GenSpring Family Office’s reputation revamp after client arbitrations related to a 2008-09 strategy of selling hedge funds with “bond-like risk with equity-like returns.” The hedge funds apparently didn’t perform that way, and outraged clients want their money back

August 12, 2013, 12:49 P.M. ET

GenSpring’s Reputation Revamp

By Robert Milburn

After years of management missteps atGenSpring Family Offices, freshly-minted chief executive officer Thomas Carroll, 39, is tasked with cleaning up the mess. Departed CEO Mel Lagomasino left Carroll holding the bag on client arbitrations related to a 2008-2009 strategy of selling hedge funds with “bond-like risk with equity-like returns.” The hedge funds apparently didn’t perform that way, and outraged clients want their money back, claiming GenSpring “mishandled” their investment accounts. Furthermore, a Penta investigation last year discovered GenSpring was inflating its assets on a seemingly reputable yet deeply conflicted ranking of wealth managers.Not smart. Why should clients trust a wealth advisor that can’t even be straight about its assets under advisement?

Carroll, who met us at GenSpring’s elegant townhouse off 5th Avenue in New York, says things are changing but confesses he has spent much of the last 11 months looking in the rear-view mirror. “One of the hardest things to do in a firm is lead a cultural reformation,” he says.

What’s the problem? Carroll says that GenSpring – an advice-only house owned by SunTrust (ticker: STI) – was built as a federation. Acquisitions drove the firm’s growth but also created regional fiefdoms with their own P&Ls, each local office holding sacred their own profits, operating models and cultures.

Conversely, GenSpring’s top leadership in Florida forced on these local offices a centralized worldview about investments and asset allocations. Carroll has a problem with that. “Our very smart investment officers, who talk to the clients that pay our fees, had no voice in crafting our investment philosophy,” he exclaims.

His answer? Upend the hierarchy, by centralizing the profit and loss accountability at the head office level, so that all the different parts work together as a whole, while simultaneously handing back to the local offices a chance to shape investment decisions.

“At the end of the day, if the firm isn’t performing well financially, does it really matter that Atlanta is doing great but Southern California is not?” he asks.

Carroll has been getting rid of dead-weight. GenSpring’s assets under management now stand at $13.2 billion, down about $2 billion, partly due to the divestment of its international business. He has also closed offices in Denver and Phoenix. “My goal is to make GenSpring better,” he says, rapping the table. “Better and bigger don’t necessarily go together.” In all likelihood, he says, as GenSpring gets better, it will probably get smaller.

With pruning coming to an end, Carroll intends to turn around shortly and expand capacity in existing offices like New York City, Washington D.C. and Southern Florida, spurring growth by partnering with parent company SunTrust. Carroll is using as a model a recent situation in which SunTrust brought GenSpring a client four months before his liquidity event. GenSpring was able to save the client a substantial amount of money.

That’s the kind of work that Carroll hopes will help GenSpring claw back its bruised reputation. To do so, he will rely on folks like northeast regional president Joseph Rotella, who told us an interesting story about a family whose will was executed 20 years ago and needed an update.

The couple had three children, one of which was highly-successful. The parents decided they would leave the successful son out of the will entirely, since he was more than capable of standing on his own two feet. A red-flag went up for Rotella.

“The emotional undercurrents of the siblings may be held at bay while the parents are alive,” he explains, “but that son might ultimately have thought the senior generation felt less kindly toward him once they were gone.” Rotella, an estate attorney of 18 years, brought the entire family into the negotiations. Over a period of two years, and many emotional discussions, the family was finally and harmoniously able to come to a consensus on its estate plan.

GenSpring serves families with $25 million or more. After exercising some tough-love at GenSpring this last year, Carroll now thinks the firm is on the cusp of business as usual. We think GenSpring will first have to draw a red-line under its arbitration disputes, a continuous reminder of how the firm went astray.

“I have told our families that we have absolutely challenged their trust,” Carroll says. “The problem is, I can’t go back and rewrite history, so I’m trying to be transparent and ask them to trust us.”

Fair enough. Carroll will get the benefit of doubt for now. But time will reveal whether Carroll has genuinely restored clients’ damaged trust and firmly launched GenSpring on a more wholesome path.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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