Money Matters

>>Cypress Capital Group's Jim Johannsen admits that he and others in the financial industry tend to have a herd mentality. But one trend-using a model that treats investors with millions of dollars the same as those with a half-million-made him stop to consider whether it is one worth following.

It's what he calls a cookie-cutter approach of investing clients' capital into mutual funds or model portfolios, some of which offer financial rewards as incentives to portfolio managers. By giving clients more customized service, Johannsen believes Cypress Capital, which serves clients with $1 million to $20 million to invest, can carve out a niche in the crowded marketplace.

"It's just the difference between having an interior decorator work with you and buying tract housing," he says.

For a lot of firms, a million dollars isn't a lot of money anymore, says Dwight Cass, editor of Worth magazine (a publication of CurtCo Publishing, which also owns Gulfshore Business). Some firms might be giving just as good service to folks with lower asset amounts.

Clients of Lowry Hill, which has an office on Fifth Avenue in Naples, are in an even higher investment tier-$10 million and up. Principal Jeff Erickson says those who come from other firms report that pressure to handle a large number of clients kept investment managers too busy to focus on their particular needs.

"Everybody's situation can be so different," he says. "It's hard to make a cookie-cutter approach work."

Although clients of those companies are aware that they're buying into a mutual fund or model portfolio, Johannsen isn't sure they know their portfolio manager can receive financial incentives for getting clients onto that "conveyer belt."

"Once the corporate decisions have been made to put this business model in place, then what you have are financial plans and marketing materials that lead people in that direction," he says.

Although satisfaction with advisers has improved, with 75 percent satisfied in 2005, it's still down from 1999, with 83 percent satisfied, according to Chicago-based Spectrem Group, a research and consulting firm.

Spectrem's recent survey of the affluent found that wealthy investors expect their advisers to communicate via e-mail and to provide access to online investment and financial information. However, they do not feel the materials and other communications they receive from their primary advisers and other financial firms are helpful. Also growing increasingly important is access to timely value-added information, which Spectrem says could cause existing service models to change.

A buzzword in investing is "open architecture," referring to the practice of offering products through a third party. Johannsen says this significantly increases client fees because multiple payments are made to investment advisers, the third-party organization and mutual funds. In many cases, when portfolio managers meet with clients to develop investment objectives, they are likely to discuss certain products and plans to put them in certain funds.

He says that Cypress, which opened an office in Naples this year, works differently with its clients. "We construct a client's portfolio to his or her goals, objectives and risk tolerances," says Johannsen. "It's separately done, so we're not pushing product. We construct, maintain and fine-tune portfolios based upon those specific objectives."

Although the other strategies aren't wrong, he adds, "This is a strategy that we like that works. It has a harder time working if you're in an organization that has 35, 575, 1,000 offices."

According to the 2006 World Wealth Report by Merrill Lynch and Capgemini, which surveyed individuals with net financial assets of at least $1 million (excluding their primary residence and consumables), declining client loyalty, the impending wave of generational wealth transfer and increased demands are "creating an environment in which client turnover could explode."

Erickson advises that if you're considering hiring a firm offering open architecture, to ask for a sample portfolio to see what funds you might be investing in and do research on your own. Make sure you understand what the final portfolio looks like in terms of the stocks, bonds and other investments. "Get a clear idea of the investment risk and potential return," Erickson advises.

And be proactive. Ask for the total fee and a breakdown of the fees, which can be difficult in open architecture because of embedded fees in each fund, he says. "It's always important to understand who is being paid what."