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Building On A Legacy

Guggenheim Investment Advisors' name has a cachet that's evident the instant you enter its midtown Manhattan office waiting area. Visitors can peruse coffee-table art books published by the famed Guggenheim Museum. The walls are adorned with colorful abstract paintings by Rudolf Bauer, whose work played a big role in the collection of Solomon Guggenheim, the museum's driving force. Juxtaposed with those is a traditional portrait, in a thick gilded frame, of Meyer Guggenheim, Solomon's father and founder of one of the country's most influential dynasties.

But while cachet is nice, it's a sidebar to the company's main focus: managing money for ultra-high-net-worth families, foundations, pensions and endowments. Security and trust are at a premium amid the triple whammy of economic meltdown, plummeting financial markets and the Bernard Madoff scandal, and the folks at Guggenheim believe this plays to its strengths. 

"As bad as things are and as troubled as the financial markets are, we think this is a great time for us to acquire a lot of clients because we focus on these issues," says Andrew Rosenfield, CEO of Guggenheim Investment Advisors, the wealth management subsidiary of Guggenheim Partners, a Chicago-based global financial services company.

"We're totally unconflicted. We did well, so I think we should get client referrals because as a group they're pretty well satisfied." 

Guggenheim Investment Advisors and its parent company trace their roots to the Guggenheim fortune forged more than a century ago from family-owned mining operations. Guggenheim Partners now encompasses a bevy of services ranging from merchant banking and institutional bond trading to a real estate investment unit formed as a joint venture with Jack Nicklaus that focuses on golf-resort communities built around Nicklaus-designed golf courses. But Rosenfield says Guggenheim Investment Advisors doesn't tap into any of this, including the parent company's bond funds. 

"They're excellent funds," he says, "but we don't allocate to any of that-zero-because we think that clients want complete independence. If you start allocating to them you become a salesman of these products." 

Instead, Rosenfield says Guggenheim Investment Advisors (hereafter, just Guggenheim) relies on its own deep bench of advisors, wealth managers, family office personnel, and two Nobel Prize winners-roughly 150 people in total-to build customized portfolios aligned with each client's needs and risk profile. To do this, Guggenheim leverages its size, resources and contacts to scour the financial world to find top-shelf investment talent across various asset classes that often isn't accessible to smaller advisory firms.  

All told, the company oversees about $40 billion in assets held by roughly 220 clients, which includes Guggenheim family members. The bare minimum asset requirement for individuals and families is $25 million. Guggenheim's fees vary depending on a client's needs. Clients who tap into the firm's in-house family office services pay 100 basis points on an account worth up to $250 million. Beyond $250 million, the fees are adjusted downward. For clients not using the firm's family office, fees are roughly 75 basis points.  

The firm's family office services are delivered by Private Family Office Inc. of Bryn Mawr, Pa., which Guggenheim acquired in 2006.

The Certainty Of Risk
Guggenheim sees asset management as both an art and a science. The art comes from intimately knowing their clients, partly through the application of behavioral finance theory that links finance, economics and psychology. That's where Daniel Kahneman comes in.  

Kahneman, 75, an unassuming man everyone calls Danny, is a psychologist and Princeton University senior scholar and professor emeritus who won the Nobel Prize in economics in 2002 for his work in behavioral finance. In the 1970s, he and Amos Tversky, a pioneer in cognitive science, developed a concept called Prospect Theory that changed the way people look at risk. In a nutshell, the theory holds that individuals feel the pain of a dollar loss twice as much as the joy of a dollar gain, meaning they dislike losses more than they like gains. That ran counter to then-conventional risk models that put equal weight on a dollar of loss and a dollar of gain. 

The impact on wealth management, at least the way Guggenheim practices it, puts the focus on first-order loss aversion-first avoid loss, and then seek gain. Guggenheim worked with Kahneman to develop a proprietary approach called Riskometry, a technical term for the process of figuring out what people want and how much risk they're willing to take to get there. 

"How much money are they willing to put at risk of loss over some duration in the quest for incremental gain?" Rosenfield asks. "Do they have regret? I think trying to figure out a client's regret structure is a different way to start an engagement. Will they feel terrible if the markets go way up and they don't capture all of the gain? That's called gain regret. How will they feel if in the quest for gain they lose 20%, 30% or 40%?" 

With new clients, Guggenheim begins by assessing the total net worth. "You can do a better job advising $60 million in liquid assets if you know they have $150 million tied up in a business," Rosenfield says. Then they take clients through the riskometry process.  

"The idea is to try to get people to think about what they think they could tolerate," says Kahneman, a Guggenheim consultant. "I'm interested in the notion of mistakes people make because of regret. By getting people to anticipate regret, we can measure if they're regret prone. Discussing regret puts the advisor and client on the same page because neither of them wants the client to be sorry that he invested in what he did." 

The process also hammers home the point that hoped-for market gains can't be divorced from potential market pains. "Many investors have return expectations that are completely disconnected from reality," Rosenfield says. "They want to make 12% with no risk. I do, too, but it can't be done."  

Adds Rosenfield, "People have two goals-not to lose money, and to make a lot more money. Since they are essentially rivals, we try to separate them and address them specifically and differently." 

Guggenheim's solution is to create two distinct portfolios for each client: a "bold" portfolio to grow wealth and a "conservative" portfolio to preserve wealth.  

Capital preservation and asset protection are crucial concepts for the super wealthy, and even more so than Rosenfield expected. "I thought very wealthy people would be about 50-50 conservative and bold," he says. "That was just my hunch. Danny thought it would be more like 90-10 conservative, and he's much closer to the mark."  

Individual Client Mandates
The Guggenheim family business is controlled generation to generation by lead heirs, and in recent years that has been Peter Lawson-Johnston and his son, Peter Jr. They licensed the Guggenheim name to Guggenheim Partners when they created the diversified financial services company with a group of entrepreneurs in 2000. The wealth advisory business began shortly after, and Rosenfield came on board to lead that business in 2004. In 2006, it became known as Guggenheim Investment Advisors. 

Rosenfield, 55, is an economist with a law degree from the University of Chicago, where he still serves as a senior lecturer. He and two University of Chicago professors started an economic consulting business called Lexecon Inc., which he ran for 22 years. It's now a wholly-owned subsidiary of FTI Consulting Inc. He also was CEO of UNext Inc., an education company he launched in 1997 that provided online business courses to corporate customers. The company's high-profile connections included seed money from financier Michael Milken's Knowledge Universe organization, as well as a roster of heavyweight academic partners that included Carnegie Mellon, Columbia, Stanford, the University of Chicago and the London School of Economics and Political Science. The company currently operates under the name Cardean Learning Group.  

Rosenfield later was working with an investment banking team that came to Guggenheim Partners, and that's how his Guggenheim association began. "This is very interesting work," he says. "It's very much like Lexecon in that we have some of the smartest people in the world-people like Danny and Gary Becker-helping us think through a way to do something differently." Becker, a University of Chicago professor who won the Nobel Prize in economics in 1992, is a member of Guggenheim's academic advisory board. The board, which also includes Kahneman, provides advice to both the wealth management unit and the overall company.  

About five years ago, Rosenfield was at a conference where Kahneman and Becker sat on a panel that discussed aspects of behavioral finance. Rosenfield says he was somewhat familiar with the subject, and that after the conference he dived into it with both feet. "I read voraciously on the topic, pestered Danny and got tutored," he says.  

From that came a collaboration that led to the creation of the dual-portfolio system that's now one of Guggenheim's cornerstones.  

"Every client's mandate is different," says Charles Stucke, Guggenheim Investment Advisors' chief investment officer. "One person's bold account can be another person's conservative account."  Riskometry helps determine the scope and makeup of these separate accounts. "We find if we anchor the risk budget first then we can outline the playing field for seeking investment opportunities," Stucke says. "Our next step is deciding how to fully spend that risk budget in search of return."  Guggenheim describes itself as a matrix organization that incorporates different levels of expertise servicing each account, with multi-person teams of up to seven staffers involved in various steps of the wealth management process. And the client's family office is involved in that process from the get-go. 

"Family offices often are helpful in working through the machinations of an extended family's set of accounts and managing those accounts over time," says Stucke, who previously was head of European manager search for Morgan Stanley's alternative investment partners group. After establishing the broad parameters of a particular family's finances, Guggenheim often treats each individual as a unique investor with his or her own risk profile.

That requires a lot of one-on-one time with each person. 

"That's usually a multistep discovery process because we find that even husbands and wives-when interviewed separately-articulate different views on risk tolerance and regretting gain," Stucke says. "When we bring them back together again to compare notes, we can help them reconcile these differences and identify important points of compromise. It's a lot of work, but it's something our families expect and it's worth it." 

Portfolio Construction
Guggenheim's centralized investment group has two subgroups. One group handles risk profiling, asset allocation and portfolio management. The other group researches outside investment managers used in client portfolios. The latter is a key part of the Guggenheim story, and Stucke and Rosenfield say that each manager gets a rigorous go-over before they're approved. The goal is to find managers not only with good performance records, but also with sound compliance and practice management backgrounds to avoid potential Madoff-esque time bombs.  

"You can never be sure, but we work hard and don't rely on track records alone," Rosenfield says. "We also meet people, do physical and structural due diligence, and a full-on interrogation of managers' strategies. We never invest in something opaque. One of the biggest problems with fund of funds is you often can't figure out what they're invested in." 

Guggenheim's investment group is international in scope-North American operations are run out of the New York, Chicago, St. Louis and Santa Monica, Calif. offices; Latin America is based in the Miami office; Asia is handled from Hong Kong; and Europe is done from Geneva and North America. "One advantage of our team is that we have people who've lived and worked in every major economic geography on the planet," Stucke says.  

Stucke and his team categorize assets into four classes: equity-like (highly correlated to equity markets); assets not highly-correlated to equities; real assets (those that adjust for inflation and deflation); and cash and similar vehicles. Conservative accounts have smaller equity risk exposure and lean toward fixed income, along with relative-value and arbitrage-oriented hedge fund assets. Bold portfolios tend to have more equity risk exposure, and are more volatile with higher expected returns. 

How did the portfolios do against the overall market in 2008?  "If we knew last year would be a year where markets would decline 40%, we'd have very different assets in our portfolios," Rosenfield says. "That said, we designed portfolios . . . where people were materially protected relative to overall market declines." He adds that they didn't have any client defections as of March.

Growth Prospects
Swiss-born Meyer Guggenheim and his family immigrated to Philadelphia in 1847 when he was 19. The family was poor, and Meyer started out as a peddler before he eventually became a successful importer of Swiss embroideries. In 1881, he acquired interests in two Colorado lead and silver mines that hit pay dirt and ultimately generated a multimillion dollar fortune. He later formed the Philadelphia Smelting and Refining Co., which bolstered the Guggenheim's financial empire. The business passed on to Guggenheim's seven sons; some played major roles in the company, while others made their marks elsewhere in art, politics, science and philanthropy. One went down with the Titanic. 

The Guggenheims became entrenched in New York, but in 2006 Guggenheim Investment Advisors returned the legacy to its Philadelphia roots, in a way, when it bought Private Family Office. With more than 70 family office clients, Private Family added a new dimension to Guggenheim's wealth management unit and has been a complementary fit for both sides. 

"It's a marriage between a services firm like ours that had no investment capabilities and a firm like Guggenheim who were investment only," says Robert Fedoris, a 20-year vet at Private Family who became president and CEO in 1998 and still heads the operation. "Both of our clients benefit from each other's services." 

The Private Family acquisition was successful, but another acquisition from around that time didn't fare as well.
The company acquired Klarberg, Raiola & Associates, a New York-based firm that represented more than 600 professional athletes, entertainers and high-net-worth families. Guggenheim eventually severed relations with the company. "That wasn't the smoothest fit," Rosenfield says. "The business management of athletes and entertainers is a different type of business. That's not what we do. We're a family office and an asset advisory firm."  Rosenfield says Guggenheim maintains growth aspirations, albeit carefully measured. The firm will open offices in locations that make strategic sense, and will grow its client base accordingly. "We'd be happy to have another 100 to 200 clients," Rosenfield says.  

"We only try to serve people who we think we can help, and that's those with between $25 million to $50 million minimum. To our knowledge, that's a channel that's reached just by reference. I don't see large-scale advertising being efficacious," he says. 

Meanwhile, Guggenheim is hanging its hat on its independence from the big Wall Street banks and other large financial services firms who have products to sell. "The wealth management space is mostly small, independent organizations or big organizations that are fundamentally conflicted," Rosenfield says. "There aren't many sizable organizations that are independent, and I think we're one of them."   

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