In their hot pursuit of the high-net-worth and separately managed account markets, investment managers have lowered investment minimums to less than $100,000 and created model investment platforms.
Such a mass-market approach would practically be treason at Fiduciary Trust, a 73-year-old international private banking and wealth management firm. While Fiduciary is willing to offer standard SMAs to millionaire offspring with less than $2 million to invest, most of its accounts are $10 million, truly individualized and separately run, says James C. Goodfellow, Fiduciary's vice chairman.
And not only does Fiduciary compete with other SMA managers by offering personal money management and access to its portfolio managers, but it also extends trust and estate planning and income tax preparation to its investors, Goodfellow says.
Not all wealth managers are created the same, Goodfellow recently told Money Management Executive Editor Lee Barney. Read on to hear one private banker's opinions on the many differences.
MME: While you serve the ultra-high-net-worth market, with many accounts averaging $20 million, what sets your firm apart from other SMA managers?
Goodfellow: First, we've been in this business for a long time, starting in 1931 managing money for individuals and families. That broadened into foundations and endowments, and eventually institutional management. Second, we manage separate account portfolios that are custom-tailored for clients, so, in effect, we are more in the market of providing investment solutions for clients than in designing and distributing products. Third, we've been managing money internationally for more than 30 years.
Last, but not least, the portfolio manager is the client's relationship manager at Fiduciary Trust. People primarily come to us to have their money managed, so we put the portfolio manager forth as the relationship manager. And that makes us unique.
I should also add that we are now part of the Franklin Templeton family, so we think of Fiduciary Trust as a relatively small, focused, personal investment management firm with trust powers, backed up by the breadth and capabilities of a very large investment management parent.
MME: That's a tall order, for a portfolio manager to also work as the lead relationship manager. Do they have any help?
Goodfellow: Depending on the client and the circumstances, the team would include a backup portfolio manager, analysts on the risk management team, an expert on trust and estate law and a tax professional. But the key here is that the portfolio manager is the captain of that team, rather than a banker or trust officer or relationship manager, or whatever firms want to call it.
We believe the critical capability that we have, the critical reason clients come to us, is to have their money managed. Our philosophy is that if the portfolio manager is not in the thick of the investment management process, then client expectations can diverge from portfolio managers' expectations. We want to stay in complete sync with our clients.
MME: What are the biggest issues on your clients' minds today?
Goodfellow: Investment management services, wealth transmission and education. Those three things, all interrelated, are what our clients are looking for.
MME: We all know that wealthy people are well educated and driven. How can you educate them further?
Goodfellow: Our clients are interested in learning more about the wealth management business, how to develop portfolios, how to manage money responsibly and ways to convey this responsibility to their children wisely. The vast majority of our clients want to leave the most that they can to the next generation. They want to maximize the transfer of wealth, and in order to do that, you have to put very sophisticated planning strategies and structures in place to accomplish that goal.
MME: Do those parents who don't leave money to their children ever leave some sort of guidance instead?
Goodfellow: They do, and in fact, many families establish foundations for that purpose. It's a great vehicle to instill the family's culture in the next generation.
MME: You have augmented some areas of your investment discipline, equity and fixed income among them. What are your new offerings?
Goodfellow: Separately managed portfolios here are typically balanced ones, including an array of equities and fixed income. By virtue of our relationship with Franklin Templeton, we now have a whole array of new products and services to complement our historically growth-at-reasonable price (GARP)-oriented style.
Franklin is more value-oriented and has a huge fixed-income capability with multi-state tax-exempt funds, as well as alternative investments, so these capabilities have all added to what we're able to offer to our individual clients.
We further augment these investment management vehicles with the kinds of services that a high-net-worth client needs: estate administration, trust administration, income tax planning and preparation and master custody.
We have something called Family Resource Management, where if a family doesn't want to give us all of the money they want to have managed, they can use multiple investment managers. We can work with other managers to create a team that works toward one strategic plan for that family. This is typically for families with $30 million or more.
MME: Isn't the objective of most SMA and trust services to preserve, rather than to grow, money?
Goodfellow: Yes, but the way you go about executing the plan to preserve the money is what I've been talking about, which raises a good point. There is a law in place in virtually all states called the Prudent Investor Act, which defines what is prudent in the management of a fiduciary or trust fund. Our interpretation of that law is that the fundamental or baseline strategy for a trust account is to preserve purchasing power, in addition to producing reasonable income. That portfolio, for us, is called a balanced portfolio, and it has an asset allocation of about 40% equity, 60% in bonds, and the equities are well diversified among U.S. large and small cap, along with some international. The fixed income portion is based on what makes the most sense from an income tax perspective for this client.
While that's the baseline strategy, some people want more growth than preservation of purchasing power. So, the objectives and strategic allocation can be changed to reflect that. The next most aggressive portfolio is something we call balanced growth. It is 60% equities and 40% bonds. And for those willing to take on more risk, the next is a growth portfolio, consisting of 80% stocks and 20% bonds.
For those clients who are willing to be even more aggressive, who perhaps are only investing a small portion of their wealth this way, we offer a high-growth portfolio, 100% of which is in equities. On the other side of the spectrum, for those clients who may have large equity exposure elsewhere, or who, perhaps, have inherited a company, we have two more types of portfolios with more bond exposure, one called income and high income.
Fiduciary Trust is somewhat unique in that because we also have trust powers, we think of these portfolios as multi-generational, so the time horizon is quite long.
MME: Aside from the products that Franklin Templeton brings to the table, is there more to your relationship with your parent company?
Goodfellow: By virtue of the fact that Franklin Templeton is the largest publicly traded asset management firm, by market capitalization, in the country, with more than $350 billion under management, we now have state-of-the-art, top-drawer technological and operational capabilities available to Fiduciary Trust's individual clients. In addition, Franklin Templeton is a very sophisticated firm with immense marketing capabilities.
It's also important to mention that Franklin Templeton was incredibly responsive in helping Fiduciary Trust to recover after 9/11, when a number of our employees perished in the attacks on the World Trade Center. We are immensely grateful and immensely proud to be part of that family.
MME: What is the minimum investment you accept, and has that changed at all since your merger with Franklin Templeton in 2001?
Goodfellow: The minimum size for an account here remains $2 million. Of course, there are certain situations where a client may come to us with an account of less than $2 million, so the rule is not cast in concrete. We recognize the fact that the relationship might start with less than that, but the important question for us is whether this is a mutually rewarding, growing relationship for us and the client. The typical client we are looking for has investable assets of upwards of $10 million. And we have clients making use of our Family Resource Management who have substantial wealth, well in excess of $100 million, with multifaceted needs.
MME: Do you think it's worth it for separately managed account managers to go after smaller accounts?
Goodfellow: Fiduciary Trust does have a number of smaller accounts, because when a family comes here with a relatively large account, it is possible that after the matriarch or patriarch dies, there's estate tax to be paid, and whatever's left is dispersed to surviving children, perhaps five or more. So, all of a sudden, after a couple of generations, the money gets filtered down to multiple accounts, and those accounts can be relatively small.
To meet these clients' needs, we may use mutual funds, or perhaps own securities or fixed income outright. But to create a truly diversified portfolio at the level of $2 million, it would be difficult to own everything directly, which is why the use of mutual funds in separately managed accounts is so important.
MME: How do you get the word out on your business?
Goodfellow: The fundamental way we get business is through referrals, chiefly through attorneys, accountants and other third-party intermediaries who recognize they need investment or trust services.
MME: Do you think the wealth management business has become too crowded and that there could be a shakeout?
Goodfellow: I think the shakeout is already happening. There are a lot of people and organizations that manage money for affluent individuals and families. There are trust companies, investment management firms, financial planners, lawyers, accountants and family offices.
Today's high-net-worth client typically needs access to sophisticated operational and Web-based capabilities. In addition, clients also need access to a large array of investment capabilities in order to create a well-tailored, well-diversified portfolio. Neither diverse products nor technology is an inexpensive proposition, and firms that cannot offer both may not be able to remain competitive.
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