealth he generates to philanthropy. Asked about his favorite charities, he declines to answer. "My children may read this article and I want to involve them and let them make some decisions for the family," he says. "I want them to be free to express their own values."
Before he gets to that point, he has to make his own variant of the multi-client family office model work. The signs are encouraging. The firm was projected to lose money in 2002, but the second quarter, a bleak one for many firms dependent on assets under management, was close to break-even.
The next step, expansion through merger or acquisition, will be tricky. Outside investor Baker says growth needs to be carefully thought through "because the model needs to be maintained." Providing consistent client services in a firm with multiple-office management will be challenging. Lutomski says the firm will actively seek merger partners, but adds that they must share similar values and culture.
How far the firm can take this model remains to be seen. One of the first major changes could be a new name, which he considered when raising capital but put off because he didn't want to spend the time or money in rebranding.
But Charlie Haines is convinced the world is moving his way. "After 9/11 and the bear market, people are getting away from the wealth accumulation phase and old values are coming back in style," he says. "What makes clients happy? Faith, family, friends, physical well-being and philanthropy." And he's focusing on that like a laser beam.
Responding To Challenges
In the face of the longest bear market since the 1930s, financial advisors are confronting some of the most serious challenges since the 1986 tax act wiped out the tax shelter. This time, the challenges come from the competitive dynamics of the business and from changing demographics rather than from Washington. Charlie Haines believes there are five serious issues confronting all advisors. They don't require professionals to create his type of sophisticated practice model, but they do require a response.
The challenges are:
1. More use of managerial accounting to pinpoint exactly what it costs each firm to deliver its services. "You need to have the most expensive people in the organization keep track of their time like you have clients track their spending," he says.
2. The issue of increasing life expectancy has huge implications. "Demographers say there's someone born today who will live to age 200," he says.
3. Confronting the multi-disciplinary practice. "What will happen when lawyers embrace financial planning?" Haines asks. "The question isn't if, it's when."
4. Consolidation of the profession was going to happen before the bear market. Now it's accelerating. "There are age reasons, financial reasons and strategic reasons, as well as the interests of clients, that will drive it," he says.
5. The private-versus-public decision. As the business consolidates, going public may become an option for firms with aggressive growth plans. "I was uncomfortable with the shorter time horizon you have as a public company, especially when you are trying to implement new ideas," Haines says, recalling that some prospective investors were interested in taking his firm public down the road.