The answer to the question everyone’s asking is “like a fox.” It might seem like a major investment in a product or service outside your core competency—at a time when most advisors are simply hanging on for their lives—isn’t the shrewdest move. But then again, diversifying your revenue stream at a time of heightened fee compression and shrinking margins can’t be all bad.
Tim Lawrence and Ted Schwartz came through the worst of the market downturn pretty well, and soon other advisors got word and came knocking. They asked the partners of Colorado-based Capstone Investment Financial Group to manage their portfolios in order to free up time for more client meetings and prospecting, and Capstone was happy to oblige.
“Market conditions and uncertainty are a good fit for what we’re doing,” Schwartz says. “It’s all about trying to compound money efficiently. Unfortunately, we think most financial services companies and funds don’t do it well.”
Big talk for the former Commonwealth Financial Network reps (and now affiliated with TD Ameritrade through their independent RIA). But they’re backing it up, partly because they have that most rare of skill sets: math geeks with personalities and people skills, which makes them ideally suited for the business in which they find themselves.
“This field is a good combination of going back and forth with using those analytic and math skills, but also building relationships and working with people,” Schwartz adds.
Lawrence, for his part, did his requisite stint in banks and wirehouses, most notably with Dean Witter and U.S. Bank. His reasons for eventually making the switch to the independent channel are awfully familiar.
“I didn’t like the way they said, ‘OK, push this,’” Lawrence says. “It was whatever the ‘investment du jour’ was. The manager was a dinosaur who wanted you to pound the phones for 300 calls a day and didn’t really care about the client. I wanted it to be more about the best thing for the client, rather than the best thing for the company.”
Both eventually found themselves at Commonwealth. In 2001, Schwartz approached Lawrence about joint marketing efforts and the relationship developed to the point where it made sense to merge their books. Today, the firm has 200 clients and is completely fee-only.
When asked about what specifically sets them apart as a firm, it (unsurprisingly) led to a discussion of the mutual fund launch.
“When the market dropped in 2008, we were already tactical with a very diversified portfolio, including alternatives,” Lawrence explains. “We really blew up after that, and the assets started coming in. We were down probably 10% to 14%. That’s when some advisors we knew from Commonwealth approached us to manage their client assets.”
Not that it’s been easy. Schwartz says the biggest challenge in launching the fund is getting people to understand it, because it isn’t traditional.
“We’re calling it variable risk investing,” Lawrence adds. “What’s the optimal asset class to be in for today’s valuation?”
Schwartz says there are three basic ingredients to their investment philosophy. The first is their decidedly global view, although they don’t ignore domestic investments. The second is their “endowment philosophy.”