From the August 2010 issue of Research Magazine • Subscribe!

'Intellectual Trust'

Graystone Consulting's Bob Scherer cultivates clients for life through his group's educational approach.

Robert S. Scherer
Managing Director-Investments; The Scherer Group at Graystone Consulting; Morgan Stanley Smith Barney; Washington, D.C.
Fun Fact: Scherer joined E.F. Hutton in 1983. His office phone number has remained the same since.

As a young man with a Wharton MBA, Bob Scherer helped Tenneco Oil reorganize its financial services division. To his amazement, the firm, which had a major presence in life insurance and financial services, outsourced the management of its substantially sized portfolio.

"Here we're a bunch of MBAs sitting around and they're still using an outside consultant to help manage their pension plan and portfolio. Here's a major institution using a typical old-line traditional brokerage arrangement and not really getting fiduciary advice," says Scherer. "And I'm thinking: What an interesting opportunity. It seemed absolutely a field on the verge of exploding."

Scherer wanted in.

He got what he wished for. Today, Scherer heads The Scherer Group at Graystone Consulting, one of 32 elite advisory groups at Morgan Stanley Smith Barney that provide high-level investment consulting advice to institutions and the upper-tier private wealth market. With $3.8 billion in assets under management, it isn't the largest practice in the Graystone group but Jim Tracy, Director of the Consulting Group at Morgan Stanley Smith Barney, calls it "second to none."

As Tracy puts it: "These guys are exceptional at researching managers and opportunities, exceptional at managing money and exceptional at asset allocation and investment excellence. What Bob and his team members have is something you can't duplicate."

Scherer, 58, still has the first institutional client he took on after joining E.F. Hutton in the 1980s. What's more, he has had virtually no client defections, which is saying a lot in a field where institutional committees routinely change managers. Not surprisingly, the loyalty meter is huge with Scherer and for him it can be measured in two words: intellectual trust.

"To me, that's different than moral or ethical trust that most people talk about. It's very easy for someone to say that they trust you and that's why they give you their money, that they can sleep at night knowing Bob or anybody else is a trustworthy guy. That's just the first step," notes Scherer, who says an entirely different level of trust exists when someone becomes a client for life.

"At that point, they believe not in you as a person, but in you intellectually. There's nothing out there you can't help them attack, explain or understand," he adds. "They trust that they will always be in the know, informed and they understand that their portfolio, specifically, and the concepts involved in running it will be explained. This level of trust is paramount to maintaining a loyal, sticky business and this is where we have succeeded above and beyond most of our peers."

Scherer advises institutional committees associated with foundations, endowments, cities, pension funds, 401(k) plans, religious organizations, associations and law firms. Clearly, he's attracted to committee group dynamics -- and in that arena he draws on his undergraduate degree in psychology and a longtime interest in behavioral finance.

"There's a synergy between helping individuals and committees," he says. "Committees are just a bunch of people, right?" Scherer confesses he loves the "grander stage of the committee setting" to indulge his twin passions: to help people with their money and to educate. "A committee is like a classroom with very smart students in it. You learn from them like any good professor and you teach. I think we do as good a job as anybody in our business in terms of education."

Scherer, who has made repeat appearances on Barron's top advisor listings, said that in today's complicated environment, institutional investors need to understand the implications of the risks tied to global markets, illiquidity, leverage, counterparty agreements and fat tails. During the meltdown last year, his 14-member team set aside a significant amount of time to discuss with clients range-bound market cycles, distressed investing and the extent to which investment policy statements should or shouldn't be altered to account for periods of exceptional volatility.

On top of that, the amount of information that exists in the Internet age -- "noise," he calls it -- has to be accounted for, understood and distilled.

"The need for this type of education is immense. And what we deliver to the client is not a one-directional thought process; it's coming from a lot of different directions and sources." Scherer adds. "This is not window dressing. Institutional clients who are not kept up to date on issues of this nature may not be well-equipped to make important decisions in difficult times and may be unable to fully process their advisor's recommendations and strategies."

Looking ahead, Scherer foresees what he calls serious "structural" challenges. First, he says, there's an entire age wave of people who are trying to retire and a zero yield to retire into. As well, he observes, the methodology of investing must change. "No longer can you invest in 3 percent municipal bonds and get yourself a rate of return that will see you through the night."

But where there is challenge, Scherer adds, there is opportunity.

"It's kind of like post-traumatic stress syndrome going on. Investors got through the night with adrenaline and fear and now there's sort of a let down. You're seeing people looking around," he says. "But we don't want to be the kid in the candy store who reaches out for every opportunity that comes our way. We want that one client out of the 10 that asks for us."

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