Michael Tiedemann: Here’s What’s Fueling Our Growth | Barron’s
https://www.barrons.com/articl...Barron’s | Michael Tiedemann: Here’s What’s Fueling Our Growth | By Steve Garmhausen | July 17, 2020
THAT WORRY ACCOMPANIES WEALTH may seem paradoxical, but Michael Tiedemann says his firm’s 400-plus client households almost invariably fret about their heirs. “Most of them share the fear that the wealth they’ve generated is going to somehow do damage to the next generation or the ones following it, that their kids will be preyed on, and that their work ethic won’t translate,” says the CEO of New York-based Tiedemann Advisors, Barron’s 11th ranked RIA firm.
Speaking with Barron’s Advisor, Tiedemann – whose firm manages $17 billion of assets under management – explains how he and his team of 37 advisors help clients address their concerns. He reveals that impact investing has become a magnet for new business. And he warns that stimulus from the Fed and the Treasury has created peril in the stock market.
Q: You started as an analyst in 1992 at Tiedemann Investment Group, a multimanager hedge fund partnership founded by your father, Carl. You left after a couple of years, then in 2000 you joined your father’s new venture, which is today known as Tiedemann Advisors. What did you do in the interim?
A: I began my career in emerging markets, and I lived in Brazil and worked for a firm called Garantia, which was the leading Brazilian investment bank. They were eventually acquired by Credit Suisse, so I did a few years at Credit Suisse in New York as well. So for, let’s call it, eight years of my career, I was not involved in the family business.
In fact, I was highly sensitive to nepotistic issues, so the only way I agreed to join was when we had zero clients and zero infrastructure built. And candidly, I took a huge pay cut to do it. For a couple of years it was pretty lean, working in a start-up business with no revenues, no clients. But it obviously was an exciting opportunity and one that has been well worth it.
Q: How did your role evolve at Tiedemann Advisors?
A: I started as a vice president, and my job was to help build, hire, and conceive of the investment offering. I by and large oversaw the selection and hiring process around the investment team as it was built out, as well as the construction of the process in those early days.
I didn’t become chief investment officer until 2007, and it wasn’t until 2015 that I became CEO, so there was a pretty long seasoning period for me to develop the skills necessary for both of those roles. It wasn’t clear that I was going to be CEO; I grew into that role. I’m no longer CIO by the way—we have that in much better hands with Kent Insley.
Q: Today the firm, which started as a trust bank, functions as a multifamily office, with $17 billion of assets under management and $22 billion under administration. Who are your clients?
A: We have over 400 clients, and our average investible assets is right around $60 million. The predominant number of clients are families, but more and more we have endowments and foundations that utilize our investment services.
Q: What’s driving the growth in institutional assets?
A: The number-one reason is our impact investing platform. There are more and more family foundations that are being built or pre-existing foundations that have the classic investment committee of maybe four or five people who are very well respected and have long investment histories but don’t necessarily have a long history of investing in impact.
A firm like ours can come in and take them through the entire process of education about the various public and private market opportunities within the space. Obviously we have spent a long time curating a list of superb managers across the spectrum of the portfolio.
We also have a diagnostic tool, which you can take individually or as a family, or in this case as a foundation board, to really define and crystallize what the priority of the foundation is: the environment, gender-lens investing, you know, across the whole spectrum. And then we help them translate that into an impact portfolio. We’re able to demonstrate how those assets have done looking backward, and then how attractive we feel they are on a forward-looking basis. That’s a very important part of the process because it makes it tangible—it’s not just story investing.
Q: Talk about the impact reporting service that goes along with that.
A: Roll the clock forward a year: You’ve built the portfolio and invested it. There’s the financial reporting, which is standard—anyone can do that—and then there’s the actual impact reporting. What was the use of proceeds in those various investments they made? Where did that money go? What did it do either within the communities, or, you know, in terms of planting new trees? And you go down the line of various elements that people want to invest in and the outcome. The impact reporting is a huge value to the compilation of the annual reviews.
Q: Your depth in impact investing owes to your 2017 acquisition of Seattle-based Threshold Group. Talk about that deal.
A: One of the many appeals of the Threshold team joining us was the fact that they had 15-plus years of investing within impact, something that would be impossible to recreate. We’ve leveraged their expertise to cross-train our entire investment and advisor staff at Tiedemann for impact.
Q: You’re also CEO of TIG Advisors. What’s that firm’s relationship with Tiedemann Advisors, and how much of your clients’ assets are invested in its hedge fund strategies?
A: The firms operate entirely separately, with separate RIAs and management teams, and do not share any business relationship or clients. That was established at inception and has remained to avoid the conflict that we felt was rampant in the system 20 years ago. They do share mutual respect for one another, but nothing past that.
Q: Why and when did you open an office in Zurich?
A: We formed Tiedemann Constantia in September 2019 to better serve our clients with complex cross-border needs. Zurich stood out as a natural location as it has the advantage of being well regulated and offers a more central location for prospective clients throughout Europe and the Middle East, which is a growing market and important opportunity for the firm. At the same time, we wanted to capitalize on transparency issues in Switzerland, changes in the openness of families to work with private firms of scale, and the ability to offer international clients trust services through Tiedemann Trust Co., a state-chartered trust company located in Delaware.
Q: Name a service or capability that clients are demanding now that they weren’t five years ago.
A: Family dynamics. All families are going to be different: They all have different backgrounds, different political views, and different things that they prioritize. But most of them share the fear that the wealth they’ve generated is going to somehow do damage to the next generation or the ones following it, that their kids will be preyed on, and that their work ethic won’t translate.
So the dynamics around how you educate your children, the dynamics about how you structure the assets, how you give to them or their children, when and how you talk to the kids about it. These are really important things that people generally wanted to talk less about 15 years ago. They are now realizing [the value of education], and I think its value is being reinforced by families that do it well.
We’re actually bringing on someone who I can’t name today but who is one of the leading specialists in this area. We’ve hosted community square events where we bring our clients together and we talk about all of the various issues that impact families of multiple generations. That has just quickly leapfrogged a lot of other topics that families want to focus on.
Q: What are a couple of the most effective ways that you help families address the issue?
A: We work with families to establish a set of stated values and reoccurring goals and activities for the family to do together. Our Impact Diagnostic is a helpful tool in this process to establish where family values intersect between generations. Also, for many families, we provide basic financial education for their children.
Q: Let’s pivot to the investment markets. What does your crystal ball say about the next year or two?
A: What everyone is [grappling with] right now is the never-before-seen stimulus from both the Fed and Treasury. The aggressiveness in which the Fed has entered capital markets as a buyer, and their commitment to extraordinarily low rates for a long period of time has a distorting effect that most traditional, fundamentals-focused investors are having a very challenging time understanding.
We are 12 years into this low-rate-environment experiment. It distorts the valuation and the importance of dividend yield and cash flow yields, and also enables inferior businesses that are being disrupted by newer, faster growing businesses to persist for longer. So it creates value traps for investors who say, “Gee, this company is cheap and it’s cash flowing, and I know the business model is changing but it still looks really cheap relative.” That has created a very challenging environment for most investors.
And we have a debt burden that is uncomfortably large at the federal, state, and municipal levels. Our debt levels are going to be challenging because it’s almost with a great degree of certainty that taxes will be higher; corporate taxes likely will return to a level they were before our current administration lowered them.
Q: What does that mean for investors in practical terms?
A: What this forces a firm like us to do is to narrow our focus and our exposures to the most high-quality businesses and balance sheets. We’ve made the choice to increase our exposure to these great businesses knowing that there may be times where they are boring risk assets as opposed to emerging market equities or small-cap equities, or things that have much more volatility and the possibility of stronger [short-term] performance.
Q: What about for fixed income?
A: As we sit here and look at valuations of traditional bond assets, whether it be Treasuries, agencies, municipal bonds, and more recently—because they’ve recovered so quickly—corporate bonds, the forward view is really miniscule returns. So a large portion of a somewhat balanced portfolio is going to be highly problematic in terms of your projected return—which then forces you to take more risk within equities as well as private equity or alternative assets more generally.
Q: Early this year you announced a new cash solution, partnering with a firm called StoneCastle Cash Management, that fits within the impact investing framework. What’s the background on that?
A: Prior to implementing the FICA [Federally Insured Cash Account] For Impact Strategy in January, we had been looking to add a daily liquid “impact cash” solution to our investment platform. This has been challenging the impact industry for some time and is one of the last steps towards true “total portfolio activation” for clients seeking to direct all assets towards a more responsible or impactful approach.
Ultimately, we partnered with StoneCastle to develop a financial technology solution to allocate cash across 850-plus FDIC insured, socially impactful community banks, credit unions, and Community Development Financial Institutions.
In addition to the impact component, the solution provides the same returns as traditional money market accounts in big banks, but because deposits are spread out across the country and are FDIC insured up to $250,000, it actually provides more security than housing all your cash in one institution.
Most of our clients, when they learn about this, say, “Well, why wouldn’t I do that with my cash?” The answer is that you should. Especially in periods when we have real liquidity availability, and $1 million or $2 million of cash where you push half of that out into the community banks and it makes a material difference in terms of their ability to lend in these communities.
Q: Thanks, Michael.
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