Old-school private banking in the end won a key battle for Silicon Valley's wealth. Netscape co-founder Jim Clark was a billionaire when, in 1999, he created myCFO and boldly declared he would change the way wealthy families managed their money. He intended to cut Wall Street out of the loop, realigning the wealth industry's power structure. Clark recruited venture capital from top firms, landed major accounts like Cisco's John Chambers and became a magnet for entrepreneurs cashing out. Says an employee of those heady days: "There was a point where the door would open and someone would say, 'My company is getting acquired.' "
And then the Internet economy cratered, and myCFO ran into trouble with the IRS for selling tax shelters. By 2002, the firm had sold its name and a portion of its assets for just $30 million. The buyer was the staid Bank of Montreal, founded in 1817. Clark, the visionary, had sold out to Canada's oldest bank.
That turned out to be a lucky break for myCFO. BMO Financial Group, headquartered in Toronto, avoided the risks that hurt so many U.S. banks in the credit crisis, and in 2009 it began making an aggressive push in U.S. wealth management, as most domestic banks cut back. In 2011, BMO bought Marshall & Ilsley, the Wisconsin bank, for $4 billion, doubling BMO's U.S. retail branch count and adding $34 billion in deposits. On the private-banking side, meanwhile, BMO was leveraging myCFO and its earlier acquisition of Chicago's storied Harris Bank, to recruit advisors from ailing peers.
Early on, the myCFO name was an effort to invoke both chief financial officer and "comprehensive family office." The firm focused not on investing but on tax, accounting, estate planning, and philanthropy. Last June, however, BMO paid $21 million for CTC Consulting, an investment advisory specializing in the ultra-high-net-worth market. Terry Jenkins, CEO of BMO Private Bank's U.S. business, says the deal filled one of the company's few remaining needs, an expertise in objective advice with particular focus on alternative investments. While CTC creates family-specific portfolios, its core portfolio is currently about one-third fixed income, one-third equities, 20% hedge funds. plus 15% in private equity and other miscellaneous assets.
BMO's ultra-high-net-worth and family-office category is now known as Harris myCFO. According to regulatory filings, the firm has 225 clients and $7.1 billion in assets under management, or an average of $32 million per client. Jenkins says the filing understates their ultra-high-net- worth holdings, since the firm also keeps the assets in other parts of BMO. Investment advisory fees, according to filings, start at 0.6% for the first $25 million in assets; a client with $100 million in assets would pay a rate of 0.4%.
Much of the wealth under management remains concentrated in Silicon Valley, as Harris myCFO takes advantage of the technology built by Clark and his team of 40 engineers. The engineers brought clients' outside accounts into one transparent reporting system and created one of the first online bill-paying systems–all at a time when the banking world was still trying to figure out Internet-based customer service.
"We were known as the firm of sudden wealth, and we still are," says Ron Gong, who began working for Clark in 2000 and is now a managing director at Harris myCFO and co-head of the firm's Palo Alto office.
More than a decade later, clients are looking for historical perspective. "They want to make sure that we take all the lessons that we've learned as a firm over 14 years," Gong says. One lesson is to treat liquidity events as a once-in-a-lifetime opportunity. During the bubble, entrepreneurs casually used their high paper value as currency, thinking the glory days would last forever. Now, Gong says, the goal is to quickly build a diversified financial portfolio around their concentrated stock position.
But there are signs, too, a new bubble is developing. Facebook paid $1 billion for Instagram last year, a mobile photo app without revenues. Wealth managers are wondering if the tech corridor is destined to repeat its mistakes; Gong says he doesn't know if that's the case. "What we do see, though, is wealth being made more slowly, more conservatively, with a lot more balance." Great ideas are pushed through with a lot more competition, such as dozens of companies alone "competing for that same photograph to share or edit." Gong says the best companies are rising to the top.
Terry Jenkins, Kristi Hanson and Ron Gong, advising Silicon Valley's new wealth. (photo credit: Steve LaBadessa for Barron's)
The softer IPO market is also making equity holdings a long-term play. Gong is pushing new clients to start planning around stock units as early as possible. "When valuations are low, we have a lot more flexibility to plan." It's usually beneficial, for instance, to exercise options before a stock rises in value. That's because the difference between the strike price and the fair value of an option is considered compensation, taxed at twice the rate of capital gains. "We want to make sure that we start the long-term gains clock ticking," he says.
THE FIRM'S RECENT ACQUISITION, CTC in Portland, Ore., gives Harris myCFO greater exposure to hedge funds. Clients now have up to 20 direct investments in hedge funds, guided by the research that CTC has been doing since the early 1980s. Kristi Hanson, CTC's president, has watched hedge funds go from unknown to overused to disliked. Today the bull market has caused investors to question the need for more costly hedge funds. "Our perspective on hedge funds, is if they are hedging, you are not going to get those [equity] returns," she says. "You use [hedge funds] for diversification purposes…We continue to believe that there are lots of good opportunities in hedge funds."
Hedge fund managers, she says, are rotating out of nonagency residential mortgage-backed securities –following their strong run– and into mortgage REITs, commercial mortgage-backed securities and collateralized loan obligations. Generally, there is also opportunity in Japan and emerging markets.
Jenkins says the offices in Silicon Valley look very similar to his Chicago home base, but Palo Alto is different. "I think in this office you probably have many fewer second-, third- and fourth-generation clients," Jenkins says. "If I'm dealing with a fourth-generation family it is a very different conversation than if I'm dealing with a first-generation wealth creator." But beyond that "you want to know that your wealth is secure. You want to have trusted advisors overseeing it. You want to make sure the management of it is linked to your goals and a firm to help you execute on that. That is no different here, or in Chicago or Seattle."
True, up to a point. Silicon Valley wealth still has its own geeky quirks. "We have clients that on paper are worth a lot of money, but they still live in an apartment, drive their 10-year-old car, and aren't thinking about private aviation," Gong says. Harris myCFO might spend years not making any real money from those relationships, he concedes. "At the same time, we know that they are very smart. And they have a company that is making a difference."
So, the bank hangs in with the client, quietly doling out advice, waiting to be at the right place, at the right time. Among its early services is ensuring such young clients have adequate insurance. Even a fender-bender can become a very costly endeavor for new entrepreneurs, according to Gong. "If you are known to own a big slug of a hot company…you could be at risk. So we want to make sure that we help build privacy, as well as asset protection early on." It's a fact of modern life: Wealth not only has to be nurtured, it has to be ring-fenced.