By Matt Blumenfeld
A new relationship with Dynasty Financial Partners gave one UBS AG advisory team the opportunity to strike out on its own. Jonathan Blau, founder of Fusion Family Wealth LLC, spoke about his team’s decision to shift to an independent model and explained what resources Dynasty Financial brings to his firm’s clients. In an interview with SNL Financial, Blau also provided his perspective on behavioral finance and how he advises clients.
The following is an edited transcript of that conversation.
SNL Financial: What made you all decide to leave UBS and start up your own firm?
Jonathan Blau: I don’t view it as a decision to leave UBS. I view it as a decision to move toward a platform that we felt would enable us to embrace the concepts that are important to us. We’ve always had an eye toward independence and that model. Over the many years we’ve recognized that while we were a relatively sizable team in the confines of a wirehouse. We’ve fluctuated over the years between $700 million and about $1 billion in assets under management — but we recognized that there was no practical solution, if we were to go out on our own years ago, to be able to access the world-class resources that we now can tap through Dynasty’s infrastructure. We can access independent research through Callan and Wilshire, state-of-the-art reporting systems from Envestnet and a broad and deep swath of investment solutions. At the same time, we can keep the custodianship function separate from the advice function. Fusion gives the advice, Fidelity is the custodian. We’ve always believed that is a nice solution from both a perception and a reality standpoint for clients, especially today.
SNL: How will you leverage your new relationship with Dynasty Financial Partners? What do they bring to the table?
JB: Some time ago we were contacted by [Diamond Consultants President and CEO] Mindy Diamond and she educated us generally about that space. After hearing the initial construct she described, I figured we should go explore it. That was the genesis.
We’re called to be the adviser to a lot of professional servicers, particularly in the accounting area, for them personally and for their clients. We’ve always approached the advice business with the intent to deliver at the highest standard on a personal and professional level for the group. What was appealing was the ability to match that standard of care with an institution that is a registered investment adviser who holds us to the highest legal fiduciary standard. That concept was attractive, along with the ability to have complete transparency with respect to all we do and to not be tied into one custodian. If a client has certain needs that Fidelity might not be proficient in, we can look to someone else. The same is true for our research; we can look almost anywhere that we need to look. Having that breadth and independence is very attractive to us and we feel we can deliver a strong product to our clients. And for our accounting clients, we can give their clients comfort that the firm they are using has that high level of the fiduciary standard. That’s particularly true when it comes to 401(k) plans.
SNL: What types of clients did you bring over and are you targeting with Fusion Family? And what has the initial reaction been to the move towards independence?
JB: We’re not targeting anybody right now. Our main focus right now is our loyalty to existing clients and making sure we oversee the stewardship of the asset transfer and ensuring it goes as smoothly as possible. Right now our focus is not on growth; our focus is on making sure our clients are in a comfortable position as they make this transition. All of our resources are focused on that. When it comes to future growth, I should note that the accounting firms also refer clients to us. Traditionally our minimum has been $3 million, but we don’t hold a hard minimum. We look at the accounting firms that call us as family. If they give us the compliment that we are the adviser that they trust with their clients, we look at them as one relationship. We would never make them feel like they are below our minimums and would handle their accounts.
We have had very positive feedback from the overwhelming majority of clients as they have gotten educated about why we moved, what resources could be brought to bear on their portfolios through our partnership with Dynasty and the higher fiduciary standard. They are very excited about it and, in many cases, learning something new about something they have been embracing with open arms.
SNL: Do you have any particular specialty or niche focus?
JB: The team members have been together on average for 10 years and what we like to think what is unique about us is that the level of education and experience on the team is broad and deep. My managing director, Harvey Radler, has been in the business for 40 years. Among the other group members we have Jeff Blick who holds a law degree and was an accountant. He worked with me at Arthur Andersen in 1992 — we’ve been working together and friends since then. James Cloudman has an advanced degree in mathematics and Joel Bodner has an MBA as well. So four team members, including myself, have advanced degrees and two have multiple advanced degrees, covering everything from law and education to accounting and business. Our clients love to call up someone who understands what is going on and who understands them. We take a lot of pride in that skillset.
SNL: In that vein, what are people calling you about today? What is the investment environment like right now and what do you folks bring to the table in terms of helping clients navigate what can sometimes be turbulent waters?
JB: Behavioral finance is behind all the advice that we give and we like to contextualize the events of the day for our clients. In the last four years we haven’t had much in the way of activity on the downside when it comes to equity markets. People tend to use the term “uncertain time,” but when it comes to the investment world, it’s always an uncertain time. It may seem more certain at times, but there is always uncertainty present. In behavioral finance there is something called recency bias. In the last couple of years, when the market hiccupped because of worries about the Federal Reserve tapering, it bounced back when the Fed decided not to taper. That pattern has been what we’ve seen for some time now. As human beings, what we do is look at that pattern and say a pattern of future predictable behavior exists based on the past — where no such pattern actually exists. In the third quarter of 2007 the market was great and no one was predicting that four months later we would be entering a period of economic upheaval that would rival the Great Depression. So it’s about perceptions and investors acting on what they think will happen. I call that the illusion of predictive value; that somehow what we think will happen has predictive value about what will actually happen.
You can’t rely on making portfolio decisions based on aphorisms like “sell in May and go away.” These things don’t work statistically. If you sold this May, for example, you would have made a bad decision.
A client called up in the first quarter and we were recommending raising some cash for certain portfolios when we rebalanced from stocks to bonds. But instead of putting money back into bonds, we said that bonds are relatively inexpensive, we need them for income, but let’s keep some cash around for future opportunities. We had a follow-up from the client and she asked if made sense to have all this cash. Stocks have been up since March! But I told her, “Remember this money came out of stocks to get your account into balance. It would either been in bonds or cash. Bonds are down 2% and so being in cash has helped the total return of your portfolio in the short run.” This client had a similar cash position back in 2008, when we were trying to get clients to reposition into stocks because stocks had become undervalued. So I said to her, “I don’t think it’s the cash that’s bothering you. It’s recency bias. You’re looking at the fact that the market keeps going up and reaching new highs, so you want to move this cash. When you had this position in 2008, you were happy to have it because if you had it in stocks it would have been going down. I had a hard time getting you to reposition.” And she said, “You know what? You’re right.”
So it’s all about being able to put those things in context for people that helps them the most and avoid behavioral and cognitive mistakes that lead them to not meeting the goals they have set financially. Something from Mark Twain is one of my favorite stock market quotes: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” The perception in 2008 and 2009 was that stocks are very dangerous, but as Warren Buffett will tell you, he’s fearful when everyone else is greedy and greedy when everyone else is fearful. He may be very bright, I’m sure he is, but I think it’s his ability to suppress the emotional and behavioral issues that makes him successful. There are many smart people in the investment business that compete with Warren Buffett, but in my view that’s what differentiates him. That’s Behavioral Finance 101 to me.