When facing a disaster, healthy families turn toward each other for emotional support, but also for practical help. Since sisters and brothers know each other so well, the advice they can provide is specific and customized, and may well be transformative.
The independent advisory family is dealing with a disaster that, while not of its own making, has shaken the family to its core. Having survived a brutal 2008, the future looks dim, and many advisors are frustrated at best with the present, and despairing at worst over the future.
So in the pages to follow, we profile how the best and the brightest among you are not only coping, but thriving in the midst of this uncertainty and volatility. These are the advisors who looked ahead and presciently saw the challenges of today and tomorrow. They then took practical steps to not just overcome those challenges, but to embrace the future and prosper in the present.
You can learn from these successful peers, and the family can heal and move forward.–James J. Green
The Future Problem Solved: Dominating a Region
The Problem Solver: Tim Kochis, Aspiriant
Dominating time and space–making sure clients know that your firm will remain stable, particularly in terms of both firm continuity and maintaining a local presence–can be a challenge for many advisory firms. In dealing with recruiting talent, servicing clients, and riding the waves of the current market, it isn’t easy to become a leading firm in a major metropolitan area as well. However, Aspiriant, a wealth management firm recently renamed after Kochis Fitz of San Francisco and Quintile Wealth Management of Los Angeles merged in January 2008, is one of the few independent firms that can claim to dominate a specific region and that has formulated a plan to continue its dominance in perpetuity. Tim Kochis, CEO of Aspiriant, says that the key motivators of the merger were to do just that–combine firms that were major players in two important geographic areas–northern and southern California–and build one for the very long run. “We have a robust team of high-quality professionals,” says Kochis, “and an environment in which they can expect to permanently make their careers, so we can make a promise that very few other firms can make–we will be around forever.”
Before the union, each firm had clients in both parts of the state, requiring Kochis and his colleagues, for instance, to travel frequently to serve them well. Now, Aspiriant can service clients in both parts of California using local offices in each. “Many clients of ours are business people or corporate executives and often have business interests or multiple homes in northern and southern California,” Kochis explains. “So having a physical situation in both places makes us feel like a local firm for them no matter where they are.” Moreover, it’s often the case that California residents grow up in one part of the state, go to school in another, and then marry someone from another part of the state. So Kochis says the multiple office locations are not only good for clients, but for employees as well. “We can do a better job of recruiting talent since we can offer career opportunities in both locations.”
Kochis says the merger has been a success, with 18 new clients joining last year, which he attributes to the firm’s broader geographic reach. “We also added five new positions to the firm in 2008,” he reports, and plans to add two more this year.
Another major objective in the merger was to ensure the firm’s independence while creating an environment in which it can survive indefinitely. Aspiriant thus created an organization with sufficient scale of ownership to produce an internal equity transfer pool. “We now have 31 owners out of about 76 total staff; that’s by design,” Kochis says. “I’m the largest owner with about 14%.” There is no majority owner and it’s this broadly distributed ownership that provides benefits such as stability, career development, and long-term independence “because the older and larger shareholders have a pool of younger and smaller shareholders who have the wherewithal to buy their interests over time,” according to Kochis. “So by having a diverse array of owners in terms of age, entrepreneurial appetite, and tenure, we’ve created a structure that permits the ownership of the firm to recirculate; we never have to go outside.”
Aspiriant did experience some revenue challenges as a result of the market decline last year. However, Kochis notes that “our revenue base is not entirely driven by the size of client portfolios. We do a great deal of consulting and planning work across the broad spectrum of people’s wealth management issues–taxes, insurance, estate planning, retirement planning, philanthropy,” and are compensated in those areas by fees or retainers. This is also by design. “We wanted to have multiple, diversified revenue streams,” Kochis says.
Also keeping Aspiriant on track is an austere budget for 2009, in which there are reductions in the principals’ base compensation but no staff layoffs. “We’ve decided that we want to maintain the infrastructure that we’ve been building–we don’t want to have to go out and rehire when things turn better,” Kochis explains.
Kochis says the firm is ready and able to grow at a 20% rate indefinitely into the future by expanding on its existing base “and by making a very welcome home for other organizations that would like to emulate what we are doing in terms of client service and investment platform, but also in terms of the long-term independence that we’ve created.” In fact, Kochis says the firm plans on expanding beyond California into other major metropolitan areas such as New York, Chicago, Dallas, Atlanta, Denver, and Seattle.–Kara P. Stapleton
Future Problem Solved: Building All-Weather Portfolios
The Problem Solver: Lou Stanasolovich, Legend Financial Advisors
Unlike most advisors who stick to using a combination of stocks and bonds to build clients’ portfolios, the bulk of Lou Stanasolovich’s portfolios include an asset class that many have yet to embrace: managed futures.
Stanasolovich, president of Legend Financial Advisors in Pittsburgh, has veered from the typical one-style investing approach used by most advisors and built “a risk spectrum of portfolios,” 14 different types to be exact, including four lower-volatility varieties, he says. The portfolios include income, lower volatility (where 80% of Legend’s client money is invested), as well as ultra speculative–which typically makes up no more than 25% of a client’s net worth, he explains. “Most of our clients (85%) are 50 years and older, and 35% of them are retired so they want the more conservative investment styles usually, but many of them also want to dabble in more aggressive pieces as well,” Stanasolovich says.
Nearly every type of portfolio strategy at Legend includes managed futures, he says, because the asset class provides “an all-weather type of portfolio or an absolute return portfolio, more so than even hedge funds because rather than following one stock market (foreign equities, for instance) managed futures invest typically in over 100 different markets, meaning that they include stocks–U.S. and foreign–but also include different currencies, types of energy (heating oil, crude oil, gasoline, natural gas), industrial metals, precious metals, various bond indexes, agricultural commodities” and so on, he says. Managed futures managers can also “go long or short on any one of those [markets] and frequently take a position on any one of those either long or short,” he adds. The managers also tend to “use mathematical models to follow trends; in fact, your better managers have anywhere from 20 to even as high as 70 PhD mathematicians on staff.”
Why haven’t more advisors caught on to managed futures? “I think they just don’t know about them,” Stanasolovich says. “The average advisor doesn’t understand the difference between long-only commodities and managed futures managers. Ten years ago I didn’t understand it either.”
The good news is that there’s no good or bad time to start using managed futures, he says. Plus, managed futures have been one of the highest returning investment vehicles since the early 1980s. “Some of the better managers over the last 10 years have earned about 14% per year while the S&P 500 has been basically zero,” Stanasolovich says. “If you went back to 1980, the total returns for managed futures outweigh the stock market by a figure of 10 to one.”
Besides managed futures, Legend has, for the last three and a half years, used currencies to “help us provide better returns, especially on the fixed-income portion of portfolios,” Stanasolovich says. Legend has been enhancing returns, too, by employing long/short managers and other hedge-like strategies in mutual fund formats. “Obviously those kinds of strategies do better in down markets than the market itself,” he says. A heavy dose of commodities over the past five or six years also played a role in Legend’s portfolios, “which worked out” until July 2008. REIT mutual funds have also been a stable of Legend’s portfolio diet over the last 20 years. Legend uses “significant weightings” of each of the investing vehicles mentioned above, to the tune of “6% to 8% of our total portfolios,” Stanasolovich says.
Over the next 20 years, he predicts that “stocks will do extremely well. But I think the better part of that performance will be in the last 15 years, not the first five.” Bonds and Treasury securities, however, “will perform abysmally going forward,” he says. “If you were to buy today, you’ll have very poor returns. On the other hand, fixed-income securities like junk bonds, bank loan funds, and high-grade corporate bond funds will all do very well, although it might be a little early to enter those markets.” These fixed-income securities will do well because, he adds, “the yields relative to Treasuries are at astronomical levels and the spreads are very wide, especially over inflation.”
Inflation could go up, he concedes, “but I would expect junk bonds with 19.5% yields will do extremely well going forward regardless of the situation. We’re merely waiting for the default rate to rise significantly, so we’re looking at the fourth quarter of 2009 to buy into junk bonds.”–Melanie Waddell
Future Problem Solved: Developing a Client Niche
The Problem Solver: Mindy Ying, Pillar Pacific Capital Management
When Mindy Ying decided to merge her San Marino, California-based half of the firm PacWest Financial Management with Art French and Craig MacLeod’s Pillar Point Equity Management in Daly City, California, to form Pillar Pacific Capital Management in November 2007, she became the firm’s president and majority owner. The primary reason for the merger was to pursue opportunities in the institutional sector, but Ying is justifiably proud of the fact that all of her staff came with her and that she had a client retention rate of more than 100%. “When we announced the merger a number of clients that had left rejoined us,” she explains. “We didn’t add any fees, but we provide full wealth management services, plus now we have the whole institutional money management program.”
The firm had more than $370 million in AUM for 226 clients at the end of September 2008. Private client portfolios range from $1 million to $30 million and about half of those clients are Asians, residing either here in the U.S. or overseas.
Although she was educated in the U.S. and has lived here for more than 30 years, Ying is Chinese by birth and is fluent in both the language and culture. This has been a tremendous asset for her in serving an Asian clientele, as has having other Asian staff, both those educated and/or born in Taiwan or mainland China and “ABCs” (American Born Chinese) who are not conversant in the language, but grew up with the culture.
“It’s not just the language,” Ying explains about making Asian clients comfortable. “Especially on the investment side, these are very complicated subjects. With things like hedge funds, it’s even hard for me to translate the ideas into Chinese sometimes.”
Ying’s background includes stints as managing director with Barclays International Private Banking, and director of Asian Market Development for First Interstate Bank’s Trust and Investment Management Group during a career that began with Toronto Dominion Bank and Citibank in Taipei, Taiwan, which has helped her attract clients from that region.
To help develop her offshore client base, Ying participates in both Schwab and Fidelity’s referral program. This past November she made a business trip to Taiwan and had close to 20 meetings with potential clients that had been set up for her by Schwab’s international group.
“You have to understand that people there have made large fortunes because of the relationship between Taiwan and China and the business opportunities they have,” Ying explains. “But they have no time, no tools, and no knowledge about what they should do with all these assets.”
As is the case with most advisors, referrals from existing clients are also an important tool Ying uses to continue growing her firm. “Our offshore clients, they know our practice, and their friends and family also need help.”
Client communication has always been important to Ying, but since the turmoil in the financial markets began, she’s stepped up the firm’s efforts to include a monthly newsletter, distributed both electronically and in print format and written in both English and Mandarin. The firm is also currently working on creating a Chinese language version of its Web site.
As a first generation immigrant herself, Ying is sensitive to the difference between dealing with Asians who reside in the U.S. and those still living primarily in their homelands, both culturally and pragmatically. “Those who have been in this country for a long time we treat as mainstream Americans,” she says, “but the culture is still different. They focus heavily on education and they want to understand everything that’s going on around them, and that’s one of the areas where we can help.”
For offshore clients, Ying says she often has to spend more time on their financial educations. “Asset protection tools are totally different for offshore clients because they are nonresidents,” she continues. “If they protect right, they don’t have to pay estate tax, and they don’t have capital gains tax. They have some withholding issues, so from an asset protection sense they are different, but from an investment viewpoint, all the tools are the same.”
As the firm develops, Ying is anxious to expand both its institutional business and its private client base and feels that with current staff the firm is well equipped to do that. Each client is assigned a team consisting of two portfolio managers, a relationship manager, and an operations manager. Like its clientele and the population in general, demographically the firm’s advisors cover a lot of bases–men, women, Asians, Caucasians, young, and middle aged. In a diverse country with a diverse population and a global economy, it’s the type of roster that’s likely to keep Pillar Pacific in the game for some time to come. –Robert F. Keane
Future Problem Solved: Building Practice Efficiency Through Technology
The Problem Solver: Greg Friedman, Friedman & Associates
You might be surprised to hear that an advisor famed for his technology expertise–expertise acknowledged in a Schwab Institutional “Best in Tech” award in 2007–would start a discussion on how to run a more efficient practice by bringing up the value of coaching. But that’s exactly how Greg Friedman does it. “It’s a leadership issue,” he argues, saying that coaching has taught him–that when you’re not getting a desired result in your firm–to ask, ‘What’s my contribution to that situation?’” But Friedman, the owner of the wealth management firm Greg Friedman and Associates in Novato, California, and co-founder of the CRM software firm Junxure, melds his coaching experience, his business acumen, and his technological predilections to run his firm in a highly efficient manner that other advisors would do well to emulate.
Any technology, says Friedman, has to accomplish two purposes: it must create efficiencies and better client service. A higher level of client service and a higher level of efficiency “produce higher profitability.”
As for people, Friedman believes in getting staff involved from the beginning of any implementation (he recommends explaining to them clearly the WIIFM of any new technology, i.e., “What’s in it for me?”), and ties employees’ quarterly bonuses to their adoption of that technology and their willingness to share what they’ve learned with their peers. Each employee trained on a piece of hardware or software is required to inform every other staff person of “three things they have learned.” There’s a dual benefit to that requirement: the other employees learn the features, and the original employee, if they share that information, they tend to implement it.
“If that doesn’t work, then you have an employment problem–you’ve got the wrong person on the bus.”
But the commitment to using technology must start with the principal of the firm. Friedman’s commitment translates into a yearly investment of 5% to 7% of annual revenues to his technology budget, and every piece of hardware is replaced on a rolling three-year basis. What if you’re a principal who doesn’t care for technology? “You don’t have to love technology,” Friedman admits, but suggests you ask yourself, “Do you like profits?”
Some advisors, he admits, “their personalities don’t lend themselves to doing any of this.” That’s “totally okay,” he says, but then recommends that you then “hire a manager and get out of the way.”
He says the best managed firms build quality teams, and those teams appreciate having good hardware and software to use; Friedman says it’s one way to attract and retain valuable employees. While study groups, industry publications, and consultants can help with technology planning, Friedman counsels that you have to “watch everybody’s objectivity.” He says an underused source of help is custodians and broker/dealers and the salespeople of the technology vendors themselves. For those who are required to use certain technology by their B/D or wirehouse firm, he recommends “using your clout” with your partners to demand new or modified systems that meet your needs.
He warns against thinking a new piece of software or hardware will instantly solve your business problems. “If you think you’re going to drop something on your desktop and push a few buttons and get results, it’s probably not going to happen. You have to take the time to figure out where you want to go, what’s really important to you, figure out what systems do that, be willing to learn and acknowledge what it takes to get that out, look at the ROI on that and do your ‘Is that worth it?’ [analysis].” If you do so, he promises, “you’ll be stunningly pleased that it was worth it, and you’ll get where you want to go. And you won’t have all that angst about it [the technology] not working and wind up on a blog dissing your vendors.”
Friedman argues that “this industry now has the tools” it needs in technology. “There’s great access to information; but you need to commit and act on it.”–James J. Green
Future Problem Solved: Becoming the Employer of Choice
The Problem Solver: Tom Muldowney, Savant Capital Management
The financial advisory business is a cottage industry right now, but it will clearly be the dominant business model as we look out 20 years,” says Tom Muldowney, managing director of Savant Capital Management. The fee-only wealth management firm is headquartered in Rockford, Illinois, but also has offices in Chicago, Geneva, Freeport, and Hoffman Estates in that state as well as one in Madison, Wisconsin. Muldowney says that his firm’s goal is to become a dominant regional player in an area within 300 miles of Chicago over the short term (although with a team of 60 and more than $1 billion under management, that goal may already have been met) and a national player over the next two decades.
Muldowney says that he and his partners realized that the key to success in the investment advisory business is not the investment, but the advisor. With that in mind, they set out to make Savant a place where advisors would want to practice their profession.
“The primary reason for any advisor to join us is that it gives them the opportunity to be an advisor, instead of having to be a lawyer or a taxman or an investment portfolio researcher,” says Muldowney. “They have the opportunity to do what they actually get paid for, which is sitting in front of clients and helping make the client’s problems go away.”
To afford advisors the opportunity to “do what they actually get paid for,” Savant uses a team approach so that the advisor doesn’t have to worry about compliance, tax advice, legal advice, accounting, or investment management.
From its inception, Savant has been client-centric. “When we take care of the client and they do well, frankly we get dragged along, so the entire focus is on them,” Muldowney explains. “We are 100% invested in our clients, but we’ve very clearly made the leap from being a planning firm or a boutique into being a business.”
He explains that making that transition meant that from a business standpoint, Savant’s clients became the advisors who in turn are spending more time with the firm’s advisory clients. “We’ve changed the nature of our business so that we now serve the advisor, and the advisor is now able to go out and do all the things he needs to for his particular clients.” Taking the same approach as he and his partners have with individual advisory clients, Muldowney notes that if Savant helps its advisors do well, the firm will do well. “If we can help the advisor become more productive, then we participate in some of the business that he generates, his net goes up because he doesn’t have to supply everything that he did before. We participate by being an assistant to him and seeing that everything we do is world class.”
When advisors join Savant, Muldowney says they usually do so for a number of reasons. High on that list are compensation, name recognition, and the opportunity to acquire some sort of an equity position in the firm. Although currently firm ownership resides with Muldowney and two partners, he says they are trying to work out a way to extend stock ownership to other advisors in the firm. “We’re at a point size-wise where we can afford it, and we want to make sure that our advisors always feel that not only are they contributing to the growth of the firm, but by contributing to that growth, they get dragged along too. It’s the same principle that we use when working with our clients. If we help them, we’ll do well.
“We want to be able to say to our advisors, ‘We can give you a small percentage of something that has value. We can create a market for you, so that you’ll know what it’s worth and you’ll know that you can sell it and you’ll know that you can use those assets for your own retirement.’ In terms of actual percentages, we don’t have those numbers figured out yet. However, the legal expenses, the accounting expenses, and the financial acumen that goes into building it–that is why so few firms have gotten it figured out.”
Beyond the possibility of an ownership stake and the advantage of a support network, Savant also offers advisors other benefits that they may not have been able to provide themselves as solo practitioners–health insurance, profit sharing, a 401(k) plan, and the opportunity to take a vacation, secure in the knowledge that their practice isn’t going to fall apart while they’re away. –Robert F. Keane