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Keeping It Simple for Clients, and Himself

Financial advisor Eric Nelson sees no need to overcomplicate things.

Kate Stalter, 08/28/2014

This article originally appeared in the August/September 2014 issue of Morningstar magazine. To subscribe, please call 1-800-384-4000.  

Eric Nelson’s “aha” moment arrived as he read The Intelligent Asset Allocator, by William Bernstein. Nelson, founder of Oklahoma City-based Servo Wealth Management, was a broker in the Northeastern United States when he stumbled upon the book. He was frustrated with the sales-focused, performance-chasing culture at banks and wirehouses, which he believed added no real value. But he hadn’t yet figured out a better way of investing and serving clients.

Bernstein, a noted researcher in the field of Modern Portfolio Theory, advocates asset class and index allocation over stock-picking.

“I read the book, and it was like a light bulb going off,” Nelson says. “I realized everything I had been doing was a joke.”

He had grown weary of chasing funds with strong past performance or star managers. He also realized that “pundits don’t have any particular industry insight that we should lean on. After reading this book, I said, ‘OK, that must be why nothing’s working. I’m doing everything the wrong way!’ ”

Nelson tried to incorporate some of Bernstein’s asset-allocation ideas at his employer, M&T Bank, but it was an uphill slog.

“I was a fish out of water,” he says. “You couldn’t create diversified, low-cost, long-term portfolios in a short-term, active-management, performance-chasing, you-have-to-meet-your-sales-goals-this- month culture.”

Nelson grew up in upstate New York and attended Hobart College, where he played basketball and remains one of the school’s all-time leading scorers. After a brief stint as a pre-med student, he changed his major to economics upon listening to a guest speaker, a Dean Witter broker from nearby Syracuse.

Nelson did internships for the broker for the next two summers and during a semester break. After graduation, he went to work for PaineWebber in Syracuse.

“After a month or two of training—which wasn’t really training, just some sales coaching— I picked up the phone book and started dialing like crazy,” Nelson says. “It took me about a year to realize I had no idea what I was doing, and I wasn’t going to figure it out there.”

He decamped to M&T Bank, where instead of cold calling from the phone book, he sold annuities and mutual funds to the bank’s clients. It was during his tenure at M&T that Nelson discovered Bernstein and Modern Portfolio Theory.

Soon after, realizing he needed a change, he and his wife, Paige, relocated to her hometown of Oklahoma City. He joined the local branch of Charles Schwab, which was touting longer-term investing using index funds, rather than the traditional commission-based brokerage model. This approach appealed to him.

Nelson stayed at Schwab for five years, earning his Chartered Financial Analyst credential and educating himself about asset allocation and portfolio construction. He and Paige moved to Novato, Calif., for three years while Nelson worked as an advisor with the registered investment advisory firm Equius Partners. In late 2011, the couple returned to Oklahoma, where they founded the fee-only Servo Wealth Management.

A former broker herself, with experience in operations, Paige initially handled many of the back-office and compliance tasks. These days, with two small children at home, she is no longer involved with the business on a regular basis, Servo has about $53 million under management. The firm’s custodian is Schwab.

One-Man Shop
Nelson prefers to run a one-man shop, rather than hiring staff, although that may change as the company grows.“I was hearing over and over from my clients at different firms: ‘The team approach is great, but it’s a little confusing. We’d like to have one core person that we meet early on and can take the baton and run with it.’ Clients find it really comforting to have one person who coordinates everything,” he says.

Nelson uses mutual funds from Dimensional Fund Advisors. The funds are constructed using academic research pioneered by University of Chicago professors Kenneth French and Eugene Fama, who won a Nobel Prize in economics in 2013. Dimensional’s philosophy avoids market timing, in favor of diversified portfolios, with a tilt toward small-cap and value.

Rather than characterize himself as a “DFA advisor,” Nelson views the DFA funds as essentially building blocks. “DFA manages the products that allow me to build portfolios that were the truest manifestation of this research I’ve been doing for 10 or 15 years,” he says.

Nelson allocates only a handful of funds in client accounts. Funds he uses often include DFA U.S. Vector Equity DFVEX, DFA International Vector Equity DFVQX, and DFA Emerging Markets Core Equity DFCEX. He thinks of client portfolios as being goals-based rather than performance-driven. Nelson says he gets more information about the appropriate strategy by listening to a client’s hopes, concerns, and plans than he does by looking at a list of investable assets.

“That approach is very uncommon in the investment world,” he says. “My job isn’t to be the wizard behind the curtain pulling all the right levers. It’s actually to make sure my clients are educated and knowledgeable.”

At Servo, planning is an ongoing activity. Nelson meets with clients twice a year to give them updates and discuss relevant changes in their lives. “It’s not the traditional thing of, we’re going to sit down in the first 90 days and grind through a 200-page, leather-bound financial plan,” he says.

A Focus on Simplicity
Rather than spending time with clients discussing specific fund holdings, he prefers zeroing in on the bigger picture. Nelson frequently blogs on the Servo website, and he will give clients one of his articles to start a discussion about investing. “I want to see if they understand it,” he says.

About half of Servo’s new clients are referrals from existing clients. The other half find Nelson through his articles, which in addition to being posted on the site and sent out in newsletter form, are published on the website Real Clear Markets. This has expanded the firm’s geographical reach. “Ten of the 15 new clients I’ve brought on in the last two years are from outside Oklahoma. This has definitely become a nationwide firm,” he says.

The firm’s tagline is “Simplify Complexity,” and that applies to how Nelson manages his firm’s operations and research. He relies heavily on three software tools: MoneyGuide Pro for planning, DFA’s Returns for detailed portfolio analysis, and Morningstar.com for historical fund data. “Without a doubt, Morningstar.com is the best resource for historical information and mutual fund data,” Nelson says. “In fact, it’s my home page.”

Keeping things simple remains front and center. “When I set up Servo and branded it with the tagline ‘Simplify Complexity,’ it was as much about what I wanted to do for clients, as it was a reminder to myself,” he says. “You don’t need to make this business overly complicated.”

Eric Nelson, CFA, co-founder and chief executive officer, Servo Wealth Management

How he caught our eye: Writes insightful posts about investing on his blog and Twitter.

Career path: Graduated from Hobart College in 1998 with a major in economics. Worked as a broker for PaineWebber in Syracuse, N.Y., and then for M&T Bank. Moved to Oklahoma City and joined the local branch of Charles Schwab. Earned his Chartered Financial Analyst designation in 2006. Worked as an advisor with Equius Partners, an RIA firm in Novato, Calif. In late 2011, he and wife Paige returned
to Oklahoma to found the fee-only Servo Wealth Management.

Personal: Met Paige when both were brokers at PaineWebber. They have two children, Tyler, 3, and Payton, 1, and three dogs: two labs and an Alaskan Malamute, “who has hated us every day since we moved to the searing heat of Oklahoma.” Avid runner who participates in races from 5K runs to marathons.

Favorite funds: DFA U.S. Vector Equity DFVEX,
DFA International Vector Equity DFVQX,
DFA Emerging Markets Core Equity DFCEX.

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