Rich Americans Kept a Key Strategy for Lower Tax Bills This Year

(Bloomberg Markets) -- When Lisette Cooper founded Athena Capital Advisors in 1993 to manage the funds of large institutions, the firm’s investment strategies addressed two core concerns: risk and return. In 2002, Cooper refocused Athena, which has $5.5 billion in assets under management, to handle mostly the wealth of individuals and family offices. Based in Lincoln, Mass., the firm has since had to consider another factor for clients: taxes. In an interview, Cooper discusses the opportunities this creates for active strategies, the impact of the U.S.’s new tax bill on the wealthy, and the difference she sees in how generations prefer to invest.

Rich Americans Kept a Key Strategy for Lower Tax Bills This Year

Devon Pendleton: Tell me a bit about how Athena started.

Lisette Cooper: Originally our clients were institutions. We actually ended up helping the executives of some of those institutions with their personal portfolios as the concept of the multifamily office, and the external CIO [chief investment officer], became more popular. And I was thinking, This is great, I’m going to modify the business model of Athena to be a multifamily office and external CIO, and we can bring the principles and best practices of working with institutions to substantial families that are just as big as these institutional investors. That was in 2002, and that is what we’ve done ever since, with only some slight modifications. Now we’re mostly families, but we’ve added back in some foundations and endowments on whose boards families, like our clients, often serve. In some ways, it feels like we’ve come full circle.

How did you get into investment management in the first place?

I grew up in a very academic family, so when I didn’t know what I wanted to do when I grew up, I went to get a Ph.D. And I got a Ph.D. in geology. There was a lot of math in that, a lot of field trips, which were great, but being in the lab was very isolating and not so great. It turned out that at that time Wall Street was looking for people with a math background. And so I joined Wall Street as one of that generation of rocket scientists. Sometimes I say that I misheard. I thought they were looking for rock scientists. I went from Merrill Lynch working in capital markets to a risk management firm called Barra Inc., which is now part of MSCI Inc., and ran their consulting group. I founded Athena out of that.

What can you tell me about the families?

We have families that are first-generation wealth and also multigenerational wealth. One of the interesting key ingredients is that someone was an investor or entrepreneur. So either they’re first-generation wealth and they’re producing that wealth themselves, or their parent or grandparent did that. We found our initial set of customers were really professional investors themselves, people who were partners with private equity, real estate, or investment firms. In the early days, we were really the investor’s investor, and then it extended into working with people who founded companies—entrepreneurs and their families.

In terms of investment interests, what would you say are the notable differences between generations? Also, how do multi­generational family clients compare to entrepreneur clients?

With first-generation [wealth], it’s very common that, since they made the money, they’ll take whatever risk they want to take with it. Future-generation wealth often is somewhat more conservative because they feel like they’re stewards of the money. They’re going to spend some of it, but it’s not “their” money. It’s not universally true, but that’s a general rule of thumb. With the folks in the investment business themselves, another important difference is that they have access to a lot of investment opportunities. They could do this themselves if they had the time and the patience. They really want someone they can trust as their alter ego to keep track of all the crazy stuff they invest in. We’ve got the full balance sheet for them, and we monitor all the investments. They will take some of our ideas, but they’ll find a lot of investments themselves. The folks who aren’t professional investors, they really are heavily relying on our investment advice.

What about tax implications? That’s got to be a very big issue when you’re thinking about allocation and strategies. It must be different from working with institutional clients.

That’s one of the exciting things about working with private clients. We used to work with risk and return in the institutional world, and then suddenly there was this other variable: risk, return, and taxes. How could we make money for our clients by mitigating their taxes? It was a lot easier to add alpha that way than by trying to find the very tippy-top manager in some space. For example, we use a tax-managed equity strategy that’s pretty core for most of our clients, and it can add, on average, 300 basis points [3 percentage points] of alpha over ETFs [exchange-traded funds] or index funds per year.

Can you tell me more about that strategy?

Sure. Just imagine you can draw a little straight line on a piece of paper. Imagine that line represents a zero. There’s zero return to the stock market. But now put some dots above that zero line randomly up there and some dots below that zero line. Those are individual stocks. In any market when the stock market’s returning zero, some stocks are making money and some stocks are losing money. Let’s say you had a two-stock portfolio. One stock makes me money. One stock is losing money, and you net out to zero. Let’s say you sell that stock that’s losing money, and you replace it with something else that has very similar characteristics. It’s going to perform very, very similarly on a going-forward basis. But since you’ve sold it, you’re able to capture the fact that you lost money, and you can deduct that loss against other gains that you have.

This sounds like a really active portfolio that involves lots of management.

It is. We understand that work very well, and we’ve outsourced it for a very, very, very small cost. It’s just about the same cost as an ETF or passive fund.

Rich Americans Kept a Key Strategy for Lower Tax Bills This Year

Can you tell me a little bit about Trump’s tax reforms and how that’s shifted the landscape for your clients?

We breathed a sigh of relief because it preserved the ability to do that particular [tax-managed equity] strategy. There was some thought that they would get rid of it, and we were so happy they didn’t. The biggest thing for us in the Trump tax bill, beside dodging that bullet, was the doubling of the lifetime exemption. Many clients are looking at ways to use up that additional lifetime exemption. The other really interesting thing about the Trump tax bill was something it didn’t do. Many of our clients use planning vehicles like GRATs, grantor retained annuity trusts, to mitigate their estate tax bill and pass on wealth to future generations. The Trump tax bill permitted that strategy to continue.

Finally, and on a different topic, research suggests more and more women are coming into wealth. Any tips for communicating with female clients?

I would boil that down to one word: respect. We have clients who came to us because their previous adviser only addressed their husbands or didn’t engage them in meetings even when they’re both asset owners. They feel they’re not being seen, and they just get fed up with that.

Pendleton is a wealth reporter at Bloomberg News in New York.

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