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It's the Best of Times

The bull market of the late 1990s didn't bring Baltimore-based investment advisor Bob Mewshaw much satisfaction. His newer clients defected, seeking higher returns than his value-based style was producing. Prospects bypassed fee-based advisors like Mewshaw and sought their own way to Nasdaq riches. Even his buddies at the gym teased the 49-year-old broker, calling him Bubble Boy, because of his warnings

The bull market of the late 1990s didn't bring Baltimore-based investment advisor Bob Mewshaw much satisfaction. His newer clients defected, seeking higher returns than his value-based style was producing. Prospects bypassed fee-based advisors like Mewshaw and sought their own way to Nasdaq riches. Even his buddies at the gym teased the 49-year-old broker, calling him “Bubble Boy,” because of his warnings that the market was in the middle of a speculative frenzy and not some grand paradigm shift.

At one point in 1999, investment guru and professional curmudgeon Jim Grant, with whom Mewshaw had struck up a friendship, took him to the Trinity Church cemetery at Broadway and Wall Street. They walked to the grave of John Paul Jones. Grant pointed to the words inscribed on the headstone: Don't Give Up the Ship.

Good advice. At the start of 2002, war, terrorism, a spreading global recession, surging unemployment and nearly two years of a bear-market “correction” have left investor confidence frayed. Things certainly look grim, especially if you're in the business of convincing folks to invest their hard-earned money in a bright future. But this, in fact, may be the best of times for brokers and financial advisors.

At least, it's a great time of opportunity for brokers and advisors who have the right skills. Those who know how to create a true financial plan and advise clients on an array of issues from college savings to estate planning are in a sweet spot. They are the ones who can snag clients who are looking for better advice than they got from the brokers who were too carefree on the upside and too slow to react on the downside. These are also the brokers who can reel in the former do-it-yourselfers who are closing out their online accounts. And these are the same brokers who will get most of the business from the aging baby boomers as they seek advice on increasingly complex investing needs.

“The 1990s was the decade of the individual investor. The first decade of the 2000s, I believe, will be the decade of the professional financial advisor,” says John Vazquez, a first vice president and portfolio manager at UBS PaineWebber in Bethesda, Md. “There has never been more money, ever, in the history of the world, that's so disoriented and confused as it is now. And it doesn't know where to go.”

Indeed, despite the damage to portfolios sustained since the bull market ran out of steam in early 2000, there are huge amounts of assets to be gathered — beyond those suddenly mobile brokerage accounts. There are thousands of laid-off workers in their forties and fifties with big 401(k)s to roll over. These same aging boomers are starting to receive a slice of the estimated $10 trillion that their parents' generation is leaving — what has been called the greatest wealth-transfer in the history of the U.S. As the boomers approach retirement, they need professional advice on estate planning and other issues. And then there are the Gen X and even Gen Y investors coming up behind. It's time for them to get serious about starting retirement funds and planning for their kids' educations.

To make the opportunity even sweeter, strategic changes in the investment business can help. Instead of increasing transaction revenue by pushing product, including questionable stock picks from in-house strategists or proprietary mutual funds, brokers are being encouraged to move to a fee-based business model (see page 12) that places a premium on investment services and solid financial advice.

These sparse days may turn out to be the best of times, indeed. But only for those who have the know-how to seize these trends. Smart brokers like Mewshaw are in the right place at the right time. Sure enough, he says, old clients are coming back. He's seeing a higher number of new referrals, and he expects the asset base from which he reaps fees to show significant growth for the year.

“They just don't want to lose any more money,” says Mewshaw, who started his firm, VanSant & Mewshaw, in 1992 after stints at Legg Mason and PaineWebber. He says 95 percent of his new clients are coming from wirehouses and brokerage relationships that were less focused on their long-term goals.

“It reminds me of the time between 1979 and 1981, when the clients hated you because the market was so bad,” Mewshaw says. It was during those tough times, however, that the novice Mewshaw, began to build up his business, forging client relationships that endure today. “This is the time to grow your book,” he says.

The firms know this, too. One Salomon Smith Barney executive says a broker can succeed now if he is “smart enough to go after accounts older brokers and trust companies have hammered.”

A top producer at Smith Barney, when asked about the outlook for 2002, smiles slyly and opens his top desk drawer. He pulls out a neatly typed sheet of paper. On it are the names of 15 high-net-worth clients he is pursuing. “Now, I can get these accounts,” he says. “Two years ago, they weren't available.”

So, who's on the list? Mostly, they are successful boomers, who are now much more attentive to a pitch about wealth preservation and prudent investment. Today, almost 80 percent of investors are over 40 years old and almost 50 percent are over 50. Top brokers have already begun exploiting these trends by pitching newly available hedge fund products and managed money programs to such clients.

“There's a lot of wealth being transferred to baby boomers, someone has to advise these people on managing this money, on tax issues, and on estate issues,” says John Maloney, chief executive of M&R Capital Management, a New York asset management firm. “Two years ago, they thought they could get rich without you,” he says. “Today, though they've lost a lot of money, and they've gained a little bit of wisdom.”

One piece of wisdom for brokers is that individual investors are not as afraid of the market as they might expect. A recent study by the Investment Company Institute showed 83 percent of investors said they still aren't “overly concerned” with short-term market fluctuations. Also, 47 percent of mutual fund investors made their first foray into the market before 1990, meaning that they have proven to be long-term investors. But another study, by the Securities Industry Association, while it confirmed the public's commitment to the markets, turned up some big questions about brokers. “I would've been a little more vigilant in my contact with my broker,” and “I would have avoided all brokers” were two comments from respondents.

Now, it's time to move beyond holding client assets: It's time to grab more. And retirement accounts are ripe for picking. While downsized workers are allowed to keep funds with their former employers, many may be looking to roll over those funds into IRA accounts managed by retail brokers.

Brokers say that rollovers haven't been a huge source of business yet, but expect to see more as layoffs reach the higher ranks of U.S. companies and some baby boomers opt for early retirement. “The 401(k) and 529 plan businesses are going to mushroom, and they are going to be helped by the new catch-up allowances in the tax law,” says Michael Flanagan, who runs Financial Services Analytics, an independent research shop in Pennsylvania that focuses on securities firms.

There are also assets to be gathered in education savings plans. The amended Internal Revenue Code section 529 allows for tax-free gains in investments that are for college savings with few limitations on contributions.

To get these assets, brokers often must deal with investors whose financial lives have been shredded. There is a certain delicacy required to bring these clients back to the fold.

PaineWebber's Vazquez, a value investor like Mewshaw, couldn't get many of these clients to listen two years ago. Vazquez tells of one who had just $500,000 with him, but had $8 million with another advisor. “He just had to have the hottest of the hot. And I told him that I don't have the hottest of the hot, and that I didn't want to be around when the hottest of the hot ended.” Now the chastened client has brought all his assets to Vazquez — what's left of them. “Well, let's just say now I manage all $5 million of his,” Vazquez says. “Clients appreciate prudent advice. So this is such a great time for us.”

Looking for a Meaningful Relationship

Brokers, says Flanagan, are in a “stage of hand-holding for clients, who have clearly realized that quick gains have dissipated and they need to get serious about their financial future.”

Philip McCauley, a financial consultant with Salomon Smith Barney in Louisville agrees. “People have a personal connection to their money and want to have a personal connection to the people who manage it,” he says.

McCauley is now positioned to bring in clients who are looking for meaningful relationships. That's not where he was two years ago. Then he was working for Hilliard Lyons, a Louisville-based regional, when he started to feel that he was spread too thin by the rigors of maintaining 1,200 accounts. He moved to Smith Barney, hired a junior broker, cut his client base in half and joined the firm's Portfolio Management Group, which gives him discretionary power to manage client money.

Since last year, his production has risen almost 30 percent and his assets under management are up 40 percent, showing that existing clients are giving him more money to manage, and he's attracting new clients. “I do very little transactional business,” he says. “There's a great demand now for conservative money management.

“I looked old-fashioned and overly conservative a couple of years ago,” he adds. “But job one is to protect assets and job two is to grow them.”

That approach serves him well as he targets clients who have between $1 million and $25 million in assets, a segment that he labels “under-served” by the traditional trust banks. Consolidation among those players and subsequent personnel turnover has pushed clients toward someone like McCauley. He built up the business by focusing on gathering assets of wealthy families, who would then refer him to other prospects.

The Smith Barney portfolio management program allows McCauley to customize individual portfolios, so if one of his clients is a retired bank executive with too much of his portfolio in the bank's shares, he'll diversify any new investments to add balance. He acts as the portfolio manager for those discretionary accounts.

So far, Smith Barney has more than $16.6 billion in these types of accounts. In the second quarter of 2001, Smith Barney brokers controlled $27.2 billion of the $64 billion in investor assets that are managed by financial consultants industry-wide.

Putting the Hedge Back Into Hedge Funds

To land and hold these savvy clients, brokers must have more to offer than a reassuring manner. They will also need to master all the new products that wealthy investors keep hearing about, such as hedge funds (see page 88). “Clients are asking me, ‘Show me things that may help on the risk spectrum,’” says Scott Rosenberg, a broker with Credit Suisse First Boston's high-net-worth private client group. “Some people have been badly burned and they're looking to make changes.”

But hedge funds and other goodies are no longer restricted to the most affluent clients. PaineWebber, where the average account is $500,000, now has 15 offerings on its hedge fund and alternative investment menu. There are funds of funds and ways of packaging assets of smaller investors to reach hedge-fund minimums, often $1 million. Hedge fund investments have more than doubled in five years, to more than $600 billion, a number that's expected to grow as the funds proliferate.

“Over the past few years, the array of products we can offer investors has increased,” Rosenberg says. “Whether it's hedge funds, private equity or alternative investments, the ability to access the best managers has been a real benefit.”

He says investors are learning the advantage of hedge funds' ability to short stocks, use derivatives or play market neutral strategies that can generate gains in even the most difficult of environments.

Investors who now have good reason to question their own stock-picking skills may be ready to get into managed accounts, too. These programs let clients get back into the market, but without having to trust a retail broker to be a genius stock picker. “Managed accounts have come back in a big way because you don't have to pick stocks,” says money manager Maloney. “You just have to make one good choice” in picking the manager.

Managed accounts have another nice selling point now: Clients and brokers may have a more difficult time cleaning out a bad portfolio than an outside money manager, who has attachments to neither the stocks nor the ideas behind buying them. Maloney says: “We're seeing a pickup in inquiries and accounts because people want a surgeon to come in and fix the portfolio. To have a third-party do it means you don't have to address all that bad karma. You wipe the slate clean.”

Clients already in managed accounts appear to be less likely to be looking for new brokers, too. Bruce Honicky, the head of consulting services at Fahnestock & Co. in New York, says the firm has seen less outflow of assets from managed accounts than from conventional ones. And brokers, instead of fearing that they will lose control of their clients' money by farming out asset management to other portfolio managers, actually find their interests dovetail more tightly with those of their clients. “More often, they find themselves sitting on the same side of the table as the client,” he says. “And it makes it easier to complement and diversify portfolios and bring in new assets from existing clients.”

One former brokerage executive says the lesson to remember is good brokers will stand out in troubling times. “People are willing to listen if a guy has a good idea. And there's very little competition. In general, the sales forces on The Street are demoralized. Now is the time for pitching.”

“Now, there's more opportunity than ever for retail financial advisors,” says Flanagan. “Investments continue to be a commodity while good solid financial advice remains critical and hard to find.” Brokers who can deliver those goods will be richly rewarded.


When you could make money by throwing a dart at the Nasdaq tables, nobody needed a broker. Now, investors are hungry for professional advice and service.


It has been called the greatest transfer of wealth in the history of the world — the Greatest Generation dies off, leaving their boomer offspring $10 trillion over the next 20 years.


Downsized workers have billions in 401(k) money to roll over. Between that and a surge of early-boomer retirees, $500 billion will flow out of 401(k) plans into rollover IRAs, according to Cerulli Associates.


Tuition keeps rising and, thanks to the enhanced advantage of 529 plans, parents have already placed $9.5 billion in kiddie accounts.


Clients want a custom fit and, for those who qualify, separately managed accounts are an easy sell. No wonder the business has jumped from a blip five years ago to $275 billion in assets. Also, new alternative-investment vehicles give nearly wealthy clients new choices.


The move to fee-based accounts can makes it easier for clients to truly believe that brokers live to make them rich.

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