Michael Stolper says he never set out to start a company. Three decades ago, he just wanted to do right by one large client.
“Everyone was calling this client with an ax to grind,” recalls Stolper, who in 1985 was a 29-year-old registered rep for Kidder Peabody, making his living off commissions. “I thought, ‘I can help this person.’ He needed someone to tell him not to do transactions.”
But Stolper wasn’t making a cent. One day, he took a deep breath and asked for a fee for his services. The client said yes immediately. Later, over dinner one night, he also urged Stolper to go into business for himself, telling him, “You could do something really important here.”
In 1986, Stolper opened up a shop with two partners and let his licenses lapse. A quarter-century later, Veritable is the third-largest RIA in the country with more than $10 billion in assets under management and 190 client families. The firm employs 87 people who work in a converted farmhouse on 25 rolling green acres in Newtown Square, Pa., outside of Philadelphia, where hunting parties on horseback often charge past in red jackets, close on the heels of their dogs.
There, the Veritable team has developed its own approach to analyzing after-tax investment returns. Stolper, who is given to measured and thoughtful, discourses, explains: “At the time, we were getting statements for our clients from around the world and aggregating them into the same accounting system. And we started to think about them in terms of tax management since each of our client’s situations was different. We felt it was misleading to look at anything but after-tax data when it comes to returns. We said, ‘Let’s apply the clients’ tax rates – federal, state, etc. – to every investment.’
“We set up a record-system so that we could figure out how much money was left over after each one was done paying taxes. We looked at benchmark indices and applied them to the clients’ actual tax rates. When it comes to doing after-tax benchmarking you have to monitor the dates on which you put money with an active manager and essentially mirror that in a hypothetical investment with a comparable ETF or index fund.
"It gives you an exactly comparable index to compare your after-tax returns to. It’s not risk adjusted, but it allows us to say, ‘Oh, this money manager over the past three years has produced a 7% after-tax return whereas the index has realized 6% after taxes.’ This was not just interesting for the clients,” Stolper continued, “it was interesting to us because once you have that filter it changes your behavior. There were a whole host of things that were revealed to us by looking at the data. Short-term capital gains rates, for example, which are high, cease to be interesting.”
Constructing benchmarks for as many client investments as possible and paying vigilant attention to taxes became a staple of the Veritable way. It facilitated an ongoing side-by-side analysis of how they always could be doing things better – or worse.
Often, this process leads Veritable to choose passively managed funds. Its most common investment is ETFs. On the actively managed side, it also prompted the firm to initiate conversations with managers of separately managed accounts.
“We had this long-only money manager,” Stolper says, “who was great at picking small-cap U.S. stocks. However, he would sell things that had doubled in value five days before they became long-term,” when the tax consequences decrease. “That meant his after-tax returns weren’t so interesting.”
With so many millions of dollars invested with the manager across many client portfolios, Veritable persuaded him to call the firm before he was about to trade. When Veritable wanted to hold a position longer than he did in order to reap a long-term capital tax gain, it would effectively buy the position from him by swapping cash equivalent to the current market value of the stock holding into the SMA side of the client account, making it available for the manager to use to make new trades.
At the same time, it moved a client’s holding of that stock out of the SMA column of his account and over to the nondiscretionary side. In effect, this functioned as a sale, from the manager’s perspective, without any tax consequences because no shares were sold on the open market.
“We would take the position and warehouse the position until it became long-term and then we would sell it and create a permanent and very meaningful savings on behalf of the client, often of nearly 20%,” Stolper says. “That’s not a deferral. That’s a real savings. It was a simple and meaningful approach to saving short-term cap gains taxes.”
Simple? Well, maybe not so much.
Veritable’s proprietary software, developed over years, facilitates this process. Stolper says this is one of 20 or strategies that Veritable has devised to manage taxes in client accounts. In fact, the company’s investment philosophy is focused so strongly around tax reduction that it has no endowments or foundations among its clients. There’s little help it can offer investors who don’t need to manage their taxes.
“The takeaway for planners with smaller clients,” he says, “is that every opportunity to sell has to be based on your ability to produce a better return on an after-tax basis.”
Given his penchant for deep analysis, perhaps it’s not a surprise that Stolper doesn’t see himself as a typical entrepreneur. “I don’t feel like I took a lot of risks ever,” he says of his career path. “I just never felt like I was going out on a limb.”
But he came close back in his 20s when he thought he wanted to become a baker. He designed a logo and chose a company name – Let Them Eat Cake – before a friend told him he would have to get up at 3 a.m. every morning to go to work. “Oh boy, that really could have been bad,” says Stolper, who boasts that he still bakes a mouth-watering cheesecake. Another friend, one who happened to be the president of S&P, suggested he try finance.
“I think it’s great I ended up with this business. I’m a curious person,” he says. “I’m easily amused. I could have ended up doing many things that were not lucrative.” The average new client typically has between $20 million and $100 million in AUM. Stolper says he’d like to see Veritable continue its brisk growth trajectory all the way up to $30 billion or $40 billion in AUM. “I think scale will help our clients,” he says. “I’m looking forward to seeing us grow.”
-- First of a three-part, web-exclusive series examining the people and strategies behind the Top 3 RIAs and how they're racing to scale and differentiating themselves from the competition. On Thursday, Financial Planning will take a closer look at Oxford Financial Group and CEO Jeffrey Thomasson.
Ann Marsh writes for Financial Planning.