Another worthy early project, undertaken at a client's request, was to convene a climate-change forum of SRI managers and foundation leaders from around the country. The attendance at this forum surpassed 100. "It was a huge success," says Murtie, "and it all came out of a client saying, 'I want to do more about climate change with my investments, I want to learn from other people who are doing it, I want to educate people who aren't doing it, and together leave the conference with a better way to invest around the climate-change issue.'"
Murtie adds that new clients greet her enthusiastically. "When I'm introduced and I tell them my role, they often say, 'I didn't know investment consulting firms had someone like you.'"
BEING CHOOSY
In its effort to vet mutual funds, hedge funds and separate account managers, Federal Street Advisors deploys a six-member, CFA-studded research team. Kristin Fafard, the firm's director of research, primed Private Wealth on the group's deliberate approach to manager selection.
PW: Beyond a strong track record, what do you focus on when evaluating money managers?
Fafard: We want to make sure there is a high probability of that past success persisting into the future. So we ask ourselves, "What would cause them not to be able to deliver the returns they've delivered in the past?" Obvious things are changes to the organization, to the people running the money or to the strategy. Some of these changes can be benign, but some are more meaningful. It's that judgment that my team works on all the time. We debate back and forth whether a particular ownership change or slight strategy change will cause an impact on performance going forward. It's really an art.
And then we blend together managers who are getting their exceptional performance in different ways, because that can increase your rate of return while reducing volatility.
PW: Is that where hedge funds come into play?
Fafard: Hedge funds are an integral part of that. If you are hiring active investment managers, you want to give them a long leash, and hedge fund managers have the greatest number of tools available to them through their ability to short and to take concentrated positions. They are the most active of managers.
PW: Isn't obtaining information from hedge funds difficult, which in turn could make performing due diligence difficult?
Fafard: Yes, information can sometimes be hard to come by. However, with all our recommended asset managers we demand access to the chief decision-makers and transparency into the portfolio. These are our key tenets. We do not compromise on them. So we leave a lot of hedge funds on the table.
PW: Why does Federal Street drop a manager?
Fafard: If we can no longer get access to the key decision-maker. Recently, a long-only manager used by a number of our clients all of a sudden just stopped making himself available to us. It was an abrupt change and there were some things in the fund's most recent list of holdings that we had questions about because they were unusual. So not being able to talk to him, we said, "We're out," and the clients started redeeming the next day.
PW: Social venture capital is part of the firm's socially responsible investing focus. Tell us about this space.
Fafard: Like venture capital, social venture is early-stage capital. It's simply identifying an industry or a company that is poised to do social good and investing in that. Right now we frequently see it with natural resources-companies just getting going with wind power or solar power. As with any venture, it is the riskiest type of opportunity, so we make sure our clients understand the risks associated with start-ups. Normally, you have to invest $1 million or $2 million, but the minimum could be anything because these are often private deals.
The Power Of Fee-Only Advice
Another key part of Federal Street's approach is its fee-only structure. Clients benefit from this because the investment-research team can look anywhere for ideas. There are no proprietary products to push, no sticky business arrangements to honor. The firm uses outside managers through recommendations to clients, and when a manager disappoints, terminating the recommendation is easy.
"We don't have to jump through hoops," says Kristin Fafard, director of research. "There's nothing political about it. There's nothing financial about it. It's based entirely on the merits of that particular investment manager." (For more on the investing process at Federal Street, see the sidebar.)
The fee model has not only attracted clients, but also employees. It is what ultimately convinced Hustvedt and Walsh to come over as principals in 2009-with four staff members and several clients in tow. "Other firms say they are fee-only, but then you find out they take referral fees or sell insurance on the side," Hustvedt says. "Being able to provide conflict-free investment advice was critical to us."
Things are good at the advisory firm overlooking historic Post Office Square. Murtie earned that MBA she moved to Boston for, and she's enjoying serving her old industry. "The foundation clients have indicated that my role has added tremendous value," she says. "It's been very rewarding to know we were right in reading their needs."
The greatest gratification no doubt belongs to LaPann. It's a long way from when he toiled alone for an abbreviated client roster. "My expectation when I started was that if I listened to the clients and responded with high-quality advice and service, I would be able to grow a business," he says.
"That seems remarkably simple-almost naïve," he says. "If there's been any surprise, it's been the extent to which clients have embraced that. It worked even better than I thought it would."