One of the telltale signs that the advisory profession is still in its infancy is how many advisors started on another path before finding their true calling. Cathy Pareto, president and founder of the eponymous Cathy Pareto and Associates in Coral Gables, Florida, says that for her it was somewhat of a fortuitous accident. When she started college, like many young people, Pareto wasn't sure exactly what she wanted to do with her life, other than find a profession where she could help people. While she admired the medical profession, she also felt it was a little too gory for her and that the formal schooling would be too much.
Instead she entered Florida International University in Miami as an accounting major. "I hated it," she recalls. "I switched gears into finance in my junior year and loved it."
After graduation she got a job with Wells Fargo Financial, but said that she felt she was selling product to people, not helping them plan a better life. So she got a job with Investor Solutions, a Miami RIA, where the owner became her mentor. But after 10 years with the firm, like many young advisors, she got the urge to set up her own independent firm. Last year, she finally did it.
Not Touchy-Feely Holistic
Although she's not really comfortable with the term, Pareto says she views her practice as holistic. "But it's not the 'Put the Kleenex on the table and cry with me' holistic," she says with a laugh. "I wanted to take a slightly different approach in the way to service clients and not just look at the investment piece. I wanted to look at every aspect of the client's life--a 360? approach.
"There are people who only do comprehensive financial planning and don't really specialize in investments, but I came from a world where it was pretty much investment management," she explains. "I wanted to marry that with the concept of planning as well--just not to the extent that some of the comprehensive planners do where they produce this 5,000-page book. I'm not quite that into the planning. My specialty is investment management, which I've done for the last 10 years and then all the other planning issues, with the investment piece being the nucleus of the cell."
That kind of holistic approach is usually taken by advisors who cater to the mega-rich and style themselves as wealth managers, but Pareto's targets are a couple of brackets lower on the asset scale. "When we started this firm, we wanted to make it accessible to young professionals or middle-income folks who are largely ignored by the bigger RIAs," she explains. With that in mind, Pareto has set the minimum investment for new clients at only $150,000, although she notes that the average client balance is in the $300,000 to $400,000 range and that the firm has about 30 clients at present and approximately $8 million in assets under management.
"My clients really run the gamut," she says. "We have a couple of niches that we've tried to target, but when you're starting a firm, if there's a client, you take it. If they're interested, but they're outside of the niche, the niche becomes irrelevant."
In addition to young professionals, for which Pareto and Karla Arguello, who serves as chief operating and compliance officer, not to mention responsibility for myriad other tasks, use a network heavily comprising fellow alumni of Miami International University and its MBA program, the firm has another point of emphasis. "One of our areas of focus is women and money," she says. "I do a lot of public speaking and writing on that, and I've gone out of my way to align myself with prominent divorce attorneys here in town that would be a great source of referrals for us. Women have unique needs, even though fundamentally the issues in terms of investments and planning are similar, there are some unique challenges that women face and we wanted to be there and steer them in the right direction."
Divorcees as Retirees
Pareto notes that it's not uncommon for a potential client referred by a divorce attorney to have had little experience with handling her own finances. "It's a different lifestyle that they've had, and they don't realize what it costs to maintain that lifestyle when that faucet of money stops and they're given a lump sum of cash, or securities, or whatever," she says. "It's a very delicate process, because it's an emotional time for them. Many of them feel some level of rejection from the marriage, and you have to treat the situation with kid gloves."
She says that for all practical purposes she has to treat those clients as if they are retirees, even if they're only in their 50s, or even 40s and burn into their brains that they have to preserve that money. Pareto says that she actually had to fire a client from her last firm because the woman was "spending the money faster than it could be made."
Although she always begins by trying to make a personal connection and showing her empathy for the client's situation, Pareto says her job really begins with education. She subscribes to the maxim that knowledge is power and feels that what really wins her clients' trust is that she provides information that empowers them to make good decisions.
"That's extremely relevant in a divorce situation because it's a lengthy process," she explains. "They may not even have the money yet they're still going through the divorce process, but what you're doing is building a relationship and educating. Frankly, many of them don't want to know the scientific details of how you manage the money, but on the surface it's good to explain how your approach is unique, how you might manage their money, and why they need things like a budget and controls on distributions."
While for this segment of her client base Pareto has to place asset accumulation out of the picture, for her young professionals, paying for their children's education is as pressing a need as planning for retirement. "My job as an advisor is to keep them focused," she says. "Often retirement is more important to focus on, because the kid can always go out and get a loan, but who's going to give you a loan to fund your retirement?"
For young professionals with school-age or younger children there is a different set of issues to be addressed. "You have to look at things like life insurance if they don't have enough assets to protect their family," Pareto points out. "Those issues tend to start changing or modifying as the client gets older and issues like estate planning or wealth transfer or charitable gifting become more important."
For investment management clients, any planning that Pareto provides is included in the asset management fees, which start at 1% and slide down to 50 basis points for accounts in excess of $2 million. "There are also some people who don't necessarily want full-time management or ongoing advice," she says. "They just want a second opinion or a plan, and we'll charge them by the hour or by the project, although that's not a big part of our revenue stream."
Knowing Where to Turn
When Pareto decided that she would follow a fee-only business model, she realized that it would be important to develop a network of other professionals to handle client needs that were beyond her area of expertise or could present a potential conflict of interests.
"We are purely fee only. We don't get any compensation from products that we place inside of the portfolios," she says with obvious pride. When she's working on a financial plan for a client and notices, for example, a gap in insurance coverage, she has a network of professionals that she has personally interviewed and vetted to whom she can confidently refer them.
"I will interview them and ask them how they feel about this type of product versus that type," she says of her process for finding commission-based professionals to work with. "If I don't like the answers I will tell them, 'I can't trust you with clients.' I'm not dogging on commissions, but if a client has put their trust in me to put them in front of the right professional, I want somebody whose values are aligned with mine."
When it comes to insurance providers, one subject that Pareto likes to address immediately is variable annuities. "If they're a big proponent of annuities, they're off my panel," she says.
As is the case with many fee-only advisors, Pareto's biggest problems with variable annuities have to do with high fees and return projections that she says "are so vastly unrealistic."
In addition to insurance agents and brokers, Pareto also maintains professional relationships with accountants and the many varieties of attorney--divorce, estate, general business, and mergers and acquisitions. The last group is especially helpful in referring clients who are newly wealthy.
More Patient Than Passive
Pareto describes herself as a "pretty big advocate" of ETFs and no-load mutual funds when she's constructing client portfolios, and although she says she hates the word "passive," she says her portfolios contain "a core of more passive vehicles," with positions in the major asset classes and then a separate, more active piece of the portfolio. "It's still using ETFs and passive vehicles, but I take a more proactive approach in the design of the portfolio and I'll more closely monitor the economic conditions for that part of the portfolio, i.e., alternative investments, commodities, currencies," she says. "When the markets were going insane, which they still kind of are [this interview took place in early September], I did a couple of short positions on some of the sectors, which really enhanced our returns. So there's a passive core and then there's an exploratory, more active piece, but I don't want to give the impression that I'm an in-and-out of the market, day-trader, market-timing kind of person."
She's not opposed to individual equities, but says that she doesn't see that as in any way minimizing portfolio risk. "I think you just take on way too much of a chance to fail that way," Pareto explains. "I'd rather diversify the risk across several thousand companies at once, rather than just a handful."
When it comes to alternative investments, Pareto limits her involvement to areas like REITs and commodities. "I have not ventured into, nor do I plan to in the near future, the more exotic vehicles like hedge funds and private equity," she says. "I don't know what I'm buying for the client, and if I don't know what I'm buying, I'm not going to buy it. I want transparency and disclosure."
At this point, Cathy Pareto and Associates is still only a two-person firm, but there are growth plans for the future. Pareto is confident that she can reach her year-end goal of $12 million in assets under management and figures that in a couple of years when that figure hits $30 million it will be time to bring in another advisor.
"My idea is to bring in young professionals who are hungry, who are honest, who share the same values we do, and allow them to have some skin in the game," she says. "I don't want to be the kind of advisor who stalls on issues like succession, or doesn't want to share the wealth with people. If you help me build this company, you're going to participate. I don't think you can become a successful firm without talent."
While firm growth is on the horizon, for now Pareto is solely focused on building the business today. When asked what she does in her spare time, the answer is a laugh, and a reply that there is no spare time, but that she's having a lot of fun working.
"I really enjoy the relationship with the clients," she says. "I worry more about their money than they could ever imagine. It's like a puzzle in a box: you put all the pieces together and at the end you see this beautiful picture. That's how I see my career, where you're helping the client put that beautiful picture together."
Managing Editor Robert F. Keane can be reached at email@example.com.