On Barron's panel at IMCA, three top advisors tell what knocked them on course

Brooke’s Note: Karl is a little cantankerous about the advisory profession and uses it to fuel his quest — to our gain — for answers and understanding about it. Karl first wrote about Meredith Whitney’s whining and now about model advisors themselves. Karl is still in disbelief that Merrill Lynch wouldn’t let him ask follow-up questions to the advisor it contributed to the panel. Karl will learn.

Three accomplished financial advisors with stories to tell: Would you commit to 60 minutes in a poorly lit room to hear them?

I did. Maybe 200 of us were there. When the session ended, a financial advisor sitting in front of me turned and said it was the best session he had attended at the conference. I agreed.

Sterling Shea moderated the session, held during the IMCA Annual Conference April 28 to May 1 at the Washington State Convention Center in Seattle. Shea heads the advisory programs for Barron’s.

Yes, I was kind of hoping for some pyrotechnics — knowing from my RIABiz editors that not everyone agrees with Barron’s idea of a top advisor. See: Does Barron’s really have a bead on the best financial advisors in America?.

But something else was on display.

Epiphanies

First, the panelists:

Eric A. Gray has parlayed two stints at Goldman Sachs and a career at Merrill Lynch into a position on Barron’s list of top 100 financial advisors (No. 69 in 2013 and No. 50 in 2012). Based in Los Angeles, he has a small client base of ultrahigh-net-worth families.

Michelle Smith discovered an unexpected area of specialization when a divorce lawyer asked her to come to court and explain money to a judge. She is founder and CEO of Source Financial Strategies Group LLC in New York, which specializes in helping clients cope with significant financial events, such as divorce, concentrated stock positions or the sale of a business.

Douglas Berger found his focus while serving on a foundation’s board; his fellow directors asked him to help them define their fiduciary responsibilities. Now he is a member of Morgan Stanley’s institutional consulting group and heads the Cascade Group, a financial advising team the wirehouse’s office in Silverdale, Wash.

The trio took turns talking about the epiphanies that set them in a productive direction and responding to questions about their practices. As a moderator, Shea is diplomatic but persistent — asking pointed questions, and if the answer isn’t to the point, prodding the advisors to take another try.

'People like me’

This was my first investment conference, so perhaps I was a little credulous. Maybe experienced advisors always expect sessions like this when they come to a big confab.

But I doubt it. I’ve been to a lot of conferences as a journalist, and this panel felt special. (You don’t have to take my word for it. A recording of the session can be purchased at this link.)

Sterling Shea: Everybody in this room
wants to be that trusted family
advisor.

Turning points were the first subject.

Michelle Smith started in the industry in 1987. By 1999 she was craving for something to specialize in.

“I was exhausted … I would say to myself, 'I’m as smart as these people. Why am I not making more money?’” That’s when the divorce attorney asked for her help in court, telling her she should bring her eighth grade math and her color crayons and explain money to the judge. It went well. The judge would tell her, “We should talk to you before we talk to the CPAs and the attorneys.”

Everybody gets a couple of lucky breaks, Smith said. So she decided, “'Wow, I’m going to capitalize on this … I drove a truck through this gap.’” The vision unfolded in 30 seconds, and then took five years to roll out. Now Source Financial Group has a dozen people on staff.

Along the way, she had to learn how to refrain from “hiring people like me”—meaning she still needed people who were authentic, but not “type A.”

'Who are you stealing from?’

Doug Berger, whose manner can be gently self-denigrating, said that when he started in the 1980s he was “more anti-fragile than smart.” He opened as many accounts as possible and developed a roster of 1,500 accounts. He was attending to a personal desire: “I only wished someone had helped my parents when they needed it.” Finally, a coach asked him, “Who are you stealing from?” That prompted him to focus on developing a fee-based business. “I realized I had to specialize—find a niche market and become an expert.”

When the foundation board asked him to become its go-to guy on fiduciary matters, Berger recalled, “I realized I didn’t know that much.” So he made it his business to find out. He organized a team. “You can’t do everything as a solo practitioner.” He became active in APIC—the Association of Professional Investment Consultants—a group composed of advisors from Morgan Stanley and Greystone Consulting that is devoted to raising standards through collaboration, education and innovation. He also became active with the Institute for Preparing Heirs, which helps families and organizations preserve their assets as they are passed along.

Doug Berger: I only wished someone
had helped my parents when they
needed it.

The questions you ask

Eric Gray marked several points in an evolution that spanned 10 years: The two stints at Goldman Sachs, learning “the big difference between selling and advising,” and learning how to use the open architecture at Merrill Lynch. See: Breaking away from Merrill with $1 billion of assets, a HighTower RIA returns to scoop up $200 million more.

“In the beginning I tried to convince people what a great financial advisor I was,” Gray said, but in the end, he felt his approach was more like this: “You have a large estate. Do you ever have family meetings, family training exercises? Do you have an attorney and CPA? Do you know your core values and drill down to them?

This comment marked a turning point in the session, where all three advisors agreed that they spend about 20% of their time on investments, devoting the remainder to client service. Shea observed that “Everybody in this room wants to be that trusted family advisor.”

Berger said the biggest change in his approach was developing an institutional awareness of his clients’ needs. This involved being client-driven and outcome-oriented, of course, but the biggest shift was realizing you’re judged by the questions you ask. See: 5 questions advisors must prepare to answer to remain relevant.

The client’s needs and worries may focus less on the investments than they do on securing a line of credit. “Clients are concerned about what you know and how you can help them,” Berger said.

Gray has a small team, including an analyst and an assistant. They have been able to work as a subadvisor to other groups within Merrill Lynch. Realizing his universe of services needed to be broadened, he worked to create a suite of products. One example is turning to Bank of America, Merrill’s parent company, to create a standard platform.

Smith said that “by the time they’re in my office, [clients] are worth 50 cents on the dollar,” so it’s important to orient to that sense, hook them up with specialists, and tend to their needs.

Eric Gray: He declined a follow-up
interview, citing the "compliance people" at
Merrill Lynch who said no.

Fire one client

At one point Shea cited research showing that the transfer of large holdings results in a high attrition rate of advisors. When the transfer is to a spouse, 46% of advisors are retained. But when it’s between generations, only 2% of the advisors are retained by the younger generation

The panelists all agreed that it is important to tend to these matters through family meetings and focusing on core value—and making sure the advisory team includes people who can relate to younger generations. And it’s not just adding them: It takes years for a new voice to establish the authority required for success.

Smith provided the most memorable moment of the session when responding to a request for a single, actionable idea that advisors could take home. “Fire one client—the one that gives you a stomach ache.” Firing that one client will make your entire team happier, and give you an opportunity to take on a client who will be grateful. Spontaneous applause greeted this suggestion. See: 10 reasons for advisors to just say no to less-than-ideal clients.

Nitty-gritty of ops

I sought follow-up interviews with all three panelists, hoping to find more detail about how their practices are organized. In particular, how do they address their clients’ investment needs? In the large broker-dealers, how do these accounts differ from wrap accounts? And how do they structure their fees?

Smith answered in detail. Her team includes a full-time investment manager, but the management of the clients’ investments is outsourced, and involves three companies: Dynasty, Callan Associates and Envestnet Inc. Dynasty Financial Partners LLC, based in New York, provides an integrated platform service to advisory firms. (On its website, Dynasty says: “We work to improve the resources of existing RIAs as well as breakaways.” See: Dynasty Financial and Black Diamond combine to pick off a big family office helmed by women.

It was the association with Dynasty that brought Smith to the attention of Barron’s. Callan Associates Inc. is an investment advisor based in San Francisco that employs more than 60 professionals working on research, database and performance measurement. Chicago-based Envestnet also plays a role, with its commitment to “level the playing field for independent advisors, giving [them] the same access, tools and support — research, analytics, advice and products — that previously were available only to the institutional community.”

As for fees, Source Financial Group collects 1% on accounts of $2 million to $5 million, and less on larger accounts. North of $15 million, the fee is negotiable. The firm also can provide financial consulting, and can act as clients’ personal chief financial officers at fees starting at $25,000.

Fiduciary break-up

Is being divorced a plus with clients who are going through a divorce? Smith, who has been divorced twice, said it is. When that first divorce attorney asked her to come speak with the judge, she was “between divorces.” See: Why relying too heavily on a divorce attorney can be a bad financial planning move by clients.

She talked further about “firing” clients. This was not a one-time occasion, and no dramatic Trump-like declaration. She consults with her staff about problem areas. When a client has been identified, the process moves to “let’s talk”—first identifying dissatisfaction on both sides, then to referrals to other advisors who might be more compatible. In effect, this makes the process part of the fiduciary relationship.

Doug Berger’s practice might seem an anomaly. With a cross-country clientele heavy on not-for-profit institutions, you might expect it to be in a teeming metropolis. But no, it’s based in Silverdale, Wash., a community of 19,000 that lies at the tip of remote Dye Inlet. It takes an hour to reach Seattle, 35 minutes on a leisurely ferry ride across Puget Sound. To get here, you have to be determined. Berger says his clientele is largely based in Washington and the other Northwest states, but they hail from as far away as Florida.

Berger is a past president of APIC, and still serves on its best-practices committees. He has thrown his lot in with the Institute for Preparing Heirs, believing that its research and teaching hold the keys to helping clients preserve their investments to achieve their desired ends. See: She’s the boss: Keeping assets means keeping the power of the family matriarch fully in focus.

The group’s fees are a sliding scale (the larger the investment, the lower the rate), and Berger believes it is closely aligned with rates across the financial services industry. Berger’s four-member team—which includes his son, Jason Berger—is in the process of expanding to six.

Gag order

Eric Gray declined a follow-up interview, citing the “compliance people” at Merrill Lynch who said no.

Karl Thunemann: Maybe experienced advisors always
expect sessions like this when they
come to a big confab. But
I doubt it.

I readily understand this decision. Large organizations always must weigh who is going to speak for them. Being transparent about fees with a client one on one might be sufficient. Sharing them in an interview might lead to their being distorted or even give an advantage to a competitor. (But, come on, isn’t it easy for advisors to learn about one another’s fees?) Allowing advisors to speak freely does open the door to countless hazards—misunderstandings, corrections, apologies—even litigation.

But the approach could be less ham-handed. How hard could it be to train advisors to speak to the press, to let them know which subjects ought to be referred to corporate? After all, Gray had already spoken eloquently in a forum that was open to the press. See: Behind the PR man’s curtain: how RIAs can successfully deal with the media.

Yes, the case for staying off the record can be made. But in a highly competitive market, where the broker-dealers’ share has been in decline, you’d think they would want to turn the spotlight on the exemplars of their profession—not muzzle them. Given all the talk about the growing need for new advisors in the next few years, you’d think that high-profile, adept advisors would be unparalleled as recruiters.

Dreams of conferences future

I asked Shea for guidance in providing a context. He said Merrill Lynch provides a lot of latitude and freedom to members of its Private Banking and Investment Group, who work with ultrahigh-net-worth clients. Their accounts are different from wrap accounts, he said, but they still operate very much within the Merrill Lynch system. See: Merrill Lynch PBIG team breaks away in tumbleweed country to better pursue next-gen oil fortunes.

On its website under careers, PBIG lists approximately 300 advisors, and says that positions are available in New York, Atlanta, Boston, Chicago, Dallas, Los Angeles, San Francisco and Washington, D.C. The group includes a number of experts on investment, management and other client service needs.

Wrapping up this article, I think of the man who told me this was the best session of the conference. I agreed, and said I wished my financial advisor had been there. See: How I’m doing after my advisor left Schwab Private Client to join a $2 billion RIA.

But then I thought—if he were there, would he have been inspired to turn his practice toward high-net-worth clients and beyond? I could only hope that he would carry me and my wife with him as legacy clients. Sentiment might lead him to continue enduring my insatiable desire for service, not to mention my cranky notions about investing philosophy.

My seatmate said his practice was aimed at clients with accounts ranging from $500,000 to $2 million. I wish I’d asked for his card. Not because I need to have a backup advisor in my pocket; I think of it more as a wish that sometime I’ll show up at a conference with a panel of experienced advisors—and he will be on it. And it will be special, too.