Founded in 1932, advisory firm Harold C. Brown & Co. embraces its past but changes with the times.
The Buffalo-based advisory firm Harold C. Brown
& Co. shares a few similarities with the majestic Niagara Falls
down the road. Both have been around a long time (three-quarters of a
century is a long time for an independent advisory firm). Both are
steady and dependable performers with predictable results-or, in the
case of Brown, fairly predictable as it strives to avoid sending its
clients' portfolios over the edge in a barrel. And both are
institutions in western New York. Considering where Brown operates
from, that last part is somewhat remarkable.
As a place known more for the Buffalo Bills than
dollar bills, Brown's hometown isn't exactly a major financial center.
Nor is it home to many major corporations or high-tech start-ups filled
with executives or nouveau riche yuppies clamoring for financial
advice. This is Rust Belt country, and Buffalo's population has plunged
from roughly 530,000 in 1960 to an estimated 280,000 in 2005.
The local economy is trying to shake off the rust by
transitioning from smokestack industries to service-oriented and
science- and research-centered activities. But no matter the state of
the local economy, Brown has stayed the course even while changing its
course, to accumulate more than $800 million in assets under management
from a client base spread over 40 states.
The firm was founded as a broker-dealer in the
depths of the Depression by namesake Harold C. Brown, and that was its
primary calling over the next four decades until it became dually
licensed as a broker-dealer and registered investment advisor in 1974.
It changed its business focus to a fee-based advisory business in the
late 1990s, and added financial planning services in 1999. As Brown
evolved it kept up with industry trends and managed to thrive even as
its home region struggled to cope in the post-industrial world.
Brown doesn't toot its horn much from a marketing
perspective because it doesn't feel the need to. Through the years it
has garnered clients from the small family-owned businesses that figure
prominently in the Buffalo-area economy. Much of Brown's new business
comes from both professional and family referrals. It won't divulge its
client retention rate, but it touts its long-standing multigenerational
relationships with various family clients as proof of its success.
"We're now serving the fourth and fifth generation from clients who
originally did business with Mr. Brown," says CEO Katherine
Christoferson. "Strong client retention is how we expect to drive our
growth going forward."
Case in point: a long-time client who recently
passed away had four children who remain Brown clients despite being
scattered throughout the Southeast and California. Some of this
multigenerational loyalty that began with a few stock and bond picks
from Mr. Brown has morphed across the continent, family connections and
complex financial topics in ways the firm's founder couldn't have
imagined.
One example involves an attorney with a large
corporation on the West Coast who had a quandary related to stock
options. A fellow attorney at the company referred him to Peter Grogan,
a certified financial planner at Brown. This second attorney is based
in the Midwest and comes from a family that's had a relationship with
Brown since the 1940s, including help from Grogan in a family financial
matter that saved them a lot in taxes.
"The guy [out West] called us, and said his wife
said, 'You're sending a lot of money to these people in Buffalo and
you've never met them,'" recalls Grogan. In the prior year the man
incurred a large alternative minimum tax hit after he exercised some
stock options.
Grogan recommended that he exercise his options as
incentive stock options (ISO) in a year when he would be subject to the
AMT, which for him is every year. Then he should sell the ISO shares
the following year after meeting the one-year holding period. This
created an adjustment for AMT purposes because his basis in the stock
for AMT calculation was higher than his basis for capital gains tax
purposes. That reduced the AMT tax. It also enabled the shares to be
taxed at capital gains tax rates.
Next, Grogan suggested he exercise a number of his
nonqualified stock options (NQSO) to push his income to a higher level
for regular tax liability. This allowed him to realize unused AMT
credits that had been carried forward for many years. The man exercised
his NQSOs at a significantly lower tax cost, preserved the capital
gains tax treatment for the ISOs and finally took advantage of his
unused AMT credits. The bottom line: The man reported more than double
his income the year he sold the ISO shares and paid roughly 50% less
tax.
Along with his CFP designation, Grogan is one of
just 49 Accredited Investment Fiduciary Analysts, a designation
introduced in 2002 and revamped in 2006 by the Center for Fiduciary
Studies that focuses on the responsibilities of fiduciaries. Grogan
says such expertise produces twofold benefits: It helps Brown better
understand its role as fiduciaries, and it enables them to prepare and
educate their clients for their roles as trustees for their family
trusts. "I think this is an area that'll get more attention as
regulators look closer at both investment firms and all people with
fiduciary responsibility," explains Grogan.
Even as Brown expands its financial planning
services, it still prides itself on its stock-picking approach and its
long-standing emphasis on investment management. Asked whether his firm
currently is more about being an RIA or a broad-based financial
planning shop, Chairman Charles McCollum replies with a laugh, "Good
question." A slight pause follows before he continues. "I'd say we're
investment advisors slash financial planners."
McCollum joined the firm in 1961 and learned the
business at the knee of Mr. Brown. He eventually succeeded Brown's
son-in-law as the firm's top executive, and helped oversee the
company's evolution toward financial planning services. McCollum says
one impetus for the change toward a fee-based, holistic financial
approach came from a long-time client who announced one day that he
wanted McCollum to sell everything in the portfolio, including his
taxable accounts, because he met with a financial planner who said he
should put everything into mutual funds. "That would've created a huge
capital gain," says McCollum. "It made me realize we had to move more
into financial planning so we could become the go-to person to help
clients with retirement and beyond."
Brown's staff of 40 employees includes three
chartered financial analysts and eight certified financial planners,
with two more in training. "We want to become our clients' coach," says
McCollum, 67.
Brown employees are mindful of their firm's history,
and like to weave the tale of how Harold C. Brown had the chutzpah to
start a broker-dealer firm in 1932 at a time when people were focused
more on soup lines than on stocks. Brown graduated from Cornell
University with a metallurgical engineering degree and after graduation
fulfilled his father's wishes by working at the family business, which
made railroad car wheels.
But that wasn't Brown's calling, and he spent time
at the local library researching other career options. The financial
industry intrigued him, and so he quit his father's business and got a
job selling bonds. Brown eventually went solo, but he needed a place to
hang his shingle. He approached the president of a major local bank,
Liberty Bank, and made him a proposition: Brown wanted office space in
the bank building but couldn't pay the rent right off-instead, he'd
make up the initial missed rent payments as his business grew and the
money came in. The bank president and his board agreed to the offer,
and Brown ultimately never missed a rent payment.
"I was very fortunate to be here while he was still
alive," says McCollum about Brown, who died in 1974 when the firm was
still very much a stock brokerage. If Mr. Brown could revisit earth for
a day he'd probably be surprised by the company's modern-day bent, and
be comforted that it remains true to his conservative investing
philosophy.
"Brownie was GARP before anyone invented it," says
McCollum, referring to the founder's nickname and to the investment
approach known as growth at a reasonable price. Brown schooled McCollum
in the ways of value investing, and the company still leans towards
companies with strong balance sheets and solid, long-term track
records. "We're long-term investors," McCollum says. "We've stayed with
our root philosophy and stayed away from stuff like options,
commodities and derivatives."
Senior portfolio managers and research analysts meet
once a week to brainstorm ideas about potential buying opportunities
among stocks and bonds. They take a bottom-up, fundamental approach to
equities, and traditionally invest a large chunk of assets in steady
consumer staples and avoid cyclical companies. "We don't expect
double-digit growth every year," Christoferson says. "But we expect
reasonable growth with dividend flow."
Brown diversifies its portfolios across different
sectors and aims to mitigate market volatility. "Generally speaking, we
do better in down markets and do as good or slightly less in really
spectacular markets," Christoferson explains. "When we meet with
clients we tell them a little about the companies they own. Probably
one of the hardest jobs we have is tempering people's emotions, and in
tough times like the market in 2000-2002 it gives them a degree of
comfort knowing they're invested in companies like Heinz or Pepsi."
As much as 75% of the equity portion of client
portfolios is invested in individual equities, with the rest comprised
of mutual funds and exchange-traded funds. "Picking individual stocks
is still our bread and butter," Christoferson says. "One of our great
strengths is that all of our portfolio managers have more than 20 years
of experience. We've been through a lot of market cycles."
Christoferson, 53, took the reins in 2003 after
then-majority owners McCollum and Lawrence Buck, now the firm's
president, decided to cash out and focus on managing portfolios. They
sat down with the entire group of senior portfolio managers to say they
planned to sell the company and asked if any of them wanted to buy the
business. Christoferson agreed to become majority shareholder, and
along with six minority partners-including three women-bought the firm
and kept it in-house.
"The enterprise value of the company was probably
worth more than we sold it for," says McCollum. "My motivation is that
we have a history that goes back to 1932, and if we sold out to a
larger institution we'd disappear in about two years. There would be no
more Harold C. Brown & Co."
McCollum said they negotiated with a larger company
who told him they'd let Brown operate independently for two years
before integrating it into the rest of the company. "Neither Larry or I
wanted to do that," he says.
Christoferson, who hails from tiny Moose Lake in
upstate Minnesota, expects to maintain Brown's independence. "We're
free to do what we think is best for our clients without pressure from
anyone else," she says. "That's the way I want to keep it."
The firm operates from the top floor of the 38-story
HSBC Center, the tallest building in Buffalo. The space occupies the
tower's former restaurant and offers sweeping views of the city and
Lake Erie. On clear days, Niagara Falls is visible in the distance. The
office atmosphere is relaxed and friendly, although casual Fridays are
verboten. "I'm adamant about our dress code," says Christoferson. "Our
dress code is always professional."
Christoferson wants to grow the firm's AUM to $1
billion in five years. "That may not be as aggressive as some of our
competitors," she says, "but I believe in managed growth. You have to
keep an eye on existing clients, rather than being consumed with
getting new clients while forgetting about who pays the bills."
Brown's conservative, slow-growth approach is also
reflected in its mentoring program. This isn't a place for young
gunslingers with big ideas about playing commodity futures or putting
clients into exotic hedge funds. After Matthew Collard graduated from
college in 1996, he worked in the financial industry in Germany for two
years before coming back home to work at Brown. "The prior and current
owners take a lot of pride in Brown," he says, "and they're very
careful about who they select to pass on the baton."
During Collard's first three months he floated
through different departments to learn about the company's operations.
As he sized up the firm, the firm sized up Collard to decide which
senior portfolio manager to pair him with. "An old-timer told me it's
kind of like being 16 and driving around with your parents until you
get your license," he says.
They eventually paired Collard with senior portfolio
manager Michael Pratt, figuring Collard's interest in research and
stock selection meshed with Pratt's background as the firm's former
research director. Pratt heads one of Brown's six portfolio management
teams, which divvy up the firm's far-flung client base.
One of Pratt's clients, Dana Rice, owned an
insurance agency in western New York before he retired and moved to
Maryland. After his father died some 50 years ago, Rice hired Pratt's
father to advise him on handling his inheritance. Pratt's father worked
for another firm, but Rice continued the Pratt relationship with
Michael at Brown. Now Pratt oversees accounts for Rice's children and
grandchildren.
"Brown is handling a very modest IRA for my
grandson," says Rice. "They're perfectly willing to take on a small
account like that because they see it as a potential long-term
opportunity with somebody in their early twenties."
And so it goes at Brown, a company that's proud to stick to its
knitting but doesn't always knit the same old sweater. And that's why
they're still going strong after nearly 75 years. "As much as we cling
to our heritage and pride ourselves in our conservative long-term
approach," says Christoferson, "we're willing and able to make
adjustments as the marketplace changes."