In 2018, Wealthstone Advisors, an RIA in Columbus, Ohio that caters to wealthy families, was facing issues prevalent throughout its industry. The owners of the RIA founded in 1977 needed a succession plan and, although the company had grown, it was fragmented. There were no clear heirs apparent and advisors were largely running their own siloed practices within the company, collectively managing about $630 million.
That year, to help the firm evolve, Wealthstone hired President and CEO Norm Cook, an experienced asset management executive who previously oversaw JP Morgan’s $250 billion Institutional Investment Group. His clients included IBM, General Motors, and sovereign nations. “This will sound like braggadocio, I don't mean it to be, but my experience is very different than most people in the RIA space.”
Wealthstone’s ownership was redistributed, advisors began working in a so-called ensemble fashion according to their individual strengths, and Cook centralized and bolstered the RIA’s portfolio management to leverage its high-powered investment committee.
The RIA was eager to begin pitching “Wealthstone 2.0” and clients — both existing and new — have taken to it. Without any mergers or acquisitions, Wealthstone has grown to $1.2 billion under management. About $200 million in assets has been added during and after the Covid-19 pandemic, which resulted in the fastest-ever bear market. The economy entered a recession in February.
The most recent surge in assets is due in part to Wealthstone employees working remotely, Cook told RIA Intel. Unlike in the office, all or most of Wealthstone’s more than 30 employees meet online every morning and discuss their day, in front of everyone. It has coincidentally created a new level of accountability and Cook feels like everyone is 50% more productive. But Wealthstone is managing another fresh $200 million belonging to wealth families for another reason, too.
For the first time in years, a severe market downturn, coupled with record volatility, moved investors to ask hard questions about their advisors’ investment management. And some RIAs failed at answering what should be an easy question, like what benchmarks their portfolios are measured against, according to Cook and others.
During a historic bull market, investors are more forgiving of advisors for underperforming a benchmark because the “numbers on the screen” are green — overall return is positive and they might still be on track to achieve the goals laid out in their financial plan. This was normal for many years.
However, the violent March selloff and near zero interest rates were hard for some investors to stomach. That sent many looking for advisors with an approach to investment management that is less and less common.
“They might not like [their advisor] as much because now there's real negative numbers on the screen and they don't like to see that. The combination of us telling this, really, an institutional story, to individuals and why benchmarks are so important” has helped attract clients, Cook said.
“If you're going to go play golf, it's against par. There's an evaluation method. Am I at par or how many strokes above par? And what am I willing to live with?”
Too many retail investors hire a financial advisor and they either don’t know what their benchmark is, or they never had one in the first place, Cook argues. That blasé approach to investment management would never be tolerated by an institution. Wealthstone has clients that, with their former wealth manager, lagged their benchmark by as much as 800 basis points for over a five year span, Cook said. Had their previous advisor been managing assets for an institution they “would never make it.”
“If you go more than four quarters, you're on a watch list. If you continue, you're going to go to a remove list. And even if you're okay at the end of three years, if you've underperformed by a certain percentage, you're going to be terminated. I understand that because I've lived in that,” Cook said.
The executive believes retail investors should demand those standards of their financial advisors charging a fee based on a percentage of their assets. Most advisors charge clients around 1%, which can equate to large dollar amounts and eat into any portfolio when charged annually over, in some cases, most of an investor’s lifetime.
Wealthstone encourages prospective clients — but, really, every investor — to ask their financial advisor how they have performed against their benchmark in recent years. In some cases, advisors are hesitant to report the information, rather than deliver it and face the data head-on with a client and explain its relevance to their goals. It’s that red flag, not even necessarily underperformance, that drives them to seek a new advisor.
“It's very interesting. Very sophisticated, very successful people have been aloof to requesting or engaging their advisor to have a benchmark. The client may be getting a benchmark, but it changes over, and over, and over again, as the allocation of the portfolio changes,” which Cook said isn’t fair.
Michael Dow, the chief investment officer of Beacon Pointe Advisors, an RIA in Newport Beach, Calif. that manages just under $10 billion for institutions and private clients, says every client should have a benchmark. Although, he’s not surprised some clients don’t or that it isn’t part of routine discussions.
“I don't doubt for one second that very few RIAs or advisors have the benchmark conversations with their clients because most of them would be fired if they were measured exclusively on performance. But the client relationship is so much more than performance,” he said.
Before joining Beacon Pointe, Dow worked for UBS Global Asset Management, where he was a managing director, head of U.S. Core Plus Bonds, head of Sovereign Credit Research, and head of Emerging Market Corporate Debt.
For most investors, their portfolio’s performance is an intertemporal problem, Dow said. As long as markets are going up and they are on track to achieve their goals, most of them will be satisfied customers. So, the benchmark is one-dimensional; it gives a client a way to measure how their investments are performing and if it only comes into play when markets are down, that might be okay.
But to Dow, the benchmark is more important. Creating alpha is one thing. Achieving a risk-adjusted return needed and expected of a private client or institution, is another. A benchmark doesn’t just help define relative performance (or whether a person is on track to meet their retirement goals), it helps guide risk management and holds portfolio managers accountable to clients over time.
Again, when markets are good, clients are generally forgiving. But when markets are bad — without a benchmark for an advisor to show and explain the sky isn’t falling — clients might start looking for another investment manager. Some clients in that scenario (with $200 million) found their way to Wealthstone this spring.
“I spent my entire investing career being compared to a benchmark where if I don’t achieve a positive alpha, I would be fired, which is the difference between institutional and private investors,” Dow said.
A team of portfolio strategists at Fidelity Institutional have done “thousands” of reviews with financial advisors and the group has seen a shift toward “more goal-oriented portfolio construction” versus “benchmark-oriented portfolio construction.” Goal-oriented components of portfolios like income, capital preservation, tax-sensitive investing, and growth for retirement, “don’t lend themselves easily to benchmark comparisons, so advisors are increasingly showing clients how they’re doing versus their personal goals,” said Paul Ma, a vice president and Lead Portfolio Strategist at Fidelity Institutional.
Over recent decades, big, legacy wealth management firms have trained advisors to be more relationship managers than investment managers, according to Russell Norwood, a founder partner at Austin, Texas-based Venturi Private Wealth, an RIA that manages $1.5 billion.
Venturi, which has 23 employees, is dedicated to investment management alongside goals-based financial planning and every client is measured against benchmarks chosen for them. Clients can log into their accounts and see their balances and performance any time. How they are doing relative to their last meeting or statement, or what they might see on television, is something the RIA believes clients need to understand.
Norwood said a benchmark is a good way for clients to evaluate a firm, even though it doesn’t mean everything. “The move to being more accountable for that is a good thing.”
Like Wealthstone, setting a benchmark and attention to investment performance has also been a differentiator and helped Venturi grow an annualized 27.5% each year since it was founded five years ago.
Recently, Venturi was in a close competition for a new client and won their business. Part of the reason the client said they chose Venturi? The RIA employed multiple people focused on investments and who held the Chartered Financial Analyst (CFA) designation. None at the competing RIA did.
“Having investment expertise — which seems odd in an industry where we’re responsible for managing money — has really become less common,” Norwood said.
Meanwhile, the number of RIAs continues to grow, along with fee-only wealth managers. Without benchmarking and differentiated investment management, Cook questions whether investors are getting enough for what some pay for.
Advisors "do not want to migrate into being held accountable to a benchmark. But now you're saying you're managing my money and most of these people have no history or experience in actually managing a portfolio. And we see it all the time, just the mishmash of products."