As Homrich & Berg Crosses The $1 Billion Mark, Fixing Things Aren't Broken Is The Key To More Growth

    When Stan Epperson hired his first investment advisor back in 1994, he had one clear-cut goal: He wanted to be able to retire. But the advisor he hired-Atlanta-based Homrich-Berg-had bigger ideas. In addition to creating a retirement plan, they helped him unwind a potentially problematic estate plan and replace it with a limited liability corporation that has allowed him to give substantial shares of his business and assets to both his children and grandchildren. Today, instead of worrying about retirement, Epperson, who launched the hugely successful Boar's Head Meat distributorship in Atlanta in 1981, is creating his own charitable foundation.
    "What these advisors really do is stay involved at a personal level," Epperson says of Homrich & Berg. "They immediately spotted potential problems with my estate plan and my insurance levels and brought in extremely good legal advice to fix things. With them, it's much more than what stock to pick. They look at big-picture planning on an ongoing basis. Now they're helping me move substantial assets to the new family foundation, so that we can continue giving for multiple generations."
    Such ringing endorsements from clients are exactly what Andrew (Andy) Berg, a founder of the firm, likes to hear. As president of the six-principal firm, he prides himself on the upscale financial planning the firm does to ferret out missed opportunities and potential liabilities that clients or their past advisors might have overlooked. And he credits that service with the firm's substantial growth-from $250 million five years ago to more than $1 billion in client assets today. Today, Homrich & Berg can count itself among only 74 independent investment advisor firms in the country with assets over $1 billion.
    "This is a firm that does a great job for clients," says Deborah McWhinney, CEO of Schwab Institutional, where Homrich & Berg custodies the majority of its client assets. "I've watched them over the years and they just seem to do things right. They're always doing analysis to figure out a better way of doing things. They're tough customers for us, but we like that."
    The firm also has a flair for setting the stage for growth. "They've done a lot of the things we believe are critical to growth, including making it an institutionalized goal and formalizing management and standard operating procedures," says Mark Hurley, who looked at the maturation of the industry in his recent report with J.P. Morgan Asset Managers, "Back to the Future: The Continuing Evolution of the Advisory Business." Homrich & Berg, says Hurley, is one of the small group of highly profitable, dominant players he predicted would emerge when he first reported on the industry back in 1999.
    Homrich & Berg wasn't always the model firm. Just five years ago they had a quarter of the assets they have today-just $250 million. And their operations were run like a typical financial planning firm, where everyone had a hand in almost every aspect of the business. "We were all generalists. Everyone was doing everything until the late 1990s," says principal Frank Butterfield. "That's when we first decided that we needed to create separate responsibilities for the principals if we wanted to grow."
    In fact, positioning the firm to take advantage of the huge upswing in consumer demand for investment advice was less "purposeful growth than it was just trying to do the right things for clients," says Berg. He founded the firm, which has always been fee-only, with fellow accountant David Homrich 16 years ago at the ripe old age of 29 because he wanted "to help people plan for the future instead of always looking back, which public accounting required." Homrich left H&B to go run a family office for Arthur Blank, one of the three Home Depot founders.   "I was surprised, but to David's credit, we didn't lose a client," Berg says.
    Frankly, losing clients has not been the problem for Homrich & Berg. In the last decade, the real challenge has been not letting the firm get overwhelmed by growth. It was equally important not to allow the firm's client-centric services or the folks who deliver them become stressed to the point where deliverables suffered. That's meant increasing client minimums from $1 million to $2 million in the past few years. As assets began to flood in and life got more complex, the principals agreed they had to build a firm that was capable of sustaining and even encouraging growth. "As you grow, life becomes more costly and more unwieldy, so you have to be careful to be strategic and efficient," Berg adds.
    Part of that has meant freeing up talented people so they can do what they do best. Today, each of the five principals oversees a specific area of the firm, and each also works with a team that consists of a lead planning associate and an assistant. Only the five principals are responsible for bringing new clients into the firm. "I never wanted to create the Andy Berg show and run all clients through me," says Berg. "I knew that wasn't the way to build a business. I prefer to surround myself with smart, entrepreneurial people."
    But back in 1997 when Bonnie Holland, the firm's custodial, operations & client reporting coordinator came on board, things weren't nearly so well organized. "Principals used to do so much. We were a much smaller firm; ten people then compared to 40 people now. Finally in about 1997 we created departments, which gave the principals the ability to focus on the things that they're good at and gave us the power to get things done," Holland says.
    When it comes to strategic growth, the firm decided to get savvier in 2005. It hired its first COO, Mark Rogozinki, in July. Previously, Rogozinki was COO at Lydian Wealth Management in Rockville, Md., which advises $11 billion and has a $10 million client minimum. "I see him as someone who will initially relieve us of much of the administrative and management duties and, at the same time, be a fresh voice to help implement strategic initiatives to help us grow," says Berg.
    When Rogozinki was first approached by a former colleague about the job at Homrich & Berg, he says initially he wasn't interested. But a visit to the Atlanta firm changed his mind. "I saw this as a great opportunity to help an organization whose main focus is clients." His role is a big one at the firm, and includes managing financials, budgets and accounting, human resources, strategic growth and even a small acquisition here and there. "That's my job description over the next two years," Rogozinki says. "I think the firm is in a position to really accelerate its growth if the five principals can focus on building clients and business. My role is to help them do that from the perspective of building the infrastructure, the right systems and the right people.
    The job is more one of tweaking than fixing something that's broken, Rogozinki says. "These partners are smart and they've built smart operations. Now we're looking to the future to help position the firm for growth three-to-five years out. You need to be practical and do that today, not be reactive when business comes in. We're taking one step back now so we can take two steps forward in the future," the new COO says.
    Bringing on a COO may be a major departure for the firm. But one thing that hasn't changed is Berg's determination to continue putting clients first. "Ethical and fiduciary duty is huge here," says Monica McDonald, a lead associate financial planner at the firm, who came on board in 2003 after working as a planner at ACCO Company for five years. "It's a rule: Clients come first and they get called back quickly," McDonald says. "We know if we start doing things like telling clients to mortgage their homes so we can invest the equity, it will be a problem. Clients aren't stupid. They know if you're trying to do the wrong thing."
    Instead, the firm bends over backward to ensure that clients are at ease with the firm's investment recommendations. For instance, Homrich & Berg often recommends more competitive CDs and money markets at banks. If clients move their money there, Homrich & Berg no longer charges asset management fees on the money. The same goes for 529 plan recommendations. "When their money is there, we don't charge," says McDonald. "I think clients come to understand quickly that if we're willing to move their money so it serves them best, even if it means lower fees for us, we really do put their best interests first."
    Making sure that clients get the services they need is at the core of the firm's financial planning process. Whether that means ferreting out potential tax liabilities and restructuring estate plans, like Epperson's, or doing in-depth planning for widows and divorcees, the firm's focus continues to be on holistic and high-end planning and innovative investment techniques. "Our greatest claim to fame is that we combine comprehensive financial planning with sophisticated wealth management," Berg says.
    On the planning front, that means going A to Z through a client's financial affairs and looking closely at cash flows, investments, insurance, estate and tax planning. And not just at engagement, but on a continuing basis. Frequently it comes down to correcting investor's existing flaws. "We often realize with new clients that their assets aren't titled properly to maximize their $1.5 million exemption for each spouse. You can't do that if you title property jointly," says McDonald.
    Other potentially costly errors that Homrich & Berg strives to help clients avoid? "With insurance we often find that people don't have the insurance or riders they think they have, and many executives don't have umbrella liability coverage," McDonald add. "We also review their income taxes, and more often than we'd like we find errors. When it makes sense, we have them amend their returns."
    Cash flow planning is a real challenge for about 10% of the firm's clients, who must have $2 million in investable assets to meet the firm's minimum requirement.
Many still live beyond their means. "There is a group of people who think, 'Hey, if I can spend $20,000 on a planner, I can spend $60,000 on travel and $50,000 on clothes.' Our job is to reign them in. I have one couple in their early forties who have $3.5 million invested and are taking $18,000 a month out of their portfolio for spending. I've told them if they don't downsize their spending or one of them doesn't go back to work, they'll run out of money by age 60," Butterfield says.
    But even this minority of clients gets to reap the reward of the innovative investment programs and portfolios that the firm continues to design under Butterfield's direction. The firm created four fund-of-funds, which invest in hedge funds; 21% of client assets are invested in these funds, and another 5% is invested in energy, real estate and private equity deals. "We set these up ourselves and basically pool client money together to buy venture capital funds, direct real estate investments and partnerships."
    The firm began creating its own energy partnerships exclusively for clients in 2002. Most advisors who survived the 1980s probably think the firm's partners are asking for trouble, but so far these alternative investments are working out well. The first two (H&B Energy Partners and H&B Energy Partners II) invest in oil and gas wells, and the third partnership (H&B Natural Resources) includes timber and other resources in its portfolio. The first two energy partnerships now have returns of 30% a year, Butterfield says. "We may decide to market the natural resources partnership to wealthy folks in the community. It's a matter of us having the time," he says.
    While the consensus at the firm going forward is that the stock and bond markets will produce 7% average annual returns, Butterfield believes that actual returns may be lower. "That's why we like alternatives so much. We think these alternative strategies will do as well or better, and will go up and down at different times than stocks and bonds."
    Active management is not a dirty word at the firm. "In fact," says Butterfield, "we try to be fleet of foot.  We do use separate accounts and have been using them more and more, especially for big clients, but we still like mutual funds because you can get in and out of them quickly and you're not making people angry."
    Now, Homrich & Berg is about to create another innovative investment strategy for its wealthier clients-an overlay strategy-which will allow the firm to tap topnotch money managers, and then run their recommendations through sophisticated software to ensure there is maximum tax efficiency and minimal overconcentration in a few stocks. Parametrics will handle the overlay part of the equation and Schwab will custody the assets and do the trades.
    "We've been working on this for over a year-and-a-half," says Butterfield. Using Parametrics frees up the firm's resources and ensures that clients get the best portfolio. "For instance, I just had a client come in the door with $2.5 million for us to invest. But he already has $10 million outside in a large-cap stock portfolio. So our overlay strategy would allow us to tell Parametrics not to buy the 50 stocks he already owns," Butterfield says.
    The cost for the service? The managers have agreed to charge just 25 basis points, Parametrics will charge 25 basis points and Schwab will charge "somewhere below 25 basis points," Butterfield says.
    "It's cheaper to the client because they're paying just over 1% now for the average stock mutual fund," he adds. "Still, you have to ask yourself whether it's worth paying somewhere under 75 basis points when we could buy Vanguard's Total Stock Market Index Fund for seven basis points. Will it beat the Vanguard fund? That's what it comes down to. Most managers do not have the skill to beat the passive index, but hopefully we've identified some who will. Certainly, looking backward, our fund managers have," says Butterfield. The firm will not disclose managers' names because the managers do not want to publicize the below-market, 25-basis-point charge. Homrich & Berg plans to require that clients have at least $250,000 to invest in the strategy and plans to invest "hundreds of millions," Butterfield adds.
    It's been a short if interesting journey from 2000 to the present for the firm, which quadrupled its assets and doubled its required asset minimum and its staff size in that time. Where to now? "We've always believed that we had the right mix of product and people to grow this thing dramatically," says Berg. "Now we want to grow assets and profits by 10%. We've never had less than 15% growth in our 16 years, but we're reinvesting now so we can lay the groundwork for the future. We're willing to pay the price."