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WHM Capital Advisors
Client since October 2007
The Drive for Diversification
WHM Capital Advisors Trade Spreadsheets for Instant Insights from Tamarac
No two businesses are the same. No financial advisor can afford to treat business clients in blindly similar ways. Each must be advised according to specific strategies geared to particular goals and objectives. Successful advisors take the time to get to know their clients' needs inside and out.
This seemingly simple concept turns out to be one of the hardest to implement in the field of wealth management. Who has the time?
WHM Capital Advisors, a Columbia, South Carolina, investment banking and wealth strategy firm has found a way to make time. Their client list consists of a range of small cap companies, a blend of legacy businesses and start-ups, all with different requirements.
They've reduced time wasted on inefficient back-end client support, while refocusing on diversification. A key ally in that effort has been Tamarac Advisor®.
A web-based portfolio monitoring and rebalancing solution, Advisor automates critical back-office functions such as; portfolio monitoring, rebalancing, cash management, tactical trading, tax-loss harvesting and trade order generation. The dramatic efficiencies gained translate to time found for business growth activities.
"We firmly believe that we would be doing our clients a disservice if stocks were all we did," says John Barnes, the firm's financial analysis director. "Besides equities, we deal in managed futures, commodities, natural resource plays, and foreign currencies." But diversification used to mean less time was available for strategy, because more time was devoted to bleary-eyed spreadsheet reviews.
"Literally, we were using Excel," recounts Barnes. "It was painstaking. We would shoot for monthly rebalancing, but we only managed to do it quarterly. With the amount of data entry needed for our models, rebalancing took a full week: data entry, double-checking the work, and arranging trades."
Then, at a 2007 industry conference in Chicago, Barnes stopped by the Tamarac booth. At first, he couldn't believe what he was seeing and hearing. "They were listing off everything Advisor can handle: stocks, bonds, mutual funds, ETFs, alternative investments. This was the technology I'd been dreaming about!"
Barnes asked representatives of Charles Schwab, WHM Capital's custodian, about Tamarac and their Advisor software, and got an emphatic green light. WHM Capital's clients didn't know it yet, but their investment lives were about to be transformed.
More eggs in more baskets
Part of WHM Capital's need for more robust technology was due to a widespread issue with small and family-owned businesses. When entrepreneurs start a business, they support it with everything they've got. Pretty soon, all their financial eggs are in one basket, and they may feel guilty about diversifying.
According to a recent nationwide survey of family business owners, conducted by Laird Norton Tyee, 93 percent of respondents across the country have little or no income and asset diversification outside of their business.
It's a story that WHM Capital knows only too well.
"We only work with business owners and their families," says Barnes. "Our practice is built around three things: analyzing the value of their business, planning for the transfer of that value to future generations, and designing investment strategies to hedge against risks."
In almost every case, clients turn to WHM Capital because, after having invested their lives building their company, owners suddenly realize the huge risk they're running. And, as start-up entrepreneurs evolve into CEOs of established companies, they face difficult decisions about everything from operational and expansion capital needs, to supplementing their retirement income.
One of the first tasks with a new client, explains Barnes, is to gauge their level of investment in their own company.
"We determine what the capital structure is, both what they take out of the business as salary and what they should expect as a shareholder," Barnes says. "Typically, they don't approach valuation from a shareholder's perspective. Shareholders have a basic equation for judging return: income plus capital appreciation. Owners tend to focus just on income."
Because legacy often is front of mind, Barnes says, "We talk with them about strategies for estate planning and taxes. We sit down and do income needs analysis with them. Generally, they're looking for 8-10% return per year, so we look for ways to generate that alpha."
While stressing the need to create value through capital appreciation, Barnes warns that family business owners often have a portfolio that runs heavily to investment in businesses they know and do business with. "If they're too heavy in their own sector," Barnes points out, "they're doubling down on their risk."
Tamarac's spotlight on alpha
Risk management is the primary concern of WHM Capital's clients, says Barnes. "Especially for business owners who have transitioned out of their enterprise, their risk tolerance has decreased markedly. They've given twenty, thirty years of their lives to risk. As investors they expect a return, but they demand risk management. So we craft the kind of portfolio that grows assets without undue exposure."
Barnes had been introduced to the concept of "opportunistic rebalancing"-a look-before-you-leap method of rebalancing that watches for alpha-boosting market noise. By building in tolerance limits to asset class bands, the need for rebalancing is reduced to times it's absolutely necessary to avoid portfolio drift-or to take advantage of swings.
That made sense to Barnes, but it was beyond the limits of his technology before he found Tamarac. He was looking at the massive staff time needed to track asset classes, check drift within bands, make calls on tolerance levels, and if needed, actually generate trade orders. That valuable time was needed to get smart about client needs.
Advisor, with its ability to quickly preview rebalancing's effect, changed the way he did business.
Getting up to speed with such powerful software, Barnes says, took "at least 60 days, practicing in the office, familiarizing myself with it. We're now 90 days into using it live. We have more advanced questions these days; we just get on the phone with them. Tamarac has been with us every step of the way."
He's already seeing the early benefits. "Tamarac has saved us the equivalent of a full-time employee" says Barnes.
A model of forward-thinking investment
Once the firm inputs a new portfolio's data into Advisor, they model virtually every aspect of a portfolio's performance before action is taken.
"With Tamarac we can model portfolios and experiment with different blends," adds Barnes. "We have a complex in-depth, multi-tiered model, and Tamarac lets us manage at all the various levels: stocks, families, classes. We're not in the market every day, but that's what we really like about Advisor-when we need to move, we already know where we're going."
That versatility is vital in a market that is going through rapid changes on a daily basis. In early 2008, the firm was using Tamarac to track the S&P's response to the subprime mortgage fall-out. Once heavily weighted in financials, the index was undergoing a reshuffling. Tamarac allowed WHM Capital to quickly adjust to the new bias in a seamless fashion.
"We've also been getting much better information about bonds from Tamarac," adds Barnes. "We have a model with bands set up, and as bonds have appreciated over the last few weeks, Advisor has notified us. We sell to get back to our position, and roll that cash back into the portfolio."
As the icing on the cake, the software also tells Barnes when it's better to wait on a trade. "You can adjust the tax sensitivity for trades that are suggested by the platform. It won't just trade automatically and that's significant," emphasizes Barnes. "Sometimes if we hold off 30 days on a trade, our client might end up paying at a 15% rate versus 35%. Tamarac lets us pull those levers, to see if we've got it right before we trade."
For WHM Capital Advisors, a key piece of the puzzle has fallen into place. Their diverse-as-possible investment philosophy, risk-wary clientele, and legacy-building all led to Tamarac Advisor.
The decision to support the firm's core strategy with technology paid off almost immediately in savings in staff time, but even more importantly, in the satisfaction of promises made and promises kept. You can hear it in John Barnes' voice as he talks about how WHM Capital, with Tamarac Advisor, is delivering just what its clients ask: "It's been phenomenal."
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