Why This Successful RIA Favors Single-Strategy Asset Managers
Independent advisor Summit Trail Advisors believes its clients are better served investing their money in high-conviction and single strategy-focused asset managers, and in less liquid alternative investments.
“We think big managers and big funds are the enemy of good performance,” says Jack Petersen, the firm’s New York-based co-founder and managing partner. “We’d rather work with smaller and more nimble managers who are very specialized. Those managers tend to deliver greater alpha over a full market cycle.”
Peterson, who previously headed Barclays Wealth Americas for two years, founded Summit Trail in July 2015 with five other individuals he'd worked with at Barclays. Summit Trail is among this year’s Financial Times Top 300 RIAs, which are judged on six criteria: AUM, company’s years in existence, SEC compliance record, industry certifications of key employees and online accessibility. The firm is part of the advisor network of Dynasty Financial Partners, which helps entrepreneurially-minded broker-dealers or advisors establish and grow their own independent companies.
When considering asset managers, Summit Trail looks for discipline and consistency in the investment style of asset managers, whether in bull or bear markets. This lets the firm better predict how an asset manager will perform, Petersen says.
“We don’t want managers to deviate from their investment strategy,” he says.
The firm also factors whether the managers put their own money in their funds and whether their funds have the capacity to take on more assets.
Petersen says Summit Trail has been able to gain access to these specialized funds in large part because of the relationships he and his partners have fostered with asset managers over the years, many of which were built over the past 10 to 12 years. Before joining Barclays Wealth Americas, Petersen was the global head of private investment management at Lehman Brothers.
Summit Trail’s asset allocation approach involves deciding – based on discussions with clients about their risk tolerance and investment goals – how much to put in each of three portfolios: preservation, inflation and growth. Within those portfolios, decisions will be made about asset classes and investment vehicles (separately managed accounts, alternatives, ETFs, mutual funds, et cetera). The emphasis is on building a multi-portfolio asset allocation, according to Petersen.
Around 45% of the firm’s client assets are in separately managed accounts. Those accounts are typically invested in large-, mid-, and small-cap U.S. equities; U.S. tax-exempt municipal bonds; and U.S. taxable credit.
Around 30% of the firm’s client assets are in alternatives, which the firm defines as investments that don’t have daily liquidity. That’s significantly higher than the allocation of the firm’s FT 300 peers, which is an average of 7% of client assets.
Among the firm’s preferred alternative investments are private equity funds, hedge funds, private credit, non-public real estate, and emerging market, international growth and international value equities portfolios that are invested in ordinary shares in non-U.S. markets.
“It is from those illiquid investments that we are generating a significant portion of our alpha: that excess return that has been adjusted for risk,” Petersen says. “That’s why investors hire advisors – to make asset allocation decisions, to manage risks.”
Summit Trail Advisors
The firm targets aggressive growth with private equity funds. It seeks capital protection and a de-risking of its equity market exposure through hedge funds.
For private equity funds, the firm looks for asset managers with “top-quartile returns in very specific strategies,” such as U.S. mid-cap buyout, European mid-cap buyout, distressed and energy.
For hedge funds, the firm looks for asset managers that produce “attractive risk-adjusted returns” with significantly less risk than the equity benchmarks that they are measured against. These include those that use arbitrage, event-driven and long-short strategies.
Peterson says many advisors are too heavily allocated in passive investments, such as ETFs, arguing that this is the intended role of an advisor. Around 10% of the firm’s client assets are allocated to ETFs, less than half the 21% average allocation of the firm’s FT 300 peers.
“If you are picking too many ETFs for your clients you are saying you do not believe that you have the ability to find a manager that can beat the market,” Petersen says. “Investing in passives feels good while the market is on the way up, but it feels terrible when the market is on the way down.”
Petersen says broker-dealers tend to be restricted to recommending investment strategies or products that are on an approved list, while independent advisors tend to be freer to pursue investment ideas.
“Regulators became more restrictive on the firms, and firms became more restrictive on their advisors,” Petersen says, describing the environment following the global financial crisis of 2007-2008 and the circumstances that helped nudge him and others to break away from Barclays Wealth Americas.
“We felt like we were being limited in what we could and could not do with our clients. Advising clients became very, very difficult,” he adds.
Petersen says the move to independence was in the works long before Barclays Wealth Americas' eventual sale to financial services holding company Stifel Financial in December 2015. Prior to the sale, Barclays Wealth Americas had around 180 advisors with around $56 billion in client assets, but many jumped ship before the sale was completed.
Summit Trail has a mere fraction of the resources of Barclays Wealth Americas and of the bigger broker-dealer firms with thousands of advisors and hundreds of billions of U.S. dollars in client assets. But with 15 advisors in New York, Chicago, San Francisco and Boston, an internal research team of six (going on seven) and around $6.5 billion in client assets, Petersen says Summit Trail can help clients access more investment opportunities.
Large financial institutions will not research investment ideas or products that clients want to consider if they’re not already on the roster because that’s not how those companies are built, Petersen says. “They won’t research one fund for one client,” he says.
“At Summit Trail, we can do that,” Petersen says. “We are constantly working with our clients. If a client brings an idea to us, we may do a two- to three-page review, give an opinion and help the client make a decision.”
While Summit Trail doesn’t impose minimum investment amounts when opening accounts, the company is partial to those who have a clear path to having $10 million in assets available for investments. The company’s average account size is around $15 million per household account.
Around 90% of Summit Trail’s clients are first-generation wealth creators. More than 60% are entrepreneurs, around 20% work on Wall Street or in financial services and around 15% are professional athletes.