Most financial advisors lust after rich people. Lust is perhaps an arresting choice of words, but it does accurately describe the intensity of desire an advisor suddenly feels when a liquid millionaire is referred to him.
This is precisely what makes advisors like Adam Bold so, well, different. Bold, owner of The Mutual Fund Store, actually targets the “mass affluent” — retail investors with $50,000 to $500,000 of liquid assets. Some reps, of course, are stuck in what some big advisors call “piker-ville,” and not by choice. Who wants to manage the financial affairs of those with no affairs to manage? Not much margin in that. But Bold, a registered investment advisor (RIA) in Overland Park, Kan., launched The Mutual Fund Store in 1996 to take advantage of a cohort he says is being left behind in the frenzy to move “upmarket.” Further, he argues, an advisor can make money in the process.
Clever Or Gimmicky?
The Mutual Fund Store? That's the actual firm name — a name which many high-net-worth advisors would scoff at. But that's just it: The Mutual Fund Store is a chain of franchises (some are company owned) located in storefronts throughout the nation's small towns and suburbs, where real people offer investment advice for a fee. Not a model that many heavy-hitting advisors care to stoop down to. Bold's practice — a registered investment advisory and not a brokerage — is built around a call-in radio show where he makes fund recommendations and promotes the local store in towns where the show is syndicated. Through referrals and the national publicity of the radio program, Bold is able to reach a wide audience.
Bold's concept is unique in many ways. Instead of having plush offices in the financial districts of major cities, Bold sets up shop in strip malls in the neighborhoods where people live (as opposed to where they work). So while out shopping for groceries or picking up dry cleaning, people can visit The Mutual Fund Store for investment planning advice. The name sounds hokey, but to his targeted demographic this setup may prove less intimidating than walking into a major Wall Street firm's branch office. The Mutual Fund Store doesn't offer any other products besides mutual funds — actively managed no-load mutual funds only. No annuities, ETFs, SMAs, insurance or structured products. Just funds as defined by the Investment Company Act of 1940.
“Nobody who has less than $5 million should own anything but mutual funds,” Bold says. “You get diversification in a way that you can't get with an individual stock.” Bold rails against annuities too: He says that Wall Street has been launching complex products in order to confuse investors and generate higher fees.
True to his humble image, Bold launched his advisory firm in June 1996 in — you guessed it — a basement office in Overland Park, Kan. The office was situated in such a way that fellow office tenants had to cross through it to access the kitchen. “We had no clients and zero assets under management,” Bold says. “People would come into my office to get coffee.”
And like other entrepreneurs, there were times when he had to charge his own credit card to make payroll; Bold also occasionally had to borrow money from his father to pay the bills. Today, he manages $3.6 billion in assets in 56 locations in 47 cities and has roughly 80 registered advisors on staff. In all, he has more than 18,000 clients and 50,000 accounts with an average client account size of $62,000, and an average client household with roughly $230,000 in assets. Because he runs an RIA, he does not accept payments from mutual fund firms for shelf space or collect any 12b-1 fees.
“The concept was, ‘Okay, let's take the same service that rich people have been able to get forever — fee-based investment advice — and let's bring it to the masses,’” Bold says. “This is a segment of the population that has been largely abandoned by the major financial services firms, and to a large degree abused by them.”
A retail investor with $10 million in liquid assets is welcomed almost anywhere; that's what's called an elephant. Regular Joes have fewer choices. They either have to do it themselves via Fidelity, E-Trade, or Vanguard — or they have to go to a full commission broker who is probably a junior broker at Merrill Lynch or Smith Barney. (And now they are most likely shunted off to some call center somewhere.) “At full commission brokers, they were being charged an awful lot for that service, and they were really paying for products, not for advice,” Bold says. “And maybe the advice wasn't as objective as they thought it was.”
No Time for Regular Joe
Your average Joe family, members of the middle class, are not terribly profitable for the majority of brokerage houses. As a result, at wirehouse firms and some registered investment advisories (RIAs), retail clients of modest means are given less face time with their brokers — if they aren't already at call centers. It's a generally accepted premise that wealthier clients drive the profitability of these firms. In fact, many of the contributing columnists for The Practice section of this magazine advocate cutting lower-end clients to focus on the wealthiest clients as a way to get to the next level. In the process, the middle-class investors are neglected; it seems that few advisors have really figured out how to make enough money targeting this demographic.
But this may be about to change. “More and more firms are going to look at this marketplace. Up-market is saturated,” says Dennis Gallant, a securities industry consultant at Gallant Distribution Consulting in Sherborn, Mass. He also believes that people — even those of modest means — still prefer, even need, the personal touch (versus investing online by themselves, on tips from friends or talking heads on CNBC). “The bricks-and-mortar, face-to-face approach is still appealing,” he says.
Besides, there are a lot of middle class investors out there: So-called mass affluent households comprise the largest number of retail clients in the United States. According to the Federal Reserve Board they make up 39 percent of the population, but only 26 percent of the wealth in this country.
“It's a demographic that has been abandoned by the traditional brokerage firms,” says Andre Cappon, president of The CBM Group, a New York consulting firm. “The large brokerages only want to talk to people with $1 million. The discounters aim below it, those with tens of thousands. So this segment is underserved,” he adds.
Bold comes from a long line of accountants. His father was a CPA and a tax attorney; both of his grandfathers were CPAs; and his great-grandfather was an accountant. Being the oldest child, off to accounting school he went. But when it came time for his father to hang his hat, Bold was not eager to take over his business. Instead, he opted to go work at Smith Barney as a broker. But after five years he grew tired of pushing proprietary products to earn commissions as he says he was encouraged — even paid — to do. “They would announce things on the squawk box like, ‘Okay, we have 50,000 shares of Disney in our inventory. If you sell them to your clients, we'll pay you 50 cents per share in extra commission’ — one not disclosed to clients,” he recalls. Smith Barney declined to comment on Bold's allegations. (Open architecture and fee-based business have since gone a long way towards changing this culture.) “I was sitting there thinking, ‘If Smith Barney doesn't want it in their inventory, why would my client want it in theirs?’ And so I became pretty disillusioned.” Bold says such was common practice all over the Street.
He moved on to Prudential Securities, but longing to be more entrepreneurial like his father, Bold decided to resign and pursue an independent model. It was anything but a clean resignation; he lost a good amount of his book of business upon his departure and had his once pristine record sullied with a mark on his U5. (To this day, Bold denies the allegations.)
But that was then. Today, Bold has created an investment advisory for the masses. His 1.5 percent annual fee on the first $250,000 invested by his clients isn't super cheap, but it is competitive with fees charged by brokerages. The fee is assessed quarterly on a trailing basis so that all of a client's initial investment can be put to work. There are breakpoints as you go up the ladder, with a 1.25 percent fee for an additional $250,000 and 1.1 percent on the next $250,000 invested. Each portfolio is tailored according to a client's investing profile as determined by a series of detailed questions. His allocation models go well beyond the standard aggressive, moderate and conservative buckets that customers are typically lumped into by brokers.
Bold concedes that he uses traditional screening tools like Morningstar and Lipper, but he also built a proprietary database from which he trolls for funds. Part of his daily routine, he says, is reading five newspapers and talking to three portfolio managers. He pays particular attention to manager turnover, selling a fund when a prominent manager has left or retired; he also avoids funds with high capital gains taxes and sales loads. He contends that all of the funds on his Select List, most of which are not household names, were in the top 20 percent of their respective categories last year. He also manages to keep costs down for his clients by not churning. Despite the name of his franchise, he argues that he does not sell mutual funds, but rather sells advice on which ones to use and how to use them.
The Franchise Way
The owners of his franchise stores pay an initial investment ranging from $50,000 to $250,000 depending upon the location. They also pay an ongoing royalty of 30 percent of revenues in exchange for Bold's investing models and all the back-office processing (handled by Schwab). As a private company, Bold does not disclose his financials, but he characterizes his profit margins as being “in excess of 30 percent” and says the company has no debt. Initially, he began franchising because he didn't have the money to build new stores, using other people's capital instead.
Scott Woodruff, managing partner and senior investment advisor in the Albany, N.Y. store, likes the business model because it enables him to focus on client relationships and advice rather than trying to bring new assets in the door. “The radio show brings in a lot of people. I don't have to do any of my own prospecting,” he says. Woodruff is a former OSJ and broker at Northwestern Mutual and an 18-year veteran of the securities industry. Woodruff and the rest of the The Mutual Fund Store advisors are on salary plus they get a percentage of revenue.
In February, venture capitalist firm Summit Partners purchased a minority stake in Bold's company, which enabled him to ramp up expansion plans. Since December 2005, Bold has opened 26 stores, about two new locations a month, and expects to have 100 by the end of 2010. “We think the right number is about one store per 1 million of the population,” Bold says. “In Kansas City, we have two locations; some place like San Francisco will probably have five or six locations.”
Bold hosts a call-in radio show on Saturday mornings that is syndicated in the areas where he has a store. The arrangement he has with the carriers is that he gets airtime in exchange for being a paid advertiser on the radio.
Bold has staffed his stores with people from the investment business who have worked at American Century, H&R Block, Morgan Stanley and PaineWebber, to name a few. In April, he hired David Byers, former H&R Block chief operating officer of retail tax services, to serve as the company's chief executive. Byers will run the day-to-day operations of the company while Bold will focus on picking funds and marketing himself through TV and radio.
But Bold is not without significant challenges. “The economics are really hard when going after the lower hanging fruit,” Gallant says. “The business model certainly has its limits,” he adds, referring to the mutual-fund-only strategy Bold employs. Chip Roame, managing principal of consulting firm Tiburon Strategic Advisors, says that while he believes it to be a viable business model, he thinks that without a call center it could extremely be difficult to turn a profit. “The biggest challenge in targeting the middle market is the ability to create substantial volume on a localized basis,” he says. “It's not good enough to have a lot of volume in one city and then none in another because then the branch system isn't profitable.”
While he knows he's leaving money on the table by not providing family office services or holistic financial planning, his expansion of the franchise should be more than sufficient to reap big-time profits, he says. “If I get 1 percent of the assets under management in any city we have an office in, I'm rich beyond my wildest dreams.”
The Mutual Fund Store's top 10 holdings by assets
|Fund||Ticker||Three-Year Trailing Return||Rank in Category|
|Excelsior Value & Restructuring||UMBIX||15.42%||23|
|Marsico 21st Century||MXXIX||20.01||16|
|Royce Low-Priced Stock Service||RYLPX||7.28||11|
|Keeley Small-Cap Value||KSCVX||29.88||3|
|Highland Floating Rate A||XLFAX||9.98||4|
|Loomis Sayles Strategic Income||NEFZX||10.77||2|
|Julius Baer International Equity A||BJBIX||21.78||1|
|Loomis Sayles Bond Return||LSBRX||17.89||27|
|Source: Morningstar data as of 7/13/2007|