Realty’s big, but not the foundation for wealth biz

If Hollywood is the generator of wealth in Los Angeles, and oil and gas are the gushers in Dallas, then real estate is the wealth machine of Phoenix. But unlike Los Angeles and Dallas, where wealth managers count entertainment moguls and oil tycoons as their clients, wealth managers in Phoenix say that real estate developers tend to keep their money in property rather than handing it over to wealth managers.

Retirees and other transplants to the Valley of the Sun, it turns out, are a much more dependable source of wealth management clients.

“Individuals who have concentrated positions in real estate receive higher rates of return on real estate than owning equities,” said Randy Oldenburg, a certified financial planner and owner of Camden Financial Management, a Scottsdale, Ariz., firm that manages $120 million in assets.

“I don’t have a single client with investments in real estate,” he said. “Real estate people put their money in real estate.”

“They don’t listen to us,” said Thomas Connelly, a CFP and president and chief investment officer of Versant Capital Management Inc. in Phoenix. He manages $200 million in assets.

‘HIGHLY LEVERAGED’

“They’re highly leveraged, and they got rich in real estate, so they stay in real estate,” Mr. Connelly said.

“Real estate developers in Phoenix lose sleep if they’re not fully invested and leveraged to the hilt,” said Michael Casey, financial principal in Scottsdale for Lowry Hill Private Asset Management of Minneapolis. “We’ve worked hard at calling them, but we’re boring to them.”

Ironically, the severe downturn in the commercial- and residential-real-estate market in Phoenix has only served to whet the appetite of developers for profits, according to wealth managers.

“When large developers look at the market now, they see values, and they’re more determined than ever to stay in real estate,” said Philip Stoker, a CFP and managing partner of Stoker Ostler Wealth Advisers in Scottsdale, which has $600 million in assets.

Timothy Rowland, chairman of Rowland Carmichael Advisors Inc., also in Scottsdale, which had $315 million in assets under management at the end of last year, said he knew developers who had been through at least five boom-and-bust cycles in Phoenix and were unfazed by the collapse in prices.

With real estate deals often yielding annualized returns of 30% or more, developers in Phoenix can become “addicted” to the business, he said.

Retirees and other transplants to the region, on the other hand, have been a lucrative source of business for wealth managers.

Wealth managers in Phoenix say that between one-third and two-thirds of their business comes from retirees.

But getting that business can be challenging, because retirees and other transplants usually have a relationship with a financial adviser from their hometown or previous residence.

“It usually takes a little while to localize them,” said Mr. Rowland.

People who have a second home in the Phoenix area tend to maintain a relationship with their primary advisers, he said.

“But once they spend more time here and identity Phoenix as their home, they start to talk to neighbors, and local accountants and other centers of influence, and we start to get referrals,” Mr. Rowland said.

“The longer people are here, the fewer ties they have to relationships back home,” Mr. Casey said. “They eventually become more comfortable here, and once they officially change their residence, their tax advisers say they need to change everything.”

DANGLING SERVICES

Many firms are making a point to offer services to attract the transplant market, all the more important in a difficult economic environment.

Rowland Carmichael provides advice as a value-added service to clients who are refinancing their homes or negotiating contracts for new homes, Mr. Rowland said.

Stoker Ostler analyzes portfolios and does cash flow modeling for potential clients for free, Mr. Stoker said.

“It allows them to ask questions and get comfortable with us,” he said.

WealthTrust Arizona in Scottsdale works with Colby & Thornes PLLC, a Scottsdale law firm, to help clients deal with estate tax issues, said Paul Ahern, a CFP and principal with the advisory firm, which has $450 million in assets and is owned by WealthTrust LLC of Nashville, Tenn.

“They rent space in our building, and we pay them a retainer to provide advice on an as-needed basis for staff and clients, and they explain the benefits of becoming a state resident. It’s been a good value-added service,” Mr. Ahern said.

E-mail Charles Paikert at [email protected].

Related Topics: Wealth Management Market Report