From the January 2009 issue of Investment Advisor • Subscribe!

Something for Everyone

Cabot Money Management started out offering strictly investment management but 10 years ago shifted its focus to wealth management. Now it offers both services to a wide range of clients.

Many advisors like to say they've spent a lifetime in the business, but for Robert Lutts it's true. He's spent the last 25 of his 52 years as president and chief investment officer of Cabot Money Management, his Salem, Massachusetts-based investment and wealth management firm. But his exposure to the world of investing didn't start there or at Amherst Associates, the consulting concern where he worked after college as a financial specialist in the healthcare industry. "I remember as a 10-year-old kid, my father would drag me behind him to visit CEOs of companies and hear what they had to say," Lutts has said.

His father was Carlton Lutts, a renowned stockpicker, newsletter writer, and founder of the Cabot Market Letter. Since he literally grew up in and around the business of investing, it comes as no surprise that the younger Lutts would make that his business as well.

For the last 10 years, Lutts explains that his firm has really been two related businesses under the same umbrella. "I started this business in 1983 basically as an outgrowth of my dad's business," he says. "For the first 15 years of our life, all we did was manage money."

The Cabot Market Letter was always geared toward growth stocks and so were the early portfolios that Robert Lutts created for Cabot Money Management's clients. But after experiencing a few bear markets, "we determined that the health of the business would be stronger if we diversified."

As Lutts's vision of the business evolved he began to move the firm in the direction of wealth management. "That decision was made because it looked like the money management business was going to go the way of a commodity kind of business and it's turned out that way," he says. "We really transformed ourselves from an investment management company about 10 years ago, adding in the key pieces--a CPA, an attorney, and CFPs--to the staff of professionals. They rounded out the capabilities of the firm, so we can take the average high-net-worth individual who has maybe $3 million of assets and we can do the whole package for them. I think the benefit is that you really get integration among all the activities in someone's financial life."

Extra Services, Greater Retention

Lutts estimates that about half of the $350 million (down from well over $400 million) that the company had under management as of the end of November comes from about 300 wealth management clients. The remaining assets belong to money management clients. There are currently about 500 clients fitting that profile, down from some 1,100 at its peak.

Lutts says he's looked at data on the advisory business from Moss Adams and other consultants and agrees with the conventional wisdom. "If you can do four or five services for somebody the retention goes up a multitude of factors," he says, and points to the fact that firm still has most of its original wealth management clients.

One area where Lutts differs from some industry consultants is with the idea that when an advisor's business gets to a certain level he should jettison his smaller, less profitable clients. "We didn't kick them out. We still like that revenue," he says of clients who hired him to manage their money in the firm's early days. "They don't get as much service, but they get what they need and they're happy. They like the way we manage the money, but all new clients coming in now are coming in under the wealth management platform, and that's been the case for the last eight to 10 years."

The only "unprofitable" clients that Lutts has gotten rid of have been those with lower asset levels who require more service than his business model allows, and even then he tries to find a broker or some other type of advisor better suited to the client's needs. These days his minimum for new clients is $500,000 in investable assets, although most new clients come in with between $1 million and $2 million.

Face Time with ClientsSelling Advice and Asset Allocation

The firm's compensation is strictly from fees for either asset management or wealth management. "Most of the clients really value that," Lutts says. "They know we're not selling anything other than, hopefully, good advice for them and good asset allocation."

For a wealth management client with $1 million in assets, the fee would be 1.25% for a range of services including, in addition to investment management, tax planning and preparation, retirement planning, estate planning, and advice. The fee as a percentage of assets slides downward from there as the asset levels climb.

"If they want a service that we don't offer, such as deep value investing or something like that, we'll find an advisor that does it," Lutts explains. "We'll have them hire an advisor for that piece of the money. We won't get compensated on it at all, and we'll advise them on what's appropriate for them in that case."

In order to provide those kinds of services, Lutts says he's calculated that the firm needs about $10,000 in revenue per client, which is why he's offered those services for clients with $1 million and up.

For his lower-asset-level money management clients, the fee is the standard 1% of AUM. "We're probably lower than we should be for some," admits Lutts. "These are clients we've had for 15 or 20 years and I feel an allegiance to them. We want to do what's right for them and keep it cost reasonable for them.

"You could say that if you eliminate those you'd eliminate quite a bit of service and other activities, but I say as long as they want us, we want to keep providing the service for them."

Making It Easy for the Client

Lutts has also found that for his wealth management clients, he and his staff can still find ways to help clients even when the investment news is less than favorable. At this time of year a lot of emphasis is being put on tax planning, looking for ways to get some tax advantages from negative investment performance.

"Taxes are hard to do because it costs a lot to hire that tax professional and to have him there, doing that regularly," note Lutts. "A lot of advisors don't want to do it, but I will tell you it's a winner. Our clients love coming into one building and then talking with three different people about different parts of their financial lives. When they walk out they feel like they're well cared for by a lot of professionals. For some people, simplicity at that stage of their life is a very big factor. It's not about getting the lowest cost. It's about getting a high-quality job done and doing it in a manner that makes it easy for the client."

In an attempt to wring some positives out of 2008's negative investment returns, Lutts and his team have been looking to at least reduce clients' tax liabilities. "We protect principal in a market like this, and this year we've recognized a lot of losses," Lutts explains. "So we go to the client and say 'We can readjust the portfolio, maybe take $30,000 of longer-term gains and you won't have to pay any taxes on that this year. Then we'll re-enter those positions after the 30-day wash rule and you'll just have stepped up your cost basis.' Then, even though the client has had a bad experience this year with the market, they do at least say, 'I'm getting some benefit by not paying taxes on a gain I had realized.'"

Lutts has also encouraged clients to realize gains made in real estate this year, since those gains can be offset by losses in their equity accounts, thus helping to further reduce or even eliminate taxes.

Investing in a Down Market

As the number of clients that Cabot Money Management has grown, Lutts has not been able to maintain close relationships with every one, but that's why he has an eight-person financial counseling team. "I actually am an investment professional," he says of his own role. "My key expertise is as the CIO and I do stock research as well."

Lutts travels several times a year, looking at individual companies and in recent years that's meant visits to China or India. "The world is changing today and I don't want to invest in General Electric and Pfizer and make that my client's portfolio," he says of his approach to investing. "I want to invest in the next General Electric and the next Pfizer and I don't think they're going to be in the U.S."

With its emphasis on aggressive growth, Cabot Money Management has taken a global approach to investing, but in recent months, Lutts has pulled back quite a bit. "In October of last year [2007] I had a large portion of my aggressive portfolios, maybe 40%, in the emerging economies, mostly in China, some in India, a little in Brazil, but mostly in China," Lutts explains. "Today, I have maybe 4% of those holdings left. I had to sell it all to protect principal. You just can't stay in a market that's declining 60% to 70%, particularly after it's had such great performance over the last three years.

"Today our portfolios look very different from a year ago," he continues. "They have a lot more cash in them."

Lutts remains invested in a number of companies that he considers to have high-quality balance sheets that are also top performers in their areas and that have strong business models. 'It forces us out of all those losers," Lutts says of the current market turmoil. "We don't have any bank exposure, we have no high consumer discretionary exposure, and are very low on industrials, because we had to get out of all of those. Now we're looking to build back up and picking the points when the market is stabilized where we're going to be building positions up."

It's been more of a challenge for Lutts to find a silver lining for his investment management clients with lower asset levels. "For many of those clients we may only have $100,000 or $80,000 and they may have to live off income from that," he says, noting that he's come to rely on ETFs and low-cost fixed-income products to try and realize those goals. "It's very important to keep the costs low when you have those other lower-size accounts, because you want to get the best results for people and you can't do that if you're buying a 2% management fee mutual fund."

Face Time With Clients

Like any good advisory firm, Cabot Money Management attempts to meet at least annually with clients, but with 800 clients spread around the country, actual get-togethers can be sometimes difficult to arrange. With that in mind, Lutts schedules at least two annual client conferences. One is in Salem and the second is in Naples, Florida, in late January. While the client base is national, Lutts realized that many of them did spend time in Florida in January, and if they didn't already might like an excuse to do so. "So about 10 years ago we started doing a Florida event," he says. "We take the investment management team and the wealth management team down there with our most valued clients for two or three days."

The conference is a combination of formal group presentations and individual meetings with members of the client service and investment teams. "For us it's about getting the right people there--the people that are our best clients, that are most important to us," says Lutts, noting that prospective clients are invited as well.

The meeting in Salem took place in late September and Lutts at that time told clients that he thought we were about three-quarters of the way through the bear market and that they could expect to see it go down another 10% or 15%. "When I said that, I didn't think it would come in the next three weeks; I thought we had a couple of months to go."

Lutts says he also stressed that risk management is more important than ever. "You have to be disciplined," he says. "I told them we were going to be cautious, to let our cash levels stay high and build up until we saw confirming evidence that we're beyond the lowering of expectations."

Overall he's optimistic that we'll recover from our current economic woes, it's just a question of how long it's going to take. He thinks the scenario is similar to the 1973-74 recession, which took quite a while to climb out of, but was ultimately turned round. "One thing I've learned in this business is that we are a resilient group of people in America," he says. "That resiliency comes from the freedom of knowledge and information that we have. When we have information and transparency, we can do the right things."

Managing Editor Robert F. Keane can be reached at bkeane@investmentadvisor.com.

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