Preparation Prevents Crisis During Succession

Chris Galeski Wealth Advisor Morton Capital Management Calabasas Capital Under Management: $1.83 Billion Morton Capital lost its founder, the late Lon Morton, in April 2017. Former professional golfer Chris Galeski, a wealth advisor at the firm, describes how Morton applied the same careful planning used for client portfolios to ensure an orderly succession for the current leadership team of Jeffrey Sarti and Meghan Pinchuk, co-chief executives. Question: How did your firm navigate the death of its founder? Answer: Lon was thoughtful to empower the next generation in the business years in advance of his passing both from ownership and management perspectives. All too often, many founders are reluctant to turn over the reins to the next generation until it’s too late. Lon was proactive. While the loss of any founder is difficult from an emotional and sentimental standpoint, we were blessed with Lon, who was so forward thinking to recognize that the client’s best interests and the firm’s success had grown beyond just one person. From an operational standpoint, nothing major changed when Lon passed as he had shifted those responsibilities to his successors well in advance. Lessons from the transition: It is important to have a well-thought-out plan ahead of time and stage the transition over a number of years. This will give the clients, the new owners and existing employees the time necessary to digest the transition. The plan should include how to deal with continuity in the founder’s vision and how the second generation of owners will balance their own vision for the future of the company while maintaining the core values that made the firm successful. Investment strategy: The total investment universe is estimated at $437 trillion; traditional investments such as stocks, bonds, private equity and commodities only represent $191 trillion. That means there are a lot of other areas for us to consider. Morton has an unconstrained view of the investment universe. We source niche opportunities with smaller managers who have a specialty in a particular market such as student housing, multi-family rental properties, storage facilities, health care royalties, private lending assets secured against either business assets or real property and other undiscovered opportunities for eligible investors. Most difficult part of the investment process: Patience is the most difficult aspect for many clients early on in the investment process. We invest significantly in private investments such as real estate partnerships, first trust deeds, health care royalties – these are not off-the-shelf retail products. Typically, it can take 12 to 24 months for the capital to be fully deployed. Managing client expectations during this timeframe is crucial to the success of their long-term financial plan. However, our experience has shown us that the benefit is worth the wait. Outlook for 2019: Given the relatively elevated valuations in the public equity and bond markets, our focus continues to be on finding opportunities in the private space. Post-2008, changes in risk-based capital rules have constrained the ability of many traditional lenders and banks to participate in the private lending to creditworthy individuals and smaller businesses. This funding gap has created an opportunity for niche lenders to step in and fill that gap. We have been able to source and add opportunities in the private lending space with adequate collateral, where we believe the risk-adjusted returns continue to be attractive. In 2018, our asset management group reviewed over 75 new opportunities in both public and private markets. They then conducted more thorough due diligence on 37 strategies. Only four new strategies passed the due diligence criteria of our investment committee and were added to client portfolios. Why financial services? I wanted to make a difference in people’s lives and make better financial decisions myself. This is a second career for me. I spent almost seven years playing golf professionally and when I decided to make a career change nine years ago, going into financial services was a great transition for me. I get an enormous amount of satisfaction at the end of every day knowing that I am helping people accomplish their goals. It is a bonus that I can help my family be more financially successful as well. Favorite story: When I was in college, my father was a senior level executive at a company. Due to his position, he was bonused in company stock and stock options which had blackout periods where he couldn’t buy or sell the company stock due to his insider knowledge at certain times of the year. He was unaware of the right resources that could help him navigate that challenge and unfortunately lost money during a downturn in the late 1990s because he didn’t have the right financial partner. I immediately changed my major from engineering to economics, so I could be better informed later in life.