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January 01, 2008 at 02:00 AM
The typical background for a financial advisor is a business degree followed by an entry-level job with a wirehouse or large accounting firm. Or, maybe it’s college and then law school. Mark Scheffler heard a different tune and got his undergraduate degrees in music education and music composition.
“I have a different background,” he admits, adding that the great modern composer Charles Ives ran an insurance agency in Danbury, Connecticut, for most of his adult life. (Scheffler continues to compose choral music and enjoyed the premier performance of a new piece last month.) “But it’s one that correlates so beautifully to investment management. Composition is about choices, it’s about architecture, it’s about analysis, it’s about balance, it’s about knowing how to make adjustments, and decision-making. That’s exactly what investment management is as well.”
After graduation, Scheffler spent three years teaching at a junior high school in Kenosha, Wisconsin. When he got married he moved back to Appleton, Wisconsin, where he’d gone to college, and took a job with a local brokerage. He intended to be out of teaching only a year, but stayed with that firm for six times as long.
“I was a lousy broker, to be honest with you, because I never really bought into the idea of selling a product,” he recalls. “I didn’t think that selling a product would necessarily do good things for my clients. It ended up doing pretty great things for me, but when the markets turned, you really couldn’t do a whole lot to add extra value. You couldn’t manage risk.”
The desire to help his clients manage the risk inherent in their investments, rather than passively accept it, was what led Scheffler to found Appleton Group Wealth Management in 2002. He’s quick to point out that managing risk is not the same thing as eliminating it–he could eliminate risk for many of his clients, but that would mean limiting their returns to 4% for the next decade. “That’s probably not a high enough return to make a financial plan work,” he says. “A lot of clients have to incur some risk and they can accept it wholeheartedly and live with all the consequences, good and bad, of that, or they can manage it. I think that by managing risk clients can achieve higher returns, and more importantly, compound more dollars, because they don’t have to dig themselves out of a big hole.”
Scheffler notes that over the last 20 years, returns for the S&P 500 have been 11.9%, but hidden in that return is the fact that in the essentially flat market of the last seven years, investors in the S&P 500 had at one point lost over 44% of their investment. “So accepting risk ends up meaning that you’re going to have to take on a whole lot more risk and accept a whole lot more downside with the hope that you’re going to be rewarded for that,” he says.
The Problem With Assuming
Scheffler feels that a good deal of his success in managing risk comes from avoiding some of the assumptions commonly made by other money managers. “There’s an assumption that if you accept risk at a given level, that you’ll always be rewarded for that risk,” he observes. “Sometimes it happens, sometimes it doesn’t. Making the assumption that you’ll be rewarded for a high-risk portfolio, to me just doesn’t make a lot of sense, when the consequences of being wrong can be pretty dramatic. They can be life changing, and that’s something we just don’t have an interest in.”
To put his risk management theories into practice, Scheffler has developed what he calls the Appleton Group Wealth Management Discipline. “It’s built off the premise that portfolios need to be flexible,” he explains. “That’s nothing new, but the way we do it is to diversify not only by what’s in the portfolio, but how those assets are managed. We diversify by wealth management style.”
The portfolios that Scheffler has developed use a combination of both active and passive management. “By knowing that there are different types of market environments that we definitely want to address and that we want to add value in, we can constantly play those two disciplines off of each other,” he says. “So if our active piece beats our passive piece in a year, we rebalance and sell off part of the active piece and buy more of the passive. When the passive outperforms, we do just exactly the opposite. This is a beautiful way for us to consistently buy low and sell high.”
This discipline has allowed Scheffler to create what he calls “ultra-efficient” portfolios. To gauge the efficiency, he looks at returns over a full market cycle and then compares that number to the worst one-year returns. “Consistently our returns have been higher than what our loss has been in our worst year,” he notes. “So an efficient portfolio is one that’s up 12% on average per year and in its worst year only drops by 4%. That’s consistent with what we’ve accomplished on all six of our separately managed accounts.”
Of the SMAs that Scheffler has developed, three comprise only ETFs, while the remaining are asset allocation portfolios using mutual funds. The minimum in any of the SMAs is $1 million, “but inside a 401(k), when you get down to the account level, they can be used starting at zero dollars. That’s primarily how they were built–to be used primarily for 401(k) individual accounts. What we wanted to deliver was the same type of wealth management discipline that formerly was available only to the largest of institutions and bring that down to a retail level.”
The Future
For many advisory firms the biggest challenges have to do with issues of ownership and future growth. Although his firm is only five years old and has a total staff of five, Scheffler has invested heavily in the future. “We’re at $91 million in total assets now, but we have enough capacity to get up to $1.3 billion without changing our internal structure,” he says. “We’ve really thought ahead about how we want to grow our business over the next decade.”
