The offices of Advisors Capital Management may be liberally sprinkled with dinosaur bones, shark’s teeth, ammonites, orthoceras, and other specimens from Chuck Lieberman’s collection of fossils, but the firm is far from a financial dinosaur. Industry consultants are constantly telling advisors that to be successful in the future, they need to determine what they do best and make that the focus of their business.
The principals at Advisors Capital Management have already done that soul-searching and know that what they do best is asset management. That’s the only service the fee-only Paramus, New Jersey, firm offers to about 100 individual clients and some 40 advisors for whom they manage the assets of another 300 or so clients. In addition to its substantial client base of other advisors, the firm stands out because they eschew the typical mix of mutual funds from the various style boxes that passes for diversification at many practices. Instead chief investment officer Lieberman, along with the other asset manager, his eldest son, David, constructs individual portfolios for each client that allow the investor to actually own a diversified group of securities at a lower cost than would be possible using mutual funds or other pre-packaged vehicles.
Charles Lieberman began his career as a university academic, put in time with the Federal Reserve and on Wall Street and spent a dozen years as chief economist first with Manufacturers Hanover, and then as a result of mergers, Chemical Bank and Chase. Eventually, he says, he got tired of the politics and decided to strike out on his own, opening up a firm he called Lieberman Asset Management.
Around the same time, Kevin Kern started his own business, called Advisors Financial Center. “What was interesting about our two firms was that I could manage money, but I didn’t have the infrastructure to market the firm, to deal with the legal issues or the compliance. Kevin was doing all of that stuff, but he didn’t have a money manager. He read a paper that I wrote and got in touch with me to see if I might do asset management for him and we ended up basically combining the two firms after a couple of years. I never did really like the name Advisors Financial Center so we modified that to Advisors Capital Management, which I think does a better job of describing what it is we do.”
True Separate Accounts
Kern, who had been designing wrap accounts and doing marketing in the retail brokerage channel, was, like Lieberman, disenchanted with the way he saw the business of investing being practiced. “What I was trying to do, was get beyond what I saw as the flaws in mutual fund wrap accounts,” he explains. “They’re just layered in fees. When I got to know Chuck, I realized his investment style was perfect for what I wanted to do too, which and was to find a pure, clean way to invest with not a lot of trading, not a lot of layered fees and let the portfolio grow of its own accord.”
Kern points out that because of the firm’s non-traditional investment philosophy, a lot of what he, and a second Lieberman son, Michael, do is educate their clients, both individuals and advisors, about this approach. “The thing that we have to break through with advisors is to teach them what a real true separate account is, not what they’ve seen out there,” he says. “We call the separate accounts that are being provided by the big firms as mutual funds in drag. Literally, it’s just your name on a mutual fund. We have to show [advisors] the deficiencies in that and say there’s something better out there and it can be done.”
“We don’t use any packaged products whatsoever because we can construct what’s in a mutual fund or what’s in a packaged product and do it at a lower cost to the client,” explains Lieberman. “We use fixed income, we use equities, whatever’s out there that works for the client’s objective. So some clients that require income will use some mix of real estate investment trusts, of bonds, of high-yielding equities, all depending upon the risk parameters of the client and the income needs of the client relative to the size of the portfolio. It’s easier if the portfolio is larger, obviously because that gives us more flexibility to use fewer bonds or fewer REITs or fewer master limited partnerships, and go into more stocks, and put more growth into the portfolio.”
“But using equities or bonds or whatever, we have no conflicts of interest,” adds Michael Lieberman. “We have nothing to sell. It’s specifically what’s best for the client.”
“It’s strictly fee-based and Mike’s point is a very, very important one, because the only way we get compensated is from the client’s fee,” agrees his father. “We accept no fees from mutual funds, we don’t sell any packaged products, no commission-based products, no markups on bonds, no commissions. The only way that we get paid by is the client through the management fee. Therefore we are absolutely motivated to try and do what’s best for the client.”
Two Different Clients
Advisors Capital Management differs from most firms because it has two distinct client bases–individual “retail” clients and advisor “wholesale” clients, for whom the firm provides outside asset management.
Because the needs of the two types of client are different, there are also two different fee schedules. An individual investor, with a minimum of $250,000 to invest, will usually pay a management fee ranging from 1.5% to 2.25%. That is the only fee the client pays, regardless of how often she may call with questions or meet with an advisor. “We don’t charge per meeting,” explains Lieberman. “We don’t want the client to be inhibited from asking questions about their financial situation. We want them to know that anytime they have a financial issue that could have an impact on them, they can come to us and get an opinion on that. If we can’t offer an opinion because it requires more specialized information, we’ll refer them to someone like a lawyer, CPA or estate planner who can handle it.”
For advisors, who handle the actual client service, the management fee is reduced to 80 basis points, although it’s up to the advisor what the actual charge to the end client will be.
Lieberman and Kern also stress that they are not in competition with the advisors who bring them assets to manage. “If somebody comes to us from California it’s difficult for us to service that kind of client,” explains Lieberman. “We would refer the client to an advisor or a rep that we do business in that local area because that makes our life a little easier and the client gets serviced more properly.”
Although individual clients are important, they’re not the primary emphasis. “We’re not marketing for individual clients,” adds Kern. “Any of our marketing dollars go to the advisors. Part of our education to the advisors is that there are managers and there are advisors. If you believe that certain people should manage and certain people should advise, we’re the firm to link up with because all we do is manage. We’re not going to be sitting there doing estate planning and doing other things. When you bring us your client, we’re managing that portfolio. That’s all we do.”
Since the firm’s investment approach is not the most conventional one, Advisors Capital Management emphasizes client communication. Every month they hold two client briefings over the Internet, the first for advisors only and the second for individual clients, advisors, and the clients of advisors whose portfolios are under management. During the web sessions Chuck and David Lieberman explain what they see as going on in the markets and why they may be making adjustments to holdings. The sessions are held in real time and anyone logged in is able to interact and ask questions.
Investors Not Traders
When it comes to investing, Lieberman looks at things over the long-term. “The typical mutual fund on average has roughly 100% turnover per year,” he observes. “I would say that our [average] portfolio turnover is probably under 10%. Our whole investment process has an orientation of a two- to three-year horizon. When we pick a stock, it’s because we think that the stock over the next two to three years will give us a very good return for the kind of objectives that the client has. So for the growth portfolio we buy a stock with the hope that it will go up somewhere between 50 and 100% over a two to three year horizon. Obviously that doesn’t happen with every security and some of them even end up going down, but that’s our expectation going in. And then we monitor these positions, monitor what’s happening at the companies and we change our mind if news comes along that suggests that their competitive position has weakened or the stock has run up excessively relative to the performance of the company. Those are things that can get us to change and sell the position out, but basically, if we think we’ve gotten aboard a very strong horse we want to ride that horse for as long as the company is doing well.
Lieberman cites the example of when he bought a big block of E-trade several years ago. “The stock was being traded in the marketplace for $3 to $4 a share, expected to make 30 to 40 cents a share at the time, trading at no more than ten times earnings in a business that we thought had enormous growth potential. E-trade is now $20 a share and the only shares that we’ve sold off, we’ve sold because that position has risen so much in value that it’s become excessively large for the size of those client portfolios. We thought of that as an exceptional value and bought a lot of it. It’s done extraordinarily well.”
The same thing happened after 9/11 when he was able to pick up a number of hotel stocks in the $2 to $4 a share range. “Some of these stocks have doubled, tripled and quadrupled in the last three years,” he notes. The firm had a similar experience in 2005 with AIG, when the stock dropped to around $50 a share following some bad publicity. By mid-December it had risen back to more than $65 a share.
“It’s one thing to go into a sector or a company that’s gotten the stuffing kicked out of it and deserved it and it’s another thing to go and find that stock that’s getting unwarrantedly beaten up too much,” explains Kern. “I tell clients, ‘don’t look at the quarterly returns, don’t look at the year-to-date returns.’ It sometimes takes time for companies or sectors to come out of their problems, but we’ll sit there and wait if we’ve got a good enough bargain.
Kern adds that on occasion the buy it and hold it approach has caused some consternation among advisor clients who either believe themselves or have clients who believe that trading activity is the only way to demonstrate what’s being done on the client’s behalf.
“We’ve actually lost a client because we didn’t trade enough,” adds Lieberman. “What is really amusing about that particular client is that the guy had outperformed the market by a considerable margin. He felt that he was paying a fee and he wasn’t getting his money’s worth because we weren’t trading enough and he didn’t obviously think it was sufficient that he was making more money than the market was.”
Lieberman and Kern both stress that an under-analyzed aspect of trading activity is the cost burden that places on the client. “Every trade costs the client money,” Lieberman says. “Trading is costly and clients need to think of it as costly. You don’t get new ideas every day and companies shouldn’t go in and out of favor by the day of the week. You really need to make longer term decisions based on the business prospects of these companies.”
A Succession Plan
A big issue for many advisory firms is, what happens next? The Liebermans have already worked that out. David, who recently finished his MBA at Yale, began reading about stocks when he was 14 years old. “For my entire life I have loved modeling companies,” he says. “I love getting into the numbers and I’ll do it whether I’m home or here. Modeling companies is probably a bizarre passion, but it’s something I do.” Not surprisingly his father always hoped they would be able work together. David’s younger brother, Michael, who has a degree in communications from Boston University, came into the firm three years ago on a part-time basis, to help with some marketing projects and was soon offered a full-time position. He now holds a Series 7 license and works with Kern on client service. The lines of succession are clear and the younger Liebermans talk about the importance of having clients know that there is continuity within the firm. Just as Advisors Capital Management is committed to investing over the long-term, so are the principals committed to the firm.
Managing editor Robert F. Keane can be reached at email@example.com.