|Summary: A US wealth manager beats the pack running an 80/20 passive-aggressive strategy, while offering transparent after-tax reporting: Australian advisers should pay attention.|
|Key take-out: Veritable has developed a sophisticated after-tax, net of fees reporting system, which brings to light what most banks are happy to keep in the dark. How well a client is doing depends on what results they take home.|
|Key beneficiaries: General investors. Category: Investment strategy.|
Veritable’s head-office is a renovated 18th century Quaker farmhouse found in a quiet copse just west of Philadelphia in the town of Newtown Square.
It is there, far from Wall Street, that Veritable has amassed $US12.4 billion in private-client assets and steadily risen up the list of the top wealth managers. Industry observers tell us that Veritable’s after-tax client reporting system is among the best in the United States, and years ahead of even the largest banks.
Veritable works with some of the US’s wealthiest families, with its 208 family relationships bringing in average accounts of nearly $US60 million each. Doug Black of SpringReef Partners is a consultant who helps wealthy families monitor their banking relationships. He says Veritable scores among the best on the 19 criteria he uses to evaluate banks. While not effusive about wealth managers in general, he has a “very high regard for” Veritable.
To find out why, we paid a visit to the firm’s founder and CEO, Michael Stolper, 58. He says Veritable’s name comes from the Latin veritas, which means truth. “Clients have a right to know the truth -- good or bad,” he says.
Veritable CEO Michael Stolper Photo: Dave Moser for Barron’s
This Quaker-like pursuit of the truth has led the firm to develop a sophisticated after-tax, net of fees reporting system, which brings to light what most banks are happy to keep in the dark. How well a client is doing depends on what results they take home. SpringReef’s Black puts Veritable’s after-tax reporting system among the top five in the country, based on his proprietary shortlist. “The level of reporting is far superior to what is available at large private banks, trust companies, and broker-dealers,” Black says.
It has always been thus. Veritable has a long history of being an innovator, claims John Copeland, president of AMG Wealth Partners, a group that invests in small but dynamic wealth-management boutiques. In 2012, its parent, publicly traded Affiliated Managers Group, bought a majority stake in Veritable, an estimated 60% holding for roughly $US100 million, according to Jefferies analyst Daniel Fannon.
Why? Copeland points to Veritable’s customised fund-of-funds platform developed in the late 1980s, built when Stolper was 34-years-old. “That was long before people were talking about those capabilities,” Copeland says. “And now [the firm is] at the cutting edge of after-tax reporting. We absolutely did not want to pass on Veritable.”
Stolper showed one client’s after-tax report. The complete document, totalling some 80 pages for a $US307 million portfolio, dates returns back to the start of their relationship in 1996. The tax rate applied to the portfolio and index is based on the client’s unique federal, state, and local jurisdictions.
The reporting system is designed to be user-friendly. The client invested, for example, $US7 million in blue-chip US stocks in October 2005. Over the eight-year holding period, the report reveals the client realised an after-tax gain of $US5.9 million for a return of 7.6% annually, versus a 6.7% gain for the Standard & Poor’s 500. Bottom line? This particular client’s overall after-tax performance since the relationship began in 1996 was 7%, with taxes shaving 150 basis points, or 1.5 percentage points, off his returns. But that was still better than the 5% the client would have earned from the weighted after-tax average of all the relevant benchmarks.
It also works with more complicated investments. Veritable’s clients have $US2.6 billion parked in long/short and long-only hedge funds. The firm negotiated separate accounts for each client, so that instead of waiting to the end of year for the hedge fund’s performance, it can collect monthly trade data from each hedge fund, informing portfolio managers of what precisely is going on. The client in the aforementioned case had $US50 million invested with hedge fund managers who, in 2013, realised substantial short-term capital gains. So the client’s portfolio management harvested losses in the bond portfolio and stocks to materially reduce the client’s taxes in 2013.
The system, and the clear vision it generates, naturally affects the firm’s portfolio calls. “If you believe [Flash Boys author] Michael Lewis, you’re getting dinged by pennies trading in and out of positions. The combination of these transaction costs, commissions, and taxes becomes a very high hurdle to overcome,” says chief investment officer David Belej.
So Veritable recommends avoiding high-turnover strategies, like fixed-income arbitrage or global macro hedge fund strategies, partly because tax-exempt endowments or foundations have an advantage over individuals in that space, says Belej. Such trading strategies are quickly dismissed in the Quaker farmhouse. In efficient markets like the US, Veritable passively parks 80% of its clients’ money in low-cost indexes. Conversely, in small-cap stocks or emerging markets, Veritable makes sure that 80% is actively managed through outside managers who have on-the-ground insight and a better chance of beating the indexes. Buy-and-hold managers favouring three- to five-year holding periods are Veritable’s preferred asset pluckers.
Interested? Although there is no minimum account, Veritable’s fee schedule charges a per-year minimum of $US75,000 or 45 basis points, whichever is greater, for accounts under $US50 million. That fee declines to 15 bps on amounts over $US500 million. In essence, it means that families with assets under $US15 million will find it difficult to digest Veritable’s minimum fee.
Stolper started his career in 1978 as a broker at Kidder Peabody, but found that he didn’t like selling stocks. Instead, he spent his time assessing risk tolerance, creating balanced portfolios, and steering his clients away from hot new initial public offerings and insurance products. This was way before Wall Street discovered “holistic advice.” But one client liked what he heard so much that he put Stolper on retainer at $US4,000 per month and told him never to feel compelled to recommend specific stocks. That was the start.
Stolper founded the business in 1986 as Stolper & Co., and within 11 years it reached $US1 billion in assets. PNC Financial Services Group (PNC) bought the firm in 1997 and named it Hawthorn. The big bank began asking why the Hawthorn team wasn’t selling PNC products to clients. Stolper had negotiated a healthy amount of independence for his firm, and resisted the head-office call, but the pressure was disconcerting.
In 2004, with a company-wide cost-cutting effort under way at PNC, Stolper saw his out. He negotiated to take 40% of Hawthorn’s assets with him, or $US6 billion, and Veritable 2.0 was born. He was 48. “I’m first and foremost an entrepreneur and couldn’t wait to get it back and build it,” he says.
By 2012, Veritable had $US10 billion in assets under management, but Stolper worried that he was being too conservative in how he ran the business. There was also little room for management to cash out without crippling the company financially. “My partners and I had too much at stake in the business, and I was definitely making business decisions differently because I was worried about my kids,” Stolper says. Discussions arose, such as going public, selling to a private-equity firm, or joining another large bank, but having worked under PNC, Stolper was concerned about conflicts of interest.
The solution came when AMG bought a stake in the firm in 2012. AMG owns a slice of 29 different asset managers, indirectly controlling $US570 billion in assets. “Our model is to identify and partner with only the very best firms,” says AMG’s Copeland. The firm buys stakes in small but growing wealth-management boutiques that are constrained by capital. AMG becomes a “permanent partner,” he says, thereby eliminating the uncertainty of what happens should partners leave or retire, while management retains a significant equity stake in the business’s future.
AMG’s hands-off approach sat well with Stolper. Backed by AMG’s war chest, Veritable has since opened an office in San Francisco, and Stolper has his eyes on an acquisition or new offices in Chicago and New York City. Either way, he wants to preserve Veritable’s client-centric culture, which is perhaps why the San Francisco office was stocked with three existing Veritable employees, rather than new hires. “We would rather reinvest in innovation than have two people in 15 offices throughout the country. That would be counterculture,” Stolper says.
In other words, this is one under-the-radar wealth manager that in the coming years is likely to shoot up higher on the top wealth-management list. When word spreads that a wealth advisor has a reputation for straight-dealing, more of the battered and world-weary come in through the door.
This article was first published in Barron’s, and is reproduced with permission.