When a Midwestern regional bank bought the independent firm financial planner Marc Henn worked for in 2002, his clients questioned where their interests ranked on the firm's list of priorities. "My clients encouraged me to start my own firm," Henn says. In 2008, he did, founding Harvest Financial Advisors of West Chester, Ohio. Over the years, many of his wealth management clients have grown into family-office clients.
Henn, who's also the firm's president, divides his clients into three basic groups: four family-office clients with a minimum asset base of $15 million; three clients transitioning to family-office status with an asset base of $7 million to $15 million; and wealth management clients with a $1 million minimum. These days, Harvest Financial Advisors has about $350 million in assets under management for 90 clients.
A Purdue University economics grad with a penchant for rare coins, Henn has been in the financial services industry in the Greater Cincinnati area for his entire 20-plus-year career. He started out with Charles Schwab and worked for a couple of local firms before founding Harvest.
The firm specializes in compensation planning and estate planning for business owners, high-net-worth retirees and corporate executives. Henn plans long term for clients, including, for example, executives holding incentive stock options. The tax benefit of these options - paying capital gains rather than income tax when the options are exercised - is complicated by the risk that these options could trigger the alternative minimum tax.
Henn says few CPAs do long-term planning to mitigate the alternative minimum tax when stock options are exercised. His firm routinely plans several years into the future to help executives minimize the consequences. He believes risk mitigation is one of his biggest responsibilities for family-office and transitioning clients.
As client assets increase, tax planning, insurance, asset titling, family governance and generational transitioning begin to take precedence over investment return. He recalls the case of one client, an executive with a privately held energy company, who transitioned to family-office status. In order to save the client's children a large amount in taxes when the company eventually went public, Henn helped transfer a percentage of the client's privately held (and deeply discounted) stock into an irrevocable trust.
Other risk mitigation strategies include purchasing a large umbrella insurance policy to avoid the risk of frivolous lawsuits. More complex strategies might include establishing a domestic asset protection trust (Wyoming is a particularly good state for this purpose) or a foreign asset protection trust (for example, the Nevis Asset Protection Trust, based in the Caribbean).
The boutique size of his firm suits Henn perfectly. He has been able to manage his client base with a staff of three: a research director, an operations director and an office manager. Henn handles most client relationships himself. He credits two software packages, Tamarac Advisor X and ByAllAccounts, with keeping his firm streamlined.
Advisor X provides a modular suite of back-office software, including a customer relationship management package that integrates with and is accessible from within Microsoft Outlook. Data/asset aggregator from ByAllAccounts retrieves, consolidates and reconciles account data from any custodian. The two packages will be fully integrated and operational by year-end, giving his firm and clients investment information on a daily basis.
"The combined software will cut our quarterly reporting time by 89%, giving us more time for our clients," Henn says. With the integrated software systems, Henn expects Harvest Financial could quadruple its assets under advisement while only doubling the size of its staff.
YES TO SECURITIES, NO TO EUROPE
In an age when many advisors shy away from individual securities, Henn embraces them in order to avoid broad-based investing in too many assets with similar correlations, something he calls "diworsification." While each client's portfolio is different, he generally starts with a core model of 60% equities, 40% fixed income - and moves from there. Occasionally, he uses separately managed accounts for high-yield bond or small-cap stock allocations, or country-specific ETFs or ETFs focused on the BRIC markets for international exposure. He's avoided Europe totally for the last three years.
Henn says he prefers individual equities for four basic reasons:
* As baby boomers retire, broad indexes may suffer as fewer dollars chase securities.
* In broad-based investing, you inevitably acquire bad investments along with the good.
* You can take advantage of individual valuations not available through baskets of securities.
* Individual securities keep his client fees lower, avoiding the additional layer of mutual fund fees. Henn charges 1% for the first $1 million in assets under management with a sliding scale down as assets increase. Some of his recent and current equity favorites include Apple, Chevron, Caterpillar, Occidental Petroleum, McDonald's, Duke and Starbucks.
Henn boasts that research and investment in the energy sector is one of Harvest's specialties. This specialty includes direct ownership in oil and natural gas production through drilling programs where investors must be accredited through specific SEC rules, but could benefit from major tax advantages.
Henn elaborates on natural gas investments: "With the disaster in the Gulf of Mexico and the renewed interest in transitioning to alternative energy, natural gas makes an attractive transitional fuel. We see a range-bound oil price over the next couple of years with a new, higher trading range for natural gas being formed. In addition, long term, we see renewed interest in natural gas not only from the Obama administration, but also from the large, integrated oil firms themselves."
COIN OF THE REALM
A member of the American Numismatic Association, Henn has shared his personal passion for rare coins with clients when appropriate. According to Henn, numismatics is one of the many less traditional asset classes that high-net-worth families and individuals have found attractive over the last decade of market upheaval. Rare coins offer the potential of additional safety through diversification, excellent investment returns (more than 13% annually for one diverse coin mix from 1979 through 2006), and a hedge against inflation.
He adds that, unlike other collectibles such as artwork, the rare coin market offers added liquidity and marketability. The creation of third-party grading services has brought structure, transparency and more standardized valuation to the rare coin marketplace. Henn's specialized investment strategies can add spice to a firm that emphasizes risk mitigation for its wealthier clients.
Jim Grote, a CFP in Louisville, Ky., writes regularly for Financial Planning.