From the May 2008 issue of Wealth Manager Web • Subscribe!

A Whole New Ballgame

That famous line from the song "New York, New York"--"If I can make it there, I'll make it anywhere"--has become a standard for measuring success. The refrain holds special relevance for the financial services industry: Because of the concentration of wealth, New York City is home to many of the largest financial services firms and thus one of the most competitive markets in the country. Nevertheless, one firm, Lenox Advisors, has carved out a unique niche in Manhattan.

The firm's clientele make the success story even more unusual: Many of their clients come from financial services firms that have substantial in-house wealth management divisions. Moreover, Lenox's founders did not have the usual background in investment management or private banking--they transitioned to wealth management from the insurance business.

By 1994, Michael Book and Greg Large were successful agents with Mass Mutual Life Insurance Co. Both worked at Cowan Financial Group in Manhattan and had similar clientele among Wall Street executives. They started hiring office staff together to leverage their businesses and increase efficiency. Rick Van Benschoten, who also worked in the Wall Street market, joined them in 1999, and the three managing partners decided to expand beyond insurance. "We really had a lot of opportunity on the investment side, but we weren't going after it because we didn't have anybody to manage the money once we brought it in the door," says Book.

That realization led to the arrival of Tom Carstens, who joined the firm as a partner in 2000 specifically to develop the asset management business. Tom Henske and Greg Olsen--both with backgrounds in wealth management and retirement plan distribution-- became partners in 2003 and 2005, respectively.

Going for Growth

Lenox's early history reads like that of numerous wealth management firms: A group of advisors with similar clientele and complementary skills get together and launch a new business. But how many other firms that started operations within the past decade have grown from assets under management of $80 million in September, 2000 to $1.2 billion as of early 2008 with offices in four major cities and a staff of more than 100?

And the business is diversified, as well. Book says that individual insurance lines--policies purchased by individuals rather than corporations--generate about 50 percent of the firm's overall revenue. Asset management accounts for roughly 25 percent; financial planning, 15 percent; and the group benefits area for about 10 percent.

The source for much of this firm's growth and for its clientele is also unique. In 1996, Large and Book began discussing the outlook for multi-life disability insurance (DI) sales. In a multi-life case, insureds may buy individual policies at favorable group policy terms and rates. For example, an employer might arrange for senior staff to buy customized, individual DI policies at a 25 percent discount to the usual individual rate.

Book and Large began working with human resource departments at investment firms and hedge funds, offering supplemental DI to company executives. They discovered that multi-life sales were a natural entr?e into prospective clients in need of wealth management services. The HR people introduced Lenox to their managers--essentially putting a stamp of approval on Lenox's sales efforts. The firm took advantage of the opportunity for its representatives to meet on-site with multiple prospects each day. According to Greg Olsen, the national closing average for multi-life DI sales is in the 15 percent to 20 percent range, but Lenox's results are much higher. In fact, the firm is the largest producing group for Mass Mutual in the country. "Our numbers are between 45 and 50 percent, and we have enrollments in which close to 60 percent of the people have taken advantage of the offer," Olsen says. "As opposed to sending out things in the mail and saying, 'Hey, if you're eligible do you want to sign up?' we contact clients to set up individual meetings and tell them not only what coverage they have in the firm but what's being offered at the discount. By doing it live," Olsen adds, "with people who have trained in this for the past 12 or 13 years, enrollment after enrollment, we've worked out all the kinks." Because it is only natural that some of those insurance clients inquire about the firm's additional services, Olsen says over half of Lenox's new wealth management clients originate with a multi-life DI sale.

Differentiating Factors

And there is another intriguing statistic that sets Lenox apart: Roughly two-thirds of the firm's clients are employed by Wall Street firms and hedge funds. These businesses often have a wealth management division of their own, which raises the question: Why would executives decide to work with Lenox instead of with their own firms? The Lenox partners cite several reasons: The first is the executives' desire to keep their personal finances private. It's common for an executive to change employers several times during the course of his career. If he has retained his current employer's wealth management division, he probably will want to switch to the new employer's division, which means multiple parties will have knowledge of his finances. Hiring Lenox avoids that problem regardless of the employment situation.

Lenox's managers also believe their service offering is unique. The firm has developed the "Lenox CFO" platform, which provides family office-style services. Clients receive advice on financial planning and asset allocation, account aggregation and online document storage. Among other services, there is also an optional bill-paying service. Van Benschoten points out that improvements in technology allow Lenox to offer these services efficiently to minimum account sizes much lower than would have been required in the past. "Ten years ago, when I did this for a client, I would literally have to spend somewhere from 10 to 15 hours doing Excel spreadsheets with data input from my assistants--just to get ready for a meeting," he says. "Now, with a couple of clicks of a button, it's available to me and to the client. So I think that has certainly helped the general public to have more access to family office services now than in the past."

The Lenox CFO program is the focal point for client relationships. Carstens says the firm will not work with clients who want only investment management services, because the partners believe these services must be part of an overall financial plan. Each Lenox CFO client works with a relationship manager who is supported by an internal team. The firm's first-year retainer for new clients starts at $15,000 for those with net worth between $1 million and $20 million, and ranges as high as $30,000. Fees in subsequent years are typically 50 percent to 75 percent of the first-year fee. The bill-paying service is an optional feature; Van Benschoten estimates that 25 percent of clients use it. Lenox does not have custody of, or discretion over, clients' funds, so the firm created a joint venture with an accounting firm that writes the checks.

Asset Management

Lenox, which has no proprietary investment products, acts as a manager-of-managers for client accounts. Carstens estimates that net new assets will increase by about $140 million during 2008; the firm's fees range from 40 to eight basis points on a declining scale. A state-registered RIA, Lenox uses MML Investor Services as its broker/dealer.

As the firm's chief investment officer, Carstens heads the investment committee. That group sets "big picture" quarterly guidelines for client portfolios--such as decisions on asset-class allocations and sector weightings. At monthly and weekly meetings, the committee reviews products it will consider for allocations, specific managers, funds and so forth. While the committee's decisions provide guidelines for the eight asset managers who work directly with clients, the managers make the final decisions for each client's portfolio. "The asset manager is free to increase or decrease (allocations) a little bit depending on their understanding of the client situation," Carstens says. "When push comes to shove, they're the one sitting across the table from the client and looking them in the eye. When the client has a question, they're the one that's going to get the phone call."

Although an asset manager's client load varies with the complexity of their accounts, Carstens estimates that each manager serves 75 to 80 clients. Roughly 75 percent of clients' assets are invested in fixed-income and equity separate accounts with outside managers. Another 15 percent of client assets are in alternative classes, primarily hedge funds or funds-of-funds. The remaining 10 percent is allocated to specialty mutual funds, private placement products and oil and gas partnerships, among alternatives.

Money Smart Kids

Lenox also works with clients to educate their children about wealth. One usual approach to this end has been through a "boot camp" environment at a suitably upscale location where clients' kids go through an immersion course in wealth management. Lenox chose a different route, creating an age-based program that runs until the child starts college.

Tom Henske says the lessons are an attempt to pass on parents' financial values to their children. Lenox provides lesson plans to parents that cover topics such as the right time to give children an allowance, when to give the first credit card and so on. The program started four years ago with a beta group of 30 clients; Henske estimates that 150 to 200 clients are now enrolled.

The program serves a marketing purpose as well. Henske relates an incident in which he was competing with several much larger firms for a new client. The prospect's estate planning attorney had arranged a series of three one-hour interviews with advisory firms and Henske was the last presenter. The two other contenders had emphasized their investment expertise and institutional status, but Henske took a different tack, including a discussion of the Money Smart Kids program. "By the time I got to them, you can imagine these people were already exhausted," Henske recalls. "I totally avoided those conversations and made it a values conversation. We talked about their kids and talked about the values that they'd like to pass on. Ironically, the other two competitors for this particular client didn't even mention that in the course of their hour. The point of this is to make a better life for yourself and your kids--it's not that you create a plan and then you stick the values in there. You have values, and then you create the financial plan around that." The clients signed with Lenox after the meeting.

Linking the Data

Tracking the data underlying Lenox's multiple business lines is a daunting task. Large points out that while the wealth management industry has made significant advances in managing clients' investment data, the applications for benefits and insurance clients are not as robust. As a result, Lenox has spent "well over a million dollars to date" to create a proprietary system to manage its business. Lenox also uses financial software from eMoney Advisor Inc., and Large says the firm is developing a proprietary client management system. One of his goals is to create a seamless data exchange between their benefits and wealth management services. "We're in the middle of a 12-month build-out, so we're probably only 10 percent there right now," he says. "But we realize the economy and the scale that it can create, and it is a huge investment for us."

Another information technology challenge Lenox faces is integrating the data that its newly hired relationship managers bring to the firm. These managers usually have at least several years' experience and substantial client rosters which the Lenox IT staff must integrate into the Lenox system. "We give them a template of data that's going to be required to make the transition," says Large. "Usually their response to us is that they have it all in Outlook, but when we actually look into the data, the holes that exist are unbelievable." Consequently, another of Large's IT goals is to streamline and automate that process so Lenox can retrieve, verify and integrate new managers' data more readily.

Looking Ahead

In November 2002, National Financial Partners (NFP) purchased Lenox. Book says that he and his partners were hesitant at first because they believed that selling "is a process for older people who want to slow down and get out of their business." Ultimately, however, they decided to sell, and Book says that joining NFP has improved the Lenox-partners' business skills considerably. "While we're all good salespeople, and we had some real solid, strategic ideas of what we wanted to do with the company and how to grow it, one thing we were missing was that none of us really had a business background," Book adds. "Learning how to run your business and grow your business in the most profitable manner was something we knew we wanted to do but did not know how to do it. Six years later, I'd say the most valuable thing we got out of the NFP deal is that we're a lot better business people than we were six years ago."

Lenox has had a great run over the past decade, but the partners recognize that growth can cause its own problems. Book believes the firm's biggest challenge is controlling its growth in a way that doesn't diminish long-term efficiency. "Everybody wants to double and triple revenues, but what you don't see is the effect of doubling and tripling revenues on the expense side and infrastructure," he says. "We need to go behind the scenes and under the hood to make sure that we're growing in a way that we can handle. We need to make sure that we're taking the time to train new employees properly and that everybody's up to speed as we bring in relationship managers."

You can't miss a hint of that "New York, New York" attitude when Van Benschoten talks about possible competitive threats, but the firm's 97 percent client-retention rate justifies his confidence. "I don't want to sound silly and say we don't have competition, but nobody's really put it together in one package like we have," he says. "They will do financial planning and also asset management, but they don't execute and they don't do the insurance. Nobody's really put together the one package from 30,000 feet where a client can have that one-stop shopping. So that's really been our differentiator, and it's very rare that we come up against someone a client is also interviewing that does what we do...very, very rare."

Ed McCarthy is a freelance writer in Pascoag, RI.

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