If Richard Manchester had his druthers he’d probably never leave the comfortable confines of Laguna Beach, California. It’s where he’s had his home for most of the last 25 years, a majority of his clients live in the general area, and, perhaps most importantly, it gives him easy access to the Pacific Ocean where he can practice his avocation–surfing. It also gives rise to the name of Manchester’s latest firm, which he launched in March of this year–Wave Wealth Management.

But catching a big wave isn’t the only way Manchester gets his kicks. He’s also a self-confessed “deal junkie,” who in addition to providing passive portfolio management for the clients of his firm also actively seeks out private equity deals to deliver premium returns.

Manchester’s approach is to place 70% to 75% of each client’s investable assets in marketable securities such as index-based ETFs and DFA mutual funds. For the remainder, he actively seeks out a variety of private equity ventures. “One of the key differentiators between Wave and other independent wealth management firms is that we syndicate private deals for our clientele,” he explains. “We’ve syndicated real estate transactions, healthcare transactions, oil & gas partnerships, drilling and production, venture capital.”

Manchester’s most recent syndication deal involves a mineral lease on a 750-acre site in south Texas, which had eight producing wells and three developmental drilling sites, and for which he raised $2 million in capital from 14 clients. “We had a reserve analysis done with petroleum engineers, assuring us, to the extent that can be assured, that there are sufficient reserves to make a return on investment at a minimum level of 10% over the next seven years,” he says of the due diligence. “Then with each of these three drilling sites we could make 25%, 45%, 70% inclusively if it all worked out.”

Another investment that a number of his clients are involved in is ownership of a nursing home in San Diego, which is structured as a limited liability corporation and is managed by an individual with an equity stake in the business. Manchester says this particular investment is generating a consistent return in excess of 15%.

Warren Buffett in the Making

Manchester estimates that he puts together an average one big deal a year and likes the private equity investments because they are not correlated to the performance of the capital markets. “It’s business risk,” he says. “I like to fashion it as a mini-BerkshireHathaway approach. We try to buy good businesses that are well-run and generate good, safe cash flow.” Although he limits the number of deals that actually go through, Manchester says he spends a great deal of “uncompensated time” doing the research and due diligence to find those few deals worth executing.

“The business models [of the different private equity placements] I have found are not so different, as long as you know how to surround yourself with the right consultants in each industry when it comes to an acquisition,” he says of his approach. “I’m a good businessperson, but I would make no claim to say I know all there is to know about nursing homes, nor do I know nearly all there is to know about oil and gas investing, but I know where to go to get the right advice, so I can make solid business decisions. I think that’s the key.”

Although Wave Wealth Management is less than a year old, a number of Manchester’s “favorite clients” have been with him for 10, 15, or 20 years. Like many advisors, Manchester began his career in the insurance side of the business.

“I was hired as a financial planner, which was a new term in the early ’80s,” he recalls. “I realized very early on that their [the insurance company's] definition of financial planning was the systematic conversion of investment dollars to life insurance premiums.”

Dissatisfied with simply selling insurance, he started his own firm, Manchester Financial, and went to law school at night and on weekends, because he was uncertain as to which professional certification to pursue and it was something he had always wanted to do. Although he’s never practiced as an attorney, Manchester firmly believes that his training in the law has been an invaluable asset.

“Law school is all about reason and research and those skills are invaluable in this business,” he explains. “I love taking things apart and if they go back together the way I think they should, I may invest.”

Wealth Management, and Passive Investing

Eventually he joined with a number of partners in the formation of Worldwide Investment Network, which Manchester recalls as one of the largest independent financial advisory firms in southern California in the early 1990s, complete with corporate jet and full-time pilot. He decided to sell his interest back to his partners, while retaining a base of the clients he most enjoyed working with, and in 1997 opened Sentinel Capital Management. Seven years later he sold that firm to one of the advisors working there, once again holding on to a carefully chosen core clientele. In the time between leaving Sentinel and founding Wave Management he did some consulting work helping a CPA firm in Santa Barbara and an Orange County forensic accounting firm each set up financial advisory businesses.

“I always kept a core group of my favorite clients–never my largest clients, but my favorite clients,” Manchester says of his practice. “I always keep them outside of any agreements that I’ve had. They just follow me here and there because we’ve had so much fun working together.”

That client loyalty helps explain that while Wave Wealth Management is less than a year old, it already has about $30 million in portfolio assets under management and another $20 million in private equity, for around 30 clients.

For those clients he provides wealth management services, which Manchester defines as coordination of all the client’s financial activities. He has a strategic alliance with a CPA firm to provide his clients with tax services and for those with more than $2 million in assets, tax preparation is included in the management fee of 75 basis points. Clients with between $1 million and $2 million pay the same 75 basis points for asset management, but must pay an additional fee for the tax service.

When it comes to the management of his clients’ portfolios of conventional assets, Manchester is a firm believer in taking a passive approach with an emphasis on low-cost investing. “Over my career I’ve made and lost money in every possible way,” he explains. “Everyone pays for their education, it’s just a question of how much.”

For Manchester the ultimate investment solution is passive index investing. “Overweighting in value stocks and small-cap stocks is clearly the way to get a little better than your average capital market returns,” he says of his approach. “Interestingly enough, that comes with little higher degree of risk. There’s always that correlation between risk and return, but when you do it with ETFs and mutual funds and you have a very diversified porftfolio, that mitigates as much of the risk as you can from the capital markets.”

While he acknowledges that many money managers do in fact beat the market in any given year, Manchester believes that those who can do it on any kind of a consistent basis are few and far between, and that “market returns are elusive on an active basis.”

Client Capacity, Not AUM

During the course of his close to 25 years in the business Manchester has built a business model that goes against much of the industry’s conventional wisdom. “The industry churns out a lot of advisors just kind of doing the same thing,” he observes. “There’re a thousand consultants out there to tell you how to build a practice. None of them would tell you how to build one like I’ve built.”

He has never developed a niche market to exploit his strengths and in fact he has never done any marketing at all. Most of his clients come from referrals, many from people in the immediate area.

Of late a number of clients have come to him as a result of domestic property settlements following divorce. “In fact I’ve had three walk-ins in the last month, each with a check for $5 million,” he says. “That’s a pretty nice net worth, although for two of those individuals that represented a pretty significant lifestyle change.”

As far as Wave Management reaching its crest, Manchester doesn’t see that happening anytime soon. “I’ll know it when it happens,” he says of any growth ceiling. “It’s just that simple. I don’t know what the capacity issues are, but I think it’s clients, not assets under management, and I know I’m not near it now.”