With eight clients and $15 million under management, one fledgling New York-based asset manager acutely knows the value each client carries for the firm. And yet, Ideal Asset Management CEO Rahul Shah says he is willing to risk challenging his clients on asset allocations and holdings. Shah says the bond between advisor and client is strengthened best through proven performance.

It's a lesson Shah was forced to learn: He co-founded the firm in October 2007, unaware of the impending economic and financial crisis. "The clients that we have, I feel we guided them through the financial crisis," Shah says. He recounts to Money Management Executive his experiences listening to clients, the push-and-pull of asset allocation and building up a firm from scratch.

How did you manage starting up the business, right as the economy lurched into a crisis?

We started in October 2007, which in retrospect was the top of the last cycle, but at that point we had about a 40% allocation in bonds and a 60% allocation in stocks, so we were a little insulated when the market fell down. Then in 2009, I sold all of the bond position and we bought cyclical stocks, because those were the stocks where the P/E ratios were high; earnings had collapsed so much, I figured that's where the real value was.

In 2009, we returned 48% and the S&P returned 24%. So that value investing strategy paid off there, and through word of mouth, I was able to get even more clients. And then in 2010, we outperformed the market again; so those two years of good performance set the foundation for us to add more clients.

A lot of the initial challenges were trying to explain to clients the risks in the market that were not apparent in financial journals, Bloomberg or CNBC. For example, in 2007, a lot of my clients wanted to go more into equities, they wanted to buy financials; I convinced them to have an exposure to bonds. So part of it was managing clients' money, the other part was actually educating them. There's a little bit of that push-and-pull. You want to make the client happy and do what the client wants, but at the same time, you want to get the best portfolio for them, and make it feel like it's their own idea. So you're working together with the client to come up with an optimal portfolio that meets their goals and the advisor's goals.

When you present products as investment vehicles, is that a two-way-street as well? Is it driven by demand from clients as much as what you suggest?

That's very interesting, because my strategy is to always be a little bit contrarian with what the market is doing, so there's always a bit of push-and-pull with clients. Essentially, the goal of the client and the advisor are the same, to maximize return with the least amount of risk possible. So for example right now a holding of ours is Facebook. That's a very controversial stock, and a lot of clients have called to say, 'I've heard that Facebook will be the next MySpace,' or other types of ideas that they get from reading blogs. And I have to sit there and educate them, and tell them, 'Look, the company has a billion people logging in daily, they have insights and so much information from all these users, they'll be able to deliver more effective ads, and the price of ads will increase.' So for certain clients I have a larger portion in Facebook, and for clients who are more conservative, I'll put a smaller percentage into Facebook. But usually the names comprising the portfolio are similar among clients, but if clients have different risk tolerances I'll change the weightings in order to be comfortable with their investments.

Considering the size of your firm, one client could make or break your business right now. So how important is client relations to your operation?

Absolutely, it is critical. I always say, the only way to make money in the market is to be in the market for a long time. And the only way to be in the market for a long time is to feel comfortable with your investments. That's one of the biggest roles an advisor has -- beyond picking investments for the client -- to explain to them why a portfolio is a certain way, what types of risks are in the market, and why the portfolio is structured in a certain way. So that even if there is a short-term fallback, in the long-term there is going to be a lot of value for them.

Right now, I don't have any investments in a lot of the sectors that can be hit by the rising dollar and rising interest rates. So we don't have many dividend value stocks, it's more toward growth stocks, and you have a large portion of cash in the portfolio. This is where we have to talk to the client, and though there might be some pushback, for instance, 'Why are you raising cash right now, when the market's at an all-time high?' But once they see your strategy pay off, there's more trust that develops. Once you establish that, you really can have a strong bond with the client that can last a long time. The clients that we have, I feel we guided them through the financial crisis, and though we were in the market, we did very well. We were 100% in equities up until about this year. I do think they feel good about the fact that our long-term vision was correct. So if you can manage the portfolio and do well over the long-term, and explain what you are doing, that creates loyalty.

How do you manage that initial client approach, given there are so many other options to choose from, from large firms to other boutique firms, and the relative youth of your firm?

The best thing for our firm has been word of mouth. We've also concentrated on building a good track record, which is a solid foundation. And once I communicate the strategy - I feel that our strategy tends to be different than most firms would do - that can be an interesting selling point to a prospective client. When they see that, he's not doing what the rest of the crowd is doing, he has an interesting viewpoint.

How do you get that message out there? Are you attending events, hosting events and leading prospecting? You don't have a dedicated marketing department.

It's a combination of all the things you just mentioned. We have a blog, and we are publishing on LinkedIn, which has been very helpful to get the word out. We just are using all of the tools available today to reach out to people. Thanks to social media, it's easier to do that, since the world is more connected and open now.

Given your firm's resources, how do you manage the regulation challenges facing all asset managers?

One just has to be mindful of course, especially when you're putting things out onto the Internet, that you're doing your proper disclosures. As long as you understand the regulations and abide by them; we haven't had any issues.

You could have just joined another boutique firm. Why take the entrepreneurial challenge of starting one?

For me, it's always been about helping people achieve their retirement goals. I feel I had a unique investment strategy that was pretty successful, and I wanted to help others reach their goals.

So part of it was to help people, and the other was to pick the investments and be in control of those for clients, rather than working for someone else. I didn't want to get clients and then not being 100% responsible for choosing investments that they would own.

You get plenty of face time with your clients as a result?

I have some clients in California, so I go out there once or twice a year, and I do have clients in the New York area. I try to get as much face time with my clients as possible. I do a lot of phone conversations as well.

What are those discussions you're having with your clients? Are they worried about the market riding too high?

Interestingly, my clients are worried about that at all. In fact it's me urging clients to take something off the table now. It's very interesting how psychology works, the whole herd mentality.

You'd figure that with the market at all-time highs and the S&P tripling from the bottom, retail investors would be scared. But I am in fact experiencing the opposite. People are saying, you buy and hold, and you hold for a long time and things will do well. But I'm a little concerned because we have a rising interest environment and a stronger dollar. And a lot of those dividend stocks were bid up to above average valuations, because interest rates have been kept so low. Now that the Fed will raise rates soon, those investments will do poorly, and a lot of retail investors prefer those investments because they generate income. So I've been explaining to clients that yes, Coca-Cola is a great name, but you're able to buy high-growth companies, that are growing five times faster with the same valuation as you're able to buy these consumer staples dividend companies.

Consumer staples was a core part of my investing strategy, but I have reduced that. Our strategy is pretty nimble; the concept is essentially to buy stocks that we think are undervalued by the market, based on their future growth.

We were buying consumer staples three or four years ago. We held them for a long time and they did very well. But at this point, although they might be decent investments going forward. My concept was to have a cross-section of portfolio and a larger portion of cash. So in case the dividend stocks do fall, if I can buy them at 10% or 15% cheaper, then I can reinvest with the cash.

Have you embraced any passive strategies, as a buttress against the whole passive versus active investing debate?

This market environment is atypical. Some sectors are very cheap - the media sector, the technology sector, consumer discretionary - but most of the other sectors are either overvalued or fairly valued. If I'm in an index I don't think it would do as well as an active manager. If passive investments made sense; if I felt there were a whole lot of stocks that were cheap and I didn't want a large amount of stocks in the portfolio, I could buy an ETF and own the whole thing, that would make sense.

In 2007, I owned the Vanguard emerging markets ETF, because you can't buy a lot of those companies in the ETF directly on the U.S. exchanges. So for emerging markets it makes sense but for U.S. stocks I wouldn't buy an ETF because clients are paying me a fee, and that wouldn't make sense then for me to pay another manager.

As a young firm then, what are some of the goals, and how are you going to achieve them?

I think a good intermediate goal would be to get between $50 to $100 million under management. We have a good track record, so we're going to expose ourselves to more investors going forward.

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