Publications

- August 1, 2017: Vol. 4, Number 8

The Tiedemann Effect: When a family and its organizations stand the test of time

by Mike Consol

It is one of the most beautiful compensations of life that no man can sincerely try to help another without helping himself.

It is doubtful those exact words, the construct of Ralph Waldo Emerson, were drifting through Mary Tiedemann’s mind during a fateful October 2005 lunch with her son, though the sentiments behind Emerson’s words were certainly present. So were notions that son Michael Tiedemann, CEO of Tiedemann Wealth Management, had been blessed with some enviable advantages in life. After all, Mary Tiedemann’s husband, Michael’s father, Carl Tiedemann was a partner at Donaldson, Lufkin & Jenrette, where he was president during the 1970s and helped take the firm public. He also founded Tiedemann Wealth Management, as well as a hedge fund in 1980 that is still operating today, 37 years later.

Mother and son were dining at Bill’s on 54th Street in New York City. She ordered a Cobb salad and listened to her son express some blue emotions. It was a “challenging time” in Michael Tiedemann’s life and he told his mother about his tribulations. She pondered. Then she suggested her son do some volunteering on behalf of the less fortunate to gain a better perspective about his situation in life.

Michael Tiedemann recalls his reply: “Really, mom? That’s your response?”

Though incredulous, he took her advice during Christmas 2005, asking co-workers if they had any recommendations. They sent him to a small organization called The River Fund New York. His first day of volunteer work took him to a hospital on Christmas Eve to bring care packages to 700 people.

“People were dying of AIDS, Huntington’s, Hodgkin’s, cancer — it was really the death ward of this hospital and it was so stark,” he recounts. “There were no cards, there were no flowers. These were almost forgotten people the day before Christmas. They were on their deathbeds and my problems very quickly fell into place.”

The experience convinced him to keep volunteering for The River Fund and, in time, he bonded with the people and the organization. Six years into his stint, River Fund officials asked Tiedemann to join its board of directors, and the organization is now one of the largest frontline poverty centers in New York City, serving 15,000 families with services ranging from delivering groceries to the homebound and mentoring needy children, to helping the unemployed find jobs and offering legal and medical expertise.

In retrospect, Tiedemann says The River Fund has done more to enrich his life than any other extracurricular activity, helping to shape his values and those he has instilled in the firm he leads.

When Tiedemann’s mother died years later, he was asked to create a gap-funding scholarship for kids who received collegiate scholarships but were still thousands of dollars short of the expenses connected with academic life, such as the hefty price of textbooks. Tiedemann took on the challenge by spearheading the Mary C. Tiedemann Scholarship.

“We now have over 30 kids in college and a couple of them have graduated and are getting engineering and digital media jobs, and it’s really awesome,” he says. “That has been the greatest thing I’ve done in my life, aside from my kids, and it is highly connected to my mother.”

HONOR THY FATHER

Tiedemann dubs his father a “visionary” in the financial world, dating back to his time as a partner at Donaldson, Lufkin & Jenrette.

“He was, without question, the vision behind creating Tiedemann Wealth Management, which also includes Tiedemann Trust Co., and the concept of having a fiduciary institution with absolutely no conflict in any element of its business,” he says.

He had a personal history that formed his attitudes toward conflict-free investment services and fiduciary responsibility. Carl Tiedemann’s father was chairman of American Tobacco, and when his father passed away during the depths of the Great Depression in 1932, there was a trust left for his mother that he eventually inherited 40 years later. At its inception, the trust contained $100,000 — a great sum of money in 1932. Come 1972, the trust still had $100,000, meaning that over the course of 40 years it did not appreciate one iota, and even lost substantial purchasing power when inflation was taken into account. Carl Tiedemann tried to break the trust — or at least encourage them to invest in common stocks rather than solely preferred stocks. It was then that Carl Tiedemann realized the managers of family trusts had embedded conflicts of interest in the way they managed investments. For example, they eschewed the great money management talent that had spun-off from the banks to start high-performing independent firms, in favor of keeping the assets’ management under their own roofs.

“His whole vision was about creating a company that would go on beyond his life, beyond my life and have aligned interests with the families’ we serve. Equally important was to achieve strong investment returns by investing in world-class outside money managers and hiring excellent talent to find and manage them,” Michael Tiedemann says. “We were lucky in timing; we caught the acceptance of the secular trend toward independent RIAs and independent wealth management firms.”

THE PSYCHOLOGY OF YOUTH

During his collegiate days at Ohio Wesleyan University, where he studied psychology, Michael Tiedemann did not look like a guy on a path to Wall Street. As the youngest of four children, he took his older siblings’ advice that a liberal arts education was advisable and that it was best to study what you liked rather than what you necessarily intended to do. But, the fact is, Tiedemann did love his psychology courses, the professors who taught them, and the discipline’s business applications. All that said, Tiedemann never intended to pursue a career as a shrink. Financial services were in the family bloodline and Wall Street was the young man’s calling. His psych degree became especially utilitarian when behavioral finance became a respected concept in the field.

“In general, just understanding relationships between how your body responds, how your brain reacts, how your emotions connect to decision making, and on and on,” he says.

This was especially the case in 2008 during the global financial crisis, when Tiedemann had numerous conversations with clients about staying the course, rather than making rash or emotionally-based revisions to their financial plans.

SOUTH OF THE BORDER

Tiedemann began his career as an emerging markets analyst at, naturally enough, Tiedemann Investment Group, though after just two years in the family business he headed south of the U.S. border to join the equity research group at Banco Garantia in Brazil, a move supported by his father — and why not? History would prove the organization, which based itself on the Goldman Sachs partnership model, was an outstanding approach for attracting and developing talent. (As a side note, Tiedemann today has a similar model of broad employee ownership where 30 percent of the employees are partners.)

“I wanted to live and work in Latin America,” he says. It was a great opportunity to be an expat in a part of the world that was really just opening up at the time.”

By the end of 1994, the region was heading into crisis. Mexico had to devalue its currency, and Argentina almost had to do the same, as did Brazil, Russia and Asia.

“I didn’t realize I was stepping into rolling devaluations while all of my American friends were investing in the bubble of the U.S. market,” he recalls. “So I had a very different entrance into finance and into sales and trading.”

It was valuable experience for a financial greenhorn experiencing his first transcontinental economic calamity, giving him the ability to speak to portfolio managers and traders in illiquid and volatile markets.

“It was an incredible training ground for me,” he says. “Just as an aside, I feel very comfortable evaluating managers in volatile markets.”

Asked if more volatility equaled more opportunity, Tiedemann’s reply is quick and self-assured: “If you’re a good trader, no question.”

Great traders need volatility, according to Tiedemann, and that is, in part, why many hedge fund strategies have posted disappointing results in what has been a stable equities market during the past few years, though that is beginning to change, he observes.

Tiedemann eventually was moved to New York City to run Banco Garantia’s sales and trading operations, after the organization was acquired by Credit Suisse First Boston in 1998.

BRAZIL IN THE BALANCE

At 6-foot 6-inches, Tiedemann towered over his Brazilian friends and colleagues. When asked to characterize what life was like for “Michael Tiedemann after dark,” he chuckles and passes on the inquiry, choosing instead to emphasize the still-enduring friendships he developed during his years in Brazil. That was greatly aided by learning to speak Portuguese fluently in a matter of six months, and he traveled often on business, at least before the waves of financial devaluations started crashing ashore. The experiences in the region were “rich” and he learned much about work/life balance from Brazilian colleagues who worked hard on weekdays and then spent weekends gathering with friends, barbecuing and listening to music.

“That was one of the things that I took personally from that experience,” he says. “If you don’t have work/life balance it’s an unsustainable structure, so you have to figure out what that is.”

For Tiedemann it is exercise, time with family and spending time outdoors — snow skiing, waterskiing, surfing, tennis, doing yard work.

“Really anything,” he says. “Just being outdoors has hugely positive effects on me.”

EMERGING AND RE-EMERGING MARKETS

Emerging markets just are not what they used to be when Tiedemann was an emerging markets specialist at the start of his career. To underscore that point, Tiedemann cites the following statistics: During the past five years (through March 31), the S&P 500 had a trailing performance of 13.3 percent, while emerging markets posted a 1.5 percent performance during the same period.

Looking back to 2008, emerging markets were expensive as a huge amount of capital surged into the so-called BRIC countries (Brazil, Russia, India and China), and there was an enormous “inter-correlation” between those and other emerging markets tied to commodities. China was the commodity demand driver that fed commodity-rich countries such as Brazil and Russia. Then China’s growth slowed and so did its demand for commodities, causing its fellow BRICs to slump.

“No one says BRIC anymore,” Tiedemann observes. Still, “for the first time in quite some time you are seeing a broad global synchronized recovery and that began about nine months ago, but it has been really confirmed in the fourth quarter of 2016 and the first quarter of 2017.”

The rally is being fueled by a few factors: 1) emerging markets have become less expensive, 2) they are producing better economic numbers, and 3) investment capital is starting to flow back into emerging markets.

Tiedemann cites India, a country where a quarter-billion people opened bank accounts in six months using various types of technology applications.

“I remember distinctly in Brazil the cost of installing a landline was about $2,000, whereas you can now go out and buy a cell phone at a fraction of that cost,” he says. “The same thing is going to occur within the banking sector. Fintech, the ability to provide banking via technology improvements, will really accelerate and that’s going to be an area of growth that will help the consumer and create a positive feedback loop.”

BACK TO THE ROOTS

Tiedemann rejoined the family business in 1999 when his father founded Tiedemann Wealth Management. During the formation of that firm, Michael Tiedemann came across executives Bruce Prolow and Craig Smith, both J.P. Morgan alumni hired by his father. Smith currently serves as president of the firm. The opportunity was not an instant sell for the junior Tiedemann.

“I was insistent if I was going to join I wanted to be there day one when we had no clients; I didn’t want to come in later. I felt uncomfortable enough about nepotism in general,” he explains. “I felt confident in my abilities and I was doing very well in my current job, so it was essential that I be a day-one partner when nothing was built, no one was there, no clients, no revenues, no nothing.”

That happened in March 2000. Things have gone well since then, as evidenced by Tiedemann being consistently called upon to give speeches at financial conferences. When speaking finance, Tiedemann is likely to be addressing the hedge fund business, which he considers misunderstood.

IN AND OUT OF STYLE WITH HEDGE FUNDS

For all the reporting about its decline, the hedge fund business is still at all-time peak assets, Tiedemann points out. Post-crisis there was a huge amount of capital that flowed from large institutions into the largest hedge funds, taking hedge funds to the stratosphere of asset levels. Many of the funds overgrew, he says, and had to expand their strategies, entering new spaces and that caused style drift.

By definition hedge funds are not supposed to compete with the S&P 500, and that is not well understood, Tiedemann says.

“These are people you hire to manage risk. The press has understandably picked up on the high-profile struggles of some very large hedge funds. They do not report on the fact that hedge funds in the $1 billion to $5 billion category are actually raising assets and performing well,” he says.

He cites the widely reported decision by CalPERS to move away from hedge funds as an example of superficial media coverage. Not well reported was the fact that CalPERS went to many of the best-performing hedge funds and asked for “massively reduced fees.” When the request was not granted, the giant pension fund moved down a rung on quality to less successful hedge funds agreeable to significant fee reductions, which were still expensive relative to traditional managers, but nevertheless agreed to the discount CalPERS wanted.

“They also used fund-to-funds and what that ended up doing when you’re a pension is you have to report the total cost of investments as if it is almost like a salary, so they had to then report to their constituents that they are paying out these incredible fees relative to the S&P 500 and it looked really unappealing,” Tiedemann says. “Those are facts that were conveniently left out by many of those that were reporting.”

THE INFERIORITY COMPLEX

Tiedemann’s firm was founded in 1999 with the expressed purpose of creating a wealth management organization that addressed the weaknesses in the services provided by traditional trust companies and investment management firms. It also took exception to “inferior” investment performance by most of the field. What causes inferior performance?

Tiedemann cites three culprits — a limited talent pool, conflicted advice and lack of discipline about size. The final point harkens his father’s mantra that you never outgrow the investment opportunities that made you successful in the first place.

Explains Tiedemann: “When businesses run an investment strategy rather than the investment professionals, businesses determine how big they get, rather than the investment professionals, and you generally have performance slippage.”

Inflexibility is also cited as an Achilles heel, meaning there are a host of investment advisers that have a very rigid investment model they are loath to change, even as market conditions change and dictate adjustments.

“They have a comfort level,” Tiedemann says. “They are either slow to or refuse to adjust. They don’t know how to be tactical or opportunistic.”

Tiedemann’s investment model includes a high proportion of alternative assets in client portfolios, both active and passive, typically ranging from 20 percent to 35 percent of a client’s asset pool.

“In our history, we’ve invested in everything from gold to energy infrastructure, agriculture and a variety of forms of real estate and strategies around real estate,” he says.

THE LISTENING GAME

Tiedemann’s professional chops are not being honed only on the job. A year ago he joined the New York City chapter of the Young Presidents Organization, where he has benefited from what YPO calls The Forum, the equivalent to an executive’s personal board of directors.

“It’s strictly confidential, so everyone opens up and knows full well that the information will go nowhere,” he says. “You can talk about any challenge with complete candor.”

One of the skills Tiedemann and his fellow members learned is deep listening. During conversation, people tend to think about their next response, even as someone is still talking to them. Rather, the idea is to listen intently and internalize what you are hearing. Rather than jumping to a proposed solution to a colleague’s problem, the idea is to continue asking questions, even asking what a particular word they used means to them, which opens them up further.

“The power of that process is that people, in their own words, begin to answer what it is that they’re struggling with,” Tiedemann explains. “It took me a while to believe, but I watched it occur with a variety of different types of very smart alpha males and it was an incredibly powerful lesson.”

LEADING BY EXAMPLE

Tiedemann’s resulting leadership style, forged by both his father and lessons learned at the Young Presidents Organization, is “optimistic, direct” and a commitment to “shared credit and shared equity.”

He recalls that his father used to correct people when they said, “I work for Carl.”

“He would say, ‘No, no, no — you work with me, you don’t work for me.’ That is exactly how I feel. I love feeling shared success and celebrating other people’s participation in it.” At Tiedemann all clients are clients of the firm. All employees are responsible for the success of the firm’s clients and their compensation is tied to that success.

A RESPECT FOR LEGACY

While Tiedemann is comfortable mixing with society’s dispossessed and finds value in attending to their needs, he is also at home with Gotham’s patricians, rubbing elbows with them at the Metropolitan Club of New York, whose original members included J.P. Morgan and James Roosevelt. Tiedemann joined because he liked its location (situated on the corner of Central Park, where he likes to run), as well as the good business development opportunities among its membership. What’s more, the club was recruiting young members at the time. There were some other compelling factors.

“It is gorgeous, it’s got great food and it doesn’t feel stuffy or clubby,” he says. “People are just friendly.”

He has since been asked and assented to joining The Metropolitan Club Board of Governors.

AN AUSPICIOUS CALL

The growth of Tiedemann Wealth Management was strictly organic during its first 16 years. Michael Tiedemann is more than a bit suspicious about the mechanics and utility of mergers and acquisitions. Then came a phone call from the founder and CEO of Presidio Capital Advisors. He saw potential between the two organizations, with Tiedemann’s physical presence in the world financial capital of Manhattan, and Presidio in the San Francisco/Silicon Valley area, where billion-dollar tech fortunes are being compiled with astonishing tempo. Encampments in the country’s two wealthiest strongholds.

“I entered with a heavy dose of skepticism about how hard it would be to pull something like this off,” he says. One year into the merger, Tiedemann is encouraged, saying the integration has been “great” and the operation is staying true to its investing protocols. Still, he remains cautious about M&As in general.

“The two things that destroy all mergers are mismatches in culture and integration that doesn’t go well,” he says. “They have to integrate, and then issues develop quickly. We knew that and were extremely sensitive to making sure that those weren’t issues in this instance.”

The structure of the deal required that all partners invest in the deal and make contractual commitments to continuing their work at the combined firm for a long duration. The operating agreement was built around creating permanence for the firm, according to Tiedemann, rather than to benefit one side or one individual.

“The point is to make sure that we have an institution that goes on beyond our lives and that there is complete clarity about how the company can and will repurchase partners’ equity if they were to pass away or retire. All the different scenarios are laid out and thoughtful and were discussed between partners on both sides.”

Indeed, Tiedemann says the two sides spent a much longer timeframe in advance of the deal being finalized and executed. Despite the short-term success of the Tiedemann/Presidio deal, Michael Tiedemann indicates that he favors organic growth over M&A, which allows for greater quality control.

“If you don’t have quality control as you grow, the clients will feel the slippage in service,” Tiedemann says. “Mistakes happen and that’s when you begin to lose clients and so the growth really will begin to be offset by losses.”

BACK ON 54TH STREET

Michael Tiedemann will not soon forget that lunch at Bill’s with his mother, or the telltale advice she gave him about putting life into a more expansive context. Ever since, his life has been shaded with a service orientation, and perhaps by some additional sentiments from Emerson: “The purpose of life is not to be happy. It is to be useful, to be honorable, to be compassionate, to have it make some difference that you have lived and lived well.”

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser.

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