When we started Smead Capital Management in Seattle in 2007, we knew we had a solid investment team. The five of us had nearly 80 years of experience at Wachovia Securities and other large broker-dealers and investment firms.
Bill Smead, our CEO/CIO, is a highly respected portfolio manager who's a regular on CNBC, Bloomberg and other media outlets. His value-oriented investment philosophy has been successful, and it's relatively easy to explain to clients. In a nutshell, we seek investments in undervalued companies that we want to hold for the next 10 years.
But, as breakaway RIAs, we also knew that our business would not survive on investment acumen and our new independent business model alone. We knew that our operations could make-or break-our dreams.
Why were we so concerned with operations? After all, our clients don't generally notice the operations side of the business. They seem to think that we magically remember their regular cash needs, produce reports, keep track of their investments and other financial information, and easily roll out client updates. They don't want to pay for all the overhead that we need, either for our planning and investment functions or for regulatory compliance.
But the minute that something goes wrong operationally, then our clients are very aware of our operations. Based on my 24 years on the operations side of the business, I've seen that a breakdown in operations is more likely to lose a client's trust than a poorly performing investment. Clients understand that investments are risky and that the unexpected can happen. But they definitely don't want the unexpected to happen on the issues we can control, such as updating their records, keeping their private information secure and staying in contact on a regular basis.
We decided to take advantage of being a newly independent firm-but with experienced leadership-to implement a system that was efficient, integrated and automated right from the start. We hoped to avoid some of the inefficiencies that inevitably creep into larger, older organizational structures, but which don't improve client service.
We're now three years into building our investment management firm. Our staff of five professionals serves 240 clients who have placed about $160 million under our management. Recently, we've started moving up the client acquisition ladder, targeting new clients with accounts of at least $2 million. We have launched the Smead Value Fund, which has about $40 million in assets.
Smead Capital has big ambitions, and we're off to a promising start. However, we don't think we are close to realizing our potential. We do believe that sticking to our operating principles will be the key to our future. We set out a few principles to guide our operations:
* Be paperless.
* Automate when possible.
* Share information internally.
* Don't ever sacrifice client service.
You've heard about the paperless office for at least five years, and you probably think that it's about as likely as free healthcare, but we are living a nearly paperless existence. More than 80% of our clients communicate with us solely by email, and their records are held securely in cyber space. We use Constant Contact to distribute our newsletters and our blog updates, instead of costly printed mailings. Our office walls are lined with empty file cabinets.
When paperwork comes in from a client, we use a system called DYMO File to scan the document directly into the client's folder on the network. Once scanned, the document is shredded. Tamarac's Advisor View performance reporting system creates our quarterly reports, which are currently emailed to clients directly.
We will soon be taking our paperless communications to another level when we roll out a private web portal that will allow clients to access their financial information, as well as educational material that we have developed, and to communicate with us securely. We will manage the portal through the Advisor View functionality on Tamarac's Advisor X software platform, which we've been using since we started the firm.
Because we handle so many functions through technology, we did not have to hire a staff person for filing, managing client mailings and tracking client information. It's probably saving us $50,000 per year.
Being paperless has another significant benefit. It enables each of us in the company to share information without having to find it in those (empty) file cabinets. In fact, our paperless system makes everything so easy that Brenda Larson, our director of operations, manages the rest of us in Seattle from a home office in Oklahoma City.
AUTOMATE IF POSSIBLE
We are big believers in having a process touched by the fewest hands possible. We do a lot of direct trading of individual stocks, and we need to be able to rebalance portfolios quickly and to update that information across our client records. Automation is the key to our efficient trading operations.
We've chosen to work with Tamarac's Integrated Advisor X software suite to automate our information processing. We began with Tamarac's Advisor Rebalancing & Trading system, which can handle our direct trading activities. For each client, we use the software to set trading bands around our model asset allocations and allocate assets into the right account groups with ease.
Next we adopted Tamarac's performance reporting system, Advisor View, avoiding what for many firms is still a cumbersome manual process. We get reports in PDF format, and they're customizable for clients who need special services, as well as for satisfying SEC requirements for RIA reporting.
Automating these functions enables us to be highly scalable-which is our key to turning solid early growth into future. succss. Thanks to the technology we have in place, we are confident that our current five staff members can handle twice as many clients and hundreds of millions of dollars more of assets.
All five of us at Smead work at the professional or management levels. We don't have traditional support staff, so each of us is expected to handle manytasks. When the phone rings, CEO/CIO William Smead is as likely to pick it up as any of the rest of us.
Our latest effort to make Outlook our dashboard has been to incorporate client relationship management (CRM) functionality, using Tamarac's Advisor CRM. With the various components of Tamarac's Advisor X suite integrated into the CRM accessible through simple Outlook screens, we have a single point for all performance reporting, trading and rebalancing for each client. Plus, we manage client information, conversations and workflow/task management.
Here's what happens when the phone rings, and it's a client calling with a question about his or her portfolio. By simply clicking on the client's name in Microsoft Outlook, any of us can call up a complete record of the client's accounts and account balances, security holdings, notes on prior recommendations and so on. All the client data is there, and it's all updated and linked. Most of the time, that yields the information we need to answer the question immediately. "
Frankly, it's a different world than my experience in a large organization, where we had to learn several complex software programs, and those programs didn't communicate with one another. Getting basic portfolio information about a client might require a request to one department, and producing a personalized response might require contacting yet another. At Smead, we get it done and move on to the next task.
Our dashboard brings to mind several issues that every young firm-and, I would argue, every mature or growing firm-should consider when it's thinking about how it will structure its operations and which software systems it will use:
* Stick to your expertise. We are investment managers, not IT experts, so we selected software that was proven to work and would be not be too difficult to learn. Advisor CRM is built on the Microsoft Outlook platform, which gives it the look and feel of a program that everyone is familiar with.
* Maximize the productivity of the software you purchase. That's why everyone in our company has been trained to use all of the integrated functionality of Advisor X.
* Support makes a difference. Tamarac's training has been supplemented by visits from staff and online support. In the case of Advisor X, we've made suggestions about how to improve the functionality of the system, and Tamarac listened to our ideas.
* Keep it simple. Every new process has to be run through our "Keep It Simple" overlay. We ask ourselves regularly, "Are we keeping it simple?" If we're not, then we rethink the process and see if it can be improved by using technology more efficiently.
DON'T SACRIFICE SERVICE
We've all heard it a thousand times before: Investment management is a people business. At Smead, we live by that creed. Efficiency is a high priority for us, but it never comes at the cost of undermining our commitment to our clients. We view technology as the key to improving the speed and accuracy of the services that we provide.
Because Advisor CRM is built into Outlook, the system automatically tracks every email coming into and out of the company and posts them into the client contacts' historical record in CRM. This gives firmwide visibility into all communications with each client, so there's no confusion over what was said and done.
As mentioned previously, we can respond to most client inquiries within minutes, even while the client is on the phone, because we have an integrated CRM package that gives us immediate access to all the information we need. Also, we can document every interaction we've had with the client by using the "notes" or "tasks" functions.
Plus, since all of us have access to the CRM, the next time the client calls or comes in for a meeting, all the records are right there-for everyone. It's extraordinarily powerful when you can talk to a client about something you did six months earlier, even if it's a trivial matter, and you can document the service that you provided.
The efficiencies we have gained through the smart use of technology have freed up time. This lets us focus on core functions that really add client value while keeping staff costs down.
MEETING THE CHALLENGE
In our industry, companies tend to put their capabilities as investment managers front and center. Operations is the silent cousin. But we can't forget that if the cousin makes noise, he can undermine the brand that we have worked so hard to develop.
At Smead Capital Management, we've seen that investing the time and resources in a high-quality, integrated system for reporting, trading and client communications has paid dividends in many ways. It's made us efficient. It's enabled us to communicate easily with one another. It's improved the speed and accuracy of our response to clients. It's simplified recordkeeping for regulatory purposes. And it's actually saved us money, in comparison to hiring an office assistant to manage communications or an IT professional who would have to coordinate our usage of diverse systems for each function.
However, I'll add one note of caution. Numerous independent software vendors have jumped on the integration bandwagon these days. We tried some of those allegedly integrated solutions, and we were disappointed with the learning curve for training and the complexity of usage-not to mention the costs. Selecting the right software vendor is crucial, and you need to ask a lot of questions and have a lot of conversations up front.
As breakaway RIAs in 2007, we had a challenge. We had to present the same level of professionalism as we did under our former employer's "big brand" umbrella, but we didn't have the same level of staff and resources. We had to earn credibility and respect from our clients and prospective clients, because we were not backed by a big corporate firm.
We chose to meet this challenge by presenting a value-oriented investment philosophy that could provide solid long-term results. And, just as important, we focused on building an efficient operation that gave us the ability to get close to our clients and to respond to their needs.
Lisa Martin is chief operating officer and chief financial officer at Seattle-based Smead Capital Management. You can reach her through the firm's website, www.smeadcap.com.