Founded in 1932, advisory firm Harold C. Brown & Co. embraces its past but changes with the times.
The Buffalo-based advisory firm Harold C. Brown
& Co. shares a few similarities with the majestic Niagara Falls
down the road. Both have been around a long time (three-quarters of a
century is a long time for an independent advisory firm). Both are
steady and dependable performers with predictable results-or, in the
case of Brown, fairly predictable as it strives to avoid sending its
clients' portfolios over the edge in a barrel. And both are
institutions in western New York. Considering where Brown operates
from, that last part is somewhat remarkable.
As a place known more for the Buffalo Bills than dollar bills, Brown's hometown isn't exactly a major financial center. Nor is it home to many major corporations or high-tech start-ups filled with executives or nouveau riche yuppies clamoring for financial advice. This is Rust Belt country, and Buffalo's population has plunged from roughly 530,000 in 1960 to an estimated 280,000 in 2005.
The local economy is trying to shake off the rust by transitioning from smokestack industries to service-oriented and science- and research-centered activities. But no matter the state of the local economy, Brown has stayed the course even while changing its course, to accumulate more than $800 million in assets under management from a client base spread over 40 states.
The firm was founded as a broker-dealer in the depths of the Depression by namesake Harold C. Brown, and that was its primary calling over the next four decades until it became dually licensed as a broker-dealer and registered investment advisor in 1974. It changed its business focus to a fee-based advisory business in the late 1990s, and added financial planning services in 1999. As Brown evolved it kept up with industry trends and managed to thrive even as its home region struggled to cope in the post-industrial world.
Brown doesn't toot its horn much from a marketing perspective because it doesn't feel the need to. Through the years it has garnered clients from the small family-owned businesses that figure prominently in the Buffalo-area economy. Much of Brown's new business comes from both professional and family referrals. It won't divulge its client retention rate, but it touts its long-standing multigenerational relationships with various family clients as proof of its success. "We're now serving the fourth and fifth generation from clients who originally did business with Mr. Brown," says CEO Katherine Christoferson. "Strong client retention is how we expect to drive our growth going forward."
Case in point: a long-time client who recently passed away had four children who remain Brown clients despite being scattered throughout the Southeast and California. Some of this multigenerational loyalty that began with a few stock and bond picks from Mr. Brown has morphed across the continent, family connections and complex financial topics in ways the firm's founder couldn't have imagined.
One example involves an attorney with a large corporation on the West Coast who had a quandary related to stock options. A fellow attorney at the company referred him to Peter Grogan, a certified financial planner at Brown. This second attorney is based in the Midwest and comes from a family that's had a relationship with Brown since the 1940s, including help from Grogan in a family financial matter that saved them a lot in taxes.
"The guy [out West] called us, and said his wife said, 'You're sending a lot of money to these people in Buffalo and you've never met them,'" recalls Grogan. In the prior year the man incurred a large alternative minimum tax hit after he exercised some stock options.
Grogan recommended that he exercise his options as incentive stock options (ISO) in a year when he would be subject to the AMT, which for him is every year. Then he should sell the ISO shares the following year after meeting the one-year holding period. This created an adjustment for AMT purposes because his basis in the stock for AMT calculation was higher than his basis for capital gains tax purposes. That reduced the AMT tax. It also enabled the shares to be taxed at capital gains tax rates.
Next, Grogan suggested he exercise a number of his nonqualified stock options (NQSO) to push his income to a higher level for regular tax liability. This allowed him to realize unused AMT credits that had been carried forward for many years. The man exercised his NQSOs at a significantly lower tax cost, preserved the capital gains tax treatment for the ISOs and finally took advantage of his unused AMT credits. The bottom line: The man reported more than double his income the year he sold the ISO shares and paid roughly 50% less tax.
Along with his CFP designation, Grogan is one of just 49 Accredited Investment Fiduciary Analysts, a designation introduced in 2002 and revamped in 2006 by the Center for Fiduciary Studies that focuses on the responsibilities of fiduciaries. Grogan says such expertise produces twofold benefits: It helps Brown better understand its role as fiduciaries, and it enables them to prepare and educate their clients for their roles as trustees for their family trusts. "I think this is an area that'll get more attention as regulators look closer at both investment firms and all people with fiduciary responsibility," explains Grogan.
Even as Brown expands its financial planning services, it still prides itself on its stock-picking approach and its long-standing emphasis on investment management. Asked whether his firm currently is more about being an RIA or a broad-based financial planning shop, Chairman Charles McCollum replies with a laugh, "Good question." A slight pause follows before he continues. "I'd say we're investment advisors slash financial planners."
McCollum joined the firm in 1961 and learned the business at the knee of Mr. Brown. He eventually succeeded Brown's son-in-law as the firm's top executive, and helped oversee the company's evolution toward financial planning services. McCollum says one impetus for the change toward a fee-based, holistic financial approach came from a long-time client who announced one day that he wanted McCollum to sell everything in the portfolio, including his taxable accounts, because he met with a financial planner who said he should put everything into mutual funds. "That would've created a huge capital gain," says McCollum. "It made me realize we had to move more into financial planning so we could become the go-to person to help clients with retirement and beyond."
Brown's staff of 40 employees includes three chartered financial analysts and eight certified financial planners, with two more in training. "We want to become our clients' coach," says McCollum, 67.
Brown employees are mindful of their firm's history, and like to weave the tale of how Harold C. Brown had the chutzpah to start a broker-dealer firm in 1932 at a time when people were focused more on soup lines than on stocks. Brown graduated from Cornell University with a metallurgical engineering degree and after graduation fulfilled his father's wishes by working at the family business, which made railroad car wheels.
But that wasn't Brown's calling, and he spent time at the local library researching other career options. The financial industry intrigued him, and so he quit his father's business and got a job selling bonds. Brown eventually went solo, but he needed a place to hang his shingle. He approached the president of a major local bank, Liberty Bank, and made him a proposition: Brown wanted office space in the bank building but couldn't pay the rent right off-instead, he'd make up the initial missed rent payments as his business grew and the money came in. The bank president and his board agreed to the offer, and Brown ultimately never missed a rent payment.
"I was very fortunate to be here while he was still alive," says McCollum about Brown, who died in 1974 when the firm was still very much a stock brokerage. If Mr. Brown could revisit earth for a day he'd probably be surprised by the company's modern-day bent, and be comforted that it remains true to his conservative investing philosophy.
"Brownie was GARP before anyone invented it," says McCollum, referring to the founder's nickname and to the investment approach known as growth at a reasonable price. Brown schooled McCollum in the ways of value investing, and the company still leans towards companies with strong balance sheets and solid, long-term track records. "We're long-term investors," McCollum says. "We've stayed with our root philosophy and stayed away from stuff like options, commodities and derivatives."
Senior portfolio managers and research analysts meet once a week to brainstorm ideas about potential buying opportunities among stocks and bonds. They take a bottom-up, fundamental approach to equities, and traditionally invest a large chunk of assets in steady consumer staples and avoid cyclical companies. "We don't expect double-digit growth every year," Christoferson says. "But we expect reasonable growth with dividend flow."
Brown diversifies its portfolios across different sectors and aims to mitigate market volatility. "Generally speaking, we do better in down markets and do as good or slightly less in really spectacular markets," Christoferson explains. "When we meet with clients we tell them a little about the companies they own. Probably one of the hardest jobs we have is tempering people's emotions, and in tough times like the market in 2000-2002 it gives them a degree of comfort knowing they're invested in companies like Heinz or Pepsi."
As much as 75% of the equity portion of client portfolios is invested in individual equities, with the rest comprised of mutual funds and exchange-traded funds. "Picking individual stocks is still our bread and butter," Christoferson says. "One of our great strengths is that all of our portfolio managers have more than 20 years of experience. We've been through a lot of market cycles."
Christoferson, 53, took the reins in 2003 after then-majority owners McCollum and Lawrence Buck, now the firm's president, decided to cash out and focus on managing portfolios. They sat down with the entire group of senior portfolio managers to say they planned to sell the company and asked if any of them wanted to buy the business. Christoferson agreed to become majority shareholder, and along with six minority partners-including three women-bought the firm and kept it in-house.
"The enterprise value of the company was probably worth more than we sold it for," says McCollum. "My motivation is that we have a history that goes back to 1932, and if we sold out to a larger institution we'd disappear in about two years. There would be no more Harold C. Brown & Co."
McCollum said they negotiated with a larger company who told him they'd let Brown operate independently for two years before integrating it into the rest of the company. "Neither Larry or I wanted to do that," he says.
Christoferson, who hails from tiny Moose Lake in upstate Minnesota, expects to maintain Brown's independence. "We're free to do what we think is best for our clients without pressure from anyone else," she says. "That's the way I want to keep it."
The firm operates from the top floor of the 38-story HSBC Center, the tallest building in Buffalo. The space occupies the tower's former restaurant and offers sweeping views of the city and Lake Erie. On clear days, Niagara Falls is visible in the distance. The office atmosphere is relaxed and friendly, although casual Fridays are verboten. "I'm adamant about our dress code," says Christoferson. "Our dress code is always professional."
Christoferson wants to grow the firm's AUM to $1 billion in five years. "That may not be as aggressive as some of our competitors," she says, "but I believe in managed growth. You have to keep an eye on existing clients, rather than being consumed with getting new clients while forgetting about who pays the bills."
Brown's conservative, slow-growth approach is also reflected in its mentoring program. This isn't a place for young gunslingers with big ideas about playing commodity futures or putting clients into exotic hedge funds. After Matthew Collard graduated from college in 1996, he worked in the financial industry in Germany for two years before coming back home to work at Brown. "The prior and current owners take a lot of pride in Brown," he says, "and they're very careful about who they select to pass on the baton."
During Collard's first three months he floated through different departments to learn about the company's operations. As he sized up the firm, the firm sized up Collard to decide which senior portfolio manager to pair him with. "An old-timer told me it's kind of like being 16 and driving around with your parents until you get your license," he says.
They eventually paired Collard with senior portfolio manager Michael Pratt, figuring Collard's interest in research and stock selection meshed with Pratt's background as the firm's former research director. Pratt heads one of Brown's six portfolio management teams, which divvy up the firm's far-flung client base.
One of Pratt's clients, Dana Rice, owned an insurance agency in western New York before he retired and moved to Maryland. After his father died some 50 years ago, Rice hired Pratt's father to advise him on handling his inheritance. Pratt's father worked for another firm, but Rice continued the Pratt relationship with Michael at Brown. Now Pratt oversees accounts for Rice's children and grandchildren.
"Brown is handling a very modest IRA for my grandson," says Rice. "They're perfectly willing to take on a small account like that because they see it as a potential long-term opportunity with somebody in their early twenties."
And so it goes at Brown, a company that's proud to stick to its knitting but doesn't always knit the same old sweater. And that's why they're still going strong after nearly 75 years. "As much as we cling to our heritage and pride ourselves in our conservative long-term approach," says Christoferson, "we're willing and able to make adjustments as the marketplace changes."