Investment Executive‘s Leah Golob sat down with Jason Pereira, partner and senior financial consultant with Woodgate Financial Inc. in Toronto, to discuss serving the high net-worth (HNW) client segment and how it is likely to evolve. Pereira, together with three other advisors, manages the affairs of about 150 core clients. The firm’s household minimum is $1 million in investible assets.
Q What kind of services do you offer?
A The first thing we do is a deep dive financial plan. We make sure we totally understand who the client is, what they have, how to optimize it and how to get them where they want to be. [Regarding asset management], we use goals-based investing: we’ll break [assets] up into buckets and [in consultation with the client] pick the best solution. On the insurance side, we look at nine or 10 different points of risk. We do tax planning throughout the entire [process], but at [a certain] point, we stop and say, “Hey, here’s a couple of [tax] strategies that might be of value to you as well.” Then we do estate planning; making sure wills and powers of attorney are in order.
In addition, we have niche market services for executives and business owners. I typically deal with business owners. For a lot of clients who are business owners, [Woodgate] becomes almost a de facto member of [the client’s] board. We also have an extensive network of professionals [to assist clients], whether it be medical or legal or whatever it is. If clients need anything, we tell them: “Give us a call. Maybe we have someone who can help.”
Q Can you tell me about your team and how it operates?
A Everything is shared equally. We tell clients from Day 1: “You have a primary advisor, but we’re all servicing you in different ways.” We all have different backgrounds, different specialties, different people we click with. When a prospect comes in, the first thing we do is identify who they’re best suited to work with, and we steer them in that direction.
Q What is your pricing structure?
A We think we shouldn’t be touching a single dollar until such time as we understand what’s going on in clients’ lives. In order to do that, we have to charge for financial planning – it’s the only way to do it. So, we charge $5,000 up front in the first year. That number will be going up in the next while, probably closer to $7,500. When you’re talking to clients who are north of a million dollars in investible assets, $5,000 to get their life completely set up is not exactly a big number. We vow to finish the entire analysis with no commitment to come with us. The reality is, though, we win the investment assets 99% of the time. [Regarding investment management fees], we’ve capped those. We don’t charge beyond $5 million in investible assets. We were quoting on $20-million cases, and we said, “We can’t charge that.” Frankly, the investment side and the portfolio management side are largely commoditized. I can’t provide a lot of extra value there. Where I can provide it is on the planning side. That’s the focus.
Q How does financial planning differ for HNW clients?
A If someone sells their business for $10 million, they want to make sure that their net worth never drops below $10 million. It becomes an anchor point for them. So, returns, I would say, in many cases, are less important. What’s more important to [that client] is being able to live his or her lifestyle and being able to maintain that nest egg on an after-tax, after-inflation basis. And then, also transferring that wealth to the next generation. Or, a lot of clients get to a certain point where charitable needs and social responsibility become issues.
Q What are the challenges for your business-owner clients?
A They worry about how to retain and reward key employees. They worry how to get money out [of their companies] without paying 53¢ on the dollar [in taxes]. And then, if they’re lucky enough, they worry about passing that on to the next generation. [These situations often are complex], so there’s a definite need to address this so they don’t blow up in everyone’s faces – and blow up the family.
Q What is your approach to investments?
A [We use a model] that is very straightforward – nothing super-fancy – but is still largely ignored by the industry, which is frustrating. [Portfolios are] automatically rebalanced; [the model is based on] modern portfolio theory. [The result is a] fully diversified portfolio that is made up of stocks and bonds that is basically at the right risk tolerance for that goal and that client. And that’s it.
Q How do you protect families against downside risk?
A We start with a time-tested risk tolerance questionnaire and a conversation about the client’s previous experience with risk [to] try to understand the [client’s] sensitivity. When we meet with them, the most important thing we focus on is downside. And we show them a portfolio with a 60/40 [asset allocation, and explain] the range of expectations in a year. [We show] what actually happened [from] 1980 to 2018 and that, basically, the worst year was 2008. The message is that anything can happen in one year. If you’re not comfortable with this range of possibilities, you’re not comfortable in that portfolio. We put [dollar figures] in front of them and show them what that negative looks like – not just in percentages – and say, “Are you sure you’re OK with negative 10%, given the fact that that translates into $200,000 for you?” [Other advisors are] talking about promising returns and what the average is going to be. But clients don’t feel the average; they feel the volatility. We don’t lose a lot of clients in real downturns simply because we prep them for the downside.
Q How do you balance managing investments and financial planning?
A The funniest part of this – and this is where the industry has it backward – [is that] managing the investments is actually the easiest part of our job. The amount of time I spend looking at business media in terms of where markets are is minuscule. When you take away all the noise that [advisors] create for ourselves and the delusion that we create for ourselves about being the next Warren Buffett -which we’re not going to be – and you outsource or delegate that, that frees up all the time to focus on providing the other things we discussed – and on making sure we’re on top of the client relationship.
Q When you’re tax planning, do you outsource?
A We work in collaboration with the accountants. Clients don’t mind if they pay some taxes. [But] I don’t know who in this world doesn’t mind paying 53¢ on the dollar. Everybody does. And besides, we tell all clients: “It’s not what you make; it’s what you keep.” And, frankly, if I [have achieved] 1% or 2% less than [other advisors’ client returns], but I am 1% or 2% better after taxes, I win.
Q Regarding estate planning, I’m sure you probably don’t have your hand in that as much.
A We do. We know what the client’s intentions are; we have a conversation; we can draw up what we want the estate to look like. And the estate lawyers love us because all the heavy lifting has been done by the time they come in and round out the process.
Q How do you build and maintain trust?
A The fact that I can have deeper, intimate relationships with clients because I have so few of them is Step 1. The second thing is: because I take a planning-centric approach, I understand far more about their lives than the average broker ever will.
Q What interests you about clients in emerging industries?
A I love seeing people succeed; I love helping people succeed. And we have shared experiences because of that because we’re both entrepreneurs. I’m a technophile; I’ve always loved learning about new technology, so getting exposure to those things is super- exciting to me. I understand that all these tech guys don’t understand finance; they started off in another industry. And having someone who understands both [tech and finance] is so valuable to them that they love having conversations.
Q Where do you see opportunity in a high net-worth space?
A Investing is commoditized, and [that] will get even worse over time. People are going to wake up to that. The only thing that differentiates guys like me and multi-family offices is [that we] continuously raise the bar in terms of service and experience. There’s a reason why Apple [Inc.] can charge what it charges for a phone. You can get an Android phone for a hundred bucks. It’s because of the experience you get; you’re going to pay a premium for it. But most [advisors] are targeting [HNW clients] incredibly poorly. They’re just targeting them because that’s where the money is. What are you going to do to win those people? What are you going to do to be better than the next guy? And [many advisors] have no answer to that question. So I think there’s enormous opportunity there.
Q Any other key points?
A Stop seeing these people as big fish to land for big money. The reality is that they’re people who have problems and needs. Meet those needs, and stop focusing on a one-dimensional solution. Or don’t – and let me take them away from you. One choice or another.