Nigel Stewart is – to put it bluntly – in the business of “stupidity prevention”. Stewart and his team see their role as protecting clients from themselves. Education, regular reinforcement of investment fundamentals, reassurance about past investment decisions, a focus on policy, strategies, structures, philanthropy and being unapologetic about charging a substantial fee for services provided are all part of the Stewart Partners profile.
Stewart sees his job as being a genuine adviser, leading clients – as distinct from what he describes as a “facilitator”: “We do not sell products; rather, we recommend them where appropriate,” he says. “There’s a difference between being an adviser and being a facilitator. A facilitator will pick up the phone and often agree with the client’s wishes or instructions.” If a client rings and says they think they should sell an investment, “if I am a broker or a facilitator I say, ‘Yes, I think you’re right’ ”, Stewart says.
“If I was in a major [financial planning group] – and I won’t mention any names – I would be fired if I was not selling products. “If we were relying on the revenue from selling products, we would go bankrupt overnight. “We spend an enormous amount of time educating and re-educating and reminding clients that they have no business being in growth assets if they cannot stand the pain or endure the volatility of markets. Risk is the cause; return is the outcome.” The test of a firm’s advice comes when things are not going so well in investment markets. Since the beginning of this year a number of firms have found, to their cost, that clients either didn’t understand what they had been sold, or had been sold something that simply didn’t suit them.
“We have not lost any clients through disappointment with investment results, although we have had a few phone calls from clients, who have normally commenced the conversation with: ‘I am terribly sorry, and I know that we have discussed this before, and I hope you won’t mind us seeking reassurance…[but] is it correct that I shouldn’t be selling out at this point in time?’.” Stewart says the firm’s task has been to keep clients “as informed as possible”, and to continually and rigorously stress-test clients’ portfolios to make sure that they remain appropriate and viable in current market conditions.
{sidebar id=3}Stewart says the aim of making sure clients know where they are invested, and why, is to help them avoid making the poor decisions that typically destroy wealth. He quotes the most recent study of investor returns, published by the US research group Dalbar. It shows that in the 20 years to the end of 2007, investors regularly and routinely compromised their wealth creation plans – assuming, that is, that they had plans – by buying into and selling out of equity funds at almost precisely the wrong moments. The Dalbar analysis shows that over the 20 years, the S&P500 Index returned 11.8 per cent a year; the “typical” investor (determined by measuring fund flows) achieved just 4.5 per cent a year.
That means a “typical” investor with $10,000 to invest at the beginning of the period would not have “invested it until it’s all gone” – as Woody Allen might have put it – but would have had only $24,000 by the end. Had they invested in the index, and done nothing at all for 20 years, they’d have ended the period with $93,000. Stewart says his firm’s philosophy of always putting clients’ interests first is designed to headoff these self-destructive impulses before they manifest themselves in actions. And by charging a significant fee – in some cases more than $5000-a-month as a retainer – clients value the advice that the firm provides, and tend to follow it.
“It’s about how you position yourself,” Stewart says. “It’s about how you can clearly articulate what your value proposition is. “It’s very much stupidity prevention. It’s delivering peace of mind to clients; it’s about acting as a sounding board. “It may be that they want to buy an aircraft for one of their children and they don’t know whether to pay cash or lease it. [One may deduce from this statement that Stewart’s clients are not typical!] “We have virtually positioned ourselves as a family office. If a client wants to buy or sell a business, they will invariably involve us in that decision. If they’re buying or selling a property, they will involve us.
On issues of intergenerational wealth transfer, we will often have a lead advisory role.” Stewart entered the financial services business in the mid-70s as an insurance underwriter. After putting himself through a course run by the stock exchange, he joined broking firm Bain & Co but very quickly discovered he was a fish out of water. The transaction-driven world of stockbroking was anathema to Stewart; he could not see how clients’ best interests were being put first in an environment where brokers lived or died on the volume of transactions they generated. “I did not like the concept of causing a transaction, to justify one’s existence, that frequently was not in the interests of the client,” Stewart says.
“It had to be a ‘buy’ or a ‘sell’; it could not be a ‘hold’. “I saw from an early age that it was imperative to put clients’ interests first, not just generate brokerage.” A year away travelling in 1982 gave Stewart time to recharge his batteries, and he returned the following year to establish Nigel Stewart & Associates. But it was not very long before Stewart found himself back where he’d started, after his firm merged with Potter Warburg and became part of an investment bank. He found himself once again confronting “the transaction mentality”. After becoming chairman and chief executive of SBC Warburg (a forerunner to UBS Wealth Management), and moving the planning business from the investment bank to the private bank, Stewart departed.
But the lure of financial planning proved irresistible and in 1998 Stewart launched Stewart Partners. This coincided with the launch in Australia of Dimensional Fund Advisors, a firm of which he became a director. “I had observed how [Dimensional’s] business model was so successful in the US, principally because they put clients first, in the overall process,” Stewart says. “It was not a case of selling product; simply, they did not pay commission, they did not pay [trailing] fees, they did not give away golf balls, hats and so on. “They provided education and they developed pure, tax-managed asset class structures. The advisers who would be interested in that approach had to be of the mindset of putting clients’ interests first, and charging on a fee-for-service basis.
“I was the first little advisory firm to use those asset-class building blocks down here. “We very much embraced the concept of efficient markets, being that all available information is in the market to set prices, one; two, things like the concept of risk and return; and the third part is the concept of diversification, coming from Harry Markowitz, received a Nobel prize in 1990 for his innovative work in 1953 on diversification. “We used that as an investment philosophy. We built our investment philosophy around the science, as we felt that was in our clients’ best interests: no market timing or stock picking or speculating or forecasting, which has proved to be costly and unreliable.
Why pretend [that you can], when you observe the scientific evidence and research results?” Stewart says the key is to “focus on what you can control, focus on what you can understand [and] focus on what you can relate to”. “We can minimise costs and fees, we can tax-manage, we can [deal with] momentum, and we can target the risk elements within markets that provide a higher return than the market itself generates. “We structure portfolios to capture these elements of risk in markets, and we educate clients to understand that although there will be greater volatility, with that volatility, over the long term, comes a greater rate of return.”
Building the kind of relationships with clients that Stewart strives for can only happen when all parties understand that the clients’ best interests are paramount. Perhaps surprisingly, Stewart does not refer to himself as a financial planner – and that’s partly to distance himself and his firm from the unflattering connotations that the term “financial planner” can conjure up for the public, particularly in the wake of high-profile financial collapses. “We’re more wealth strategists, or we work in the wealth management business,” Stewart says.
“It’s sadly not a profession. It’s heading towards being a profession, but there’s still work that needs to be done. “I feel sorry for clients who have gone into these investments [that have collapsed]. The client has gone to an adviser thinking they were getting good and proper professional advice, and it’s turned out completely differently. “What was on the adviser’s mind, putting forward these high-risk products to clients in the first place? I can only feel that a large part of the process was driven by the greed of the adviser and the high fees that were being paid to promote these products. “If somehow we can educate clients to pay a reasonable fee for the service they are receiving, and to avoid naive salespeople who are out there flogging high-risk products, I feel we would have improved the transparency and professionalism of the planning industry. {mos_fb_discuss:21}
