As You may have heard that E.F. Hutton is back. A brand new firm with a long legacy—the original E.F. Hutton was founded in 1904—it’s still in the process of setting up shop. Former executive Frank Campanale is at the helm and is stacking the management team and board with E.F. Hutton alumni.
Many ideas in the industry that are now taken for granted – performing due diligence on money managers, fee-based retail accounts, fund subadvisory services – were launched by E.F. Hutton back in the 1980s. It may seem like a vintage name now but during that time E.F. Hutton was a profoundly cutting edge and innovative shop in all respects, including it's iconic marketing campaign. The slogan “when E.F. Hutton talks, people listen,” became a cultural touchstone.
Wealthmanagement.com caught up with Campanale to talk about the firm’s history of innovation, how that history will figure into the new incarnation of the firm, whether its check-kiting fumble stained the brand, and what the future of wealth management might look like.
WealthManagement.com: What does this firm means to you now, and what it did it mean back then?
Frank Campanale: The E.F. Hutton of the past is not necessarily the E.F. Hutton of the future. But the fundamental principles of what E.F. Hutton put in place back in 1904 are what we’re striving for: a firm that is very client-centric in nature.
The one thing that made EF Hutton really exciting, and you couldn’t wait to go to work in the morning, was the fact that they were clearly the most innovative firm on Wall Street. When I first joined EF Hutton in the mid-seventies, I was introduced to Jim Lockwood and Jim was the visionary behind the whole fee-based consulting services model that the entire industry enjoys today. We took an institutional consulting model and created a four-step process: develop a statement of investment guidelines, create asset allocation model appropriate to those guidelines, find the appropriate asset management entities to plug into the model, monitor it in an ongoing fashion. Doing that, we were the first ones to conduct real due diligence on money managers. You would walk into a firm and they’d have a filing cabinet of marketing brochures but there wasn’t a stringent research and due diligence process.
After that we decided we could take that institutional model to private clients as well. In 1976, I think it was February, we had a meeting with a high-net-worth individual client. We told him if you want to be a successful investor, you have to go through this process. And most importantly we’re going to sit down with you every quarter in person and we’re going to show you how well each component of your portfolio is performing versus the appropriate index. Anyway, this particular client bought into this.
But then he looks at us and says, ‘I like everything you’re saying here, but you’re saying that these money managers are going to have discretion on some part of my account. How do I know that you guys aren’t in cahoots with these money manager guys and that you aren’t going to churn my account?’
So everybody kind of looked at each other and we said, ‘Ok, we won’t charge any commissions.’ And he said, ‘Well, but how are you going to get paid?’ And we said, ‘Well, we’re going to charge you a fee.’ ‘A fee based on what?’ ‘Fee based on the assets you have.’
And literally we were pulling this out of our left ear, during the meeting. And he said, ‘Well, how much?’ We said, ‘Ok, we’re going to charge you 3 percent.’
When we were talking about this, there was no scientific methodology behind this. I’m telling you the truth. At the time, the average commission charged on a fairly high volume trading account was somewhere between 5 and 6 percent, so if you look at 3 percent, it looked like a very reasonable all inclusive fee, versus what it would cost to trade. We explained that to the client, the client says, ‘Well that sounds pretty good to me.’ That was our first fee-based account. And it’s taken almost four decades to get most of the rest of the industry to determine that they really need to be in the fee-based business. EF Hutton is known to be the one who was really the pioneer in this. For the better part of a decade we had 80 percent share of the fee-based market.
So back then we were only using separate account managers. Money managers back then weren’t pigeon holed in investing styles. We started to do that. ‘Tell us how you manage money,’ we would ask the managers, and we would determine that they were a large-cap value manager or a small-cap growth manager or a sector rotator, or a GARP manager (growth at a reasonable price). We told them we were going to watch to make sure they stuck to this style. The managers didn’t really like that but they liked the amount of money that we were bringing to them so they continued to reduce their minimum account sizes.
WM: Historically, the wealth management industry has had a horrible record of successfully training advisors. So how did you go about doing this?
FC: Well, I wanted more and more training money and I couldn’t get it out of management, so I started doing training meetings on the campuses of major universities across the country, with my staff. The University of Michigan, Michigan State, Ohio State University, University of Texas, and we used their campuses in the summer. We’d bring these advisors in who were used to staying at the Ritz Carlton and the Four Seasons and we put them in dorm rooms, in bunk beds four at a time. We’d hire the professors that taught economics and finance at these universities to come in and teach them how to calculate standard deviation, what modern portfolio theory was really all about, how to calculate regression statistics on a portfolio. You may as well have been talking Swahili to stockbrokers, but they got it. And the ones that really got it became very, very serious about it. And word got out and the other firms had advisors that wanted to do the same thing and this was the genesis of what today is IMCA, the investment management consultants association.
As we began to develop the business, by the mid 80s, we were really burying these institutional-quality managers, so they began to push back. They started raising their account minimums again. So we had to come up with a solution or risk losing this market share we had developed. So Len Reinhart, he came to us in 1978, a former engineer at General Electric. We came up with the idea of a subadvisory platform. So EF Hutton had the first subadvisory platform in the business. That meant we went to these institutional quality managers and said listen, ‘We want you to subadvise. So we will become the registered investment adviser, the RIA, we will create these different portfolios and styles. Then you can fulfill those styles by subadvising those on a separate account basis.’ So we got these managers to reduce their minimums to $100,000, which was unheard of then, and to reduce their fees by half. There were 17 managers who came to the dance with us.
WM: Are there other wealth management brands out there that you feel could or should be revived, either from the 80s or more recent, a Lehman Brothers or Bear Stearns?
FC: I don’t know. What is the general public’s last impression of Lehman Brothers? It’s way too soon. E.F. Hutton, what it’s remembered for more than anything is that great tagline, right? ["When E. F. Hutton talks, people listen"] And it was also remembered because when E.F. Hutton was around it was also a heyday in many ways for America. We were cruising upward, things were going well in a lot of different respects. You know, some of the companies that went out recently went out at a time when America’s been on a downswing, in a lot of different ways.
I do know what E.F. Hutton was about fundamentally, and I do believe, and our entire team of executives believes, in what needs to be done in order to make the new millennium version of E.F. Hutton effective in today’s environment. And there are a lot of great things. There’s not a history of 15 other firms, legacy, administration, operations and systems that have to be unraveled or merged together. Everything is brand new. Trying to innovate when you’re running a huge global company is like trying to tune up your car while you’re driving. We also have an advantage of the nostalgia for the past and a vision for the future. The nostalgia of the client centric model and a group of people that are very innovative and visionary about where the business is going five years from now, how clients are going to pay for the services in the future. I’m not sure how, but I’m pretty sure it will change to a great degree.
WM: Do you have some guesses?
FC: You know, there are a lot of things that are going to be different. The way that asset management companies are compensated for their services is going to change. Right now they’re asset based. To some degree in the future it may be hard dollar-based. I think that there are going to be certain components of what advisors provide for clients that are paid for today that may be paid for on a project basis. Our new firm has to be open to all those possibilities and listen very carefully to what the client says they want. And the way you hear that 508 is through your advisor. What we’re doing right now is having focus groups and think tanks with advisors that may never join EF Hutton but are willing to share their opinion. As we’re building out this model over the next six months, it will be built on the vision of those advisors.
WM: Can you talk at all about the near-term plans for EF Hutton?
FC: We just made a terrific addition to our board. Jamie [Price, former head of UBS wealth management] is a very highly thought of executive with some of the best advisors in the business. We’re hoping we can bring him more and more into the operations of the business. You’ll see a lot of those announcements coming out over the next few weeks—who our board members and senior executives are going to be, which of our offices are going to be opening first and who will be running those offices.
WM: Do you worry at all that the check-kiting stuff that happened at E.F. Hutton in the 80s has stained the brand?
FC: No, no. Let me put it this way. When Shearson bought Hutton, and was owned by American Express, so it was Shearson Lehman Hutton American Express. American Express, which was one of the most powerful and well regarded companies in the world, used the Hutton name for five years. Do you think they were worried about it being tarnished by the check-kiting thing? If you really read what that was about, and what banks do, and did back then, I think it was kind of a non-event. That really wasn’t the problem at Hutton. The real problem was it really got clobbered in the middle of what happened on Oct. 19, 1987. There was a really bad bond trade that was done by a trader. That was really what created the capital reserve issues which forced a sale to Shearson. But the check-kiting thing I’m not even concerned about. And that had nothing to do with the advisors in any way shape or form. It had to do with a branch manager who was trying to figure out a way to generate more interest on the float of the money.
