Advisor spotlight: Vern Sumnicht was determined to diversify -- but it cost him

Brooke’s Note: Vern Sumnicht has seen good and bad luck both in life and as a financial advisor. After a rough several years, he’s on an upswing again. After trying various approaches to attracting assets, he has struck on a unique approach that is bringing in $1 million per week. Here is his story.

In a restless quest to diversify his sizeable RIA business into a wealth management operation, Vern Sumnicht has started a hedge fund, gotten into private equity partnerships and now is licensing ETF asset allocation models for other RIAs. Some of his moves were risky, requiring big investments in overhead (mostly in talent).

Not every one of his choices has led to immediate success. Most notably, as he’s focused on establishing other companies, his RIA seems to have taken a back seat: it has $300 million AUM today, about what it had in 2003.

In this Q&A, Sumnicht talks about which strategies have led to success, and how long it’s taken some of them to bear fruit.

Q: You’ve said that the wealth management market is getting commoditized. Care to elaborate?

A: When I first started anyone would pay me 150 basis points to see what I did, but now people want to pay me 30 basis points, if you’re lucky.

The thing is, everyone thinks they’re a wealth manager; CFPs; brokers, banking trust units, insurers – everyone on the block. And now Fidelity and Schwab offer all these free models on the web. Who wins in a market like that? The guy with the lowest price.

Q: So wealth management is becoming a commodity. How are you coping with that?

A: In June 09 we got up and running with a iSectors, an investment firm that licenses model portfolios that only use ETFs and serve specific investment objectives or needs. The company has 21 different investment models from endowment style to inflation-protected portfolios. The advisor can also create his own platform, though I think we’ve thought of damn near everything. This other division now has $66 million in AUM. It’s rolling along at about $1 million a week now.

Q: Back in 2003, you took a big risk by hiring eight employees, including an attorney, accountants and a hedge fund advisor. Did it pay off?

A: We took our knocks. We had no profit for four or five years … even salaries were smaller. Then, profitability came back. These are lean times again, of course.

We now have 10 people in place, all salaried employees.

Q: Why didn’t the RIA firm, Sumnicht & Associates, grow in the seven years since you made the big hiring move?

We focused more on private equity. We’ve added Sumnicht Asset Management, which is the general partner for SA Alternative Opportunities Fund – a series LLC.

We’ve had eight offerings; G is the only one raising funds now. Some have been late-stage technology; there have been a lot of secondary market investments. It’s worked out really good for us.

Some of it has been really deep value stuff. With one series, we bought 6,000 acres of land in Tennessee at $700 an acre at a bankruptcy auction. I don’t even know how we did that. We raised a few million dollars and I sent someone down there.

Within a week, we had offers for more than we paid for it.

Q: When did you get started in financial management?

In early 1983 with a company called Howe Barnes Investments – it was an institutional bond broker out of Chicago that was trying to get into the retail business. I was the office in Appleton, Wis. I was working out of my house. It worked out well – my wife is from Appleton, too.

But you didn’t stay long.

A: No, I soon got fed up with the brokerage business. It was very stressful, not the business so much, but how they treated its customers. I did not like the what-have-you-done-for-me lately mantra that was creeping into the business.

Q: Wasn’t that a risk for you career?

A: Back then it was a big leap to go to a fee-based advisory business. But I had taken a certified financial planner program and that really opened my eyes. I finally took the leap in the 1990’s and it was different. In the brokerage business, when $100,000 walks through the door I got paid 8% in a week or two. But I was getting 1% in four months. I knew too well that it would be the brokers who were eating well and not me, if that kept up.

But after a while I had 50 clients and accumulated $30 million in assets under management. At that time I was just researching, trading and clearing trades, producing statements, producing quarterly performance reports and talking to clients. It became overwhelming and I needed to try a different approach to my business. So I started to look at other programs like SEI, which had rolled out wrap programs back in the mid-1990s.

My wife had always told me that I should do the right thing for my clients and if fee-based management was that right thing, I should do that. So I outsourced a lot of the administration stuff and focused on my clients’ portfolios. It was the toughest thing I’d ever done.

Q: You have a physical disability to deal with — how has that effected your stewardship of your advisory business?

A: When I was a sophomore in college I broke my neck in a car accident. I broke the cervical six and seven bones in my neck. My wife, who was my high school sweetheart, was a huge help in my rehab and I went back to college after my rehab was done. Still, I had to deal with the fact I was a paraplegic and that really manifested itself in my career. Even though I had my MBA from the University of Wisconsin, and had graduated number one in the MBA program, I could not get a job. Everyone in my class had guaranteed jobs and I could not even get a job as a stockbroker.

Q: What led you to start your own hedge fund?

A: I hooked up with a separate accounts firm to start a new portfolio business, with Ken Phillips and Tom Yanari. It was called Portfolio Management Consulting.

I had some knowledge of separately managed accounts and I wanted to work with individual investment advisors, hopefully larger groups. I talked to Ken and he hung up the phone on me twice. I told him “Ken if you hang up the phone on me I am going to kick your ass.” He thought that I was gutsy to call him back so we started talking and became friends. Eventually I wound up doing a wrap program for PMC.

But by 1997 we got scared of the stock market and we began looking at hedge funds via a web site called hedgedfunds.net. There, I could register a hedge fund for free – it started like that.

We tried to categorize our hedge funds –essentially a portfolio of hedge funds – but they didn’t know where to categorize me. Today there are plenty of hedge funds of hedge funds. I wanted to diversify where my clients want to put 10 or 20% of their assets and hedged, protecting them from stock market. And that’s what we did. By the time the 2000 stock market crash developed, our clients were well positioned.

Q: What’s your biggest worry right now?

My biggest fear for my clients is inflation. Sure, it might be deflation in the short-term, but over the long haul inflation will be a very serious problem. We have so much debt in this country and so many obligations with Social Security and Medicare. Depending on whom you talk to it adds up to $118 trillion in debt.

We cannot sustain that – and we can’t grow our way of that. I thing we need to monetize all that through inflation, slowly over a period of time. We also need to maintain confidence in the dollar as a global currency and work our debt off at 7% over 30 years. Either way, the biggest risk investors face today is inflation. People aren’t used to this. It really is a “new normal”.

It ought to be challenging but every challenge has opportunities. I think RIAs can make some money and help their clients, by leveraging that volatility in a positive way, so their clients can make some money.

Q: What’s next?

A new wholesale 401(k) plan. A new advisor has come on to help with that. I love the fact that I can help these retired employees who have been getting really bad deal.