Stories
In Cadence Capital’s ornate lobby, carved into the mantlepiece of a broad oak fireplace, is the crest of the Jameson family.
The townhouse, which overlooks Fitzwilliam Square, was once owned by the famous family of distillers. It’s a reminder that even in Ireland – a country whose aristocracy has twice been turfed out – there is no shortage of old money.
It’s a suitable home for Cadence Capital, the wealth management company founded by Anthony Moyles and Robert McGlynn.
Moyles – former captain of the Meath gaelic football team, and a regular on Newstalk’s Off The Ball show – and McGlynn come from Davy. They worked there together for 20 years, before leaving to start Cadence Capital last year.
In going out on their own, Moyles and McGlynn are going against the grain of the wealth management business. In Ireland and across the world, wealth managers have been consolidating into bigger and bigger entities.
In February of last year St James’s Place bought wealth manager Harvest Financial Services. In May of last year Brewin Dolphin bought Investec’s €2.9 billion wealth management business for €44 million. And Bank of China was in the process of buying Goodbody for €155 million, before the deal fell through last week after the Chinese pulled out. According to Piper Sandler, a law firm, 2019 saw a record number of acquisitions of small wealth managers.
Wealth managers are in demand. Why? They have a quality that’s increasingly rare in the banking world: a steady income stream. Wealth managers make money irrespective of prevailing interest rates or asset prices. As the share price of the Irish banks shows, banks and other financial institutions badly need to diversify their sources of income.
Yet for all that, Wealth management is a relationship business. Wealth managers work with the same clients year-in, year-out for many years. Their clients place a great deal of trust in them. So there’s always an opportunity for trusted wealth managers, with strong relationships, to make a go of it on their own, like McGlynn and Moyles have done.
Cadence pays a third party, Credit Suisse, to handle the “back end” of the business. Credit Suisse handles custody of the assets and provides a menu of assets for clients to pick from. Moyles and McGlynn’s job is to understand what the clients need and help them pick the right assets.
Most of our clients are business owners. Some of them have inherited wealth. We don’t have any lotto winners.
Robert McGlynn
Credit Suisse provides fancy products not available to ordinary investors, like leveraged equity notes with built-in insurance protection, or hedging to protect against losses during particularly scary periods. These products help. But they can’t resolve the fundamental dilemma for all investors, which is the lack of value on offer in every market. Assets are incredibly expensive, meaning returns will be lower than before.
In times past, wealth managers could have fairly confidently forecast eight per cent returns from investing in the public markets. Even bonds, a safe asset, returned eight per cent per year in the last 20 years.
But that’s no longer the case. To make eight per cent returns now you’re into the world of risky private equity deals or direct loans. Moyles and McGlynn acknowledge that, even though equity markets are the lifeblood of the economy, they don’t make sense as an investment right now. It’s getting harder for a wealth manager to deliver the outcomes their clients took for granted in the past.
I sat with McGlynn and Moyles to talk about the wealth management industry in Ireland and the outlook for investors more generally. We discussed:
Why they made a break for it
In a world of bigger wealth managers, why their ambition is to stay small
Where Ireland’s wealthy put their money
Irish banks may buy wealth managers
It’s a bad time to invest in the stock market
Fees may need to fall in the wealth management industry
SK: You were working together at Davy. And when you were chatting down the pub, thinking ‘we could go out on our own, we could do it’ – what was the thing that you could do? What was the vision for Cadence Capital?
RMcG: We worked together for 20 years in Davy so we know each other for an awfully long time. And just to go back a bit, I joined Davy straight from Trinity College in ’93. After learning the ropes I went to London for five years working in equity derivatives and I then returned to Davy in 2003. The joke at the time was ‘I’d returned to the bosom of Davy’.
The first person I sat beside when I came back was this fella and we struck it off. That was, as I said, 20 years ago, but we struck it off well from the get-go. I remember making a comment to my wife that this fella I’m sitting beside is really good at what he does.
So the pub chat so to speak was, ‘we’re 20 years in the firm. Are we still getting the same satisfaction out of the job?’ You learn a lot in the first year in any role. After that first year, you gain more experience but you essentially do the same thing in years two, and three, and four and so on…
There were three things that motivated us to leave the big firm and establish Cadence. We both had come to a point in our careers where we wanted a new challenge. We both had demonstrated entrepreneurial skills in our careers and we thought, why not do it for ourselves. And the third and most important thing was that we had a vision for a modern wealth management business albeit with old-fashioned approach to doing business, meaning we like a very interpersonal relationship with our clients. Really holding people’s hands. And we had witnessed with big firms, what happens is as they grow bigger they lose the flexibility in their business.
On the face of it, you might think all clients want the same, and they have the same requirements. But there are subtle nuances and in our experience the wealthier you are, the more nuanced the service you require.
And so the combination of looking for a new challenge, satisfying the entrepreneur in us, and the vision for an old-fashioned investment boutique got us out to establish Cadence. But of course an fashioned investment boutique wouldn’t go down very well in the context of security, so we collaborated with Credit Suisse.
We don’t do marketing, but if we did, our strapline would be that we marry the best of big and small. The ‘small’ is the interpersonal and time we give our clients. The ‘big’ is the security, track record, investment expertise and discretion that comes with Credit Suisse. Our clients have no financial exposure to our firm. We place our client assets with Credit Suisse with all assets registered in the clients own names. Credit Suisse has a very, very strong balance sheet meaning it’s a safe place to hold client assets.
SK: In wealth management there are affluent clients, and then high net worth clients, and then ultra high net worth clients with €15 million worth of assets or more. Where does your average client sit on that scale?
AM: We have a line in the sand which is a million euro minimum account. Some families, some clients would have multiples of that. But that’s the minimum amount of money that they would have available for investment or that they want to keep and protect.
We want to have a very concise number of clients who are being catered to as well as they expect. And if we spread ourselves too thin, and you have 100 or 200 clients, it’s just not gonna happen.
The Irish banks will likely be buyers of wealth management businesses at some point in the future.
Robert McGlynn
RMcG: Most of our clients are business owners. Some of them have inherited wealth. We don’t have any lotto winners. We have some professionals. But most of them are business owners and like most business owners, a lot of their wealth is tied up in their own business.
When it comes to looking after their money we have a bias towards conservatism. Business owners take risk in their own businesses, risks that they understand and that they can in some way control. They give us the excess capital if you like and we have very strict parameters around what we’re doing with the money and how we manage it.
Cadence is a small operation. We’ll always be a small operation. We don’t have an ambition to be another Davy, Goodbody or Investec.
SK: In the wealth management industry, the trend is toward consolidation. Why are wealth managers typically getting bigger?
RMcG: I think a lot of finance houses or banks are acquiring wealth managers because in the financial services industry, wealth management is a very attractive business model. It’s basically a recurring income. It’s a fee-based business.
SK: And in banking, a lot of other traditional business lines are slow at the moment.
RMcG: Much of the financial services industry revolves around transactions. If a transaction happens, there’s a payday. But sometimes transactions don’t happen and the COVID backdrop is a good example of that.
Wealth management is an attractive string to your bow. The Irish banks reduced the resources that they would have traditionally committed to wealth management. They’ll likely be buyers of wealth management businesses at some point in the future.
SK: And that’s come back to bite the Irish banks on the rear end now, hasn’t it, because they’re so dependent on their loan book. In a time like now, when interest rates are falling, their share price is super sensitive to that. Whereas other banks have a bit of ballast from wealth management and other business lines.
AM: If you look at the US, you’ll see that the big investment banks out there that have a foot in both camps, so they perform a lot better. Because you can rely on one when the other one’s not going so well.
And obviously, money is cheap at the moment. So a lot of consolidation is going on. And there’s lots of people hunting around. And then there’s obviously corporate finance guys out there trying to get activity going as well.
But I’d say for the likes of us, consolidation by the big guys is actually a good thing for us. Because there’s certain people who are dealing with one individual in one company then all of a sudden, they’re under a different corporate umbrella dealing with someone else, or potentially the same person but in a different regime. And so someone who wants a more bespoke service with consistency in terms of who they have a relationship with will come to the likes of us.
SK: Your service is about the relationships you have, and there’s a limit on how scalable that is. So are you at a point yet where you’re not actively courting new business? Or are you still getting there?
RMcG: We have 35 clients at the moment. We have a goal to get to 50. Once we get to 50 we’re going to close the door, pause and take stock of where we are. There’s three people working in Cadence at the moment: Anthony, myself and Sandra who is our office manager. We may take on another one or two people to work in the background. We have an ambition, which is kind of strange one, that we don’t ever want to have more than ten people on the payroll. Because one of the great things about our business model is it is scalable in terms of the quantum of assets that we can manage. There’s not a huge amount of capex in advance of taking on more business. Interestingly, Warren Buffett referred to that in his last letter; he loves business models that are scalable without a huge amount of capex.
SK: So you can grow your assets under management infinitely, but the number of relationships is limited to a certain extent.
RMcG: Exactly.
SK: And how big are your assets under management?
RMcG: Trade secret!
A lot more people will have a look at the bottom line of what they’re being charged, and what they’re paying to get performance.
Anothony Moyles
SK: How active are you involved in picking the assets yourself? Do you choose the broad asset allocation, or do you choose to go into certain funds that will steer you or, maybe, smart beta products. Or do you choose specific stocks, bonds and options?
RMcG: The first thing I’d say is that in terms of our investment philosophy, it’s open architecture. Cadence doesn’t produce any proprietary products. And that allows us to be independent and provide unbiased advice.
At a high level, we will advise clients in terms of how much risk they should be taking based on their requirements. So if someone comes to us and says that they want to grow their 10 million to 50 million, and they want to do it in the space of 10 years, well, then there’s a certain avenue you have to follow.
But when it comes down to the day-to-day nitty gritty of it, we allocate a lot of responsibility to third parties, and that will typically be Credit Suisse. Decisions such as whether to buy Ryanair or Easyjet, we leave to Credit Suisse. That doesn’t necessarily mean that the clients invest in Credit Suisse products.
You have some practitioners in the industry very good at fixed income, some firms are very good at equities. Within equities some firms have a particular expertise in Japanese equities. So at a high level, we prescribe what a client requires.
And I will say that, if we had to put a moniker on it, we are active asset allocators and we prefer to use passive instruments. So rather than buying individual shares, or individual bonds, we allocate capital to Exchange Traded Funds.
SK: You’re using low-cost funds like Vanguard, and ETFs.
RMcG: Exactly, correct.
SK: And so it’s not a fund-of-funds type approach.
AM: No.
RMcG: We spend a lot of time at the outset getting to know our clients. Many of our clients we know very well already, because we’ve dealt with them all through our careers. For people we don’t know so well we devote a lot of time at the beginning to understanding where they’re coming from. And sometimes we have to challenge people’s perceptions. It wouldn’t be unusual that you might meet somebody who’s delighted with the concept of taking lots of risk, but you know that they’re not really ready for it, or not able for it. Or may not be able to afford to take as much risk as they think they can take.
AM: What we try to do is look at where’s the risk associated with this? So, you go back to November, December of last year, we would have said at the time ‘Listen, markets are getting very very overbought here. They’re overstretched. There’s a dislocation between value and where the markets are trading. Caution is warranted here. You actually tell people that to increase cash, reduce down equities, again, depending on the mandate and risk profile. Lo and behold, we didn’t know it was going to be Coronavirus but what happened was a massive down drag on the market.
And then obviously, the way markets move lately – down thirty per cent and then back up thirty per cent – you have to be able to react pretty quickly. It’s about being in regular contact with our clients and availing of opportunities as they arise.
We understand the value of equity from establishing this business. Equity is precious – equity is blood!
Robert McGlynn
SK: In your experience is there a disconnect between investors’ gut feelings and your professional opinion of how they should be investing?
AM: The way we like to look at is we establish a core amount of capital for investment in a multi-asset portfolio. And what we say is, that’s going to be pretty boring stuff. It’s going to tick along within a strict mandate, and we’ll keep an eye on the major pivot movements. We’ll protect that portfolio as much as we can. And then you have your satellite capital, your opportunistic kind of investments. That can be direct equities, it could be property or it could be private equity. We have independence, so we’re able to actually talk to whomever we choose, or whomever wants to come and talk to us and show us different stuff around the market.
RMcG: For client capital, we will typically put 80 per cent into a safe, well-managed multi asset core portfolio using ETFs. We keep a very close eye on the costs that are being accrued within the portfolio.
We then prescribe 20 per cent of the investment capital go into what we call a satellite portfolio. We’re strict in terms of how we segregate those two pools of capital. What happens in the satellite is very different from what happens in the core. The core is your bedrock. It’s liquid. The satellite is more opportunistic and often isn’t liquid.
SK: It strikes me that constructing a core of safe and steady-returning assets is a tricky proposition in today’s markets. Bonds have been an incredible run for 20 years, and I’m sure they would have been the bedrock of a safe portfolio. But they’re expensive now. So what’s a core portfolio made of now? What’s a safe multi asset portfolio for the next 20 years?
RMcG: There isn’t really “a safe asset”. It’s about blending assets. It’s like a recipe. It goes back to what the client needs or wants to achieve. Often clients will have a number of core portfolios working to different mandates. One core portfolio might be an estate-planning endeavor; ‘This is money for the kids and for the next generation.’ And if you have that 20 or 30 year time horizon well then you can afford to take the risk that goes with equities, you can have more growth oriented assets in there than fixed interest assets. There’s always a question over timing, whether now is the right moment to deploy money into equities. We believe in multi asset portfolios and we invest right across the world. There’ll typically be equities, bonds, commodities and some property in our core portfolios.
SK: Equities are expensive right now. What’s the alternative, if you want to grow your money over a longer time period?
AM: Just to add on to what Robert said. Once we’ve talked to a client, we may go and mandate Credit Suisse to design something bespoke for the client. Credit Suisse have portfolios all the way from a really cautious 100 per cent cash mandate out to 100 per cent in equities. Credit Suisse can hedge your portfolio and that’s a big differential to what’s available in the Irish market. Hedging can be expensive but you can 100 per cent hedge your portfolio when the time is right or if you feel the need to.
SK: Hedging, if you can execute it, is the silver bullet. But let’s assume that maybe it’s not always there. In the absence of that, do you think that people have to get accustomed to lower returns from everything really from both stocks and bonds?
AM: We’re in a low interest rate environment. Corporates are being charged now to hold cash. And that’s where it’s going to go. So banks and other financial institutions are saying well, look, cash is now negative. So investors are being forced to take risks.
And that obviously readjusts everything down. So in a broad sense, you’re right. People will feel well, the returns are going to be less. But from what we do on a daily basis, we pose the question what is the moral hazard of all that? What’s the fallout? So do we get a situation where interest rates kick and all of a sudden start to rise rapidly? And then what does that do for anyone who’s locked in?
So what does amaze me, over the last five or six years our work has become much more all encompassing. Now it involves not just financial markets, but politics, central bank policy and then you throw in something like Covid!
So I think people will have to get adjusted to it. If you’re only earning four, five or six per cent from a portfolio but you’re being charged three per cent, well, then that’s not a great situation. So I think there are probably a lot more people who will have a look at the bottom line of what they’re being charged and what they’re paying away to get performance or not good performance as the case may be.
SK: So as returns fall, do fees have to fall along with them, in order to compensate investors?
RMcG: Yes, I think so. The bond markets are effectively now nationalized. That’s not an original thought, it’s been talked about and written about. But it is potentially worrying. And there’s a lot of talk now about Modern Monetary Theory and that fiscal deficits don’t make any difference anymore – ‘Just keep printing away and interest rates are going to stay low forever’. That may not necessarily always remain the case. I’d expect at some point investors will question the ongoing intrinsic value of a US dollar or euro.
What our clients expect from us is that we have conviction, and that we have their best interests at heart. Protection is a very, very strong theme here. Our clients own successful businesses or they’re from a family of money. It’s our job to have a bias to the conservative to ensure wealth protection. That doesn’t mean that we’re afraid of risk. But there’s a time to take a risky bet and then there’s times where the odds are against you and you don’t take the risk.
SK: Because it’s both expensive and a bit scary.
RMcG: Many of our clients don’t need to participate in the markets while that dynamic is at play. For instance we’re quite happy at the moment to sit on the sidelines until after the US election.
All you’re reading about is markets at all-time highs, this is going great. There’s an army of day traders in America, making loads of money. And then people are saying ‘sure this stock market is easy!’ Well, it’s easy until it’s not easy.
Anthony Moyles
SK: Do wealthy Irish people invest in Ireland? Where are their assets?
RMcG: Why would they choose to invest in Ireland when their businesses are dependent on the Irish economy? We encourage people to take a global perspective and invest their capital worldwide.
AM: A typical Credit Suisse core portfolio would have say 70 per cent in Euro denominated assets and 30 per cent in dollars.
SK: ls there a specific equity, or asset, that you like that you keep going back to that you recommend to people?
RMcG: We like equities. Don’t get us wrong. Right now we don’t love equities but we like equities because equities generate growth over time. There are many great businesses out there and the stock-market provides you with an opportunity to become an equity owner in that great business. We understand the value of equity from establishing this business. Equity is precious – equity is blood!
If you can maintain your resolve through these little shocks equities will be fine. But we love investments where you’re getting the opportunity to grow your capital but you’re also getting your backside protected. Like the note we spoke about before.
SK: Specifically what are the biases you see in clients? What do they tend to want that you have to push back against?
RMcG: Everyone likes the concept of earning 10 per cent on their investments. And you can achieve 10 per cent but there’s a lot that goes with that 10 per cent, and it won’t be 10 per cent every year.
AM: The risk/ reward trade off is the one. In times like this, all you’re reading about is markets at all-time highs, this is going great. There’s an army of day traders in America making loads of money. And then people are saying ‘sure this stock market is easy!’ Well, it’s easy until it’s not easy. And then all of a sudden you get the big swing down.
RMcG: Our business is built for people with wealth, who want to make sure it’s there for them when they want it, which is why we have a strong bias to protection. That’s everything from how the assets are registered and capital is invested.
SK: How do your fees work?
RMcG: We charge a flat fee and levy no commissions. Our fee is derived from the value of the assets that we manage.
SK: And what’s the fee on assets under management?
BMcG: When you take everything into account, Credit Suisse, other professional third-parties and our fee, it comes in at 2 per cent.
SK: And the incentive therefore is to hang onto it rather than take big risks in order to grow it.
RMcG: If, like us, you follow the model of charging on the assets under management, it is of course in our interest to grow the assets under management. Our interests and our clients’ interests are aligned in that way. But you have to be disciplined and you can’t chase growth for growth’s sake. Our charging model is very transparent. Our fees are not the cheapest in the market, but neither are they the most expensive.
