Get Institutionalized

It has long been the case that the heaviest hitters rely mostly on high-net-worth retail clients for their outsized success. But now many advisors are finding what they seek one more link up the food chain — in the lower reaches of the institutional segment. To make this jump an advisor has to be highly skilled in picking managers.

Landing institutional clients is “a natural progression for the top producers — even larger accounts, more sophistication, more profitable,” says Jeffrey Roush, a managing principal with CEG Worldwide, a consulting firm.

A smattering of institutional clients can be a boon in another way. Ultra-high-net-worth clients are increasingly enamored of institutional-style investment management, and the advisor who has experience in the corporate, endowment and nonprofit realms often has a leg up in the competition for upper-echelon retail clients.

Indeed, many of the advisors in the 2005 edition of Registered Rep.'s Top 50 list (see page 87) already serve their ultra-wealthy clients in an institutional manner — employing institutional-style investment policy statements, asset-allocation strategies, extensive manager due diligence and monitoring and providing in-depth quarterly reviews.

“It's what clients are demanding — they don't want the firm's wrap managers, they want to see the boutiques, they want the best, the same managers the institutions demand,” says one advisor on Registered Rep.'s Top 50 list of his ultra-high-net-worth clients. And while the job of creating asset allocations, finding, vetting and monitoring managers may have once been a Herculean task only a large institution could handle, technology has changed that. Advisors have asset-allocation software and databases of manager analytics available on their desktops. They also have teams of analysts to handle manager research. Combine that with a finely-tuned institutional process, and advisors like the ones on Registered Rep.'s Top 50 list are well equipped to meet the demands of the finickiest high-net-worth clients.

Getting High

It's hard to separate the quest for institutional customers and the race for high-net-worth individuals. And top brokers are seeing more competition than ever, including from colleagues in their own firm. But amid all this competition is buried some welcome news: there appears to be more wealthy people to go around.

According to Cerulli Associates, in the two years ending last December, the number of clients with a net worth of $1 million to $10 million grew nearly 10 percent. Further, the 2005 Capgemini/Merrill Lynch World Wealth Report finds that the number of Americans with more than $1 million increased 10 percent last year, to 2.5 million.

It's no coincidence that more opportunities are opening up for advisors in the world of small- and medium-sized institutional clients (those with assets in the $10 million to $100 million range.) Since institutional account relationships tend to spring from an introduction from a wealthy individual client, advisors with large high-net-worth concentrations are in a good starting position.

“Certainly, for a great majority of advisors, these accounts are a byproduct of a high-net-worth client base,” says Dennis Gallant, an analyst at Cerulli, a Boston-based consulting firm.

One Merrill Lynch advisor on Rep.'s Top 50 list is a great example. The advisor, whose business is primarily high-net-worth individuals but includes some foundation work, says that one of his earliest and wealthiest clients — a longtime director of a prominent foundation — recommended him to the board of her foundation.

“The client knew how I ran my practice, that I had a institutional approach, and she trusted me,” he says.

Work It Baby, Work It

A referral is a welcome foot in the door of an institutional client, but oftentimes it is just the beginning of another drawn-out courtship.

“Just getting the account is a very long process — it can take a year, even two,” says Barry Mendelson, a former pension consultant and founder of Capital Markets Consultants, an advisor-consulting firm. “Meanwhile, the effort doesn't show in production numbers, so breaking in isn't easy.” It took the Merrill rep a year after the referral to be hired by the foundation.

This lengthy process can work as a weeding-out mechanism. Most advisors lust after large clients, but when confronted with the realities of servicing an institutional client, many balk. Crafting investment policy statements, mission statements, dealing with boards and navigating federal and state rules and regulations can be overwhelming, and not every advisor is up to the task.

For those that are, however, business can be quite rewarding. Take Craig Dobbs, who tops our list and is profiled on page 92. One of three children of an Indiana single mom who spent 39 years as a steel worker, Dobbs had a soft spot for labor unions when he started out as an advisor. After five years of eking out a living pushing IRAs to retail clients, he managed to land his first big union client — the sheet metal workers union, a $17 million account, which is now worth $100 million. Today, Dobbs' average account size is $212 million. (Norm Nabhan, head of Smith Barney's consulting group, says an advisor's typical fee on a $100 million account is usually in the range of 10 to 20 bps. Dobbs says of his roughly 40 relationships, the fee lies at the low end of that range.)

Only Back in the Day

Unfortunately, the strategy that worked so well for Dobbs in 1988 — cold calling pension trusts — is unlikely to work today, Dobbs and others agree.

“It's almost impossible to prospect institutions — that is, unless you already have an established track record,” says one Manhattan branch manager at a large regional firm. Dobbs suggests finding a mentor with experience and spending five years learning the ins and outs of the institutional market.

Roush agrees it's hard to prospect, but says it shouldn't be written off: “Helping raise money for a foundation, investing your own money, getting to know private client attorneys, ERISA attorneys, high-end CPAs who handle books and records for endowments and foundations — that all helps grease introductions.”

One traditional milestone for top advisors is assuming the fiduciary role in an institutional relationship. “If you asked these top 50 advisors to make a list of the critical practices they employ in their businesses, you'd find many of them already are using the best practices defined for fiduciaries,” says Don Trone, founder and CEO of Fiduciary360, an education and training center for investment fiduciaries headquartered in Sewickley, Pa. “But that's why they're the best — it's very rare.”

What's in Play

While large 401(k) plans, pensions and college endowments are generally out of reach of retail advisors, the opportunities for reps in the institutional world aren't just small potatoes. “The sweet spot of opportunity for reps is between $10 million and $100 million — those are the accounts firms like Frank Russell and Callan [Associates] are likely to pass up,” says Smith Barney's Nabhan. That isn't to say those larger accounts aren't fair game: Nabhan says the firm's reps brought in four clients worth a total of $1 billion in May, a feat he attributes to “the personal attention our network of offices and specialized FCs provided.”

Though $250 million institutional accounts are very rare among retail reps, those in the $10 million to $100 million range are not beyond the grasp of advisors who serve wealthy individuals.

One place to find such institutions is Guidestar (guidestar.org), a searchable database of more than 1.5 million IRS recognized nonprofit organizations, including the nation's nearly one million public charities, roughly 118,000 private foundations and 170,000 faith-based associations. On the site advisors can find the organizations' most current 990s — the annual reporting return most nonprofits must file with the IRS.

Taking care of pension and retirement plans does require special expertise. “It's a huge responsibility, and the emphasis comes down to procedure, whether or not a prudent process is being followed,” says Nick White, an ERISA attorney and partner with Reish Luftman Reicher & Cohen in Los Angeles. The fiduciary must comply with 20 requirements of the ERISA code. “But there are all sorts of exceptions and exemptions, it gets very complicated,” says White, who suggests advisors have a general understanding of the rules but utilize an ERISA attorney as well.

Tim Walter, CEO of the Association of Small Foundations in Bethesda, Md., says many advisors shy away from the liability. “For starters, advisors have to be willing to be held accountable,” he says. “A lot of them freak at the mention of an Investment Policy Statement.”

Complex Business

Then, he says, there's the portfolio allocation, manager search and selection, determining target returns and reviewing them against the benchmarks quarterly, as well as creating and monitoring watch lists for investments. “It goes on and on,” says Walter.

The average advisor may aspire to institutional status, but most lack the academic foundation. “Barbers and beauticians have higher education requirements than investment professionals,” says Fiduciary360's Trone. For instance, to become an investment consultant in this country an advisor need only pass the Series 65 exam to register with the SEC. (Interestingly enough, in the state of Wyoming, an advisor doesn't need to pass anything at all until he has more than five clients, be they retail or institutional.)

“Simply passing the Series 65 does not prepare you whatsoever for what it takes to deal with the institutional marketplace,” says Trone.

At Smith Barney, Nabhan says the firm is doing its part to round out its advisors' education. He says the firm's push to get advisors into the institutional market includes an effort to expand the educational resources available to them. The firm's consulting group has a university and a grad school and provides the designation of Senior Institutional Consultant to those advisors who meet the educational requirements and have at least six institutional accounts with more than $10 million in each. The firm currently has roughly 100 FCs carrying this distinction.

For Nabhan, who was a Teamster long before he came to Smith Barney — he drove trucks to put himself through college — the allure of institutional business is obvious: more time to service fewer clients, and more money for doing so.

“If I've got 20 $100 million accounts — as opposed to 300 much smaller ones — and I get paid 20 basis points, that's $2 million a year, with a lot fewer quarterly meetings,” he says. “Not bad.”

Not at all.

America's Top 50 Advisors

The following rankings of financial advisors are based on a combination of objective and subjective factors, including production, assets under management and tenure at current firm. As part of our information-gathering process, we promised to hold production numbers in confidence. To provide some sense of who these top advisors are, we profile five of them in the pages following this chart.

Bean Counter Turned Bean Maker: Marcie Behman

Firm: Merrill Lynch
Age: 42 years old
Location: Boston
Assets Under Management: $2.9 billion
Years with the Firm: 15
Years in the Business: 15
Business Specialty: HNW executives, retirees, corporate consulting services.

Marcie Behman is an expert at finding tax-minimizing solutions for wealthy executives with huge concentrated stock positions. But she doesn't do tax returns anymore.

“I'm not the accountant anymore, I'm the quarterback,” says Behman, a former CPA who left PriceWaterhouseCoopers 15 years ago because of the increasingly impersonal, technical nature of the work.

In her very first year at Merrill, she organized a seminar aimed at women, and ended up making the niche a centerpiece of her practice (after cold-calling nearly every businesswoman in Boston).

Behman, along with her partner Amy O'Sullivan, has been the advisor to a Fortune 500 company's stock option plan for the past eight years. Her interactions with company employees often act as a “soft introduction” to her advisory services. For those who become clients, Behman turns into an advocate.

“You have to stay on the managers, ahead of them, asking questions,” says Behman. “Because at the end of the day, clients want to be informed, and they want to know that you're doing everything to improve their situation.”
— John Churchill

Mr. Persistence: Martin Halbfinger

Firm: UBS
Location: New York, N.Y.
Age: 57
Assets under management: $1.4 billion (seven-person team)
Years in the business: 29
Years with current firm: 21
Business specialty: Asset management, estate planning, liability management for wealthy families and individuals.

Martin Halbfinger was determined to be a stockbroker. When he graduated from college, he promptly interviewed with five big firms. Every one of them turned him down, but he kept at it. Six years later, after stints in operations at a small broker/dealer called Hornblower Weeks, and in marketing at Dean Witter, he finally landed the coveted stockbroker job at Dean Witter.

“The frustration of not being able to get the job early on made me want it even more,” he says. “I knew I would be good at it.”

Halbfinger's perseverance has served him well. Today, he is a top broker at UBS, and he and his seven-person team manage assets of $1.4 billion. Halbfinger's top priority is capital preservation, because “most of my clients are already wealthy,” he says.

Halbfinger says he got where he is by making integrity the cornerstone of everything he and his team do. “There are no shortcuts in this business,” he says. “This is about doing right by the client, and eventually that client refers you to others.” Getting a financial x-ray of his clients, testing what he calls their “intestinal fortitude,” early and often is key.

Being passionate about his work has made it easy for Halbfinger to get ahead. “This business keeps me young. It's the greatest opportunity I have ever had in my life.”
— Kristen French

Big Man in a Small Town: John Stevenson Sr.

Firm: Wachovia Securities
Location: Quincy, Ill.
Age: 63
Assets under management: $750 million (four-person team)
Years in the business: 34
Years with current firm: 30
Business specialty: A little bit of everything.

John Stevenson is proof that big business can happen outside the big city. Stevenson has worked as an advisor in downstate Quincy, Ill., (population 40,000) for 34 years, and the rural town's residents comprise three-quarters of his client base. It's a “nice little town where you don't lock your door,” he says.

Stevenson has a wide range of clients, the biggest of whom accounts for $125 million of his assets under management. He also works with a cleaning lady, who has just $2,000.

Stevenson says the small-town atmosphere is a boon to his business. Unlike most brokers, he has never done seminars, advertised or even asked for a referral.

“All I've done is build a business on hard work and integrity,” he says. His reputation does the rest: “In a small town, people know who we are.”

Over time, he has built a team of four people, including an engineer and mathematician, a Wharton MBA and his son, an MBA with a law degree and seven years of experience in estate planning. Together they work with foundations, individuals and small companies, handling everything from retirement accounts, corporate lending and charitable work, to financial planning and estate planning. “In a town of 40,000, it's kind of difficult to specialize,” Stevenson says.
— KF

‘Family Man’: Michael Swenson

Firm: Swenson Financial Advisory Group, Piper Jaffray
Age: 39
Location: Wayzata, Minn.
Assets Under Management: $1.1 Billion
Years with the firm: 16
Years in the Business: 16
Business Specialty: HNW family wealth consulting and planning, corporate consulting and services.

Michael Swenson learned about the power of investing in college. One of his dad's stock picks paid for his undergrad degree at the University of Wisconsin, Madison.

Today, Swenson builds “100-year plans” for clients. His practice serves a total of 150 families and corporations, primarily in the Minneapolis area. A typical client has a net worth between $3 million and $20 million, but they can range as high as $100 million.

Swenson's business grew out of prospecting small business owners as a rookie rep. “I noticed a constant need for tax planning and retirement planning with small businesses,” he says. A CIMA, he helps firms set up and implement defined-benefit and defined-compensation plans and educates trustees on the fiduciary rules and requirements of ERISA. He also collaborates with retirement specialists to help executives integrate captive assets (stock options and restricted shares) into a financial plan.

Swenson only uses third-party managers (Piper has none of its own), and underperforming managers are flagged for interviews. He is particularly proud of his practice of full fee disclosure — he walks every client through every tiny fee they incur. “We go way beyond ethical expectations, and that definitely separates us from competitors.”
— JC

The Well-Organized Rep: Craig Dobbs

Firm: Smith Barney
Location: Indianapolis
Age: 41
Assets Under Management: $9 billion
Years in the business: 17
Years with the firm: 3
Business Specialty: Consulting to Taft-Hartley plans.

Craig Dobbs might well be the most organized rep in the country — but not in the usual sense.

Dobbs is an investment consultant to several of the nation's Taft-Hartley funds — union employee retirement plans — and the funds form the very core of his practice. Serving his clients' means educating and protecting labor trustees and playing mediator in often-contentious labor-management meetings, all the while somehow finding time to pull together a long-term financial plan for thousands of union workers.

For Dobbs, due diligence is crucial and “disclosure is your friend.” Because of the “litigious market” he serves, he must pick asset managers in a manner that can hold up under intense scrutiny.

Dobbs also vets his clients as they do him. His team doesn't respond to requests-for-proposal without first examining all past plan documents and guidelines. “We have a procedure and we're very compliant,” he says. “We just want to make sure the client fits.”

How did he end up in Taft-Hartley land? He started by working double time, prospecting pension trust committees by day and retail clients by night. It was an effort born of “being stupid and not knowing any better, and accepting that there were smarter guys in the advisory business but that nobody was going to outwork me.”

He lives and works (though not on weekends) on a 40-acre horse farm “a six-iron from Indianapolis.” In addition to his advisory business, he runs speech therapy and riding programs for kids, as well as charity riding events. How does he find time for it all? One favorite timesaving tool is his plane, a Meridian that he calls his “little Ferrari.” He uses it not only to get to client meetings across the country, but also to create some extra time with his family.

“The other day I had a meeting in Chicago, a meeting in Saginaw, Mich., and I still beat my wife home for dinner,” Dobbs says.
— JC