Skill, service plus separate accounts are key for advisors managing a billion.
A billion dollars under management-for many
advisors, it's the stuff of which dreams are made. But for more than a
few, it has become reality. Even with the higher asset levels being
gathered by advisors today, it's hard to imagine how to approach the
billion-dollar mark, much less break through it. According to Barnaby
Grist, director of business development at Schwab Institutional, an
estimated 400 to 450 advisory firms have achieved this lofty level, and
they seem to fall into four different categories:
Wealth managers who work with multimillion dollar corporate executives;
The classic money manager aiming
to outperform a chosen benchmark and usually focused on a single style;
Family offices, which provide a
full slate of customized services including wealth management;
Institutional consultants who
bring unique asset allocation skills into the high-net-worth business.
With the larger assets under management, these
advisors are able to use separate accounts as they were originally
offered to institutions and wealthy families. As their assets grow,
their capabilities also will grow, allowing clients to meet minimum
investment requirements for any manager-especially those not commonly
listed on popular platforms-and reap the greatest benefit from separate
account management.
Most of the advisors who established these firms
started out on the brokerage side of financial services and decided to
go on their own with a partner or two. They left because they reached a
point in their businesses where the large brokerage house could no
longer support them adequately in providing customized service, or
because of conflicts between product and service-centered business
models.
But without exception, there is something different
about the way these advisors have approached their businesses from the
outset. Although a billion dollars is a significant amount of assets
either to have under management or advisement, reaching that level
happened as a natural result of doing business the way they thought it
should be done-putting clients' needs first as an every-day,
second-nature habit.
What commonalities do such advisors have? What differences? What is
their secret formula? The answers to these questions mark the line in
the sand for those wishing to follow in their footsteps. And the line
looks a little different than one might expect.
The Commonalities
Advisors and teams who have made it to the
billion-dollar asset mark have distinct characteristics in common. Most
have a different mindset and approach to both their clients and their
businesses. These firms share six primary commonalities:
They define their practices
differently, and reaching $1 billion was not a conscious goal.
They focus on client satisfaction above all else.
They've never allowed operational concerns to get in the way of client service.
They have created businesses out
of their practices, catching the market trend early and creating equity
for themselves.
They serve clients using a team
approach, with no one advisor handling all aspects of any single
account or household.
They have a well-designed
hierarchy of service that allows each team member's talents to be used
to its best capacity.
These advisors have had a distinct vision for their
practices from the start. Staffing, technology and growth decisions
have all been made in terms of client service, not primarily in terms
of profitability. Jack Thurman, CIMA and president of BKD Wealth
Advisors in Springfield, Mo., distinguishes this level of
client-centered focus by stressing the objectivity that must be
associated with it. "You must have a passion to serve them and you must
have complete objectivity," he notes. "If you have a passion to serve
your clients, but in the back of your mind your focus is to make a
whole bunch of money doing it, you mess up on the objectivity."
Operations were a concern, especially to start with,
but these functions were either handed off to internal people hired to
provide support or were outsourced. According to Grist, the advisors'
priority was to enable them to do what they do best-earn new business
and focus on client service. Technology, reporting and strategy issues
were also delegated to others. As each firm grew, the detailed,
day-to-day service aspects continued to be delegated or outsourced,
ensuring that advisors had the time to properly nurture client
relationships. Grist confirms that this is the right focus for firms
who are serious about growing their businesses to bolder levels. "If
you want to be 100% focused on clients, every minute you spend worrying
about what your reporting looks like is a minute wasted."
Most of the firms interviewed use both Schwab and
Fidelity, and some specialized vendors such as PPCA and Prima Capital,
for performance attribution and manager search for their separate
account portfolios.
The Business Model
In hiring more advisors while building their
respective firms, they also prepared for the conversion of their
practices to actual businesses. "We see an aging population of money
managers, and if we have our clients associate with us personally,
we're not going to be able to transition our business," explains Jane
Williams, CEO of Sand Hill Advisors, in Palo Alto, Calif.
Reaching the billion-dollar mark was primarily a
rite of passage for these advisors. For Thurman and his group, "We saw
it as a threshold of credibility. We didn't view it as the threshold of
completion, we viewed it as a starting point." After being with Merrill
Lynch for 14 years, Thurman became a partner at BKD LLP, one of the ten
largest CPA and advisory firms in the country, with the assignment of
building the wealth management arm of the firm.
The office has 35 staff members, 22 of whom are
advisors or portfolio managers. He hires the best talent he can find,
looking for that same passion to serve clients. "Competency comes
quickly thereafter," Thurman says. The firm has approximately $140
million in separate accounts that are either managed by Schwab's
platform or by managers chosen through Prima Capital's screening
process.
Williams and her partners also came from Merrill
Lynch. "We wanted to be managers of portfolios," Williams explains.
"That was about the time Schwab was emerging, and we saw the market
really bifurcating between the discount and full-service houses and
moving toward sales and product development. Our objective was to have
a close relationship with our clients-a planning-based relationship,
which was pretty unique at the time." Williams and her partners also
had a portfolio-based philosophy.
The billion-dollar level offers Sand Hill greater
scale than a $500,000 manager. "It puts us into a different mix and
will, hopefully, give us more leverage with greater pricing power,"
explains Williams.
As CEO, Williams does most of the core work with new
relationships. "We've developed a robust team approach. We've recently
split our wealth managers' roles." Senior managers used to handle all
aspects of the client relationship and portfolio management. Now, those
functions have been separated.
With portfolio managers taking over portfolio
management and implementation, investment decisions are implemented
promptly, improving service to clients and allowing senior and junior
wealth managers to manage the relationship. The next layer of service
involves a customer service person assigned to each client
relationship. "We've really leveraged what our senior wealth managers
are able to do, so they are more available for new business-they're
prospecting at higher levels than before."
The firm is part of Fidelity's Advisor Network, but
also works very closely with Schwab and sees that relationship growing.
"Schwab lines up appropriate managers and offers them to you," says
Williams, "and Fidelity operates on the 'no advice' model, using a much
more open framework-it's just a different capability. We use both
platforms for clients, sometimes for the same client-where they
wouldn't gain access to a particular manager in one group, we go to the
other group."
The firm uses either separate accounts or institutional funds,
depending on fees. "Separate accounts are part of our overall wealth
allocation. In each class, we find contradictory numbers regarding fees
(compared to institutional funds). For example, in REITs, sometimes we
find an SMA alternative that's less expensive than an institutional
fund, whereas in other market areas, the reverse is very decidedly
true."
Richard M. Todd, CIMC and principal at Innovest
Portfolio Solutions LLC in Denver, Colo., says, "We started Innovest in
1996 with three partners; we dropped our securities licenses and became
completely independent. We don't sell investment products, insurance or
financial plans. We don't have a fee schedule per se," Todd explains.
"We look at a situation and determine what we need to make to be
profitable based on the advice we're giving and the complexity of the
situation."
Todd started his career at EF Hutton in 1986 and
uncovered wealthy families by cold calling. He needed help servicing
them, so he aligned himself with another advisor who had more
experience dealing with larger accounts and who was part of the firm's
consulting group. Both became uncomfortable about conflict of interest
at their former firm. "Our fiduciary responsibility was to the firm and
not to our clients, where it should have been. We just felt
uncomfortable with that relationship," he explains.
The team doesn't want to "be all things to all
people," and works in tandem with other family advisors, especially tax
and legal. There are 20 people in the firm who work as a cohesive unit
delivering investment advice to clients. Each client works with two or
three advisors. Approximately 70% of the firm's clientele are
institutions and 30 % are families. Clients are surveyed every year to
gauge satisfaction.
The client survey is a good idea, according to Grist. "Your true
distinction point is what you actually deliver, so your clients are the
only credible ambassadors for your brand."
Innovest uses separate accounts for institutions because of the cash
savings and the ability to identify the source of performance.
According to Todd, "The benefit
of the separate account or SMA is the ability to see inside the
portfolio and really understand why performance happens, good or bad.
That's going to help you be a better judge of whether a strategy or
solution or manager is still viable going forward."
Within the dedicated client focus of each, certain
unique market opportunities have developed based on the team's
conglomerate talent and capabilities. Each firm views separate accounts
as a large part of its business, but as a tool within a larger client
service model. Thurman's subsidiary has built a platform
customized around the needs of its clients. "We view passion as our
strength and we try to serve clients on their own terms," says Thurman.
He cites a recent example of a client who sold his
business for $50 million. "I knew that Goldman Sachs, Morgan Stanley
Private Asset Management and JP Morgan Asset Management would all be
going after this client," he explains. "I met with the client and said,
'I'm not here to sell you on anything. What's your greatest problem?'"
The client was concerned that his children were
about to inherit $5 million each-he wasn't sure how they were going to
deal with it and needed help. Thurman offered to develop a customized
educational program. "We charged him for it, but we customized it
around his challenge. Our whole perspective is to provide solutions,
not to sell."
Williams' firm specializes in providing a deep level
of financial advice to people going through transitions. "Sometimes
these transitions start long before there is a money management
engagement to be undertaken," explains Williams. Typical situations
include counseling the less informed party in a divorce as they go
through the process of dissolution, or counseling with trustees in
estate resolution matters where assets are shifting.
Williams developed an affinity for working with wealthy women early on
in her career. "We have a significant business with wealthy women.
We've long felt women would be the repository of great wealth transfer.
Sometimes it comes from parents, sometimes from a deceased spouse where
the woman has to take control, an infirm spouse where a wife needs to
take command, and, of course, from divorce," she says. The firm has
instituted a Women's Wealth Network offering women "an inspiring and
safe educational and networking space where they can achieve financial
confidence."
In addition to high-net-worth individuals, the firm
manages money for a variety of charitable foundations and endowments.
It has about 170 clients and just over $1 billion under management.
Although not a family office, the firm has a very broad service
offering for clients. It runs two portfolios in-house, a core equity
and active bond. "But we are open architecture to a very great extent,"
Williams adds.
Innovest, according to Todd, works with families and
foundations, both public and private; as expert witnesses in fiduciary
cases; does retirement planning; and works on special projects for
clients. "We don't want to be all things to all people, but we want to
make sure we work in conjunction with their other advisors," says Todd.
"We call ourselves an extension of the family, or investment committee
or board."
Such phenomenal growth also breeds challenges.
Thurman's firm hired Schwab to help it expand its client service
platform and streamline communications with its clients. He also cites
the difficulty of balancing customized service with scalability. "It's
very difficult," says Thurman. "There are a lot of things we have to
compromise on. We focus on customization through standardization, like
the solution we offered the client who sold his business for $50
million."
Williams cites price competition as a challenge. The
boards of public foundations are becoming very sophisticated. "They're
looking to bargain their fees down to nothing, and it's just not a
proposition you can very easily support," she offers.
Todd cites the continual challenge of offering
clients value in what is delivered. "Because we're a consulting firm,
we don't offer the same solution to everybody. With that business
model, there are capacity issues. As we grow and continue to bring in
clientele, we have to continue to bring in quality people."
"Often, success breeds arrogance," says Thurman,
citing what he views as the firm's greatest challenge. "We want success
to breed humility. Getting to $2 billion means tweaking 1% better out
of a hundred different things-being a little more efficient on
quarterly report generation, making three phone calls to a
half-million-dollar client instead of two calls."
Platform providers realize they need to offer more
than just a good platform. Schwab's Grist says his focus is on advisors
who are trying to develop their businesses and are thinking about
strategic planning. Two major themes at Schwab are generating referrals
and creating the proper educational structure for employees to ensure
quality client service.
As each firm is adamant about maintaining its proper
focus, it continually refines its original delivery structure,
adjusting to the growth challenges cited earlier. "Our momentum is so
good, our biggest challenge is to grow at a measured pace. I'm afraid
of growing too quickly," says Williams. Narrow focus, proper deployment
of personnel and capabilities, custom managed account solutions and a
unique service-based vision are what catapulted these firms to the
billion-dollar level. The same ingredients offer them much promise for
the future.
Financial writer and former wealth manager Lisa Gray contributed research and interviews for this article.