Heron Financial Group | Wealth Advisors enters 20th year of business

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It only seems yesterday (September 1993) that Heron Financial Group commenced operations with two clients. Our initial incorporation was Heron Capital Management, reflecting our original focus as mid-cap growth stock managers. However, as our clients' needs evolved, so did our firm. Our mid-cap picks grew into large caps, and we also added small cap, value and international stocks to our portfolios to increase diversification and reduce risk.

Our clients asked, "Is my all-stock portfolio right for my retirement." "No!" we said, "You need bonds to reduce the risk of stocks in retirement." So we began building balanced portfolios.

From time to time, we took on clients that preferred to be in mutual funds and ETF's rather than individual stocks and bonds, so we created a second investment platform to accommodate those clients. For clients with at least $5 million in investable assets, we created a third strategy - the "Manager of Managers" platform - where we spread the client's assets across multiple managers, manage the cash flows and operations, and provide the performance benchmarking and analysis.

As we entered the decade of the 2000's we began fielding more questions like:

"I want to buy a second home. How do we accomplish that?"

"I have a new grandchild. How can I save for that child's college tuition?"

"We're divorcing. Can you help us divide our assets fairly?"

"Is my estate plan up to date? When can I retire?"

At first, we would tell our clients to call their accountant, their lawyer, or their financial planner. Over time, we realized that we were the professionals with the best information to help our clients answer these questions. We are not trust & estate lawyers, or accountants, or life and property insurance brokers, but we have much in-house insight to answer questions in these fields. Furthermore, we developed an network of experts in these fields, so that if a client needs a new will, or needs a new insurance policy, or needs highly technical advice on a tax issue, we can tell the client, "Call this person, ask these three questions, and they will take care of you."

In November 2006, we commissioned Advisor Impact to survey our clients. Historically, we thought that performance was the attribute most important to our clients, but on the top ten list of factors rated important by our clients, performance was only 5th after: Advisor is trustworthy 5.0 - Client would refer to friends, family and colleagues 4.9 - Calls are returned promptly 4.8 - Client is comfortable with plan to meet retirement goals 4.6 - The short to mid-term performance (1-5) years of my portfolio  meets my expectations 4.2. On a scale of 1-5

Performance, of course, is always important, but the fact that our clients gave us the highest possible score on "trustworthiness" was eye-opening. This survey confirmed out hypothesis that we had evolved from a straight up stock picking firm into full service wealth advisory firm.

We commissioned a new client survey to be conducted April 2012. We hope for a high participation rate, and that our clients don't hold back from telling us what we could do better!

In 2007, we began the process of rebranding our firm to emphasize wealth management. We re-incorporated under the name "Heron Financial Group | Wealth Advisors." We updated our marketing materials and client contracts. We looked at our technology tools for managing clients' wealth and saw many shortcomings. In 2008, we began what we thought would be a one year effort to upgrade all our systems.

Our technology upgrades went on hold in the second half of 2008 as the financial crisis struck. We devoted 100% of our activities to communicating with our clients about what we were doing to protect their portfolios. It was a difficult and anxious time for ourselves as well as our clients. History told us that the storm would pass eventually, but it was hard to focus on history when the "end of the world" seemed eminent. Not all clients stayed the course - 6 clients out of 110 families fired us in March 2009, liquidating their portfolios at 45 cents on the dollar for no good reason other than that they were scared to death. The clients that stayed with us were rewarded as their portfolios doubled over the next two years.

In 2010, we focused on getting our clients' portfolios back on track. In 2011, we returned to the task of technology upgrades. We replaced all our trade entry systems, achieving significant cost savings and efficiencies as a result. We consolidated all our operational support systems into a single Client Relationship Management (CRM) system. For the first time, we have a holistic overview of a client, their relationships to other clients, to other professionals such as accountants and lawyers, and to the tasks necessary to satisfy a client's needs. Information came out of paper files and off of Post-It notes, which allowed our firm to "pro-act" rather than "re-act." For example, our clients used to remind us about their annual stock gifting; now we remind them. Instead of scrambling to fulfill IRA minimum required distributions in December, we now program the distributions in January (or monthly or quarterly, if a client so desires.) We now send accountants tax data as soon as available, rather than waiting to be asked.

Our next project is to replace our client reporting systems. Our current reports are quite comprehensive, but the type font is painfully small. We want to be able to do more custom reporting for clients - some only want a single summary page, while others want every possible detail. We want to create an internet-based "secure vault" for client reports rather than sending as PDF's. We have never had a client data breach, but e-mailing PDF's is not "best practices" for security. Also, a secure vault will allow access to a client's data by other trusted advisors such as accountants and bookkeepers. We will select a vendor in Q2 2012 and implement in Q3 2012.

The www.HeronCapital.com website is still active, but has not been updated since September 2010. Our new website www.HeronFinancialGroup.com is in beta, which means that we have worked out the overall design but are still tweaking the details. That project is way over-due for completion, but we hope to make big progress between now and April 2012. When complete, the site will offer direct access to the clients' accounts at www.Fidelity.com account as well as the secure vault, and will integrate our social media applications.

Performance

Clients want us to outperform the markets when rising and preserve gains when markets are falling. There are plenty of advisors who claim their strategy achieves this goal, but we are skeptical. Any advisor who could actually do that wouldn't need clients - they'd be too rich!

We remind our clients that the better their accounts perform, the larger the fees we derive, so believe us, we are on the same side of the table as you. Recognize also that we are constantly balancing risk with reward, which compels us to invest when others are afraid, and pull back when others charge ahead. We scrutinize the performance of our client's portfolios against benchmarks (typically the S&P 500 and the Barclays Aggregate Bond Index.) Beating benchmarks is not our goal (achieving a client's financial goals is our goal.) However, variance from benchmarks, either positive or negative, alerts us to problems.

We expect that having better technology in place will enable us to make even better decisions on behalf of our clients.

After four years of defense, our marketing is back on offense!

Through 2007, our firm's assets grew 10%/year from referrals from existing clients. From 2008 until recently, client referrals evaporated. The issue was that our clients feared that if they recommended us to their boss, or their brother-in-law, or their best friend from college, and that referral signed with us, the new account could be down 20% in a matter of weeks and the referrer would get blamed. In the environment of the past 4 years, that concern was totally reasonable!

Clients have come to realize however, that even though every possible worst case scenario short of nuclear war has occurred in the last twelve years, their portfolios have performed reasonably well. Indeed, those clients making systematic investments are at or near all-time high asset levels.

For those clients who would like to make introductions on our behalf:

  • Heron Financial Group, LLC is a registered investment advisor serving individuals & families across the United States, Europe, Asia and Latin America.
  • Our clients are corporate executives, managing partners of law firms and consultancies, Wall Street professionals, owners of businesses, and heads of families.
  • Our purpose is to clarify and simplify the means by which our clients will achieve their financial goals.
  • Client relationships range from $250,000 to $15 million in assets.

Our process is as follows:

After the initial conversation when a referral contacts us, we ask the prospect to fill out our standard 5 page questionnaire. The first page is basic data we need such as addresses, phone numbers and birth dates. The next 4 pages are "thought questions" designed to help us understand what matters most to the prospect. We no longer ask "what is your risk tolerance?" It's our job to tell the client his or her risk tolerance. We ask also for copies of current investments, summaries of liquid assets such as checking accounts, debts, real estate held and mortgages outstanding.

From that data, we provide a summary of a client's "personal balance sheet" and identify shortcomings in their current investment strategy. A typical family may have 6-18 accounts with multiple banks and brokers, but no overall strategy and therefore enormous anxiety about the future. After a series of iterative conversations, we make a proposal about how we can re-align the prospect's assets to achieve their financial goals. This proposal includes consolidating the client's investment accounts at Fidelity Investments and linking the client's bank, savings, credit card, mortgage and insurance accounts to Fidelity through the "Full View" dashboard application.

Some clients worry about "having all their eggs in one basket" with one custodian. Fidelity is consistently head and shoulders above any other custodian that we have worked with. In the extremely unlikely event that Fidelity could not fulfill its obligations, each account at Fidelity has $500,000 of Securities Investor Protection Corporation (SIPC) insurance and an additional $99.5 million in private insurance. This insurance does not protect against market decline in the value of securities, but does protect the investor if, for some reason, Fidelity could not deliver the cash or securities in the account.

Important note for current clients:

We would like our clients to go through the exercise of reviewing their personal balance sheet and investment strategy annually. The problem is: like pulling records together for tax returns, this is a task that clients would rather avoid doing. Those clients who have gone to the effort of connecting all their accounts to the Fidelity "Full View" application can give us what we need effortlessly. Contact us if you need help accessing this tool.

Strategy

In December we wrote, "Three weeks remain in the year. Stocks could finish up 5% on the year or down 5% on the year, most likely around up 1-3%. Given that the market undershot our forecast for this year, we think next year will offer above average returns of at least 12%. We are fully invested in anticipation."

The S&P 500 closed out 2011 with a gain including dividends of 2.1%. So far in 2012, the S&P 500 is up 7.8% in 6 weeks. Not much has changed since the 4th quarter of 2011 - the situation is Europe is still a mess and the US economy is still running below potential, which means that full employment in the US is far in the future. However, if investors can stop worrying about macro issues for a few days, they realize that US stocks offer exceptional value right now relative to other asset classes. We were fully invested through the 4th quarter of last year and are reaping the benefit of being early.