By
Steve Garmhausen
Nov. 8, 2019 11:15 am ET
Published by Barron’s. Click to see original post.
ED MOLDAVER, BARRON’S 19TH-RANKED advisor nationally, probably wouldn’t even be a U.S. citizen had his parents not made a bold decision, in 1978, to emigrate from Soviet-block Ukraine. “I was living in George Orwell’s 1984 and didn’t know it,” he says. “Fortunately for me, my parents did.”
Sitting down with Barron’s advisor, Moldaver recounts his path from the New York Mercantile’s commodities pits to Stifel, where he advises billionaires. He also makes the case for value stocks and MLPs, and explains why it’s harder than ever for young advisors to get a foothold in the industry.
Q: You immigrated from Kiev in 1978. Tell me about that, including what Ukraine was like.
A: My family left Ukraine when I was 11. As a kid, what you see is what you know. There was no internet, so to a kid my reality appeared normal. Long food lines, shortage of toilet paper, constant brainwashing at school and indoctrination into the Communist Party, all was a daily ritual. Only when we were out of there did I realize how backwards and inefficient that system actually is. I was living in George Orwell’s 1984 and didn’t know it. Fortunately for me, my parents did.
They make you leave the country with nothing. They let you take a few personal items like some silverware, Matryoshkas [wooden stacking dolls], and teakettles. When the train reaches the first destination, which was Austria, you set up a blanket in a flea-market type of place and sell the last of your personal items to buyers haggling for every penny. But the great thing is you have money to survive the next leg of the journey to Italy, where we stayed for three months waiting for a visa to the U.S.
The first few months were difficult. I spoke zero English. My math skills, however, were great. At that time the Soviet Union was four years ahead of what the kids were learning here. I learned the language and made great friends, many of whom I see often to this day.
Q: How did you get into the business?
A: As a kid, I was always interested in money, primarily because we had none. In 1988, while a sophomore in college [Moldaver earned a management degree from Widener University, outside of Philadelphia—Ed.], I got a job with Lind-Waldock on the commodity exchange floor at the World Trade Center. To get the job, I convinced some random guy to get me a pass onto the floor. I walked around the floor asking for a job until I got one. The action in the pits was invigorating to me. I loved the energy and the thought process of price-movement prediction. I started studying for a Series 7 the following year, and passed it upon graduation from college.
After that it was all smile and dial. I built my business from the ground up by cold calling. At that time, that was my only option — 250 to 300 dials per day and lots of rejection. I have one client that has a billion with me that I cold called in 1990s. God bless America.
Q: Your 10-person team has $6.5 billion of AUM. What were the biggest hurdles to your success and how did you overcome them?
A: My first 10 years in the business, I was trying to be everything to everybody. I didn’t have a focus or appropriate knowledge. I needed to look inward and ask myself who I really wanted to be around, and who would naturally want to be around me; what are my best traits and who would value them?
I decided to become an expert on business owners, entrepreneurs and their families. I learned what makes them tick, their fears and concerns. I went to their networking events and read all the industry magazines. The more granular I got into a specific industry, the better my results became. Being authentic brought me the best results.
Q: Describe your investment approach and preferred vehicles.
A: It’s a client-driven approach. We concentrate first on how the client is wired financially; everyone is different. We call it Financial ID. We understand what their knowledge of the markets is, their expected involvement, and their emotional composition during the euphoric times as well as times of market stress. Only then can we get our hands around which vehicle to use.
In short, across all of our relationships we use all financial products. Although each plan is custom, the underlying investments can be similar and thus scalable from an operations standpoint. For example, if a client believes in long-term, liquid active management, and their allocation justifies small-cap value, they will have one or several of what I believe are the best managers.
Q: How are you positioning portfolios in light of the current market backdrop?
A: Low interest rates are distorting the pricing of many assets. As longer-term borrowing gets closer to zero, what would you pay for a company if you can borrow money for close to nothing to buy it? With my clients, we’ve started to slowly re-allocate from large growth, which has been a terrific performer, to both large and small value.
Q: What’s the case for value stocks?
A: Currently there exists one of the largest gaps in valuation of value versus growth that we’ve seen in decades. These companies’ balance sheets are less risky, [and they] pay more in yields and should perform better if and when there is stress in the markets. Having said that, “slowly” is the key word, in my opinion. There have been some extremely smart people that took this position a year ago, and although it’s a logical stance, are lagging way behind in performance. On the income side, we have mainly switched to low duration, high quality most liquid vehicles. You are not getting compensated to do anything else. The reward is not there, in my opinion.
Q: What are the best places to find yield right now?
A: Several times per year, when market volatility picks up, there is an opportunity at specific moments to create various structured products, such as yield notes for certain clients that can [tolerate] less liquidity. I also like the MLP space, with 7% distribution rates.
Q: Can you be more specific about the types of MLPs you like?
A: I like gas pipelines for the most part. You’re definitely getting a distribution in there, which is pretty good. Unlike five years ago when these guys financed their expansion by taking on more and more debt, and it was primarily owned by individual retail public [investors], that has switched to a lot more institutional.
And many of these are financing themselves internally through the income that they’re generating. So they’ve de-risked themselves. You still have pretty decent growth and you’re getting, you know, 7% distributions in the period where the 10-year [Treasury] is trading at 1.7%. And I don’t believe the MLPs are as risky collectively as high yield bonds.
You can construct a dividend blue-chip stock portfolio and get 4% percent yields as well.
Q: How important are Stifel’s investment banking capabilities to your clients, and what are examples of how they benefit from it?
A: The greatest percentage of the families whose wealth we manage are entrepreneurs and business owners. Stifel’s investment bank concentrates on the middle market. Our few hundred bankers concentrate on companies with valuations ranging from $100 million to $1.5 billion. We’ve been a market-share leader in this area of the market. So when my clients need acquisition targets, sale of divisions, to merge or simply to monetize their lifetime of hard work though IPO, sale or merger, the bank is there. It’s the perfect size and area of expertise for my target market.
Q: Has the ability to offer help with an eventual exit event helped you win some of your entrepreneur clients?
A: Absolutely, I lead in with that in some cases. When I’m speaking to a business owner that has a company that’s worth, you know, $200 million, and it hasn’t been monetized, I say, “I specialize in people exactly like you, and my investment bank is designed to help people exactly like you.” And my team, which are nine people and each person very versed in their own specific part of wealth management in a granular level, will help you do everything from A to Z. Trust and estate work, financial plan, investment plan, and then ultimately all that has to tie into the monetization, however that’s going to take place.
When I worked for extraordinarily large institutions, you get good name recognition for sure, but you also don’t have access to the investment bank to the extent that we do here.
Q: You have a few billionaire clients, but billionaires like to spread their money around. How you deepen share of wallet?
A: You need to relate. You relate the most to the people that are like you. The billionaires that I deal with are all first-generation wealth. They are grand thinkers. To this day, they are some of the hardest working people that I know. Two of them are immigrants. They have raised great kids. They all love this country. Naturally there is a lot in common for us to talk about and enjoy each other’s company at dinners and events. That’s a starting point.
Next is delivering performance, service and access to unique investments. You don’t want to be just another asset allocator. [Clients] want specific ideas, not just a regurgitation of your firm’s or competitors’ research. They expect complete honesty and transparency. If you screw up, say so. They have done so plenty of times themselves. They are used to taking risk and [understand] no one is perfect. They’ll respect you more for it. You deepen your share of the wallet over time if you deliver in the manner that is expected of you. There are no shortcuts.
Q: Can you say more about the specific ideas you might offer a client that they might not find elsewhere?
A: Because I see a lot of not most of the deals that come through here, I’m able to [study] some of the unique transactions that have to do with … companies that are about to go public. Currently I’m invested in a couple of companies that have anywhere between $500 million and $1.5 billion in revenue, that intend to go public, and there are some unique opportunities that some of the higher-net-worth individuals can invest alongside some of the institutions that are in these deals. And that’s a rarity.
Q: What is your biggest business challenge at present?
A: The bond market is the biggest challenge; controlling risk while getting yield. We as an industry are taking on more risk to meet the goal and plans made 10 years ago. None of the assumptions that I’ve seen in any firm planned on prolonged low interest rates.
Look at the 10-year [Treasury] bond yield of 1.7%. In addition, we’ve driven the bond spreads to ridiculous levels. Now I see people using leverage to buy low yielding bonds, CLOs, private loans with ridiculous spreads.
Q: You’ve written two books. Worth it?
A: Absolutely. If my knowledge can help more people, mission accomplished. It’s a major differentiation point as well. Yes, it took a long time, but if you want to stand out in any profession, you have to do the things an average person will not do. Getting Larry Kudlow, Ace Greenberg and Governor Paterson to endorse the book [Logical Investing: The Fluff The Bark & The Bite https://www.amazon.com/Logical-Investing-Fluff-Bark-Bite-ebook/dp/B01EQHGS0I ] didn’t hurt either. (Paterson, the former governor of New York, joined Moldaver’s team shortly after the book came out, and left earlier this year to help the Las Vegas Sands push for a casino in New York City.)
Q: Wall Street’s changed a lot since you got started nearly 30 years ago. Is it better or worse, in your view?
A: Far better, if you change with it. We use a lot of technology. If it wasn’t for tech, I’d probably need double the number of people to manage the same number of relationships. Lower costs are driving out competition and building barriers to entry. When I came into business you needed to have probably 20% of what’s required right now to make the same amount of money.
Teams with efficient practices end up with much more in AUM and production even in the face of lower fees. You can easily see this effect by looking at the Barron’s list.
Q: How do you manage the stress that comes with your profession?
A: I feel stress when my clients feel stress. The easiest solution to my stress is to talk to my clients. I have the highest number of conversations during the volatile markets. It becomes therapeutic for both parties. If all else fails, I go to the gym and lift heavy weights.
Q: Thanks, Ed.
Published by Barron’s. Click to see original post.
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