When the markets began to unravel in September, it was a signal to the seasoned team at Brown Advisory to reach out to its lient base.  These pros knew the drill.  In times of stress, people want insight and guidance from someone they trust. So the Baltimore-based firm made certain it conveyed to clients what the turmoil meant to their portfolios.

"We are a net beneficiary of this market environment," says Richard Dumais, the trust and estate attorney recently named to head Brown Advisory's high-net-worth business. "We will set a record this year for new assets coming into the firm," he says.

Brown Advisory stood out in another way: While they were contacting clients, their competitors slept.

"Many prospects have told us their advisors are not communicating with them, be it a broker or investment advisory firm," Dumais says. "But in the high-net-worth business, communicating effectively with clients is extremely important.  We've been getting positive feedback for how much we've been in touch during this very challenging period."

Standing in clients' shoes to proactively assess and address their needs is standard operating procedure at Brown Advisory, an independent shop with a staff of 200 and $15 billion under management that started in the early '90s as a tiny subsidiary of Alex. Brown & Sons, the legendary investment banking and brokerage house.  It's an approach that has helped the firm, and its clients, withstand the market's recent historic ups and downs. The firm expects to reach a new record in new assets, which are running 25% ahead of last year and now total about $1 billion.

There are many paths to success in the advisory business. Deft delivery of comprehensive advice, innovative ways of working, strategically placed connections and solid investment performance have been the chief touchstones for Brown Advisory.

"We are an investment firm first," says CEO Michael D. Hankin.  "If you walk around here, you'll hear people talking about making money and preserving capital.  But we also have to be very good at client service and being strategic thinkers for our clients.  At the core of our beginning was an effort to put together a team of people from different backgrounds-portfolio management, investment research, tax, trust and estate law, along with very talented administrative people-to think strategically for high-net-worth families."

When Hankin was hired in 1993 as the firm's second employee, one-stop financial-shopping for the ultra-affluent was hardly a proven marketing concept.  Still, a need was sensed.  Alex. Brown & Sons was for years a leader in the IPO underwriting business and cash-flushed executives from companies gone public-Oracle, Microsoft, Starbucks, AOL, et al-frequently asked the firm for help in managing their new fortunes. So did entrepreneurs who sold businesses through Alex. Brown's active M&A practice.

Current and former CEOs and business owners remain a significant portion of the firm's $10 billion private-client business. A typical client family might have an investable net worth of $20 million scattered across taxable accounts, retirement accounts and trusts. "These individuals are really dynamic, impressive people who raise the bar very high," Hankin says. "They challenge us to find creative ways of meeting their objectives."

Services available to these and other well-heeled clients through offices in Baltimore, Washington, D.C., New York and London include proprietary asset management, brokerage, philanthropic planning and fiduciary services, as well as access to a roster of outside managers specializing in alternatives and other asset classes.

Most of the remaining $5 billion under management is institutional, with close to half having arrived last summer via a merger with another former Alex. Brown & Sons company, Alex. Brown Investment Management.  Brown Advisory was attracted to ABIM's largely institutional clientele and its proprietary value investment style-what the firm calls "flexible value." ABIM saw the merger as an opportunity to expand its narrow focus by adding the advisory firm's broad menu of offerings. Plus, many of the two firms' principals knew one another from when they were both owned by Alex. Brown & Sons.

Separation From The Mother Ship
Both subs were eager to split from their parent after it was acquired in 1997 by Banker's Trust. The New York bank's product-driven culture seemed alien to the two relatively autonomous subsidiaries. Brown Advisory, for example, had its own research group and trading desk. "We used outside managers long before 'open architecture' was a cocktail-party phrase," Hankin says.

Most importantly, Brown Advisory had its own independent board of directors. The board not only supported breaking away-several directors were willing to back it financially. The board's support was critical, according to Hankin. "We didn't have to go out and raise money to go private," he says.

Independent directors continue to hold Brown Advisory stock today. They, along with select clients and other well-positioned outsiders, own about 30% and play a vital role, Hankin explains. "They serve as our eyes and ears into the world," he says. "We listen to their views, and then it's an easy transition to listen to the rest of the world."

Still, it's important for the employees to have majority control, he adds, so that investment strategy can be executed freely.  Every staff member with at least one year's tenure can acquire voting stock.  Currently, 94% of employees are owners, which has produced benefits beyond low turnover, Hankin says.  "When we get together quarterly to talk about the performance of the firm and how we are doing for clients, it is amazing how closely all of our employees pay attention."

A Different Way Of Doing Things
A very affluent Brown Advisory client typically has three advisors:  an investment professional, a strategic advisor (a highly experienced attorney) and a senior administrative person. There is no designated relationship manager.

"We leave that up to the client," Hankin says.  "They see which person they become most comfortable with, and that can change as the relationship evolves."  Clients obsessed with the markets gravitate toward the investment person.  Those who establish trusts and foundations often work with the strategic advisor. Families that have a heap of moving parts may rely on the administrative expert to keep it all from coming unglued.

Having a senior investment professional on the team is one of two things that differentiates Brown Advisory, Dumais asserts.  A portfolio manager who's sitting in the quarterly meeting with the client can provide the exact reason why a stock was sold or an asset-class weighting altered.  "That is a significant advantage with certain clients," Dumais says.

Hard-boiled CEOs and business owners, for example, don't like to hear "I'll get back to you" when they have a question about their investments. "They want to know, eyeball-to-eyeball, 'What are you doing for my portfolio right now?'" Dumais says.

The other distinguishing aspect of Brown Advisory is the high degree of interaction between the firm's investment and strategic advisory (planning) groups, Dumais says.  "It is not unusual for the portfolio manager on the team to come into my office and say, 'The Smith family has a large holding that has appreciated dramatically.  We know they have some charitable goals.  Should we talk to them now about a charitable remainder trust as a way to diversify this investment, achieve their philanthropic objectives and increase their cashflow?'"

Dumais is similarly tuned into the investment side of the house.  These days, he's asking around for beaten-down assets that can satisfy clients' wealth-transfer needs.  "The whole trick in estate and gift planning is valuation," he says. "Anomalies in the markets create an opportunity to shift assets between generations at an incredibly low tax cost."

Grantor retained annuity trusts are among the estate planning tools that are a "phenomenal vehicle" under the present market conditions. "It's the horrible silver lining to all this, and it's part of the message we are getting out to clients."

A Fundamental Investment Approach
Fundamental research guides the core styles handled in-house: fixed income, small-cap growth and large-cap growth and value.  Prior to visiting a company, Research Director Paul Chew and his 20 analysts-most of whom are CFAs with experience in the industries they cover and with salaries comparable to a portfolio manager-project three years of financial statements under various scenarios.

"That can be a lot of work," Chew admits.  But it helps pinpoint the drivers of success for the stock and whether it's margin expansion or top-line growth-vital insights to carry into a meeting with a company. "Corporate managers today attend classes to learn how to talk to investors like us.  We try to change the conversation from them pitching us to us grilling them for the information we want."

The analysts continue their research by tapping a carefully cultivated, national network of contacts that includes business-oriented clients and venture capitalists.  With so much data readily available these days, Chew seeks "a differentiated information source."  The firm's nexus of connections helps build out the mosaic on a company and has paid off in the small-company space in particular, he says.

Whenever a security is purchased, the strategy for selling it is immediately plotted, shaped by the pro forma financials.  "We set an upside target and, equally important, a downside target," Chew says.  "If we are wrong, we want to know where things can go wrong, and how badly."

The Message To Clients
As they have done successfully during previous downturns, Brown Advisory's portfolio managers are spreading money across more positions to reduce company-specific risk. For example, the flexible value portfolio holds 45 stocks today, up from the usual 30 to 40.  Although buying when the market is sinking carries risks, Brown Advisory sees plenty of investment opportunities, says Rick Bernstein, the firm's large-cap value manager.

Bernstein likes innovative global companies that have strong balance sheets and markets with barriers to entry, such as industrials 3M and Dover Electrical Works, tech giants Microsoft, Dell, Cisco, Intel and Nokia and consumer staples Unilever and Procter & Gamble.  "You can buy many of these at a single-digit multiple and they will pay you a nice dividend while you wait out this nasty market," he says.

What lies ahead? The credit crunch, rising unemployment and dwindling consumer demand will turn 2009 into a "sloppy year," Bernstein says.  "We expect the profit cycle to slow considerably. In 2005 through 2007, easy money supported a lot of lower-quality companies' performance. 

With that gone, it's back to investing in high-quality companies with solid managements and proven franchises.  I'd be surprised if that isn't an obvious theme in the markets this coming year."

Bruce E. Behrens, the flexible value manager, is telling clients "this is an environment to be doubly safe about avoiding what you don't do well.  Where we have been hurt in the past is accepting too much financial leverage and misjudging management."  After getting burned by Countrywide's Angelo Mozilo, he's avoiding debt-saddled companies and using new clues to analyze executives' actions.

"We'll be looking at whether behavior changes as the business environment changes," Behrens says. "Maybe you see a certain aggressiveness come forward, or quarterly results differing from management's guidance.  We will be more skeptical of management and less accepting."

Behrens, however, says the firm is also preaching consistency. "I'm telling clients that it's important to consistently apply the principles which have been successful for you in the past, yet also adapt and not be stuck in what you do," he says.

Delivering such words of wisdom to its high-net-worth circle has helped bring Brown Advisory a record year.  Consider the wealthy Pennsylvania woman with a small relationship at Brown who had primarily been utilizing a large brokerage firm.  She didn't hear a peep from the broker when its troubles made ugly headlines in the fall, according to Dumais.  "She decided we offered very good service and that she liked the close communication," he says. "She is moving $25 million to us, and that's just one example."

A 'Flexible' View On Value
Boasting average annual returns in the rarefied neighborhood of 200 basis points above the S&P 500 for the last 20 years, flexible value investing is a proprietary style developed at Alex. Brown Investment Management, which recently merged into Brown Advisory. Bruce E. Behrens, former Alex. Brown co-president and current investment manager at Brown Advisory, was an architect of the methodology. In a recent chat, Behrens, 64, fondly quoted cultural and industry icons as he revealed himself to be a student of the investment game.

PW:  What exactly is flexible value?
Behrens:  We are flexible in how we view value.  What is a really attractive value in the market changes over time.  The Russell indexes have a lot of stocks that fit both growth as well as value, and so do we. United Technologies. Disney. Wal-Mart.
Ben Graham was really the epitome of the value investor. [He advocated that you] look at asset values as well as earnings, and buy things cheap for a margin of safety. Warren Buffett has made most of his money in growth companies, but he bought them when they were at bargain prices-like we hope he's doing in today's market.
That progression of thought from Graham to Buffett is something we incorporate in looking for value.  We believe growth is part of the value equation.

PW: We're told your shop is a big fan of the 'Oracle of Omaha.'
Behrens:  Our chief investment officer, Hutch Vernon, has been to the Berkshire annual meeting for 22 years now.  Many of us have been there five or six times.  We study Buffett and try to learn from him all the time, although I don't think we're as good as Warren [laughs].

PW: What is your portfolios' market capitalization?
Behrens:  We're typically two-thirds to three-quarters in large-cap, the rest in mid-cap.

PW: Historically your portfolios have tended to be somewhat concentrated.  Why?
Behrens:  Part of it is a residual of success. If you look at our Top 10 holdings, they typically have been between 40% and 45% of the portfolio by market value, but probably 30% by cost. In line with what Peter Lynch said-that it's important to let the flowers grow and cut the weeds-we will hold something we bought really cheap that is now fairly valued if it is an excellent business, as long as it doesn't get excessively overvalued.

PW: How have you fared with the financial sector?
Behrens:  At the outset we got burned.  We owned Countrywide Credit, which we had had for a long time and made a lot of money on.  We also owned some financials that were exposed to the drying up of the securitization market in student lending.  That hurt us in the last half of '07.  But we were not in the celebrated names that have had trouble recently and our finance stocks actually helped us in the third quarter relative to the market, even though we were slightly more than market-weighted in the industry.

PW: What do you like now, in early October?
Behrens:  Some wonderful companies are coming into range.  We are underweight in energy because we refused to get on the bandwagon when it got really hot.  Now Occidental is less than $60 per share.  That's been a big opportunity.  Another one is a diversified industrial stock, Danaher.  It has 60% international sales.  It's not super-cheap-14 times earnings or so-but usually sells at well over 20 times and is extremely well managed.