[Thomas Meyer also will tell his story Wednesday, March 4, on CNBC's "On The Money" beginning at 10 p.m.]
At the start of this decade, when advisors seriously considered trying to get their wealthy clients into hedge funds, Thomas Meyer was among the skeptics.
Where some saw exclusivity, Meyer saw shadiness. Where some saw outperformance, he saw only managers who were charging an eye-popping 2% of assets and 20% of profit. He was equally skeptical of the things he didn't see: the managers' daily reporting, holdings and liquidity.
Thus, Meyer, CEO of Meyer Capital Group in Marlton, N.J., largely steered his clients clear of hedge funds. Instead, he cut a path to uncorrelated alternative strategies through open-end mutual funds.
It's a decision that probably cost the firm some clients, he admits. But who he lost was a mere blip, he says, compared with those he thinks he can win over now, at a time when Wall Street banks and wirehouses have disgraced themselves with the products he avoided.
As an independent fee-only advisor who has always placed a high value on transparency and ethics, Meyers feels this is a time to shine. "Hollywood couldn't have scripted a more fitting ending to 2008 than Bernie Madoff," Meyer says. "The high-net-worth client is sick and tired. The elitist attitude is over. This is another great opportunity for the independent fee-only model."
It's not surprising that Meyer is a cheerleader for the fee-only philosophy. Meyer Capital Group, with 480 clients and about $500 million under management, has been an independent fee-only shop since Meyer's grandfather, Clarence Whipple, founded it in 1963 as Whippco.
When Meyer joined his grandfather's firm in 1982, immediately after college, his grandfather was serving a group of 20 clients with $2 million under management in a converted house in Cherry Hill, N.J. This was back when investment management was a labor-intensive process that involved a pile of paperwork for each client, he adds.
After Meyer's arrival, the firm was able to take on new business and assets under management grew to $20 million in 1987, the year in which Whipple passed away and Meyer took over the firm.
Meyer says Whipple didn't place a high priority on expanding the firm, or becoming rich, but simply loved the business. "When I got there, there was $1,200 in the [firm's] checkbook and I was making 75 bucks a week," Meyer says.
As he grew up in the business, he was taught by his grandfather to "do what's right by the client and avoid conflict and all bias."
Over the past several years, Meyer says he's applied those same principles while gradually introducing alternative investments to his firm's five asset-allocation models. It was a step Meyer, as well as much of the overall investment community, deemed essential after the bear market from 2000 to 2002.
For many during the bear market, the search for alternatives led to hedge funds, whose use of leverage and absolute return strategies bewitched investors who had been soaked by the bursting tech bubble. Some might say the obsession with hedge funds became manic. As the trend gained momentum from 2002 to 2003, the assets in these funds increased by about 30%, to more than $800 billion. That figure exploded to $2.7 trillion in 2008-before the market collapse.
Despite all the hype, Meyer found the vehicles troubling. In any case, he had limited access to them through his custodian, Schwab Institutional. "Quite frankly, we did not know enough about them," he says.
He also found their fees to be exorbitant, particularly when taken with their lack of liquidity and transparency. For a shop that always prided itself on full disclosure, Meyer says, the murky reporting on hedge fund strategies, holdings and performance was something to be avoided.
It all reminded him of the travails of his grandfather, who started Whippco after spending a decade selling mutual funds with hefty sales loads to individual investors. In a typical sale back in the 1950s, Whipple could collect two years' worth of commission while his customer would be left 8% in the hole, Meyer says.
"He couldn't stomach it anymore," he says. "That's why he decided to go the fee-only way."
In similar fashion, Meyer avoided hedge funds, except for a few carefully screened funds for a select few high-net-worth clients.
Meyer Capital's move toward other types of alternatives in 2002 coincided with the hiring of Timothy McGeeney as vice president and senior portfolio manager. McGeeney's team now implements the alternative strategy, which makes up 20% to 30% of client portfolios.
Coming from wirehouses-he was a portfolio manager at Morgan Stanley and Paine Webber-McGeeney says the vision back in 2002 was to apply institutional strategies to the portfolios of the firm's individual investors. "We wanted to take it a bit further, to provide strategies that are truly only available to pension plans and endowments," he says.
The investment strategy serves both the ultra-high-net worth and upper-middle-class markets, Meyer says. The firm has a soft minimum account requirement of $500,000 but also serves clients who have as much as $20 million in accounts there.
Most of the firm's clients are individual investors, though there are some foundations as well, he says-all together, an eclectic group of clients, each of whom require different asset allocation models. The troubled economy has caused all Meyer's clients to become more concerned about wealth protection and cutting spending. "Before, the ultra-high-net-worth client wouldn't think twice about spending," he says.
The firm's alternative space consists of managed futures, market neutral, absolute return, currency and private equity and real estate mutual funds, he says. "This is the workhorse of our portfolios-the Steady Eddy compounding machine," McGeeney says.
In a second prong of its approach, the firm also invests in the broad markets, including actively managed equities and fixed income, through traditional mutual funds and separately managed accounts that can bring alpha with low volatility. The third prong is satellite, or "exotic beta," strategies designed to capitalize on momentum and trends. These, McGeeney says, include commodities, natural resources, global real estate, high-yield and convertible bonds, TIPS, emerging market stocks and international small cap.
The purpose of the alternative investments, according to McGeeney, is to help clients achieve performance in line with that of the S&P 500, but with less volatility, over a full market cycle. That means capturing about 50% of the index in a down market, outperforming it in a flat market and capturing 60% to 80% of an upside in any given year, he says.
Client portfolios performed according to plan in 2008, he notes, with an average loss of about 20% in a year that the S&P 500 was down 38.50%.
The firm uses an exhaustive due diligence process for its managers, digging far back into their pasts. This allows the firm to look closer at funds with short track records gone unnoticed by other firms. Closer inspection, it turns out, might reveal that these funds' managers have a longer history of using their techniques elsewhere, perhaps at hedge funds or institutional portfolios.
"What we like to find is emerging managers, managers who fly under the radar screen, who managed money for ten years on an institutional level but may have wrapped into a mutual fund a year ago," Meyer says.
For that reason, some of the firm's best-performing funds, he says, have short histories, sometimes three years or less.
This is a way of getting access to hedge fund investing, without the lack of transparency and illiquidity, fees and other negative aspects of an actual hedge fund, Meyer says.
One example would be the TFS Market Neutral Fund, a long-short fund with a small-cap focus that was started in 2004 under the management of TFS Capital LLC. Meyer Capital was initially attracted to the firm two years ago because of the exposure it gave to small caps.
The fact that the firm had slightly less than a three-year track record at the time normally would have been a problem. But, looking further, Meyer Capital found that the management team had run the same strategy in a hedge fund for more than ten years.
The fund, since its inception, has annually outperformed the S&P 500 by an average of 10.6 % on a net basis, McGeeney says. The portfolio's earlier history only buttressed those numbers, he adds.
"We saw the audited numbers and got a sense of their performance through various markets," he says. "We spent time to get a comfort level and understanding of how they generate returns."
The Absolute Strategy Fund, managed by Jay Compson's Absolute Investment Advisers LLC, is another fund that ended up in Meyer's clients' portfolios even though it had a history of only three years. It's essentially a mutual fund of separate accounts, McGeeney says. The fund has a stable of subadvisors representing 14 different strategies, ranging from distressed debt, to equity market neutral to short-biased credit. Although these advisors normally manage money only for endowments and pension plans, the assets they manage for the Absolute Strategy Fund have to be held under the custody of Citigroup, McGeeney says.
While the fund is less than four years old, Compson runs it using relationships he has cultivated over two decades. "This gives us exposure to managers we otherwise would not have access to," McGeeney says.
Moreover, he says, the relationship offers transparency and liquidity-including daily third-party pricing-that would not be possible if the firm dealt directly with the subadvisors. "We know our manager knows exactly what the 14 subadvisors are doing," McGeeney says.
In the traditional stock marketplace, Meyer Capital has used the Nuveen Tradewinds Global All Cap Fund. The fund has a track record of only two years, and was down 26.5% in 2008, according to Morningstar. However, portfolio manager David Iben has a 13-year track record of managing money for institutions and endowments.
McGeeney likes the fund's strategy of capturing all international market caps and feels Iben has a "fantastic" track record as an institutional manager. The fund is so new, in fact, that McGeeney put together a white paper explaining to clients why the firm was investing in a fund with no Morningstar rating.
Meyer says the firm's due diligence process includes face-to-face meetings with all management teams before money is invested. This means continuously monitoring about 100 managers, including a core group of 30 who have the bulk of the firm's investments.
The due diligence is more a function of time and work than special access, McGeeney adds. "I think if any investment advisor has the time, the patience and the resources to spend time and do the screening, make calls and read the research reports, anyone can do it," he says.
The performance of Meyer's alternative strategies in 2008 ranged from a positive 8.53% on the Rydex Managed Futures Fund to a loss of 25.90% on the Ivy Asset Strategy Fund. The firm heads into 2009 looking to make moves into TIPS, gold and convertible bonds.
The firm, meanwhile, wants to grow. With assets under management now at about $500 million-down from a high of $580 million last year-Meyer says he's looking to reach $1 billion. If the circumstances are right, that could entail an acquisition, which would be the firm's first.
It's a huge leap from its ambitions in 1982, when Meyer came to work for his grandfather's firm. And much of that has to do with the big changes going on in the fee-only world.
The profound change in direction came in 1990, when the firm-renamed Financial Architects-was introduced to Schwab Institutional. Using Schwab as custodian revolutionized Meyer's business in terms of costs, efficiency and profit margin, Meyer says.
For the first time, there was a platform specifically designed for wealth management shops like his. "It put us on the radar screen," he says. "For the first time, we didn't have to talk to someone who didn't know what an advisor was."
In 2000, the firm reached the $100 million mark. Meyer, using the referral services of Schwab Advisor Source as a springboard, decided to get aggressive about growth. As dot-com mania was in full tilt, he hired two marketing people, moved into a larger and more expensive office and, in what he hoped was for the short term, said goodbye to his 70% profit margin.
It was a bold move and one that could have been disastrous since it happened a short time before the complete collapse of the Internet bubble. From a high of $200 million under management, the firm-renamed Meyer Capital Group-was down to $135 million in 2002.
"Believe me, it was not fun," he says.
Yet the firm was sustained by another trend that gained little attention during Internet mania but which, over the long run, was more important. As a result of the explosive growth of 401(k)s and defined contribution retirement plans, people were becoming more informed about the stock market and wanted independent advice, Meyer says.
As a result, the firm saw an explosion in client and Schwab referrals. The reputation forged by his grandfather helped drive the firm's growth.
Now Meyer hopes that, in the wake of collapse and scandal on Wall Street, investors will again look to go the independent fee-only route. "The fee-only movement has just blossomed and taken the dinosaurs to task," he says. "The way they did business was not the way to do business. This is our time."