Tom Balcom, Founder of 1650 Wealth Management was interviewed this week by international financial risk management news outlet, Risk.net. In the article entitled “Liquidity Never An Issue, Says 1650 Wealth Management“, Balcom was profiled as a “new breed of advisors” who consider structured investments to be “ETF 2.0”.
Risk.net requires an online subscription to access their news coverage, but we have posted the full article below for 1650 Wealth Management clients and followers.
1650 Wealth Management is one of a new breed of advisers for whom structured products are as familiar as ETFs. Yakob Peterseil talks to founder Tom Balcom about exploding myths and staying relevant
Perplexing pricing, tricky terms and credit risk are just some of the bogeymen trotted out to arouse suspicion of structured products. Convincing investors that they will be unable to offload their notes before maturity is another stock horror tale, but the reality is different, according to Tom Balcom of 1650 Wealth Management in Florida.
“[Illiquidity] is something people who don’t use structured investments use as a reason to avoid them. We’ve never had any problems putting notes back to an issuer,” he says. “Depending on how our notes are performing on a monthly basis, we decide whether to hold it or roll it, and if we roll it, we’ll put it back to the bank.”
Willing to burst the illiquidity myth, Balcom is no less open to telling issuers what they could do better. Having bought his first structured note in 2007, the registered investment adviser continues to be an avid buyer for his clients, who range from young professionals to retirees, business executives to small business owners. Account minimums at 1650 Wealth are $250,000, with most clients having a net worth of more than $1 million. Balcom often unloads the notes he buys before maturity, but he will hold on to them if they have not capped out earlier.
Banks could be more proactive as product maturity approaches, he says. Instead of having to call around and ask what is on offer each time a note comes to term, Balcom says he would prefer it if the banks reached out to him. And on the subject of what banks could do better, a user’s guide to the investments would also be useful, explaining what notes work best in certain market conditions, he adds.
A wholesaler that visited his offices was the first to show Balcom the potential that structured instruments held for his business. “The rep said: ‘These are designed to reduce downside risk and provide leveraged upside to a cap,'” he recalls. “And I thought to myself: this is the holy grail.” After the financial crisis hit, Balcom branded them ‘repair and recovery’ strategies for the way they could repair his clients’ portfolios more swiftly than a long-only strategy.
One way Balcom gets around the pricing trap set by low volatility and depressed interest rates is buying notes linked to assets that are showing above-average volatility. Commodities, small caps, emerging markets and Reits [real estate investment trusts] all fit the bill – Balcom recalls an early commodities trade was moving a client’s money from a long-only mutual fund to structured notes. More recently, he has looked to ‘smart’ indexes from Barclays and JP Morgan to obtain commodity exposure. He typically buys 3x leveraged notes with a cap tied to these underlyings and a 10% buffer on the downside.
Balcom has resisted following some of his colleagues all the way down the yield curve, steadfastly keeping to tenors of two years or less while others put their clients into notes lasting seven years or more. One reason is his pickiness about underlyings, which gives him the pricing advantage others seek in a longer maturity, but the shorter tenors also seem of a piece with his investment philosophy. “Structured investments aren’t one of those buy-and-hold investments where you wait for it to mature and then decide what to do with it,” he says. His style is more tactical – he will flip a note in a matter of months if conditions are favourable.
Balcom is part of a wave of young advisers who consider structured investments to be ‘ETF 2.0′ and for whom an unwillingness to experiment with the products brands you as out of date. “I think you’re doing clients a disservice if you don’t at least go out and investigate other tools,” he says, before comparing advisers to GPs. “If you walk into some doctors’ offices, they have the same equipment they’ve had for 20 years. Their thinking is: ‘If the equipment works fine, why change it?’ But if you walk into other doctors’ offices that have the latest equipment and tools, you think: ‘This doctor knows what he’s doing.'” Balcom marvels at the fact that for a lot of advisers, exchange-traded funds are still a new phenomenon.
A vociferous supporter of the industry, Balcom avoids any taint of capture by running his business on the fee-only, independent registered investment adviser (RIA) model. ‘Fee-only’ means he does not earn commissions from recommending certain products over others, instead pocketing a percentage of assets under management. ‘Independent’ means there are no mandates or matrixes coming down from above, and the RIA structure holds him and his partner, David Austin, to the fiduciary standard, a high threshold that obligates the adviser to always put his client’s interests above his own.
As a discretionary adviser, Balcom is also free to trade without having to obtain client approval first. This implies a level of trust that was likely difficult to earn and is probably even more difficult to maintain. Balcom would say it comes from putting client interests first, even where that means making tough decisions. “Our job is to create well-diversified portfolios using good tools. We try to tell our clients: this is not a sprint – it’s a marathon.”