Keeping the Wealth in Washington

Seattle has long fancied itself a world business capital, especially when it comes to computer software, coffee or internet retailing. A lot of local people certainly made a lot of money from nationaleven internationalsuccess in those and other businesses. If ever there was a community that benefitted from the economy over the last 30 years, Seattle was the place, says David Lewis, chairman and chief executive of Seattle-based First Washington Corp., which manages $750 million in client wealth.

But when it came to managing the money its entrepreneurs, investors and business executives made, says Lewis, Weve largely been a branch office.

As fast as the money was made, much of it was sent off to Wall Street firms. At the height of Seattles economic boom, some big national firms opened Seattle offices to scoop up even more of the money believed to be lying around.

You dont have a lot of the money actually managed here, says Bill Whitlow, senior vice president and senior portfolio manager at Davidson Investment Advisors in Seattle. You dont have a lot of large money managers here.

That era may be coming to an end. Wall Street is now more vulnerable than at any time in recent decades. The past years financial meltdown has evaporated billions of dollars in assets from the smallest individual retirement accounts to the biggest endowments. Century-old firms have been shut or forced to sell to banks at huge discounts. Local investors burned and chastened by sinking money into exotic investments marketed by East Coast firms are retreating to plain-vanilla investments they understand, and to close-to-home managers.

Old money, the inheritors of which have tended to keep their funds in the big New York firms that their parents and grandparents frequented, is now beginning to look around.

We are getting a lot more calls from second- and third-generation wealth that tended to stick to the big companies in the past, says Jon Jones, one of the founders of Brighton Jones, a Seattle-based wealth management firm that manages about $1.5 billion in client assets.

A perceived lack of communication during the meltdown between the big Wall Street firms and their clients may have contributed to investors seeking safer harbors for their money closer to home. Amid the confusion of the meltdown on Wall Street, Jones says his employees were in constant contact with their clients. By contrast, with many Wall Street firms facing possible liquidation, their brokers didnt always do a good job of returning investor calls.

The physical proximity of local firms helped calm some individuals during the crisis. Investors just like to go around the corner and talk to the person whos got my money and make sure its still there and they havent shipped it off to Bernie [Madoff], says Richard Lindsay, senior vice president of the life and annuities division at Bellevue-based Symetra Financial Corp.

There are a lot of good brokers at all size firms that have high client touch, says Mark McClure, president of Ragen MacKenzie, a regional brokerage now owned by Wells Fargo, but regional firms are also very good at that. I think that is going to play very well going forward. Stealing From the Street

Taking market share from the Wall Street firms is not going to be easy. For one thing, in terms of performance, clients of local firms got hit just as severely as national firms. The clients know that, says Richard McCormick, president of McCormick Capital Management, a Seattle firm that operates the Elite mutual-funds group. There was no place to hide.

Assets under management by 330 Washington state money managers plunged to $292 billion in the first quarter of 2009, down $79 billion, or 21 percent, from the year before, largely reflecting the markets decline, according to RH Financial, a Covington-based financial services executive recruiting firm that compiles a yearly ranking of the largest money management companies in Washington. Investors are in a frozen state and there may be no clear winners to flee to, says Roger Hendrix, president and chief executive of the company.

This financial crisis has been so well publicized, clients dont actually blame the broker or the adviser, adds Ragen MacKenzies McClure. Unless they were heavy in cash or gold, the downturn clobbered every [asset] class, and we were right along with that.

Youve already got a portfolio somewhere, youve got a broker, an adviser or a trust officer or somebody you have a relationship with, Whitlow says. Unless theyve burned you, youre probably going to stick with that person. McCormick adds that while he received lots of calls from clients who had accounts at other firms prominently mentioned in headlines, almost all of them kept their money where it was. (There was one exception to this rule in a local company with very bigand ultimately fatalproblems: Washington Mutual.)

Richard Sias, who holds the Gary P. Brinson Chair of Investment Management at Washington State University, thinks both local and national wealth managers might find themselves with more clients. People who were handling their own money and may have felt comfortable about how their retirement/college savings were going are likely to feel much less confident now and seek advice, he says.

Even if clients do come home, they wont be bringing as much with them. Says Sias, There are simply fewer assets to manage now. From the money management firms perspective, assets under management [and associated fees] have declined sharply. Thus, even with an influx of new clients, firms are unlikely to see increased profitability.

For all the scary stories, customer inertia is also very hard to overcome. Investors are in a frozen state and there may be no clear winners to flee to, says Roger Hendrix, president and chief executive of RH Financial.

The Recruiting Rush

But local firms have a shortcut to winning new business: Recruit the brokers and money managers, who in turn will bring their wealthy customers with them. The big national and global firmsinsiders call them the wire houseshave had their financial performance and their reputations torched by the markets meltdown.

Many are undergoing challenging mergers. Soon after Bank of America acquired Merrill Lynch, it angered brokers by slashing their share of the commissions they bring. Morgan Stanley has treated the employees of Smith Barney, the troubled brokerage it acquired, as a second-class citizens. Brokers at many of these national firms are now looking for new homes.

Great Falls, Mont.-based D.A. Davidson & Co. has added five offices in Washington (Bainbridge Island, Burlington and Port Angeles) and Oregon since mid-December. In the case of two of those offices, Davidson picked up brokers who had been with Smith Barney, which decided to close offices in the region. A team of four brokers who had been with Oppenheimer & Co. for 18 years recently left the company to join Seattle-based Freestone Capital Management. With many large financial institutions forced into bear hugs with former competitors or requiring staggering taxpayer bailouts, says Andrew Erisman, who was part of the Oppenheimer team and is now managing director at Freestone, clients are asking, If you cant handle your own money, why should I trust you with mine?

Erisman says boutique wealth management firms also do a better job of working as a team to focus on client needs than Wall Street firms in which each broker tends to compete with other members of the same firm.

We have been hiring from the so-called wire houses, adds Scott McAdams, president and chief executive of Seattle-based McAdams Wright Ragen Inc. Most of these folks were exposed to a regional firm at some point in their careers and ended up at a large firm via industry consolidation. While that was problematic enough, it was exacerbated by the large firms muddying up their own reputations and brand names in the last 18 months. That combination has pushed a number of these folks out the door.

Honestly, it is the best recruiting environment that I have seen in the 10 years that we have been in the business.

Jones of Brighton Jones says he has had conversations with three groups that manage a combined $8 billion in client assets. These are long shots, he notes, but its conceivable that we could go from $1.5 billion to $10 billion pretty quickly.

Keeping it Simple

Heres another shift in the market that could play in local money managers favor: More than one local money manager has noted the difficulty of competing with big firms in offering (supposedly) high-return investments. We had clients who asked, Why arent you into hedge funds? says Carla Wigen, vice president and senior trust officer at Spokane-based Washington Trust Banks Seattle office.

Local firms can more convincingly make the case that they didnt dabble in the more exotic flavors of investments that caused the most damage, and potential clients may be more willing to listen to lectures about the tradeoffs between risk and reward. The reality of what that downside could be is much more tangible to them now, Wigen says.

When markets are doing well, most investors claim they are willing to take risk to reap higher rewards, WSUs Richard Sias says. When markets suffer, however, people usually want a more conservative portfolio, such as a mix of stocks, bonds, real assets rather than all in the latest hot stock.

Wall Street firms once lured customers by offering them exclusive access to the hot IPOs and derivatives their firms were underwriting. Now, many investors have been burned by those hot instruments and are staying away. Clients are looking for investments that are transparent and easy to understand, says McClure. The regional players tend to stay in areas like straight old stocks and bonds that are very easy for clients to understand and easy to explain.

Meanwhile, there is growing recognition that the products sold by Wall Street firms on commission may not always be the best instruments for investors. Many investors are turning to fee-only financial advisers who have no incentive to push one instrument over another.

Symetra, which markets investment and retirement products such as annuities to banks, employers and other distributors, is seeing much greater interest in more straightforward fixed-interest products, Lindsay says. Banks are coming to us and saying, Look, we want to make sure weve got stuff that our advisers understand, that customers understand.

Its kind of a return to the basics, McAdams says. Well see how long that lasts. Among local firms, many observers believe the larger companiesthose managing over $1 billionmay be best positioned to grow in the current environment by adding new financial advisers or absorbing smaller firms. The market meltdown will result in a winnowing of weak players, local and national, small and large, and the consolidation of others seeking to cut costs. Hendrix says he expects the 2009 list of Washington money managers will have 20 to 30 fewer firms listed than the 337 on the 2008 list.

Ive gotten calls, Do you want to merge? McCormick says, from firms dealing with overhead costs that are the same while revenue has been sliced in half. I think theres going to be a shake out, probably at the smaller end.

The general state of the industry was that it got too large, says Leonard Brennan, president and chief executive of Rainier Investment Management. There were too many marginal players. When the day of reckoning comes, a lot of marginal players [will] have a difficult time. He cautions that the survivors will need scale to withstand down cycles and to prove to clients theyre sustainable.

While the region doesnt have a lot of big money-management firms, Seattle and the Northwest do have a lot of self-described boutiques, and more may appear as money managers (some of whom find themselves orphaned by national firms closing or in retreat) decide to start their own firms.

While McClure is referring to broker recruitments, he could just as easily be speaking about an investor sentiment that local money managers hope will enable them to reclaim customers and their investment dollars: When people get uncertain, they start to look at alternatives. Rainier Investment Management Out of the Spotlight, Growing Reasonably

When Rainier Investment Management launched itself into the mutual funds business in the mid-1990s, Safeco was the best-known locally based player in that corner of the investment world.

Safecos funds have long since been sold, but Rainier is still aroundif not much better known by the public than it was then.

Thats partly due to Rainiers orientation as an institutional money manager. Its not an aggressive marketer of its funds, which are sold directly and through distributors nationally.

But people in the money management business know Rainier. Mutual funds made up about 34 percent of the firms assets as of July 8, with the rest coming from Taft-Harley, corporate, nonprofit and a few individual accounts.

And people who track the money management business know Rainier. The company recently picked up an award from Lipper, a leading source of business information, as the Best Equity Small Fund Group for three-year performance ending Dec. 31, 2008, among 169 small fund families.

Rainier got its start in 1989 when top executives bought the company from Security Pacific Bank. Initially, it handled investments for endowments, health and retirement accounts, and high-net-worth individuals, but it later moved into mutual funds for the wealthy, and then to low-minimum, no-load mutual funds for the retail market. The firm is still locally owned by principals.

Rainier manages more than $13 billion, which, Chief Executive Leonard Brennan says, puts us comfortably in middle-sized institutional money managers.

What has enabled it to grow to that size, and to win recognition from Lipper and others, is consistent application of an investment strategy referred to in Rainiers prospectus as GARP: growth at a reasonable price.

The thing about Rainier, we have a very good sense of who we are as an organization, says Brennan. Growth-oriented equity is who we are. Were very comfortable with who we are, and our customers are very comfortable with who we are.

Not that Rainier is standing still. It has expanded into the subadvisory business, in which it provides investment management for funds marketed by such firms as John Hancock, Metropolitan Life and Nomura. Its now 20 percent of our business, Brennan says. Two years ago, we didnt have any [subadvisory business]. Rainier has also opened an office in New York.

Those moves signal an interest in boosting Rainiers profile, but they dont portend a change in Rainiers operating philosophy. Says Brennan, Lets keep doing what weve been doing on the investment side, and go out and see if anyone is interested in what we do. Bill Virgin First Washington Corp. Across the Generations

If it isnt Seattles oldest money management firm, First Washington Corp.founded in 1937has to rank near the top for longevity. First Washington does stake a claim to being the oldest independent securities broker in the state.

That record would suggest the firm has been through a few bruising markets beforeunless, of course, the people managing the money are relative newcomers who have only known bull markets.

First Washington has that aspect covered as well. We have three people who are over 80 years old who work for clients every day, says David Lewis, the companys chairman and chief executive.

That long-term experience brings continuity to First Washington, which has been handling some families investments for several generations.

But does continuity matter in recruiting the investors of tomorrow, whose families havent done business with it for so many years?

Thats every firms challenge, to remain relevant, says Lewis, a former co-chief operating officer at Ragen MacKenzie who formed his own investment company before joining First Washington in 2003.

Not to mention maintaining what works while making changes needed to adapt the company to a new environment. Lewis has been adding brokersthe company now numbers 18 employeesand five years ago, started a money management business to handle larger pools of investment dollars, recruiting veteran Seattle money manager John Morbeck, co-founder of Olympic Capital Management, to run it.

Making the talent evident will be the key to our success in recruiting not just customers but also brokers, Lewis says, who find themselves lost in these bigger firms.

But First Washington, he adds, still has a fairly straightforward business. … Our mission is to build capital for our clients. The companys relative small size and independence will be prime points of differentiation. At the end of the day, you need a place you can go where you can get the right advice. You need to establish a place and a culture where people work it the same way.

Just as Lewis and the current owners and employees inherited the business from previous generations, Lewis vows to keep passing the torch to the next generation. Were going to pass this business on to the people behind us. Bill Virgin Firerock Research LLC Doing the Math

Washington is hardly Wall Street West. So its more than a little surprising when a finance-related startup surfaces, as one did earlier this year. Of course, FireRock Research LLC is still little more than a proprietary mathematical formula and a website. The formula, which the company calls the element, calculates the per-share value of a company based on cash flow, price-to-earnings ratios, return on equity and other notoriously unreliable financial measures.

The calculation was developed by Peter Psara, who previously wrote for The Motley Fool, the popular personal finance site. FireRock CEO Jason Leehan says testing the algorithm against stocks past performance suggests the element may be a good predictor of those stocks future performance.

The company has a subscription-based website that allows investors to assess over 7,000 United States and Canadian stocks based on how high the value of the element is relative to what the share price is at any given time. Leehan is looking for ways to work more closely with regional wealth managers as well as national stock investment sites. The graph below shows investment recommendations based on the element. Does it work? Caveat emptor. Leslie D. Helm Sharebuilder Corp. Incremental Growth Catches On

If many investors are abandoning Wall Street firms to go to fee-only investment advisers, others are choosing to make their own investment decisions.

Seattle-based ShareBuilder Corp., the nations sixth-largest online brokerage firm, is a big beneficiary of that trend.

A lot of people who were with Merrill Lynch are saying, If Im going to take a beating like that, why should I pay their high costs? says Dan Greenshields, president of ShareBuilder.

The firm, which was acquired by Dutch-based financial giant ING Direct in 2007, differentiates itself from other online brokers by allowing investors to buy stocks in small increments for fees as little as $4 per transaction. The company keeps fees low by slashing costsit accepts no paper applications and has only a handful of offices across the country. The company now has over 1 million customers with deposits, up 70 percent from a year ago.

The largest proportion of Sharebuilders customers are under 35, many of them college-educated professionals with an average income of $60,000 to $70,000, and Greenshields says they are continuing to invest in spite of the markets recent troubles. While the company has a 5 percent share of the discount brokerage market, it is winning 20 percent of all new online traders. The firm recently moved from Bellevue to new headquarters in Pioneer Square. In one sign of its optimism, although it currently has 250 employees, Greenshields says the business acquired rights in its new headquarters building to house as many as 1,000 employees. Leslie D. Helm Top Wealth Managers A list of the top Washington wealth management firms of 2008, ranked by assets under management (as of Q1 2009). 1) Russell Investment Group Wealth/Hedge Fund Mgmt. (Tacoma) Assets: $92.5B 2) Parametric Portfolio Associates Money Mgmt./Mutual Fund Specialists (Seattle) Assets: $19B 3) StanCorp Investment Advisers Inc. Wealth Mgmt./Inv. Advisors (Lynnwood/Portland) Assets: $15.5B 4) Edge Asset Management (formerly WM Advisors) Money/Mutual Fund Mgmt. (Seattle) Assets: $14.1B 5) Rainier Investment Management Inc. Money/Mutual Fund Mgmt. (Seattle) Assets: $12.5B 6) Prime Advisors Inc. Wealth/Inst. Fixed Income Mgmt. (Redmond) Assets: $8.7B 7) Milliman Inc. Wealth Mgmt./Pension Consultants (Seattle) Assets: $8.1B 8) Wentworth, Hauser & Violich Private/Institutional Wealth Mgmt. (Seattle) Assets: $7.1B 9) Silver Creek Capital Management Hedge Fund Mgmt. (Seattle) Assets: $6.4B 10) UBS Financial Services Wealth Mgmt./Broker-Dealer (Seattle/Bellevue) Assets: $6B 11) Convergent Wealth Advisors Wealth Consultant (Kirkland) Assets: $5.3B 12) U.S. Trust/Bank of America Wealth/Trust Mgmt. (Seattle) Assets: $5.3B 13) US Bank Private Client Group Wealth/Trust Mgmt. (Portland/Seattle/Coeur dAlene) Assets: $5.1B 14) The Whittier Trust Co. of Washington Wealth/Trust Mgmt. (Seattle) Assets: $4.7B 15) Freestone Capital Management Wealth/Hedge Fund Mgmt. (Seattle) Assets: $4B Source: RH Financial, Covington, Wash.