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Advisor Profile: The Institutional Way

As he did as a hedge-fund manager for Bear Stearns, Jim Dowd focuses on bringing low costs and diversification to his clients.

Kate Stalter, 08/29/2011

This article first appeared in the August/September 2011 issue of Morningstar Advisor magazine. Get your free subscription today!

Before setting up shop in 2008, Jim Dowd didn't follow the traditional career path to becoming a financial advisor. But the former institutional investment advisor and money manager says that his experience gives him a unique perspective on the needs of retail clients. As he observed the asset-management choices available to individuals, particularly those whose net worth was less than $1 million, he concluded that there was a gap.

"I believed there was a real need and a business opportunity to bring an institutional approach to retail investors," he says.

That approach starts with lowering costs and diversifying holdings. Frequently, Dowd says, clients will come to him with brokerage accounts containing stocks and mutual funds. He says that their average expense ratio runs about 1% to 1.5%. "If there is a broker, odds are good that they are not in regular contact with the client, which is why we're in the picture," he says. After examining a client's investment objectives and risk constraints, he generally shifts most of the portfolio into passively managed funds, reducing the underlying expense ratio by 75% to 80%.

Dowd also sees higher-income clients who haven't contributed to IRA accounts in recent years, "because somewhere along the line they were told that they couldn't." He immediately sets up IRAs for those clients and often recommends Roth conversions.

Home Office
Dowd began his career in financial services in 1985 at the boutique investment bank Samuel Montagu Capital Markets (now a part of U.K.-based HSBC). Two years later, he decamped for Bankers Trust, where he spent nine years in New York, London, and Tokyo. Ready to bring his family back to the States, he spent a few years managing hedge funds. In 2003 he joined Bear Stearns, where he ran an institutional investment advisory and fund of funds business for the investment bank, until the firm's infamous collapse in 2008. Seeing his chance to bring an institutional approach to retail investors, he then launched North Capital in San Francisco.

Dowd initially worked from home, a situation he jokingly refers to as "not very institutional." Today, the fee-only practice is headquartered in downtown San Francisco, and Dowd works with three colleagues who assist him in providing the firm's planning and advisory services. The firm has about $50 million under management, $100 million if planning assets are added to the total. The firm charges planning clients $1,200 for a financial review, which includes an analysis and recommendations for asset allocations. For clients who want to manage their own assets, Dowd will also include an implementation plan using Vanguard funds. After the review is complete, the firm's hourly rate for additional consulting is $350. For clients who retain the firm for discretionary portfolio management, North Capital's fees are 0.5% on the first $1 million, 0.35% for additional balances up to $5 million, and 0.25% above the $5 million level.

The firm uses Morningstar Office for research and reporting, and it even developed some of its own software to integrate Morningstar reporting into its own web portal. North Capital also uses Morningstar's back-office services for daily account reconciliation.   

Investment Process
Dowd engages his clients through a process he calls PRIM--which stands for Planning, Recommending, Implementing, and Monitoring.

To allocate investments, he created four model portfolios: liquidity, fixed income, global equities, and diversifying strategies (the place for alternative investments). The model portfolios are combined in different proportions for each client, depending on objectives and risk profiles. For example, a client with a conservative risk profile might have only a 20% allocation to global equities, while a client with an aggressive profile might have an 80% allocation to that model. Underlying investments in the models are the same for each type of investor, but the weightings within the portfolios differ. When choosing the underlying investments of each model portfolio, Dowd's objective is to help clients save money, achieve tax efficiency, and be diversified.

Dowd says that his first preference is to use open-end passive mutual funds to keep transaction costs down. He frequently turns to funds from Vanguard (such as Vanguard Emerging Markets Stock Index VEIEX) and Dimensional Funds Advisors (such as DFA U.S. Core Equity 2 DFQTX). He says that he appreciates that Dimensional and Vanguard let investors diversify across various styles and geographic regions. Another favorite is quantitative investment management firm AlphaSimplex, headed by MIT professor Andrew Lo and longtime asset manager Jerry Chafkin. (He often uses the firm's Natixis ASG Global Alternatives GAFAX.) Dowd likes that the firm is able to achieve alternative beta while maintaining liquidity and transparency.

Turn to ETFs
When he can't gain exposure to a particular market segment or wants to lower expenses, Dowd looks for exchange-traded funds. For example, in the liquidity model portfolio, where bond funds play a big role, Dowd uses PIMCO 1-3 Year U.S. Treasury Index TUZ, iShares Barclays Short Treasury Bond SHV, and iShares Barclays 1-3 Year Treasury Bond SHY. To give clients exposure to China in the global equities model, Dowd uses Guggenheim China Small Cap ETF HAO and Guggenheim China All Cap ETF YAO. There's emergingmarkets exposure in the fixed-income model through WisdomTree Emerging Markets Local Debt ELD. Fixed income also includes iShares Barclays MBS Bond MBB, which focuses on U.S. mortgage-backed securities.

ETFs play a bigger role in the diversifying strategies portfolio, where there are few open-end options that meet client needs. Here, Dowd turns to the WisdomTree Managed Futures Strategy WDTI, which invests in various instruments including currency, Treasury, and commodity futures. He also uses JP Morgan Alerian MLP ETN AMJ, which invests in energy-sector master limited partnerships.

A Postcrash Advisor
In addition to his institutional perspective, Dowd also has the unique viewpoint of someone who went into business after the 2008 crash. What he saw at Bear Stearns, combined with the experience of opening his own firm amid a financial meltdown, "underscored the fact that markets are driven by sentiment as much as value," he says.

"It highlighted the need for diversification of risk. A number of people have said that 2008 proved diversification did not work, which is nonsense," he says. "Diversification works, but certain exposure--like the process of taking risk at all--cannot be diversified away. You can't have return without risk. The most important factor in generating returns is maintaining exposure to the market."

Dowd is confident that his career change was the right move. He enjoys helping families, retirees, and small-business owners and making a difference in their lives. "It's the most gratifying work I've ever done," he says.

Kate Stalter is a columnist for RealMoney at TheStreet. com and editor-at-large for StockChartReader.com.

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