Old-Fashioned Advice

On a recent Thursday, advisor Howard Sontag had his first client meeting of the morning with a hedge fund manager and his wife who had come in to review their investment portfolio and to discuss setting up a trust for a college-age child. Next, it was a sit-down with a 70-year-old couple with two grown children to go over family planning goals and wealth transfer issues. Then came a session with a CPA retired from one of the big accounting firms and his wife to go over in painstaking detail each of their investments as well as to review overall asset allocation. The final client meeting of the day was with a partner in a large law firm, in his mid-40s with a bonus from last year to invest and a desire to see what it would take for him to retire in five years.

In each case Sontag provided what he likes to call “old-fashioned investment advice.” Those four words combined with dedication to providing a high level of client service and accepting fiduciary responsibility are at the heart of this advisor’s approach. “The business model insists on our keeping the client’s interests at the forefront of what we do,” he says. “We’re independent and we’re not driven by short-term greed, we’re driven by the long-term alliance with the client.” Being able to retain that independence to serve his client’s best interests is what ultimately made Sontag choose to sell his practice to National Financial Partners in August 2005.

Howard Sontag had four years experience as an advisor with Lazard Asset Management when he launched Sontag Advisory in 1995 with a staff consisting of himself, his secretary from Lazard, and an assistant fresh out of college. While his asset management experience was just a small part of his resume, Sontag’s skills also derived from his years as a corporate tax lawyer and employee benefits consultant, something that has been most reassuring to his clients. “I’m not going to sit and provide tax advice on some complex problem, but I will know when there is a tax issue,” he says of his approach. “The law school training allows me to read people’s wills and trusts and tell them what they say and allows me to understand much more readily changes in the trust and estate tax provisions and explain them to clients. I think [tax issues are] woven into almost every meeting that you have with a client.”

Immediately before moving to Lazard’s asset management group, Sontag spent a decade heading up that company’s tax and benefits departments. Since his group handled all the tax and benefit issues for the firm’s partners, he became involved in the peripheral issues that are at the heart of the advisory business–family planning issues, personal tax planning issues, insurance planning issues, and retirement planning.

Going It Alone

While Sontag found himself thriving on the client service side of the business, he realized that the business model at Lazard, which was primarily geared toward institutional investors, had limitations. “My concept, and this was 11 years ago, was simply to be attached to the client, take the client’s best interest into account, and serve the client,” he recalls. “It was a very simple concept–open architecture, best of breed, trying to find the best management available for whatever asset class you were thinking about–but it was not a concept that the world had embraced yet.”

In setting up the model for his own practice, Sontag analyzed what had made him successful at Lazard. “It wasn’t because I knew more than anyone else in terms of which stock to buy or which manager to hire,” he recalls. “It was very clear that it was the service model. Clients trusted me, liked the idea that I had experience in benefits and tax and family planning issues, and they were making use of that expertise. It was clear to me when I left to form my own firm that it would have to be based on the service model side, not on the product side. Clients wanted the one-stop shopping. They wanted one person or one organization that was their go-to person or firm that would deal with integrated financial issues. That was really the key to the whole business.”

Sontag’s New York-based firm has a pretty broad range of clients including widows and people who have had a liquidation event, such as the sale of a business, the death of a spouse, or a divorce, and people who realize that they have accumulated a certain amount of assets that they don’t have the competency to manage on their own. He does point, however, to one subset that represents a substantial and profitable niche. “Probably 20% of our total clients are partners of larger law firms in Manhattan and elsewhere,” he says. “We find [lawyers] to be an excellent group of clients. In large part they are thoughtful about the advice you provide, they make a decision about whether they trust you, and if they do, they listen and follow that advice. We’ve found that to be an excellent relationship on both sides. We bring a lot to the table for them and they are a very good group of clients for us to have.”

Courting Junior Partners

In terms of which clients are right for the firm’s business model, Sontag says he likes to be flexible. A full service client would probably have in excess of $1 million in assets, although he notes that the firm can handle and do a very good job for clients with only a few hundred thousand dollars, although at a lower level of service. Interestingly, there’s also a group of clients who get the full-service treatment despite a lack of megabucks–junior partners in major law firms.

“The junior partner model actually offers a high level of service but with a low initiation fee, because we are believers in our lawyer relationship model and how well it works for both sides,” says Sontag of what looks like a pretty smart investment. “Young partners at law firms have something that not many people have–pretty good job security and fairly reasonable and predictable earnings streams going forward. One can look and, in many cases, know that earning stream is going to grow over time. On the other hand, when they’re young they have a lot of needs to fulfill–housing, children’s education, capital in their firms–so normally a lawyer four or five years out is just beginning to start to save money. That is a client we would definitely want to have and a client that definitely would like to have us. So we make that a full-service model even though the assets that may be available are not very large. It’s a good value and long term it pays off very well for us.”

When talking about client assets, Sontag notes that the firm has responsibility for more than $3 billion in assets. He’s not as hung up on the custodial issue. “Unlike many other people in our industry, we do not insist on physically having assets,” he says. “If the assets are doing the right thing where they are, we’d be the first to tell our clients, leave it there, just make sure we get a copy of the statement so we can report on it to you. It is not about harvesting assets, it’s about being responsible for the assets that the client has, which is a huge distinction.

“A lawyer at a firm has between 25% and 50% of their net worth tied up in the firm’s programs,” Sontag continues. “So if you’re a partner at a law firm, you’ve got a significant Keogh plan or 401(k) plan or an insurance-based deferred comp plan. No one can physically have those assets, but the client wants someone who is responsible for helping them think about those assets in a context with what their other money is doing.”