Building A Specialty Business Within A Wealth Manager


Originally published in Financial Advisor

By Mark Hurley

Deb Wetherby is one of the wealth management profession’s trailblazers. Charismatic and innovative, she founded Wetherby Asset Management in 1990, and today it is one of the industry’s largest firms with more than $4 billion of AUM. Last year, she recruited Justina Lai, a Stanford MBA with more than a decade of investment management experience, to help create a specialty practice within the firm that would increase the value-added that it provides to clients, a trend that many other industry participants are now exploring. Here, they share their views on the industry’s future, their reasons for and approach to building a specialty practice focused on impact investing and what they have learned from doing so.

Hurley: You went from being only one of 14 women brokers in Morgan Stanley’s Private Client Department worldwide [in its high-net-worth broker program] to running one of the industry’s leading firms. What did you want to accomplish? Mark

Wetherby: At that time, Morgan and Goldman were really the top firms on Wall Street. You could cold-call the CEOs of companies and say you were from Morgan Stanley and they would take your call. It was crazy.

But all of the incentives were around making money. You could have the worst behavior in the world but if you were a big producer, it didn’t matter. The whole environment, all the rewards, all the measures of success, everything was measured in money. But that isn’t my value system.

I then went to a small firm that did investment banking in Asia and realized that I didn’t care at all about investment banking in Asia. That firm also had very different values than I have. However, it ended up being a great experience to have before starting a firm.

Hurley: A good “bad example”?

Wetherby: Sometimes it’s easier to know what you want, when you know what you don’t. want.

Hurley: Like second marriages. 

Wetherby: Those experiences gave me a very definite idea of how I wanted to serve clients and what I wanted in terms of a culture and environment—a meritocracy where good behavior mattered and everyone was dedicated to serving the client.

Hurley: Obviously the industry has changed a great deal. What will it look like in 10 years?

Wetherby: I don’t spend a lot of time looking at the industry as a whole and instead spend a lot more time thinking about client needs. With that as a qualifier, this is a really young industry. I think the big trend is that people are moving away from sales of products, towards objective advice.

Hurley: Tibergien’s “shifting from professional sellers to professional buyers”?

Wetherby: Yes. We are a boutique firm that customizes and that is high service, high touch. There will always be a place for these kinds of businesses. And although many firms talk about “faster, better, cheaper,” our focus is on what is better for the client.

Hurley: What will brands look like?

Wetherby: Brand is people; they are our most important asset. But it also incorporates your values, whether people feel like you can be trusted and have integrity. Not just at an employee level but at a firm level.

Hurley: In a sense, your firm is a bit paradoxical. Although you are not obsessed with growth, it is one of the biggest firms in the industry.

Wetherby: It’s been a wonderful outcome of what’s been important to us. We want to grow but not at the expense of our existing clients.

Hurley: What will be the minimum size for even “boutique” firms? 

Wetherby: That’s a hard question. There is pressure to deliver more for the same or lower fees. But, within that context, you must still ensure that you have the resources that you need. It used to feel like a billion dollars was a big firm. Now it doesn’t feel that way.

Hurley:  And there is a chronic shortage of really talented successors?

Wetherby: We aren’t experiencing that.

Hurley: Because you are in San Francisco?

Wetherby: Yes, in part. However, it is also because our culture is attractive to talented people.

Hurley: When you started, fee-only financial advice was somewhat a specialty. How did you evolve from that to a specialty in impact investing? 

Wetherby: It’s all been driven by clients’ needs. Before we sign on to take care of a client, we need to know that we can do [what the client requires] in the best possible way. We only were going to do something like impact investing if we felt we could do it well.

Hurley: What did clients say that led you to create this specialty? 

Wetherby: Typically, the conversation went like this, “I want my values to be reflected in my portfolio. I spend a lot of time thinking about these things. I do things philanthropically. I would also like to align my portfolio with those same values.”

Hurley: “Socially responsible investing” has been around for decades. What is the difference between that and impact investing?

Lai: Impact investing is more of an umbrella term that encompasses a whole spectrum of activities. Socially responsible investing has traditionally involved negative screening—you screen out the “bad” things, sin stocks, in order to align your investment with your values.

Hurley: Which became increasingly difficult as more companies became conglomerates.

Lai: Sure. It requires that you set thresholds as a percentage of revenue. But there is no right or wrong answer. Look at pornography, for example. It is often a sin that is screened out. But at the 1% revenue threshold, you exclude companies like Amazon and others that you might want to own for other reasons. More problematic, the negative screening approach doesn’t necessarily have a fundamental investment thesis behind it.

However, there is a real investment thesis behind impact investing. It allows you to integrate environmental, social and governance considerations into your investments. And by looking for thematic investment opportunities that directly target solutions to social and environmental challenges, you can actually drive financial returns and enhance value.

Hurley: How do you use it to position your firm?

Wetherby: I would frame it slightly differently. We have the ability to customize portfolios to meet a client’s specific needs. If a client’s desire is to reflect their values in their portfolio, we have expertise in that arena, by virtue of having done it for about 10 years.

Hurley: Creating this expertise required additional talent at additional cost?

Wetherby: It’s been a fantastic investment. Justina’s been an incredible addition to the team. She has a background in traditional investing as well as a decade of experience in the impact investing world. That’s a rare thing. Our goal is to deliver both competitive financial returns and social impact

Hurley: The landscape is littered with the remains of firms that have attempted to do this. 

Wetherby: That’s because their approaches have been based primarily on negative screening. Impact investing also incorporates positive attributes. We want competitive returns and social good. The positive attributes of impact investing can add return and reduce risk.

Hurley: Are you selecting managers or are directly investing?

Lai: We’re doing both but we’re primarily working through managers.

Hurley: You’ve had success from both a return and a societal benefit standpoint?

Lai: First, I’d say that real success is to meet our clients’ needs. The kind of impact that you have varies based upon the asset class, as well as client-specific impact goals.

A core component of what we offer to clients is the ability to integrate that across asset classes without compromising in any way, shape or form with regards to clients’ financial objectives.

An example success story in achieving impact as well as financial return is Generation Investment Management. Their entire focus is on the macro transition to a low carbon economy and businesses that are part of this transition to a sustainable economy in terms of environmental and social sustainability.

We invest in several of their products. One is a global public equity fund that has outperformed its benchmark by more than 5% for the past decade. It is managed by David Blood, who came out of Goldman Sachs. He uses the exact same methodology that he used when he was there but adds a sustainability overlay based on long-term macro drivers.

For example, Generation doesn’t screen out the tobacco industry in and of itself but they would never own a company where the product kills its customers. So they screen tobacco out because killing your customers is not a sustainable business model.

Hurley: How do you measure the impact of impact investing?

Lai: This is a key challenge, but the industry has made great strides in developing frameworks for greater accountability and rigor on this front. For example, the industry has created a set of standardized metrics called the “Impact Reporting and Investment Standards.” In addition, the Sustainability Accounting Standards Board has collaborated with industry working groups to identify the most material sustainability factors affecting each industry and encouraging companies to include them in their investment disclosures. There is also a rating system—the “Global Impact Investing Rating System”—which measures the social and environmental performance of companies and funds.

With that said, a lot of the work comes in the up-front due diligence—ensuring that there is a clear impact strategy and thesis that is tied into investment decision-making or built directly into the business model as well as the management team’s commitment to driving that impact over time. We look for investment opportunities that view measurement not only as a one-way flow of information but, rather, use metrics as a management tool to help improve impact and financial performance over time.

Hurley: How do you help clients to measure their impact? 

Lai: In the reporting and communication of impact to clients, we use both qualitative and quantitative assessments customized to each client and their impact goals. We gather metrics from the underlying investees and aggregate and report on that. But we also share [stories on specific examples].

Wetherby: Once a year, we do an impact report involving each of our investments. Based on the client’s pro rata share, we report, “You’ve helped build so many affordable homes, take so much CO2 out of the atmosphere, create so many jobs, etc.” We lay out metrics while recognizing that it’s an imperfect measurement system.

The reaction we usually get is “I can see that my financial returns are competitive and I did all these other things. Why isn’t everyone doing this?”


Hurley: How do you know if this might make sense for a new client?

Wetherby: In all aspects of what we do for clients, it’s not our place to judge or to opine on whether they want to integrate their values into their investing. Our job is to say, “If this is important to you, we can help you do it. If that’s not important to you, what are the things that are important to you?”


Hurley: What percentage of your clients use impact investing?

Lai: About a quarter of them. Of course not 100% of their portfolios are invested in this way, so it’s not a quarter of our assets. But again, our core value is that we meet our clients’ needs. Impact investing is a value-added service offering for certain clients.

Hurley: Do you charge differently for it?

Lai: No.

Wetherby: We also don’t charge if we do a projection, or if we review the tax projection from a client’s CPA. It’s about “What is it that you want wealth to do for you in your life? How can we support and enable that?”

Hurley: Does it have a separate branding strategy?

Lai: We have a multifaceted approach to impact investing. We want to make clients aware that this is an opportunity for them, that this is something that we offer. Part of my role is to educate our clients about that.

Hurley: What about outward communication?

Wetherby: We get referrals from other advisors and are trying to create awareness in the field. But we historically have focused our energy on serving our clients.

Hurley: Do you speak at conferences? 

Lai: Frequently. And I participate in a lot of industry networks and working groups. For our clients, we put out a quarterly impact investing digest, making them aware of what’s happening in the field. We publish it on our website because we want to build general awareness around impact investing.

Hurley: What about sub-advising for other advisors? 

Wetherby: Our priority is serving our clients well. But if somebody came to us and said, “Hey I have this client, and I’d like you to do the impact part of the portfolio,” we’d be open to that conversation.

Hurley: Does it have liquidity limits? 

Lai: That is highly dependent on the asset class and the client’s impact goal. For example, the impact goal may involve affordable housing but clearly we can’t invest 100% of their portfolio [in these strategies]. So we invest as much as possible without compromising other objectives, such as meeting liquidity needs.

Hurley: What about tax efficiency?

Wetherby: There are very tax efficient strategies such as Aperio’s tax-loss harvesting, which has both positive and negative overlays on top of it. It actually generates some tax alpha.

Hurley: Hasn’t socially responsible investing historically involved very high fees? 

Lai: Like everything else, it’s yet another one of the considerations that we have to take into account when making an investment decision. We don’t charge more for impact investing and neither do the majority of our peers.

Hurley: How many peers are doing this? 

Wetherby: It’s growing. Five years ago, it felt like pushing a rock up a hill. Today the topic comes up at every conference that I go to.

Hurley: Does that suggest at some point it’s going to become a generic?

Wetherby: That’s the dream.

We originally saw the interest from deeply philanthropic clients, typically more female than male. There was also interest from second-generation investors, equally male and female. The third generation does not believe that you have to choose between return and social good. They have grown up with companies who have done good things and also been good investments.

Lai: That consciousness permeates [these individuals’] whole decision-making framework. It affects the products and services that they buy from companies. It permeates how and where they choose to work. If you’re ignoring these issues then you’re missing opportunities as an investor.

Hurley: What would be your advice to your peers who are looking at building a specialty practice? 

Wetherby: Start with what clients need and then go from there.

Hurley: What do you want [Wetherby Asset Management’s] brand to look like 10 years from now?

Wetherby: A high-quality boutique firm that is passionate and committed to serving clients with high levels of expertise and professionalism.

Hurley: What other expertise will you have to develop to achieve this?

Wetherby: One area will be in financial education for next generation family members. We do some now, but we will need to be able to do much more.

Hurley: Is there a client size threshold where this becomes uneconomic?

Wetherby: Yes, our minimum is $10 million. Our growth plan is to add smaller numbers of larger clients.

Hurley: But not all of your current clients are that large, right?

Wetherby: We decide whether we can serve them well or not. If not, then what we’ve done historically is to recommend three other advisors. We help them interview [the other firms], we transfer all the data, and enable a smooth transition.

Hurley: That’s got to be hard.

Wetherby: It’s really hard.

Hurley: How do you think new technology will facilitate what you are trying to do?

Wetherby: It will make us more efficient but with high-touch customized businesses, there are certain things that aren’t scalable.

Hurley: What about the next 10 years keeps you up at night?

Wetherby: A prolonged environment of low returns. Life expectancies are lengthening. I worry about what this may mean for people’s financial plans.

Hurley: What was the most pleasant surprise you’ve had in this industry over the last decade?

Wetherby: How quickly people have embraced objective advice without structural conflicts. Fifteen years ago, I had to spend the first half hour of every meeting explaining why we were truly objective and different from the brokerage and the product models.

Hurley: What do you think is the most pleasant surprise you’re going to see over the next decade in the industry?

Wetherby: I love the idea of businesses more accurately reflecting all the true costs. My hope is that our industry becomes more accountable over the next 10 years.

Hurley: Thank you very much.

Wetherby: Thank you.

Mark Hurley is the Founder & Chief Executive Officer of Fiduciary Network LLC.