Planning For The Long Run

Lowry Hill feels like its ability to simplify the lives of affluent families is why clients rarely leave.

Like a lot of wealth management firms, Lowry Hill of Minneapolis can throw out some impressive numbers in describing itself. There's the firm's $6 billion-plus in managed assets, for example, or the 330 affluent families it has as clients spread out across 40 states.

Talk to the people who run the firm, however, and there's another number that they prefer to cite first: 98.

The number doesn't even refer to money. It's a reference to the fact that the firm has attained a 98% retention rate when it comes to keeping its clients.

That, says Managing Principal James P. Steiner, is something Lowry Hill is more proud of than any investment returns or asset gains.

"Once a client comes here, they typically don't leave," Steiner says. The number one reason clients leave, in fact, is death. And even in those cases, the client's beneficiaries keep the assets with Lowry Hill more than half the time.

When asked to explain the firm's high retention rate, principals at the firm cite a number of reasons. These include the fact that all 18 of the firm's principals handle clients, with each principal limited to no more than 25 to 30 clients. The firm's trust and estate planning services also come into play, as do its investments-stylized groupings of single company stocks that have consistently beat their respective benchmarks.

Indeed, Lowry Hill also has pondered the basis for its own retention rate. It conducted focus groups five years ago to explore the question. What the firm found was that there is no one thing that clients like most.

It is the accumulation of all the firm's services, says Stephanie Prem, the firm's chief marketing officer and a principal. "The interesting common denominator there is that clients seem to feel we do an incredible job of simplifying their financial lives," she says. "We make a lot of the financial details very seamless to the client."

Making the financial lives of affluent families simpler was actually one of the objectives behind the creation in 1986 of what is now Lowry Hill. At the time, the ten founding principals of the firm were all employees of Norwest Bank, which had been working on a strategy to spin off its capital management group.

Today, Lowry Hill is one of several bank-owned advisory firms providing comprehensive wealth management services that rival the top independent firms. Now a subsidiary of Wells Fargo, Lowry Hill has undergone several changes in ownership since the 1980s without losing its focus. Other banks getting into this game include The Harris and Mellon Financial.

Thomas Hull, Lowry Hill's chief investment officer, was hired by Norwest to manage money with the group in 1983 with the specific promise that such a spinoff would occur. "The thought behind the spinout was that we could have a dedicated group that was not necessarily bank-associated, committed to high-net-worth individuals," says Hull.

By focusing on affluent clients-which at that time was defined as those with a minimum of $2 million in liquid assets-the thinking was that the group could concentrate more services for individual clients on a more cost-effective basis than could be achieved at the bank. Distancing itself from the bank's trust department, however, was also seen as a strategic advantage.

That's because, among affluent clients at least, banks had a reputation for stodgy investment performance, Hull notes. Another drawback was the high turnover rate of personnel at banks, which made it impossible to build up personal relationships with clients, he adds.

"They just weren't gaining customers, especially high-net-worth customers," Hull recalls. "They were holding their own and maintaining their relationships through the trust business, but they weren't attracting new money-especially entrepreneurial wealth."

Much of that money, he says, was ending up at brokerage firms such as Goldman Sachs and Morgan Stanley. One of the strategies behind the spinoff was to confront the competition head-on with an experienced capital management group that could also offer affluent clients financial planning, estate and trust services.

"They [Goldman and Morgan] did not offer the extra stuff," Hull says. "That was something unique about our model. In addition to asset management, we brought services like tax administration and estate planning."

The spinoff happened in 1986, with the bank seeding the entity-then called Norwest Capital Advisors-with about $400 million worth of assets, according to Steiner. The initial organization had ten principals owning up to 40% of the company and Norwest retaining ownership of the rest, he says.

At first, business was slow, Hull recalls. This was partly due to the stock market crash that happened a year after the spin-off. Being brand new in a tough environment was also a challenge, he says.

"When we first spun out, I think there was a concern as to the longevity of the operation ... We just didn't have a track record and we didn't have any credibility," Hull says.

It took several years before the firm started to see substantive growth in its client base and assets, he says. Most of it was through word-of-mouth and referrals by existing clients, he adds.

"I would say it was persistence in terms of managing client relationships and developing happy clients," he says. "Our new business efforts in the early years was a function of our existing clients."

By 1992, the firm had more than $1 billion in assets under management. It was about this time that the firm started to transition from a regional to a national client base, says Peter Glanville, who served as the firm's managing principal from 1996 to 2002, when he retired. "We had a wonderful run there, with good investment results and national advertising, which brought in a surprisingly good amount of business," he says.

By the time he left, Glanville says the firm's assets under management were just below $6 billion. By that time, also, the firm had raised its minimum account requirement to $10 million, where it stands now.

The firm actually pondered raising the minimum to $20 million when there was an explosion of wealth at the height of the bull market. That idea was dropped, however, when the equity market fell back to earth. "The market took care of that idea," he says.

The firm has also opened offices in Scottsdale, Ariz., and Naples, Fla. The Scottsdale office was opened because of the flurry of new business startups in that area, says Prem. The Naples office is the result of many clients either moving or having second homes in that area, she says.

Another key change during this time was the merger of Norwest Bank with Wells Fargo, which helped precipitate the firm changing its name from Norwest Capital Advisors to Lowry Hill, which is the name of an affluent community in the Minneapolis area.

The change, which was suggested by a marketing consultant, was partly meant to give the firm a defined market brand-to essentially make a distinct entity. "In terms of establishing our own brand and our own consumer awareness, it was advantageous to have a name that was unique to us," Hull says.

Organizationally speaking, Lowry Hill is now a wholly owned subsidiary of Wells Fargo, which owns 100% of the company, after an organization change in which principals shifted to an incentives-based compensation structure. But the firm's autonomy and ability to run itself independently has contributed to its growth rate, which has outpaced many bank-owned trust companies and investment management entities.

Changes are in the works, however, in which principals will once again have an ownership interest in the wealth management company, principals say. Although legally a subsidiary, principals say the firm in reality runs as a separate entity, while using Wells Fargo's trust powers. "Everyone is integrated together," Steiner says of the firm's employees, some of whom are technically Wells Fargo employees and others of Lowry Hill Investment Advisors, the firm's SEC registered advisory unit.

Although the firm has 330 clients it handles about 2,300 accounts, which reflects the array of services the firm provides. One client, Steiner says, typically consists of a family that may have six or seven accounts, including accounts for the children, an IRA, and a charitable remainder trust or a foundation.

Investments, while important, are usually just one piece of the puzzle when it comes to mapping out a financial plan for clients, says James W. Rockwell, a financial principal at the firm.

"It really runs the gamut," he says. "On one end you have clients who we are paying bills for. On the other end of the spectrum, you have clients who like our investment style and like having their assets held in a single place."

Most of the firm's clients are either entrepreneurs who have sold, or are planning to sell, their businesses, or current and former company CEOs, according to the firm's principals.

Before the end of the bull market, Rockwell says the firm saw a steady influx of clients whose fortunes were derived from building up businesses and reaping the rewards through a profitable IPO.

Clients pay on a sliding scale, with a 1% fee on the first $10 million in assets, 0.60% on the next $15 million and 0.50% on everything above $25 million.

Principals are required to invest in the same portfolios as clients. Also, two years ago, compensation for the principals changed from an ownership interest to an incentive-based program tied to the firm's earnings, investment performance, client retention and asset gathering. "Our compensation program is really tied to the success of the firm," Hull says.

Steiner feels the firm's steady and incremental development of its asset management operation was responsible for the firm's overall growth. Starting out with a basic growth approach, with investments primarily centered on individual large-cap stocks, the firm started to diversify its strategies.

It did so by finding portfolio managers with expertise in specific strategies the firm wanted to pursue. Among the first of these hires was Steiner himself, who joined the firm in 1998 to revitalize its small-cap portfolio.

One of the major changes Steiner made was to move the portfolio from a regional to national a approach. "Six years ago, the small-cap equity was a regional product," he says. "We owned ten companies, most of whom I could see by looking out my office window."

More changes followed. Jeff Erickson, who ran international mutual funds at Advantas Capital Management, was hired to run the firm's international portfolio. In an effort to hedge the firm's risk against the dollar, he developed a portfolio in which 80% of company earnings were in nondollar denominations. To run a real estate portfolio, the firm brought in Brian Donahue, a manager with experience in both private and public REITs, Steiner says. "We've hired carefully selected portfolio managers to fit specific strategies," Steiner says.

Martha K. Pomerantz, investment principal and head of the firm's investment committee, says the firm has been increasingly doing more of its own research, as well as utilizing more independent research. "We'd always used street research, but we, like others, recognize that their perspectives are limited," she says. "It's often a playback of what companies are saying, as opposed to a creative view."

As for the firm's broad investment philosophy, the principals at Lowry Hill describe it as not strictly principal preservation, but also not overly conservative. They all agree, however, that they're not suited for "hot money" investors.

"If someone is really high risk," Steiner says, "we're not going to fit very well, because what will end up happening is our investment strategies won't meet their return requirement."

The firm believes its investment returns have been right in line with client expectations-slightly beating out the market while managing risk. The firm's large-cap portfolio has a ten-year annualized return of 13.4%, compared with 11.3% for the S&P 500, says Steiner. For small cap, it says the ten-year return has been 14.7%, compared with 10.1% for the Russell 2000.

In the end, however, Steiner feels it is the client relationship, and not the baseline investment performance, that has been at the root of the firm's success. "The first thing we try to do is, we try to understand them as people," he says. "At the end of the day, what they value and what their values are, are going to have an impact on how they want their money managed."