Wellington is the rare money manager increasing assets in a tough market. It has set the standard for excellence in client service, but the firm must cope with an exodus of the group’s senior executives.
By Rich Blake
July 2002
Institutional Investor Magazine
The folks at Wellington Management Co. certainly like to go their own way.
Even as most big money managers have long since sold out to one financial services acquirer or another, the 74-year-old Boston-based firm remains resolutely independent. Once publicly owned, Wellington bucked industry trends, recasting itself more than two decades ago as a private partnership and is now one of the last holdouts. While other money managers plump up their retail brands and fight over 401(k)s, Wellington moves in the shadows, subadvising for Vanguard Group and other fund families, while focusing on defined benefit plans.
Its executives rarely talk to the press, but with more than $300 billion in assets, placing it 18th in our II 300 (see Money Management, page 43), up from 19th last year, they have lots to brag about. Defying market doldrums, the firm grew its assets 35 percent during the past two years, while most of its competitors suffered asset declines. Delivering strong performance across most portfolios, Wellington in 2001 earned estimated pretax profits of about $300 million on revenues of $600 million or so. This is one extraordinarily profitable operation.
“There aren’t too many managers out there that have had the kind of success Wellington has had recently,” says Joshua Dietch, a consultant at Boston-based Cerulli Associates.
But not everything is sunny at this venerable shop. A decade ago, once again blazing a trail, Wellington determined to strengthen its business by building from scratch a topflight client service division. Staffers in this group (Wellington calls them relationship managers) took on an important job - holding the hands of institutional clients. They described changes in portfolio strategies, explained weak performance, proposed new investment products. In short, they were meant to keep the customer satisfied - and they did. Recruiting veteran executives, Wellington quickly set industry standards for quality and excellence. Other money managers, eager to follow in Wellington’s footsteps, launched or expanded their own client service operations.
Now Wellington’s much-admired client service group is in flux, raising questions about the firm’s direction. In the past two years, as Wellington has grown rapidly, the firm has suffered unprecedented turnover; since January 2000 at least 200 employees have left and some 400 staffers have joined the firm, whose payroll now totals 1,250.
Few areas have been hit as hard as client service. Nearly half of its senior relationship managers - at least 11 of about 25 at last count - have left Wellington since 1999, many to join rival firms. As these well-paid, experienced veterans (typically, a 38-year-old making $300,000 a year) depart, they have often been replaced by younger faces (typically, a 25-year-old making $100,000 a year). “In replacing senior people with junior staffers, Wellington is doing client service on the cheap, and you have to wonder how long they can get by on that strategy,” says one former employee.
Also affected was a small but important pension consultant marketing team that worked closely with client service. Since 2000, four of five staffers jumped ship, with only a junior employee remaining. Wellington salespeople now service consultants, while other money managers continue to deploy marketers who cater exclusively to this powerful constituency.
Getting by with less is a familiar pattern in corporate America, of course. At Wellington it leaves surviving client service employees wondering if the firm’s managing partners, led by CEO Duncan McFarland and president Perry Traquina, are running the risk of jeopardizing the group’s reputation for excellence. If Wellington loses its reputation for quality service, will it risk losing important institutional accounts? Certainly, industry observers are beginning to wonder.
“Wellington has built a top-notch reputation for quality interaction with clients,” says Christopher Acito, a principal at Darien, Connecticut,based Casey, Quirk & Acito, which provides money management firms with strategic consulting. “They can’t afford to lose sight of the fact that going forward client service is going to be more important in the industry. No firm can.”
Lisa Finkel, a Wellington spokeswoman and partner, declines to comment on any developments at the firm, as do senior executives McFarland and Traquina. But some former partners and current clients believe that Wellington’s service is as good as it has ever been. “Client service was always a priority at Wellington,” says Marie-Claude Bernal, who retired as a partner and value equity portfolio manager in December 2000 after 23 years at the firm. “The people doing that job
were all exceptional. That hasn’t changed.”
Paul Slivinski, executive director of the Taunton Retirement Board, in Massachusetts, echoes that judgment. (Wellington manages a $24 million bond portfolio for the $118 million fund.) Slivinski says that after a client service staffer quit, “his replacement has done a fantastic job.”
Wellington set out to create its premier client service operation back in the early 1990s. The managing partners had grown alarmed about their dependence on Vanguard, which then accounted for half of all assets and revenues. To diversify the client base, the partners targeted the pension market, calculating that superior client service would give them a decisive competitive advantage.
The firm already deployed a sales and marketing team, which scouted out new accounts, as well as product managers, who served as the in-house liaison between salespeople and portfolio managers. For most of the firm’s history, servicing clients had been handled mainly by portfolio managers.
According to former employees, the recent generational shift in the client service ranks reflects a long-standing debate within the firm. Investment professionals reportedly took the view that the client service function represents a cost center that should be scaled back in a difficult market environment. Client service staffers, for their part, insisted that the quality of their operation is essential to the long-term health of the firm. “You can get by with mediocre client service when performance is good, but when returns go against you, it doesn’t cut it,” says one former employee.
Debates at Wellington unfold within the context of the 23-year-old partnership structure. In 1979 the then,publicly held company went private in a management-led buyout. From the start, investment professionals dominated the firm’s leadership. Today they hold 55 of the 76 partnership slots (divided among 23 research analysts and 32 portfolio managers), while representing only one fourth of the overall staff. Of the 21 partners who work outside investment management, just three currently work in client service; an additional four, including CEO McFarland, came up through the client service ranks and moved elsewhere in the firm.
Over the years, employees accepted the dominance of the investment professionals, who, after all, perform the most critical function of a money manager. But in recent years, say a number of former staffers, noninvestment professionals felt that their chances of ever making partner had become ever fainter. Since 2000, as many partners retired, Wellington named 22 new partners. None came from the client service ranks.
“They don’t come out and tell you that there’s no upside for your career,” says one former senior client service executive. “It’s more opaque than that. When they take away your ability to hire quality people, it tells you the role isn’t as important.”
The investment and client service factions bickered for years, but Robert Doran, Wellington’s CEO from 1990 to 1999 and a managing partner since 1979, kept the team together. A beloved paterfamilias and a 33-year company man, Doran had been a forceful proponent of the importance of client service, especially in bear markets, when performance doesn’t sell itself.
But McFarland, Doran’s replacement, has gradually sided with the investment professionals, even though he had worked in client service and had earlier joined Doran in championing the group. At a summer 2000 meeting, according to a source in the room, several partners objected to the money being spent on client service. A few months later, one particular client service unit with four open spots was told to get by with one, according to one ex-staffer.
During a semiannual meeting for the partners and 100-odd associates held at Cape Cod’s posh Chatham Bars Inn in early June 2001, the partners broke away for a private discussion. According to someone who was in the room, two portfolio managers complained that the firm was spending too much money on servicing clients. Says the source: “Some of us argued to expand client service. But they were fiscal hawks.”
Last autumn, when the partnership tapped head of global research Traquina as Wellington’s new president, the move underscored the investment staff’s power at the firm. According to sources, Traquina was a longtime, outspoken advocate of cutting the client service budget. With his promotion he became the heir apparent to McFarland.
In April, just a few months after Traquina became president, the partners decided to reorganize the client service division, naming an investment professional - Diane Nordin, formerly head of fixed-income products - as the new head of global relationship management. In the memo appointing her, Wellington said that she would “sustain the standard of quality” for which the firm was recognized (by, among others, Greenwich Associates’ surveys).
Nordin’s promotion meant that several client service executives may have felt passed over: Clare Villari, head of mutual fund client service; Michael Knight, head of international client service; and Mark Jordie, a client service executive who runs the firm’s London office. Though they remain at Wellington, the move reportedly left some colleagues disheartened.
In the past two years, several of their former co-workers defected to competitors. One of the first to decamp was Richard (Bear) Albright, a top public fund relationship executive and nine-year veteran, who moved to Bain Capital in Boston in the summer of 2000. His replacement: Jeff Lemieux, a client service analyst.
Says Albright: “People may speculate about turnover, but you only need to look at Wellington’s results in these past two difficult years. They’re doing just fine.”
But the parade continued. In December 2000 Dean Patenaude, the former head of Wellington’s global consultant marketing, joined Affiliated Managers Group, in suburban Boston. Sarah Morton, his replacement, moved to Evergreen Investment Management Co. in Boston in January 2002 to market hedge funds. She has not been replaced. In addition, Dino Davis, who worked with corporate pension plans, signed on with State Street Research in Boston in 2001. About the same time, Lorie Campagna, who had been especially effective working with foundations and endowments, joined Pell, Rudman & Co., a high-net-worth shop.
To be sure, Wellington Management is in superlative health. Two giant subadvisory clients, Vanguard and the Hartford Financial Services Group, kick in half of all assets. (The money manager handles $55 billion for Hartford and $103 billion for Vanguard.) On these assets Wellington earns fees of 10 to 20 basis points, far less than it would earn directly managing a retail equity fund. But economies of scale and extremely low distribution costs make it a lucrative business.
About half of Wellington’s $321 billion in assets is invested in domestic equity, 40 percent is in fixed income, and 10 percent is in international equity. Some $2.3 billion of the firm’s assets are in hedge funds managed on behalf of about 100 of Wellington’s 1,000 clients. A lesser-known fact about the firm: It manages about $2 billion in Islamic-friendly mutual funds, which it subadvises on behalf of such Middle Eastern financial institutions as Saudi Arabia’s National Commercial Bank.
Like other Wellington clients, they’re attracted to the strong performance record. For example, the firm’s institutional large-cap value composite product returned an average annual 12.5 percent over the past three years, versus a ,1.0 percent average annual return for the Standard & Poor’s 500 index.
With such strength it can appear odd to outsiders that Wellington should seem to be devoting diminished resources to client service just as rival firms are boosting their own teams. Other money managers are betting that superior client service will help them snare new assets - and hold on to existing ones - in a difficult market. For example, Citigroup Asset Management recently hired well-regarded former GE Asset Management consultant specialist David Motill to join its client service division.
“The basic economics of the industry will be increasingly driven by relationship management,” consultant Acito says. “Superior client service will be a differentiating feature at leading organizations.”
From a former No. 2 executive at a large Boston-based money manager comes this observation: “It is dangerous for Wellington to replace senior staffers with younger staffers at a time when a lot of competitors are shoring up client service with more senior people. Clients like to know they are working with senior people.”
Wellington’s storied history begins with the 1928 debut of Industrial Power and Securities Co., an open-end mutual fund. Created by Walter Morgan, a 31-year-old Princeton University graduate and Philadelphia accountant, the stock and bond portfolio was the country’s first balanced fund. Seven years later Morgan renamed the fund Wellington, after the British general who triumphed at Waterloo.
In 1951 Morgan made a critical decision, hiring 21-year-old John Bogle, a fellow Princeton alum, as his executive assistant. As Morgan expected, Bogle, the future founder of the Vanguard Group of Investment Companies, rose quickly through the ranks. In 1966, to jump-start growth and secure Wellington’s future in the go-go era then under way, Bogle, at the time an executive vice president, persuaded Morgan and his fellow directors to merge the firm with Boston-based Thorndike, Doran, Paine & Lewis, a young, aggressive-growth shop.
Initially, the merger seemed charmed. But when stocks collapsed in the grisly bear market of 1973,'74, the firm lost nearly half its assets. Bogle, not surprisingly, took the fall: The board dismissed him in January 1974. “I made a big error pushing the firm onto the bandwagon of aggressive investing, and I paid a high price,” says Bogle, who continued to serve as chairman of the board of the 12 mutual funds managed by Wellington, which were effectively owned by its shareholders. Soon Bogle formed Vanguard to handle recordkeeping and administration for those 12 funds, which included the Wellington balanced fund and Windsor Fund, the value fund managed by Wellington partner John Neff.
Bogle hoped to take over the asset management and distribution of the funds, which Wellington still controlled. By the late 1970s Vanguard began distributing the funds, but portfolio management remained with Wellington. Today the Boston money manager handles 15 Vanguard funds.
By the summer of 1979, with asset growth stagnant and its stock depressed, the board voted to take Wellington private (it had gone public in 1960). The agreement, carefully crafted to ensure that the firm could remain independent, was signed on August 31, 1979 by the 29 new partners.
Three managing partners - Bob Doran, John Neff and Nicholas Thorndike - agreed that Doran would run the day-to-day operations of the firm. The 1980s brought Wellington’s name into the public eye, thanks to virtuoso stock picker Neff. But the managing partners worried about the firm’s dependence on Vanguard.
To expand the client base, Doran, who took over from Thorndike as CEO in 1990, orchestrated an assault on pension funds. How could Wellington win a greater share of the competitive defined benefit market? Doran’s answer: build a preeminent client service operation that was clearly superior to that of its competitors. He tapped Duncan McFarland, the partner responsible for the firm’s marketing and administration, to get the job done.
Before McFarland took on his new mandate, the role of client service was only vaguely defined. Doran and McFarland wanted to “professionalize” it. Their plan: A team of relationship managers, sophisticated about investments, personable and articulate, would focus exclusively on client service. “Our job was to love the client,” says one former team member.
Wellington recruited people who were plainly overqualified for the client service job and paid them very well. In 1992 McFarland made his first major hire, bringing on board Peter Cory, a finance professor at Boston University. About the same time McFarland hired Mark Jordie, a consultant from New England Pension Consultants, and Scott Elliott, a consultant at Callan Associates. Three years later the firm recruited Dino Davis, an operations manager at First American Real Estate Tax Services, and Dean Patenaude, formerly a relationship manager at Brinson Partners.
In 1997 the client service staff proved its mettle when Wellington faced a nasty, public battle with a former partner who left to start his own firm. Wellington sued the partner, Arnold Schneider, who promptly countersued. Before the dispute was settled in 1999, some plan sponsors thought that the fight would prove distracting. But Wellington’s relationship managers managed to allay their concerns.
Wellington faced a different kind of difficulty in 1998, when the then-66-year-old Neff’s career was in its twilight and the Windsor Fund badly lagged the market, gaining less than 1 percent, a far cry from the S&P’s 28.6 percent return that year. Neff’s big bet, on Citicorp, the fund’s largest holding, proved disastrous as the stock fell 57 percent from its high. In early 1999 Wellington’s Charles Freeman replaced Neff at the helm of Windsor, but Vanguard nonetheless decided to slice 25 percent of the fund’s assets away from Wellington, handing them over to value manager Sanford C. Bernstein & Co. That was a devastating blow to the Wellington name - which client service staffers managed to parry.
Still, throughout the late 1990s more and more portfolio managers grumbled that client service was draining off too much of the firm’s money. After Doran’s June 1999 retirement, client service lost its strongest protector. “Clearly, there were pressures from partners to change the business model to scale back client service to save money,” a former staffer recalls.
So far the fallout seems minimal, as clients generally give the money manager high marks for its service. Still, some slipups are beginning to appear. Last month one of Wellington’s pension fund clients held a semiannual meeting at which several money managers made presentations. According to someone present at the meeting, when it was Wellington’s turn to take the floor, the relationship manager was not initially in the room. When he belatedly arrived, he spoke for 30 minutes instead of the allotted 15, giving unimpressive answers to the plan sponsor’s questions.
Last autumn a few Wellington executives were reportedly called on the carpet by a major pension fund executive who was angry that a client service staffer never told him that Traquina had been tapped as McFarland’s successor. He learned it secondhand. “They put out an e-mail and word kind of filtered out, but they never got around to telling the clients,” says a source familiar with the episode. “That kind of thing never would have occurred a few years ago.”
One constant remains: Wellington’s relationships with Vanguard and Hartford will be protected. Cindy Marrs, one of the original client service professionals hired in the early 1990s, recently moved from the London office to handle the important Hartford account.
Sums up Joshua Dietch, the Cerulli Associates consultant, “A lot of money managers would love to have Wellington’s problems.”
