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November 30, 2015 at 07:00 PM
The financial services industry has changed a lot over the past few decades. From the products sold to the technology used to the clients served, advisors today are working in a much different environment.
One of the biggest changes, according to Fred Taylor, president and co-founder of Northstar Investment Advisors in Denver, is that advisors have become “managers of managers.”
While many advisory firms are outsourcing their clients’ investments to mutual fund managers or ETF providers, Northstar has forged a different path, focusing on finding individual dividend-paying stocks that meet clients’ need for income, especially as they near or are in retirement.
“We analyze and pick individual companies that have strong operating businesses and pay meaningful dividends,” said Taylor.
Those companies have to increase their dividends every year, too. Dividend yields have gone up roughly 3% to 5%, he said, but “the most important thing that we look for are companies that not only pay a meaningful dividend, but also increase their dividends every single year, roughly two to three times the rate of inflation.”
He said there’s a high correlation between a company increasing dividends and its stock price. “The longer you own a stock, and if it increases its dividend over time, the greater likelihood the price of the stock’s going to go up because the dividend acts as something that holds up the stock price,” he said.
Northstar is a fee-only RIA that was founded in 1995. Then, investment management meant picking individual stocks, but since the early ’90s, most people are using the “Harvard-Yale model, which is to own a lot of different asset classes and many different managers,” Taylor told Investment Advisor in October.
“Most people had their money managed by stockbrokers or local trust department officers 20 years ago. Now they’re really having their money managed more by RIAs, but they’ve become asset allocators,” he said.
His firm still analyzes companies and picks individual stocks to build clients’ portfolios “because our investment strategy is truly about income.”
Clients have to live off that portfolio, he said, so it had better generate income.
As clients’ needs have changed, so have the products advisors use to meet them. For example, consider the growth in alternative investments, which Taylor says is “a nice way of saying ‘hedge fund.’”
“In the old days, hedge funds were very limited,” he said. “Only the very wealthy used them, and now a lot of individuals can get into hedge funds or alternative investments.”
Taylor doesn’t particularly like hedge funds. They’re expensive, first of all, but “hedge funds by their nature really haven’t done all that well since the financial crisis because they’ve had to be long and short the market, and you really wanted to be long-only since March 2009. I think a lot of individuals have gotten into alternatives at the wrong time,” he said.
Many Good Salepeople, Not So Many Good Advisors
As the industry moved away from picking individual stocks, it also moved away from personalization toward automation — not just in the recent robo-advisor trend, but also in product design. “Everybody’s using exchange-traded funds now, and before that they were using mutual funds,” Taylor said.
