A fence around the nest egg
Advisors to the wealthy suggest hedge funds, foreign investments to protect the family fortune

by Richard Foster
for Virginia Business
August 2007

Michael Manfredi understands risk. A wealth management adviser who leads a team of four at Citigroup Family Office in McLean, Manfredi usually starts out telling potential clients about his own career, which wasn't always rosy. The Naval Academy graduate is a former naval officer and defense-industry executive. He was involved in leading a leveraged buyout in the early 1990s, only to have the enterprise end in ruin. "It wiped me out financially, and so I had to start all over," Manfredi recalls. "I started in this business 10 years ago with $1,000 in the bank and five mouths to feed, and I knew why I was in the business: to feed my family and to serve my clients."

Surprisingly a lot of his high net-worth clients can relate to Manfredi's tale: "We generally find out that they've been up and down  in business, too."

Manfredi ‘s team  handles about 100 clients with collective investment of around $200 million. Many of their clients are moving into the next phases of their lives after founding and selling businesses or becoming multimillionaires through stock options. They're moving past the concerns of gaining wealth and becoming more focused on protecting their wealth and achieving their aspirations. 

"Most of your life, you're leaning into the wind trying to make money, but once you accumulate it, you've got to put a fence around it to protect it," says Manfredi. "We like to tell people that most financial advisors managing $100,000 clients are talking to them in a language that explains how they can become a $500,000 client.  When we deal with our typical $5-plus million client, the discussion is about how not to become a $500,000 client."

Manfredi is a prime example of the new additions to the Virginia Winner's Circle, author R.J. Shook's list of the state's top financial advisers. Though Williamsburg-based Joseph Montgomery of Wachovia Securities continues as No. 1 on the list for the third year running, and Douglas Stewart of Fredericksburg (who recently joined Cary Street Partners) took the No. 2 spot for the second consecutive year, there are a lot of new names in this year's circle. Shook, who writes the top-selling Winner Circle's series of books about the financial advising industry, has increased the Virginia list from 30 to 50 advisers (or adviser groups), adding 27 newcomers because he had so many strong nominations in the commonwealth.

The Winner's Circle is also the trademarked name of Shook's independent advocacy group that promotes best practices in the investment industry and the value of financial advice. His annual lists of the nation's best advisers appear in Barron's, the Dow Jones business and financial weekly newspaper. Shook compiles two financial adviser lists for Virginia Business. One is a list of 45 advisers to clients with high-net worth (more than $1 million) and ultra-high net worth (more than $10 million). The second list names the top five retail advisers, who serve clients with a net worth of less than $1 million.

Even though Manfredi doesn't handle a lot of retirees, many of the new analysts on the Winner's Circle list are seeing a booming business among baby boomers reaching retirement age who are intent on keeping their wealth intact. "I'm seeing a big trend towards retirees who want guaranteed income sources" such as variable annuities, says Gregory Nerantzis of Smith Barney in Leesburg, another new addition to the list. "As people get wealthier and older, risk takes on greater meaning as you're closer to retirement. We are recommending some some variable annuity strategies as well as other diversification strategies for many clients entering their retirement risk zone [within 10 years of retirement, or presently in retirement]."

Nerantzis also suggests alternative investments to protect high net-worth clients from the volatility of the stock market. And he's not alone. Shook notes that one of the trends in high net worth financial advising in recent years has been "investing in alternative instruments — private equity, hedge funds and other instruments that may not be correlated to the general market — as an alternative place to seek returns. In the past these advisers may have allocated 5 percent towards alternatives. Now they could be recommending as much as 20 percent or 40 percent or more."

Not all of the analysts are crazy about hedge funds — some caution that recent events like the Bear Stearns Cos. bail-out of a struggling hedge fund may herald troubles ahead. But financial advisers point out that these can range from low-volatility structured finance products to a venture searching for life on Mars. The amount of risk that clients might take depends on where they are in their lives, their financial goals and their predisposition to risk.

Advisers are also more apt to recommend money managers and investments with a more global bent. "It's important to be a global investor," says Rebecca Robertson of Wachovia Securities in Richmond, another Virginia Winner's Circle newcomer. "You can't be myopic and just stay inside the states." (This trend also is being seen in a growing portion of portfolios, Shook says, because "We are recommending some some variable annuity strategies as well as other diversification strategies for many clients entering their retirement risk zone [within 10 years of retirement, or presently in retirement].")

One thing's certain: Clients are much better informed about their investment options than in years past, a fact that can be chalked up to the plethora of information outlets from the Internet to cable financial news channels. "I'll have a new client come in, and I don't have to tell them what asset allocation is. In general they understand what it is," says Laurel Kent with Smith Barney in McLean, who is a Virginia Winner's Circle honoree for the second time. "Ten or 15 years ago, I had to explain it. … I don't have to do that anymore."

Another returnee to the list, John M. Verfurth, a senior vice president and wealth adviser with Morgan Stanley in Vienna, says his team's clients are "talking more about nonconventional assets. They understand risk better than they used to … They know there are different ways to get what they're looking for, without the old conventional method of just increasing your stock allocations. They're much savvier than they used to be about managing the risk portion of their portfolio."

Financial advisers are changing along with their clients. For instance, Verfurth's advising team, The VWG Group, typifies another strategy in high net-worth investing — the team approach. Verfurth, Richard Weeks and Jeffrey S. Grinspoon lead a team of six, serving about 200 clients worth a collective $650 million. Verfurth specializes in estate planning, Grinspoon focuses on corporate matters and Weeks is an expert on foundations and nonprofits in addition to serving as the team's financial analyst. "We don't want to be duplicating services," says Weeks. "That way our clients can get more things out of each of us."

Other first-time teams on the list include the team led by Richmond-based Jane Brooke of Wachovia Securities. Her three-member team manages $1.2 billion in assets spread among 650 clients. "Gone are the days of one adviser and one sales assistant," notes Brooke. "Those advisers who are seeking the real affluent individuals, they tend to have bigger teams with specialists. A lot of them have their own analysts on the teams who are constantly looking for the right investments or the right money managers."

A typical team is made up of three or four advisers each with a different specialty, says Shook. "You might have a specialist in alternative investments, a specialist in liabilities and handling loans and other credit-type needs. Someone else might specialize in fixed incomes and someone else in asset-allocation strategies. They're hitting on both sides of the balance sheet."

The more specialties the better when you're dealing with ultra-wealthy clients like the ones represented by Manfredi's team. "Wealth management's broader than just asset management," says Manfredi. "It's taking care of all the various complex needs of a high-worth family. Life gets more complex when you manage more resources."