The Heretic

These days, it's all about open architecture. Money manager Kenneth Fisher is having none of that. Fisher hires reps to gather assets for him to run on a discretionary basis

OPEN ARCHITECTURE IS THE SONG on Wall Street's collective lips. Having been chastened by New York Attorney General Eliot Spitzer, big broker/dealers — especially ones with in-house asset managers — have been encouraging reps to use third-party asset managers. Some firms have been divesting their proprietary-management arms or reducing their stake in them.

Then there is Kenneth Fisher, the 55-year-old founder and CEO of Fisher Investments, a global money manager with $32 billion under management. Fisher, a longtime Forbes columnist, is something of a heretic — and a rather unique heretic at that. (If you're not a Forbes reader, you might know him from his prolific use of “direct-mail” marketing.) Fisher is a proponent of the “closed shop”: He runs discretionary separate accounts for institutions and high-net-worth retail investors. He uses a top-down, quantitative asset-allocation model and invests in global securities. Fisher invests in stocks (and bonds), weighting or underweighting various industry sectors. Fisher farms out nothing.

To be sure, there are other wealth-management boutiques and multifamily offices with discretionary control and proprietary asset management (Alliance Bernstein, with $625 billion in assets under management, comes to mind). It's just that Fisher, based in Woodside, Calif., has enjoyed tremendous growth with this system (in 1999 the firm had just $4 billion). He now works with more than 100 registered reps who gather assets for him to manage. (Fisher intends to hire four to six more reps per month.)

Aiming High

Some executives have five-year plans and some have 10-year plans, but Kenneth Fisher has a 20-year plan: To be to the high-net-worth community what Fidelity Investments is to the mutual fund world.

“Our goal, very simply, is to have an ongoing, respected presence in institutional while eventually becoming the market leader in high net worth. There's no reason that 20 years from now you won't see a world where someone like us has 10 percent or 15 percent of the high-net-worth market,” says Fisher.

The pie is an awfully big one. Cerulli Associates, a Boston-based research firm, estimates the private wealth market at $6.3 trillion, with wirehouse, multifamily office and traditional private client groups having a combined $5.4 trillion in assets under management and accounting.

But it's also a highly competitive arena. “Everyone's looking at the same marketplace — brokerage firms, registered investment advisors, banks — even credit unions are looking to get into the game,” says Dennis Gallant, a Boston-based consultant with Gallant Distribution Consulting. The challenge for a lot of firms, he says, is this: Do they have expertise in all of the investment disciplines to manage a client's entire asset-allocation model?

Fisher is the son of legendary investor Philip Fisher. In addition to the many hats he wears at his firm, he is also one of the longest-running columnists for Forbes and the author of several books, including a new one coming out in January called The Only Three Questions That Count, which is designed to help investors learn how to think about markets.

It's an area with which Fisher has a lot of experience. He began his career in the investment business with his father, but left after about a year to go out on his own — in what he calls an effort to preserve his personal relationship with the elder Fisher. He started Fisher Investments in 1979 and incorporated the company in 1986. Fisher Investments is registered as an investment advisor under the Investment Advisers Act of 1940 and charges clients a percentage of assets under management. The reps, then, are Series 65-holders. If they had a Series 7, they have let it lapse, because Fisher is not a b/d.

According to consultant Philip Palaveev of Moss Adams in Seattle, there are not many firms with a national presence that rival Fisher Investments. While companies like Bernstein and J.P. Morgan and other large investment managers compete for the same clients, they don't have the same sales approach. There are local firms like Edelman Financial in the Washington, D.C., area who have a similar approach, but they have more of a local presence, he says.

While the rest of Wall Street talks up its open architecture model, Fisher plays up his proprietary-investment model. That means that reps don't place clients into mutual funds, separate accounts or other vehicles run by third parties. “In my mind, the competition that could go after this world isn't going about it right,” Fisher says. “They're trying to be a distributor or a manufacturer, and you can't conquer this world unless you do both.” That's because, according to Fisher, control is key. “When you give up control, you give up quality control and that is deadly in the financial-services business.” Fisher Investments, by contrast, has the best of both worlds, according to its founder. “When we manage portfolios we have complete control over what happens in the portfolio. We also have quality control over the distribution.”

Within the past several years a number of financial-services companies have moved away from proprietary products in favor of an open-architecture model. But the multifamily-office world has been slower to change. “Some 29 percent of private wealth groups have less than 25 percent in assets with outside managers; a few are still 100 percent proprietary,” according to a May 2006 report by Cerulli analyst Benjamin Poor. “Though the marketplace assumes that all distribution outlets have adopted open architecture, this is clearly not the case with private wealth groups,” the report states.

What's more, Poor told Registered Rep. in an email interview, open architecture can be a hindrance at times. For example, he says, is it really open architecture if revenue sharing or other business considerations come into play? Is access to 1,000 managers helpful if you don't know which one to pick? How about if all the choice leads a person to chase performance? What about an investor who is either extremely wealthy or a high-ranking person in the government? In either case, discretion and working with limited, trusted partners might be more important, he says.

“Closed architecture is less of a problem when the in-house capabilities are strong, or when nominal rate of return is secondary to taxes, preservation, discretion, capital markets services (taking a family business public) and other factors,” Poor says.

In Fisher's mind, open architecture is clearly not the way to go. What he is trying to do is this: Build a business that works like a machine, but retains quality control, generating a low-termination rate and a higher growth rate for the firm and above-average returns for clients. And it seems to be working. For the 10 years ended June 30, 2006, his firm's average annualized return on high-net-worth clients' accounts was 11.5 percent, versus 9.8 percent for the S&P 500 and 7.9 percent for the Morgan Stanley World Index. What's more, Fisher says his client turnover is less than 5 percent per year; compared with about 5 percent for the private wealth industry at large, according to data from Cerulli. Fisher declined to give a more precise figure.

From Institutions to Kitchen Tables

Interestingly, the firm's target market at present — the high-net-worth client — was not an integral piece of business for the firm until several years into its tenure. The firm started primarily as an institutional shop, and it was a pioneer in small-cap value investing. Indeed, it wasn't until 1995 that Fisher really decided to ramp up the business, which has proved quite profitable for the firm. Two-thirds of its more than $32 billion of assets under management come from its high-net-worth business, which focuses on individuals with at least $500,000 of assets to invest with the firm.

“Clients are looking for a decision-maker who doesn't have a particular agenda. We don't have to work with shelf space or anything like that,” says Scott O'Brien, a senior vice president of Fisher Investments, whose responsibility is to meet with new and prospective clients in southern and central California. O'Brien, a Series 65-licensed rep who comes from a wirehouse background, says clients also like the personalized service that Fisher Investments provides.

At Fisher, each investment counselor works with 100 to 150 clients, as opposed to a wirehouse broker who could have 300 to 700 clients if they're big producers, he says.

To serve its roughly 16,000 client relationships, Fisher Investments has a little more than 850 employees, including 104 salespersons out in the field, 60 account executives for telephone sales, several hundred individuals in the client-services group, a research department, a trading operation and a three-person investment committee. Its annual revenue is in the $320 million range.

Yet the firm still manages to compete for client assets with large brokerage firms and money managers that have far more resources, like Fidelity, Merrill Lynch and Charles Schwab, he says. And growth is on the horizon. By year-end, the firm, which has operations throughout the U.S. and the U.K., expects to open an office in Vancouver, Wash., to house part of its client-services group as well as some account executives. In addition, the firm is in the latter stages of creating a television advertising campaign, in addition to its continued use of direct mail, Web-based ads, direct-response print advertising and radio ads.

What's more, the firm, which has always grown organically, is thinking about making its first foray into the world of mergers and acquisitions — a goal it hopes to reach by year-end. This past spring Fisher Investments appointed one of its longtime employees to the new position of director of M&A, and the firm has what Fisher calls “a very active plan” to acquire particular types of high-net-worth and institutional shops. “My biggest mistake was not being aggressive enough,” Fisher says. “I could have done a lot more, a lot faster, a lot younger.”

In the high net worth area, Fisher Investments is looking for firms that have between $200 million and $700 million in assets under management, and that have an older founder who is ready to retire but doesn't have a succession plan. On the institutional side, the firm is interested in buying investment capabilities that it doesn't currently have: small-cap growth, large-cap growth and value and emerging markets.

While the firm's growth plans do include some small acquisitions, going public is not on the horizon, according to Fisher. He says he's thought about it, but would only actually do it “shortly after hell freezes over.” In Fisher's opinion, managing a public company would distract him from taking care of his clients and employees, and from growing the firm.

For Fisher, so much of what he does is about innovation. In fact, he says his firm is one of the only firms in the industry to have a chief innovation officer whose job is to come up with new ideas and to implement them throughout the firm. “Our industry is too prone to go down the road of conventionality,” says Fisher, noting that it's a road he prefers not to travel. “You cannot excel doing the same things everybody else does. You have to decide what to do different and better,” says Fisher.

Case in point: Fisher Investments' somewhat unusual marketing campaign. While the firm does use other forms of advertising, its biggest publicity venture is its $30 million direct-mail campaign, making it by the far the largest user of this medium in the world of asset management, according to Fisher. “I think we're the first people that actually ever turned this into a predictable quasi-science,” he says.

Fisher Investments sends a little over 30 million pieces of direct mail per year to potential high-net-worth clients. “There is a proprietary art in getting people to open the mail, read it and respond to it,” Fisher says. “If you can get them past the first few sentences, you've got a good chance you can keep them going to the end.” He declined to give the firm's response rate or how that compares to industry rates, saying that those figures are proportional to the economics of the campaign. “Most people get it and throw it away. The ones that don't pay for the whole thing,” he says.

Another way in which Fisher distinguishes himself from others in the industry is in his investment style. Unlike some firms, which preach the importance of a balance between stocks and bonds, Fisher says that 80 percent of his clients need an all-equity benchmark. In Fisher's view, whether you look at the world market or the S&P 500, doesn't matter. There has only been one rolling 20-year period where bonds did better than stocks — and for him that means equity is the way to go. “People are trained by the industry and the industry is wrong,” he says.

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