A.G. Becker: The Birthplace of Investment Consulting
(An Excerpt from Never Bullshit the Client)
A.G. Becker is widely and rightly regarded as the birthplace of modern institutional investment consulting. But in most quarters these days, “Becker” is largely a legend. Well, here is the inside story of A.G. Becker and the origins of investment consulting from someone who was smack dab in the thick of it.
A.G. Becker & Co., founded in 1893, was a Chicago firm in the same vein as Carl Sandburg’s 1914 poem, Chicago, and Nelson Algren’s 1951 essay, City on the Make.
Sandburg’s Chicago opens with:
Hog Butcher for the World,
Tool Maker, Stacker of Wheat,
Player with Railroads and the Nation's Freight Handler;
Stormy, husky, brawling,
City of the Big Shoulders...
Sandburg later described the poem as “...a chant of defiance by Chicago... its defiance of New York, Boston, Philadelphia, London, Paris, Berlin and Rome. The poem sort of says "Maybe we ain't got culture, but we're eatin' regular." [Corwin, Norman. The World of Carl Sandburg. Harcourt, Brace & World. p. 32.]
The title of Algren’s essay says it all: a city on the make.
The Becker I joined in 1975 comprised a group of first-rate brokers and bankers, absent any airs. They hustled in a freewheeling yet focused professional and ethical environment. Everyone was busy with their own bustling business, of which there were many. Profits abounded. Overhead was virtually nonexistent. Little was to be gained from politicking. At first, I was flattered when they offered to make me a shareholder. Then I realized they were simply sponging up every last morsel of capital to put it to work in deal-making and trading. They were benignly on the make among their own, so to speak. The A.G. Becker I joined in the mid-1970s was a wonderful, entrepreneurial place to be.
The Birth of Investment Consulting
Investment consulting’s seeds were germinated in the early-1960s by a fellow named John Mabie. John and some other brokers were looking (on the make) for new sources of commission revenue. They knew that corporate clients had no clue how their pension and profit sharing funds were doing. The Becker brokers approached corporate treasurers with an offer they could not refuse. Becker would gather data from bank custodians, calculate a rate of return and report it back, comparing it with the returns of other funds. And it would not cost the company a penny. All they had to do was direct their fund manager to trade with Becker. Thus were born the ubiquitous, upside-down percentile ranks of the performance-reporting industry.
Performance evaluation first took take shape as a line of business for Becker in 1965, when a few key players began to organize it as a formal part of the business. The Funds Evaluation Division, or FED, as it was known at Becker, was formally launched in 1967. Its management began recruiting a sales force that over time would number approximately 30 men and women. They added product development, systems and production specialists as well as support personnel for a completely self-reliant business unit.
There was a real need for fund performance evaluation services in the marketplace and no real competition. After a few years FED created specialized versions of its performance report for various market segments — corporations and endowments as well as public and union funds. Another version of the report was offered to investment managers, who were eager to better understand the watchdog that was now overseeing their work. The sales force rolled on. Within the first six or seven years Becker acquired more than 1,000 clients, achieving a 70% market share for fund performance evaluation, according to Greenwich Associates.
As the market matured, members of the sales force found themselves spending more time servicing accounts. The Becker rep was typically the only person apart from the fund managers themselves meeting with clients to discuss investments in those days. The reps began to expand the type of consultation they provided. The clients welcomed the help and increasingly relied upon it in their fund oversight.
There proved to be limitations to how much help the sales-consultant reps could provide for their clients. Noticeably absent were formalized approaches to establishing investment policy and assistance in selecting investment managers. Other firms were beginning to offer these as specialized services. Becker was well aware of this activity and realized it presented both a threat and an opportunity. A chance to help seize that opportunity is what took me to Becker.
Investment Policy and Manager Search Services
A fellow by the name of Jim Knupp and I were to work together to put A.G. Becker in the investment policy advisory business beginning in 1975. Jim was an AGB veteran in the management of Funds Evaluation. He knew the performance-reporting business and all the sales-consultant reps through whom we would work in the marketplace. I had joined Becker from a West Coast firm of pioneering quants, O’Brien Associates. I brought the finance expertise. We were a team. Jim proved to be a quick study and soon distinguished himself professionally as an expert in advising on investment policy. For the two of us it was the beginning of a partnership that would endure over many years through thick and thin, and a friendship that continues today.
Investment Policy Advice
The first new service introduction at Becker was a pension investment modeling technique that had been invented at O’Brien Associates a few years earlier. Nowadays this is known as asset-liability modeling, or ALM. The work involved making long-term projections of pension liabilities and simulating future investment experience using Monte Carlo methods. In doing this, we were able to map abstract risk (standard deviation of return) into familiar financial parameters for investment-policy decision-makers. We also employed the Monte Carlo simulation technique with college and university endowment funds. This enabled them, too, to appraise alternative stock-bond policies in concrete terms, such as the potential impact of those policies on future amounts of spending from endowment.
Now, for the first time, Becker was helping clients to actually establish investment policy. This meant Becker had become an investment advisor to institutional investors. This was a change for Becker, which had remained cautious about assuming an advisory role until it knew it was ready. ERISA, with its stringent fiduciary standards, had recently been enacted. Firms like Becker, with so much at stake financially and counseled by lawyers who understood the new law only to a very limited degree, were uncertain where to draw boundaries around their investment consulting work. Not surprisingly, Becker embarked on advisory work with an abundance of caution.
The second major offering was a service to evaluate investment management firms in order to make hiring recommendations to clients. This would come to be known as the manager search business, a staple of every modern investment consultant. We had to build a research department to accomplish this, which we did. Manager search was also a substantive advisory service for Becker, which in turn caught the attention of Becker’s lawyers.
After manager search came the development of additional consulting services for institutional investors. These would round out the service offerings of one of the first comprehensive institutional investment consulting operations anywhere.
Becker’s Funds Evaluation sales-consultant force and clients were initially cautious in their embrace of our work. After about two years things picked up appreciably. After four years the advisory practice was flourishing, becoming the busiest of just a handful that were doing what we were doing.
Handwriting on the Wall
As our influence grew in the institutional investment community, inevitable conflicts of interest would arise within the large brokerage and investment banking firm of which we were a part.
One day the president of Becker, Jack Wing, asked me to his office to discuss a matter. It turned out that one of the firm’s largest clients — one of every brokerage firm’s largest clients — felt neglected by our manager research team. The chief investment officer of Morgan Guaranty (J.P. Morgan), the largest manager of institutional funds in the world then, had informed Jack that Morgan had suspended trading through Becker’s desk and would welcome a visit by yours truly. Jack asked me if I might be good enough to speak with the gentleman. Hmm.
It became apparent that for our work helping clients select investment managers to be taken seriously, it was vital that we be perceived as independent of the investment management community. We could not have managers paying us fees. Nor could we operate in an environment that relied heavily on remaining in the good graces of money managers. It would not do to simply have the biggest or most influential investment consulting business in the land. It had to be done right.
As I looked around, there was no other firm I would have wanted to join. Most had conflicts of their own. None were doing work more interesting or relevant than ours. It became increasingly clear that, if I wanted to keep doing what I was doing in a truly independent, professional environment, I would have to hang out my own shingle somehow. This was not something I had ever envisioned doing. Nor was it good timing for me to get all entrepreneurial.
Nonetheless, in the fall of 1980 I floated the idea of breaking off from Becker with Jim Knupp and a few others. We had weekend discussions, some in my living room, others at the Glen View Club, where Jim was a member. Several individuals participated in the discussions at one point or another. I could see people were really enthusiastic about the idea of forming a different type of consulting business — more like a professional practice. My confidence grew. I wrote a business plan. Most importantly, my wife, Sally was supportive.
When all was said and done Jim Knupp and Ronald Gold would join me in establishing a new firm. Ron worked for me and led our investment manager research team. We three formed the core of the Becker consulting unit and would launch our own firm.
When the time came to resign, Jim and I went to our manager and informed him of our decision. Seventy client projects were in the works at the time. We realized our departure would leave a big hole in the consulting activity and offered separation alternatives that would minimize disruption of the services being provided to clients. We offered to clear out that day, a not-uncommon practice in brokerage firms. Or we could give two weeks’ notice. Or we could extend our employment for a period of several weeks in order to minimize the impact of our departure.
After giving it some thought, our manager proposed that we depart at our earliest convenience, set up shop and have the work in progress subcontracted to us for completion. This was an ideal solution. It was good for Becker and the clients, and it was great for us. We had not solicited any of the clients for obvious ethical reasons, and had no revenue prospects lined up when we went in to resign. The Becker work would provide substantial revenue from day one that would last for six months, long enough for us to make a start.
We opened the doors of Ennis, Knupp & Gold, Inc., on February 1, 1981. Our departure from Becker did not bring about the end of investment consulting there. But the end came soon enough.
The End of Becker
Warburg (London) and Paribas (Paris) bought stakes in Becker in 1974 and later acquired control. If they had been content to simply receive substantial year-end distributions, things might have worked out better. Alas, they sought “synergies” and influence in the running of Becker. What a disaster. The cultures of Continent and Chicago couldn’t have been more at odds with one another. The Americans from the Middle West endured hours-long luncheons in private dining rooms in Paris and London. The European partners would have to put up with a box lunch on a conference room table in Chicago. Everything that could go wrong did. The Europeans’ handpicked man to oversee Becker was a New York attorney without experience running a securities firm. His name was Ira Wender. Working with the steady support of the Europeans, Wender proved to be a one-man wrecking crew at Becker. As testimony to the sturdiness of A.G. Becker, it took the bungling Europeans and Wender 10 years to run it into the ground.
The Funds Evaluation division was sold to SEI Corporation in 1983 in the course of Becker’s undoing. It was sold for the whopping sum of $5.8 million. This was an ignominious demise for a very special operation. Some employees joined the buyer, which soon morphed into a money manager. The event also triggered a diaspora of Becker Funds Evaluation personnel to positions all over the investment landscape. These folks had a huge impact on the investment business for they were truly a band of go-getters. The brother- and sisterhood of A.G. Becker’s Funds Evaluation Group remains intact, although we are now mostly retired.