Many advisors like to say they’ve spent a lifetime in the business, but for Robert Lutts it’s true. He’s spent the last 25 of his 52 years as president and chief investment officer of Cabot Money Management, his Salem, Massachusetts-based investment and wealth management firm. But his exposure to the world of investing didn’t start there or at Amherst Associates, the consulting concern where he worked after college as a financial specialist in the healthcare industry. “I remember as a 10-year-old kid, my father would drag me behind him to visit CEOs of companies and hear what they had to say,” Lutts has said.
His father was Carlton Lutts, a renowned stockpicker, newsletter writer, and founder of the Cabot Market Letter. Since he literally grew up in and around the business of investing, it comes as no surprise that the younger Lutts would make that his business as well.
For the last 10 years, Lutts explains that his firm has really been two related businesses under the same umbrella. “I started this business in 1983 basically as an outgrowth of my dad’s business,” he says. “For the first 15 years of our life, all we did was manage money.”
The Cabot Market Letter was always geared toward growth stocks and so were the early portfolios that Robert Lutts created for Cabot Money Management’s clients. But after experiencing a few bear markets, “we determined that the health of the business would be stronger if we diversified.”
As Lutts’s vision of the business evolved he began to move the firm in the direction of wealth management. “That decision was made because it looked like the money management business was going to go the way of a commodity kind of business and it’s turned out that way,” he says. “We really transformed ourselves from an investment management company about 10 years ago, adding in the key pieces–a CPA, an attorney, and CFPs–to the staff of professionals. They rounded out the capabilities of the firm, so we can take the average high-net-worth individual who has maybe $3 million of assets and we can do the whole package for them. I think the benefit is that you really get integration among all the activities in someone’s financial life.”
Extra Services, Greater Retention
Lutts estimates that about half of the $350 million (down from well over $400 million) that the company had under management as of the end of November comes from about 300 wealth management clients. The remaining assets belong to money management clients. There are currently about 500 clients fitting that profile, down from some 1,100 at its peak.
Lutts says he’s looked at data on the advisory business from Moss Adams and other consultants and agrees with the conventional wisdom. “If you can do four or five services for somebody the retention goes up a multitude of factors,” he says, and points to the fact that firm still has most of its original wealth management clients.
One area where Lutts differs from some industry consultants is with the idea that when an advisor’s business gets to a certain level he should jettison his smaller, less profitable clients. “We didn’t kick them out. We still like that revenue,” he says of clients who hired him to manage their money in the firm’s early days. “They don’t get as much service, but they get what they need and they’re happy. They like the way we manage the money, but all new clients coming in now are coming in under the wealth management platform, and that’s been the case for the last eight to 10 years.”
The only “unprofitable” clients that Lutts has gotten rid of have been those with lower asset levels who require more service than his business model allows, and even then he tries to find a broker or some other type of advisor better suited to the client’s needs. These days his minimum for new clients is $500,000 in investable assets, although most new clients come in with between $1 million and $2 million.
Face Time with ClientsSelling Advice and Asset Allocation
The firm’s compensation is strictly from fees for either asset management or wealth management. “Most of the clients really value that,” Lutts says. “They know we’re not selling anything other than, hopefully, good advice for them and good asset allocation.”
For a wealth management client with $1 million in assets, the fee would be 1.25% for a range of services including, in addition to investment management, tax planning and preparation, retirement planning, estate planning, and advice. The fee as a percentage of assets slides downward from there as the asset levels climb.
“If they want a service that we don’t offer, such as deep value investing or something like that, we’ll find an advisor that does it,” Lutts explains. “We’ll have them hire an advisor for that piece of the money. We won’t get compensated on it at all, and we’ll advise them on what’s appropriate for them in that case.”
In order to provide those kinds of services, Lutts says he’s calculated that the firm needs about $10,000 in revenue per client, which is why he’s offered those services for clients with $1 million and up.
For his lower-asset-level money management clients, the fee is the standard 1% of AUM. “We’re probably lower than we should be for some,” admits Lutts. “These are clients we’ve had for 15 or 20 years and I feel an allegiance to them. We want to do what’s right for them and keep it cost reasonable for them.
“You could say that if you eliminate those you’d eliminate quite a bit of service and other activities, but I say as long as they want us, we want to keep providing the service for them.”
Making It Easy for the Client