Remember when conservative, income-oriented investing was pretty simple? You know, hold some bonds here and buy some dividend-paying stocks there. These days, that old playbook just won’t cut it. At least that’s how some investment strategists see it.
“The paradigm of conservative investing has changed quite a bit the past couple of years,” says Mike Sorrentino, chief strategist at Global Financial Private Capital LLC. “Years ago, you could’ve bought a government bond, gotten returns above inflation and paid the bills. Those days are over.”
Compounding the situation, he adds, is that equity sectors that traditionally looked like bonds with their fat dividend yields––think telecom, utilities and consumer staples––have gotten expensive relative to their growth rates.
Add it up, and that presents a conundrum for financial advisors trying to generate income for clients. For Global Financial, a Sarasota, Fla.-based registered investment advisor with a huge focus on mom and pop retail investors and seniors, the solution is to go on the offensive via actively managed strategies from its in-house investment team.
“We call it a war on seniors and savers because if you want to generate income you’re being pushed into riskier assets,” Sorrentino says. “The majority of seniors and savers don’t trust equities after the meltdowns since 2000. The need for active management has never been stronger in recent times because there’s income out there, but it takes some work to find it.”
Global Financial’s quest for income is shared by other financial advisors in more ways than one. The firm provides portfolio management for individuals, businesses and institutional clients, but the vast majority of its business is aimed at retail-level clients through its network of roughly 425 financial advisors around the U.S. who use its investment management services.
Every individual client of advisors who tap into Global Financial’s money management platform has his or her own separately managed account based on one of 10 in-house investment models ranging from conservative income to aggressive growth. The company’s platform also includes outsourced offerings: a Federated high-dividend-paying stock portfolio, an Astor Investment Management long/short portfolio and a Virtus short-duration bond portfolio.
In addition, Global Financial says its connections on the institutional investment side enable it to bring institutional-level benefits to retail investors regarding pricing, trade execution and research capabilities. The latter includes Global Financial’s access to Bernstein Research’s highly rated research capabilities.
“Our main goal is bringing institutional asset management to the kitchen table by providing similar service and access and economics that institutions have,” says Geoff Frazier, Global Financial’s president.
Beyond that, Global Financial helps the advisors it supports expand their practices through acquisitions. And in January it launched a new succession planning program for those advisors. The program was developed in tandem with two well-known advisory industry consultancies, Advisor Growth Strategies and MarketCounsel.
These various activities have helped make Global Financial one of the fastest-growing RIAs in the land. It manages about $3.4 billion in assets, or more than double its AUM of $1.5 billion in the third quarter of 2012. In last year’s RIA rankings by Financial Advisor magazine, the firm was the fourth-fastest growing RIA among firms with at least $1 billion in assets.
“It’s all organic growth from people coming to us and asking us to manage money for them,” says Mike Dixon, Global Financial’s CEO. “We are immensely and eternally grateful to a small number of partners who refer advisors to Global.”
Go Anywhere For Income
Global Financial became an RIA in 2004, but its roots go back to the prior decade when it was with a large insurance company-owned broker-dealer. Today, Global Financial comprises three different entities: Global Financial Private Capital is the RIA that works with retail clients; Aviance Capital Management LLC is the institutional RIA working with institutional clients; and GF Investment Services LLC deals only with broker-dealer activities related to the sale of commissionable products.
Dixon says the retail-focused RIA is the company’s fastest-growing business segment.
According to Frazier, roughly 75% of advisors supported by Global Financial are investment advisor representatives with its RIA; of these, about 40% are hybrid advisors who are a registered rep with its broker-dealer and an IAR with its RIA. The rest are stand-alone advisors.
Investment management decisions regarding the firm’s 10 in-house portfolio models are the responsibility of Aviance. According to Sorrentino, the three main models are conservative income, conservative income with growth and moderate income with growth.
The conservative income model, which is considered the firm’s bread-and-butter offering for retail investors, is a go-anywhere strategy focused on generating income. It can hold up to 70 to 80 holdings including fixed income and stocks with bond-like characteristics, solid balance sheets and cash flow, low volatility, a history of paying dividends and attractive valuation.
“We look for risk-adjusted yield, Sorrentino says, adding that in 2010 the conservative income model was 100 percent in fixed income but that it was recently 30 percent in fixed income and 12 percent in cash.
“When it’s required, we’d rather have a lot of cash and be opportunistic because at the end of the year I’d much rather have a conversation about why our cash balance was so high versus why we were down 6% to 7%,” Sorrentino says.
The conservative income model has done well when it counts, says Chris Bertelsen, Global Financial’s chief investment officer. It was up around 7% in 2002 versus a 22% drop in the market, was up slightly in 2008 when the market sank 38% and gained around 7% during the flat market of 2011.
“I actually feel that 2013, when we were up in the 9% range, was a good accomplishment given that other income funds from Pimco and Vanguard struggled to break even,” Bertelsen says.
In 2014, Global Financial is playing defense with fixed income by keeping interest rate sensitivity as low as possible and finding opportunity in the short-duration, high-yield space. “We feel there’s an outsized risk in bonds right now, and that equity is a more interesting area where active management really comes into play,” Sorrentino says.
That said, Global Financial has been eschewing utilities, telecom and consumer staples because it believes they’re pricey. “We like to find laggards that didn’t do well last year and have lower valuations but still generate attractive yield,” Sorrentino says.
One example is mining company Freeport-McMoRan. “The reason why we like this one so much is that it pays a good yield so we are not really timing a rebound in copper and gold,” Sorrentino says. “Rather, we are getting paid to wait out the bottom of the commodity cycle.”
Regarding Global Financial’s other two main portfolios, conservative income with growth and moderate income with growth, Sorrentino says they’re meant for investors with a little more risk tolerance. “These two have a strong focus on capital appreciation but still offer some yield,” he says. “They offer our investors more exposure to equity appreciation on a risk-adjusted basis.”
Bertelsen says putting every Global Financial end user client into their own separately managed account is complicated from an operational standpoint. “Running mutual funds would be a lot easier, but we see it as an opportunity where we can bring our trading and execution and institutional rates to individual investments.”
The minimum account size for seven of Global Financial’s models is $25,000. Three other models have account minimums of $5,000.These smaller portfolios generally consist of eight to 10 exchange-traded funds.
Frazier says Global Financial charges an asset management fee, and advisors charge their fee on top of that. He notes that average total fees can range from 190 basis points for accounts of $100,000 or less to 125 basis points for account sizes between $3 million and $5 million. Fees are negotiable for accounts of $5 million or more.
The bulk of Global Financial’s SMA assets are custodied at Fidelity Institutional Wealth Services, and it has smaller relationships with Schwab Institutional and TD Ameritrade Institutional.
Global Financial’s in-house financial planning department, which includes a staff of 11 financial planning specialists at its Sarasota headquarters, acts as a bridge between the investment committee and the end retail client, Frazier says.
“We focus on co-creating a client’s financial future together,” he explains, adding that this entails individual financial planning proposals––including an investment policy statement––constructed for the end client after the advisor takes the client through a detailed discovery process.
“Generally, the advisor will focus on first building the foundation of income for the client using core or less risky portfolios, then once the income foundation is secure they can explore other portfolio investment options to deliver additional customization,” Frazier says. Popular options, he adds, include portfolios focused on inflation protection, rising dividends and enhanced income.
Chris Hobart of Hobart Financial Group, an RIA in Charlotte, N.C., was introduced to Global Financial several years ago through another financial professional and decided to team up with them in February 2012. “They’ve built a platform that speaks to a lot of our clients who want conservative income or a conservative-based equity portfolio,” he says.
He says he’s been pleased so far with Global Financial’s portfolio performance, but he says a bigger reason he works with them is that they help their advisors grow their business. In his case, Global Financial last summer helped his firm acquire two other offices.
Regarding such deals, Global Financial’s role includes both involvement in the discovery process after an advisor identifies a potential acquisition and then help with financing. “If the seller accepts,” Frazier says, “Global Financial funds or uses its funding source to provide 100% of the down payment for the advisor––usually one-third of the total purchase price.”
Earlier this year, Global Financial rolled out a dual-track succession and business continuity program for partner advisors it developed with Advisor Growth Strategies, a practice management consulting firm, and MarketCounsel, a business and regulatory compliance consultancy.
The first track helps advisors identify a successor, normally from the Global Financial network, and then enter into a revocable buy-sell agreement. The initial discussions are orchestrated by John Furey and his team at Advisor Growth Strategies; legal documents are provided by MarketCounsel.
The other track, called “Legacy Lock,” is an option for advisors who haven’t found a successor. In this case, Global Financial will buy the practice at fair market value and will fund it under normal buy-and-sell terms. Next, it will look to its existing advisor base to see if a local or expanding advisor has interest. If that’s not happening, it will resell the business using normal channels.
Global Financial’s phenomenal growth hasn’t come glitch-free, however. Hobart notes that while his transition to Global Financial two years ago went smoothly on the investment side, the company had “growing pains on the servicing side.”
“The onboarding process was sloppier than I would’ve liked, and I let them know that,” Hobart says. “To their credit, they take constructive criticism well and have worked on improving things the past two years.”
He adds that his firm’s acquisitions of two other offices last summer with Global Financial’s help went smoothly. “The fact they want to help in purchasing other offices along with us, that’s a partnership that says, ‘What do you want, how can we get it done, and let’s all grow together,’” Hobart says.