Question: How did you get into wealth management?
Answer: In 1992, after I graduated from UCLA's Anderson School, I got to Goldman Sachs in a funny way. I was planning to go to work for Merrill Lynch's investment banking division in New York. I had a friend in business school that suggested I check out private wealth management. I had no idea what it was, but I was intrigued. I've always been interested in investments and investing. Since high school, I had bought stocks in companies on my free time, but it wasn't something that I thought of making a career out of. What was intriguing to me was working in the investment side of the business and doing it in my home city of Los Angeles. I really saw wealth management as a way of having more control over my career. If you go into investment banking, there's really one career path. You go to New York, work there for five years, and that's the main place to make a successful career unless you can relocate later. For me, I was raised in Southern California and I wanted to live here. I never realized there was this side of the business and you could do it in an entrepreneurial way.
Q: Why did you jump ship and join Merrill Lynch?
A: I left Goldman Sachs in 1997 with our whole team. What happened was, the investment business about 10 years ago was pretty simplistic. Most of the brokerage firms had what is called "closed architecture," that is, you only use the proprietary internal products of your own firm. The problem with that is, you'd have one or two great money managers and the rest were just so-so. After a few years, my clients would ask me to get rid of the poor-performing managers and find better outside managers.
We told Goldman at the time that this was becoming a bigger challenge in the industry. People with a lot of wealth wanted an unbiased structure. So we asked the company whether we could open the doors to outside managers to keep the assets from leaving the firm. Goldman decided that wasn't in the best interest of the firm. So we, as a team, decided to look for other firms. We thought Merrill had the most unbiased platform. In the five-year period from 1997 to 2001, I would estimate that at least 50 advisors of a total 300 worldwide joined Merrill from Goldman Sachs.
Q: How many money managers do you actually want to invest with?
A: In my opinion, there are less than 100 money managers in the world that anybody should care to have money with. But that's bad for the industry. If you think about it, the big investment firms are structured to provide investment products to hundreds of thousands of people. So they have to have managers that can handle a fair amount of money Fidelity Investments, Capital Guardian, American Funds they all do a fantastic job for the amount of money they manage. But at the end of the day, I'm looking for managers who are much smaller in asset size, with less than $10 billion in assets. If you're a small cap manager, it's tough to manage a portfolio greater than $1 billion or $2 billion in assets. If you take on too many assets, the performance of a fund tends to suffer.
Q: What you're saying, of course, is the ultra-wealthy have access to the best managers, right?
A: Big firms have a tough challenge in advising people on how to manage money because they tend to stay with bigger managers. But, some have created avenues within their firms that allow clients to access niche managers. The minimum you have to have to put in is $5 million or more to invest. Merrill created a Strategic Portfolio Advisor program that allows access to niche managers. That's what we use predominately. We try to find unique managers that are discriminating about the amount of money they will take in.
Q: What do you do during the day?
A: My job is to go and find the next great money manager. We do not deal at all with alternative investments. No hedge funds. We're really focused on fixed income and equities and commodities, strictly meat-and-potatoes. There are a lot of mediocre funds out there and a lot of people are throwing money into them. The challenge for us is that we are trying to operate like an investment boutique inside a big firm. From a client's perspective, putting your assets with Merrill Lynch is because there's safety in having a big name.
Q: How many clients do you take on personally?
A: We only have 250 clients and $5 billion in assets with 5 partners and 15 support staff. Most investment advisors or wealth managers will have anywhere from 100 to 200 clients per person. Our focus is to have 50 to 70 clients per person. Two partners are assigned to each client. I tend to have fewer relationships because my clients tend to be much larger. It's relatively exclusive. Our minimum investment is $10 million, though my clients typically have a minimum of $25 million. We're not selling anything but our intellect. We don't have any product. We sell our intellect and our capability to get access to great managers.
Q: What is your biggest challenge?
A: Evaluating managers. I do think I'm really good at evaluating people. What many people do in our industry is, they spend time interviewing managers. Yesterday, I spent all day interviewing David Iben, a value manager in L.A. with NWQ (NWQ Investment Management Co. LLC, a unit of Nuveen Investments Inc.). Los Angeles has some very good managers. I like First Pacific Advisors Inc.'s Bob Rodriguez (the firm's CEO) and Steve Romick (senior vice president). The real challenge is having access to the best managers. Getting access to them is hard, because not all of these funds are open and they don't need us. We have access to about two-thirds of the top 100 money managers. So it comes down to relationships. Our clients are very, very wealthy, and they won't move their money around. That is something that's attractive to managers.
Q: What's your performance?
A: Last year, the average balanced portfolio was up 10 percent for the year. That compares with the Standard & Poor's 500 Index, which was up 4.9 percent.
Q: What do you do with your spare time?
A: I'm the father of a 2-year-old baby and my wife and I have another on the way. I'm pretty boring. I don't have many hobbies other than playing basketball. I will tell you that anyone who is interested in investing should consider reading a book by David Swensen, the chief investment office of Yale University's endowment. (The book is titled: "Unconventional Success: A Fundamental Approach to Personal Investment.") I actually send the book to a lot of my clients.
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