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December 6, 2004

Under the radar | Maine investment advisors eschew flashy marketing campaigns for a conservative approach

By Taylor Smith
To commemorate its 150th anniversary, Portland-based financial services firm H.M. Payson & Co. this year opted not to fete itself with a lavish reception. Instead, the firm's employees in September were invited to a lecture. The speaker was Peter L. Bernstein, a legendary New York investment analyst, author and economist. His topic was a singular event that occurred in the financial markets in September 1958. During that month, Treasury bond yields for the first time rose higher than dividend yields on common stocks. That switch, he contends, made a lasting impact on the financial markets.

In an October interview with Money magazine, Bernstein explained that the continued dominance of Treasury yields ˆ— which in 1958 was believed to be a short-term market aberration ˆ— made him believe that "there's never a time when you can be sure that today's market is going to be a replay of a familiar past." In short, anything can happen, and you'd better be prepared. It's a philosophy that H.M. Payson has taken to heart.

Ever since founder Henry Martyn Payson returned empty handed from the California gold rush and set up shop as a stock and bond broker on Portland's Exchange Street in 1854, H.M. Payson has aimed to help clients find some solace from the topsy-turvy investment climate. But at the company's core always has been a disciplined approach ˆ— to investing as well as day-to-day operations ˆ— that favors quality above all else.

As a result, H.M. Payson has grown into one of Maine's largest registered investment advisors, managing assets of more than $1.3 billion. The company bills itself as a full-service financial services firm and offers clients standard investment advisor services such as investment management and portfolio planning, but also specializes in areas including tax advice, estate planning and trust services. But like many of the nearly 20 registered investment advisors in Maine ˆ— which collectively manage more than $4 billion in assets ˆ— H.M. Payson operates in relative obscurity.

"People who know me well will ask me how the insurance business is," says Peter Robbins, a managing director at H.M. Payson who also runs the firm's research department. "I'm ambivalent about that. I'd be happy for more people to know what a cool business we have here, but we just don't think that we need to be self-promotional. It's not our core competency."

The investment advisor market, however, is becoming more popular despite the relative silence of firms like H.M. Payson. According to Cerulli Associates, a Boston firm that specializes in researching the financial services industry, retail registered investment advisors in 2003 managed more than $1.5 trillion in assets, compared to $1.1 trillion in 1998. Part of that jump stems from larger brokerage firms such as Charles Schwab and Merrill Lynch ˆ— whose hallmarks are selling securities ˆ— increasingly touting personalized investment services in hopes of reaping a larger share of their customers' business. "The marketplace is converging," says Dennis Gallant, director of intermediary research with Cerulli Associates. "And the lines of distinction are being blurred, especially from a customer's eyes."

But despite the big firms' entrance into the market, investment advisors in Maine aren't scrambling to roll out big marketing initiatives to trumpet their services and bolster their client base. Instead, it's business as usual at firms like H.M. Payson, Head & Associates and Deighan Associates, where analysts are tending to carefully assembled portfolios and turning a deaf ear to the latest market hype. "We're not a huge growth story," says Robbins, "but that's okay with us. Growth for growth's sake has never been a big strategy for us."

A diversified portfolio
Don Head, president of Head & Associates, a registered investment advisor in Portland that manages $418 million in assets, says larger firms ˆ— and typically those firms without a background as advisors ˆ— are pushing their way into the business to smooth out their revenue streams. But he contends that firms like Head & Associates, staffed with people with extensive backgrounds in portfolio management and investment analysis, are better suited to help clients achieve their financial objectives. "To those of us in the industry, Charles Schwab and Merrill Lynch are trying to generate returns by selling things," he says. "Our relationship with the client is more akin to a relationship they might have with their lawyer or their accountant or their psychiatrist."

And while many larger firms are marketing personalized services to prospective clients, Jean Deighan, president of Bangor-based investment advisor Deighan Associates, says not every firm that claims to focus on clients' needs actually can follow through on that promise. By contrast, she says the investment process for Deighan Associates, which manages $75 million in assets, always begins with an in-depth evaluation of the client's goals. Deighan then educates clients about the financial markets, providing basic information about the three main asset classes ˆ— stocks, bonds and cash ˆ— that make up a diversified investment portfolio. Afterwards, she works with her clients to draw up an investment policy statement that clearly lays out what the client's goals are and the plan to achieve those goals. "We try hard to have people make an informed choice in making an investment policy statement," she says. "We outline the football field and play the game within it."

But for prospective clients, playing the game requires a significant investment. Cerulli Associate's Gallant says $250,000 is a typical minimum investment required by investment advisors, though he's seen firms charge millions of dollars to open an account. Though all say the rules aren't hard and fast, the minimums at Deighan Associates, Head & Associates and H.M. Payson range from $250,000 to $400,000. High minimums, they say, allow them to build a properly diversified portfolio made up of individual stocks and fixed-income securities. "It's not cost-effective to have a small account invested in equities," says Jenifer Wilson, vice president and portfolio manager at Deighan Associates, adding that the firm's benchmark for diversity requires shares of approximately 30 companies spread out in different industries and different asset classes.

Avoiding volatility
Jean Deighan prefers individual stocks and bonds over mutual funds because she says relying on the latter makes it more difficult to control what the portfolio holds. As a result, a portfolio full of mutual funds tends to have what she calls "superfluous diversification." She adds that mutual funds often tack on extra management fees. Chicago-based fund tracking firm Morningstar reports that the average U.S. diversified fund carries an annual expense ratio of 1.49%. The average fee charged by a registered investment advisor, according to Cerulli Associates, is around one percent. At H.M. Payson, for example, fees start at one percent of assets, but begin to fall as clients bring more assets to the table; the average H.M. Payson customer pays an annual fee between 0.6% and 0.7%, according to Robbins.

Firms like H.M. Payson can charge clients relatively small fees in part because much of the work to manage accounts is done in house. Rather than farming out stock analysis to a larger brokerage, H.M. Payson has seven certified financial analysts on staff who spend their days vetting the equity and fixed-income markets using a disciplined methodology to identify what they consider high-quality investments. The company also manages two in-house mutual funds ˆ— the Payson Total Return Fund and the Payson Value Fund ˆ— with more than $30 million in assets.

Head & Associates' small staff of analysts also uses a proprietary method to screen stocks in the tightly packed equity universe, whittling out of tens of thousands of shares roughly 35 high-quality stocks that are trading at a 25% discount to the stock's intrinsic value.

For these firms, putting into place a well-defined investment process can help build trust with clients, but it also gives companies something to fall back on when the financial markets exhibit signs of volatility. In 1999, at the height of the irrational exuberance Federal Reserve Chairman Alan Greenspan saw in the stock market, Peter Robbins remembers clients peppering H.M. Payson with questions about why they weren't shooting out the lights the way the rest of the market was.

But Robbins and his colleagues shied away from the clamor and remained committed to the company's investment philosophy ˆ— a strategy that eventually paid off. "1999 was our bear market," he says. "Like a lot of people that really stuck to their guns, without being shrill or dogmatic, we refused to get swept up in it. We lost a couple of important relationships, but whatever we've lost has come back to us in spades."

Maine investment advisors

H.M. Payson & Co.
1 Portland Sq., Portland
Founded: 1854
Employees: 45
Assets under management: $1.3 billion
Services: Investment advisory, trust services, mutual funds, custody and brokerage services
Minimum investment: $400,000
Annual fee: Sliding scale, starting at one percent of assets
Contact: 772-3761
www.hmpayson.com


Head & Associates
121 Middle St., Portland
Founded: 1989
Employees: 10
Assets under management: $418 million
Services: Investment advisory, tax planning, estate planning
Minimum investment: $250,000
Annual fee: Sliding scale, starting at one percent
Contact: 773-5333


Deighan Associates
455 Harlow St., Bangor
Founded: 1994
Employees: Six
Assets under management: $75 million
Services: Investment management and trust services
Minimum investment: $250,000
Annual fee: Sliding scale, starting at 1.25%
Contact: 990-1117
www.deighan.com

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