Chief Conclusion

We think that at the heart of our growth lies a simple, old school focus:  helping families with their financial problems.

Surpassing One Billion in Assets Under Management in Five Years

Last week we were excited to announce that our team’s collective efforts had powered our firm’s assets under management past the $1 billion milestone.  That we grew from a startup investment company to $1 billion in assets under management in only five years is even more remarkable, in my opinion.  I couldn’t be prouder of our exceptional team!  This achievement is theirs.  I don’t believe you will find more dedicated, hard-working people anywhere. 

One of the questions we often get asked is: what are we doing differently that enables us to grow so quickly?  It’s a good question.  As one of the fastest growing companies in our industry, we have learned a few things about how it is changing and what we believe it takes to compete within it.  There is a lot of disruption under way in our industry and in the business of investing, as I describe below.

Never Lose Sight of This: The Long Arc of the Universe is Towards Progress

It seems that wealth management clients are fleeing investment banks with their opaque fees, bond markups, conflicts of interest, and over-reliance on high fee products.  The best financial advisors at these firms must fear they are only providing a flawed and imperfect solution for their clients.  Otherwise, why are some financial advisors abandoning these banks?  I believe that they, and their clients too, are voting with their feet.

The investment management side of the business is also changing rapidly.  Many traditional mutual fund managers are shrinking.  They face not only the threat from lower-cost passive products, but also from exchange traded funds (ETFs).  Many believe ETFs are delivering a better active solution than mutual funds for clients at a lower price point, with daily transparency, more liquidity, and better tax treatment. 

Mutual fund managers may be on the wrong side of history.  I understand that it’s painful for some fund managers to give up the scalable yet opaque mutual fund structure that made so many rich, but how can one fight the arc of the universe towards delivering a solution that is better/faster/cheaper/more transparent/more tax efficient?  Do mutual fund managers really want to set themselves in opposition to the best interests of their ultimate clients, wealthy families?   

For far too long, these ivory tower investment managers have blithely assumed that their wealthy clients could and would bear the dual costs of a financial advisory fee for the delivery of personalized financial advice and counsel, and the additional burden of a “product manufacturing fee” in the form of the management fees for a mutual fund or an ETF.  You need only look at where interest rates are now to understand that those days may be over. 

Clients only retain the money they earn after fees, so wealthy families are wisely focusing on who can deliver the best individualized solution at the lowest delivered cost.  In my opinion, many product manufacturing companies such as mutual funds and ETFs are simply “hired guns” paid to do a job by understaffed financial salespeople who cannot otherwise credibly perform security analysis and portfolio management.  These hired guns often have no direct relationship with their ultimate clients.  They are literally begging to be disintermediated.  The market is obliging them.

Once mighty hedge funds, even those run by legendary managers, are finding that just one tough year can put them out of business.  I believe they have realized, too late, that to their clients, they were never more than a disembodied voice on a speakerphone from somewhere in mid-town Manhattan.  Having lived by the sword, they are dying by the sword.  Their passing goes unmourned as they are laid to rest in nameless graves.

In contrast, what has been our firm’s narrow pathway to success?  What does our growth say about how our industry is changing?  In today’s “Trends and Tail Risks” I attempt to answer this question.

Helping Families Create a Customized Solution at a Lower Delivered Cost

Somewhere along the way, our industry lost its focus on helping families.  It lost its way when the storyline became all about fearless, gunslinging managers and their acts of high-wire heroism.  Forgotten was WHY that manager existed: to serve the needs of clients and their families.  The story of our growth suggests that our old-school focus on serving our clients first is meeting an unmet need.  Let me illustrate with a story.

Only weeks into this entrepreneurial venture, my fellow co-CIO Kyle Cerminara and I were interviewing two of Wall Street’s leading investment banks.  We needed a prime broker that could support the complex requirements of our global investing.  We were fortunate to get to choose between two of the leading investment banks on Wall Street.  (The names will remain secret to protect the guilty).

Our first visit was to a leading prime broker for new investment partnerships.  An historic “white shoe” firm, it was ranked very highly in launching firms like ours!  It could help us with everything.  We were greeted by the impressive global head of prime brokerage in their gleaming New York City office.  Not a strand of his blond, swept back hair was out of place.  He was the very image of Wall Street success, there to pitch us on what his firm could do for us.  I can’t deny that it was an exciting time.  We leaned in eagerly to hear his counsel.  The room quieted in anticipation. He spoke. 

Five minutes later, Kyle and I banged open the door and walked out.  His advice was antithetical to everything that we wanted to build. We would not be working with that firm.

What was the flawed advice?  To build the “Field of Dreams” (if you build it, they will come).  We were to aggressively overinvest in the business and burden it with excessive costs.  Spend millions on everything from our own servers, pricey mid-town Manhattan real estate, and back office computer systems.  Everything had to be gold plated, sized for a firm many times our size and complexity, completely superfluous for the scrappy startup that we were. 

Why?  To him, the reward for mortgaging our young business’ future, if it even worked, was to hope to earn the business of what I believe are the most fickle investors on the planet – “hot money” fund of funds.  Fund of funds aggregate capital from individual investors and invest with managers.  But if we tailored our firm for their needs, we would never have a relationship with our ultimate clients.  And we would never have the luxury of the long-term investing that we believed was so critical for the success of our clients.  We wanted our clients to be like family. 

To the above-mentioned prime brokerage head, that was not what mattered.  He thought that we needed growth, and lots of it – fast!  Anything to scale the business.  But was this really the right way to build a sustainable business?  Our answer was an emphatic no.  We would go about things differently.  We would do it the difficult, but right, way. 

The suave Wall Street executive with the perfect hair was sure that he had it all figured out.  He was sure that we were throwing away the best shot we would ever get.  And for what?  An old-fashioned focus on helping families!?  That was no way to make the cover of “Barron’s!”

A short cab ride later, we visited his firm’s arch rival.  There we had friends who had followed our analytical careers closely for more than a decade.  Their message to us was simple: “We love you guys.  We want to partner with you.  Tell us how we can help you.”  Now that was more like it!  Even then, however, their well-intended efforts were all on trying to introduce us to the “usual suspects” for customers: more funds of funds.  Their focus too was off, but at least their heart was in the right place. 

With those key strategic decisions behind us, we knew that if we were to create an investment business we would be proud of and that had a chance to endure, we would do so by striving to help individual families, not faceless institutions.  Our unorthodox path took us just about as far from Manhattan as we could get, to the white sand beaches of Naples, Florida.  There we partnered with Bill Beynon and Blaine Ferguson, who had founded the successful estate planning and family office firm Capital Wealth Advisors.  They shared the same vision of growing a wealth management business.  I moved to Naples to help and, five years later, our team’s combined efforts helped our firm to surpass the $1 billion in assets under management mark. 

In Conclusion

Napoleon, who rose to power during another revolution, knew a thing or two about how change creates opportunity.  In our industry’s own revolutionary times, we believe that the “best artillery” is a lower delivered cost of customized, transparent solutions to families.  This focus demands many things, the most important of which I believe is the long-term, tax efficient management of a portfolio of individual stocks and bonds customized to meet a family’s goals.  We have assembled what we believe is a world-class team of experienced investors from all over the world to do just that.

However, our efforts would be incomplete if they ignored the other financial challenges our families face, that we can address with comprehensive estate planning and family office services.  Our goal is to earn a place on our families’ support team by becoming their trusted financial partner.  All of our efforts are focused upon that one goal.  This is why we meet quarterly with clients and share our views weekly through this and our other research publications.  For many clients, we can deliver this suite of services for less than it would cost them to invest in many mutual funds or ETFs.

Our vision for helping clients harkens back to a simpler time, back to the origins of how this industry started.  We are excited about our journey.  We think that we are just getting started!