Sometimes Say Never

Earlier this month, one of Wall Street’s leading, old line investment management firms announced that it would “combine its business” with that of a larger investment bank. The valuation criteria implied by newspaper reports, if applied to Tocqueville Asset Management, would have made most of our partners wealthy enough to qualify as Tocqueville clients.

Not surprisingly this announcement generated a lot of questions from friends and colleagues regarding Tocqueville’s long-term strategy.  This interest in our future was compounded by the fact that the manager selling out was a grande dame of investment management, which had long served as an informal model for Tocqueville. A solidly entrenched culture of intense fundamental research; an entrepreneurial spirit based on a relatively flat and informal management organization; decentralized cells with different styles of investment or client service; a strong back office infrastructure and the ability to attract unique talent: all these are qualities that defined that firm and which we have strived to sustain and enhance, in a kinder, more gentle fashion, as we grew from a few hundred millions dollars under management to the present nearly two-and-a-half billion.

Over the last few years, we have been approached by many (perhaps most) of the likely suitors of Tocqueville, including the above referenced firm.  None of these investigations went beyond the ego-boosting, exploratory stage; for the truth is we have never been for sale. Still, in the wake of the announced merger of our “model”, we decided to poll our partners on their resolve to remain independent. The answer was a resounding “yes”.

Why is it that we aren’t interested in selling our firm, even at prices that may not be seen again for the rest of our careers? The answer lies in three words: principles, selfishness and strategy.

Principles

One overriding business principle is that one can no more sell one’s private clients than a family doctor can sell his practice. This does not mean that sales of medical practices do not happen or are unethical but, in our view, they belittle and tarnish the special relationship built between patient and family doctor over the years.

We find nothing objectionable with the sale of a mutual fund company or an institutional portfolio-management business, but private clients and their managers often have built a history of reciprocal trust and loyalty that goes well beyond simple financial performance. It is precisely that trust and loyalty which is at once very valuable and at the same time not transferable.

This is why our firm has never paid to attract managers who would join us along with their clients, and also why we do not insist upon “non-compete” agreements in the eventuality that one of our managers should leave or retire, something that, to-date, hasn’t happened.  (On the other hand, we have endeavored to build depth, support and redundancy in management, so that our partners can eventually retire without trauma for the families for whom they have been caring).

Another important principle is that one does not mislead one’s partners. Most of the portfolio managers who have joined us in recent years have done so to enjoy a certain quality of work life, including independence, intellectual stimulation, and support from their peers.

Many of them might well have made more profitable arrangements elsewhere, but most had also tasted the work environment of larger, more “corporate-like” environments. They joined Tocqueville for its family-firm atmosphere, unbending commitment to client care and management by peers rather than by bureaucrats or marketing types.

Selling out now, after attracting new partners on the promise of these qualities would betray the confidence they placed in us.

Selfishness

Good money managers seldom wish to retire. Managing money is both their passion and their hobby, and they typically intend to continue doing it as long as they enjoy it. That is how our partners and we unanimously feel.

In addition, the managers at Tocqueville are mavericks who typically do not function well within larger, more structured organizations. We value our independence, entrepreneurial latitude and freedom from unnecessary (non-regulatory) bureaucratic red tape.  Let’s face it; we all have a little problem with authority.

In order to sell the firm, we would almost certainly be required by the new owner to continue working for several years. However, we would have to do so within someone else’s organization, with guidelines and constraints and a shift in emphasis that we would find unbearable.

Just one example illustrates the point.  Our activity requires very little capital, since the financial protection of our clients’ assets is the responsibility of our chosen custodian institutions. On our relatively small amount of invested capital, the profits generated by our firm constitute a very high return. By contrast, an acquirer who would have paid a very high price to purchase Tocqueville would legitimately expect a much higher return on that expensive investment. This would soon change the set of priorities guiding our activities, elevating marketing, product development, new business, cost cutting and other “efficiencies” over the intellectual freedom and the pursuit of excellence in client service that we currently enjoy.  In short, an acquired Tocqueville would be working for the new owner rather than the clients.  And it would be a lot less fun.

In other words, we could become richer sooner, but the quality of our lives would suffer.  We’re too selfish to make that trade.  We’d rather build our fortunes over the length of our work life than all at once.  And we’d rather enjoy ourselves while we’re at it.

Strategy

As investors, we pride ourselves on being “contrarians.”  As businessmen running our firm, we also believe in a strategy that runs counter to the latest fads.

In today’s landscape, companies like Tocqueville Asset Management have been slowly disappearing.  Consolidation has created a large void between financial “megastores” offering a multitude of packaged products designed to appeal to the mass market, and small boutiques, lacking the resources to offer families the kind of customized service that used to be the trademark of the best private banks.  We are neither.  Though not a bank, we have achieved a critical mass in traditional private banking services and family money management. This makes us one of the last remaining havens for talented and independent managers who insist on combining ideas and hands-on research with a strong commitment to service and total loyalty to clients.

By remaining independent, it is already apparent that we are increasing the attractiveness of Tocqueville Asset Management for unique talents elsewhere – and their faithful clients. Independence, we strongly believe, will be the source of a new period of growth and prosperity for our firm.

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For all this, of course, we have to thank our clients and partners who, by their foresight and loyalty, have allowed us to become what we are today. They deserve our commitment to continue on a path of independence, attentiveness and excellence.

The information contained herein has been obtained from sources believed to be reliable and to the best of our knowledge is complete. The validity and completeness however cannot be guaranteed by Tocqueville Asset Management. Nothing herein constitutes investment or any other advice and should not be relied upon as such. This document has been prepared solely for information purposes and does not constitute an offer or an invitation to buy or sell securities. The opinions expressed in this document are those of Tocqueville Asset Management as of the date of the writing and are subject to change.