Jun. 29–As a young man, Vernon Sumnicht loved math calculations and wanted to mix this passion with the excitement of stock market investing.

So, in college, he prepared himself with an undergraduate degree in finance and master’s of business administration.

His rapture with being a stockbroker lasted less than five years, though; he became frustrated with the limited one-fits-all product selection and his inability to provide a wide range of potential investment strategies.

He was making a comfortable living with about 400 clients, but he had lost his ardor for simplistic investing when he did his MBA research in the early 1980s. In that paper on convertible bond arbitrage, he used an engineer’s mathematical calculations to explore a highly sophisticated investment-friendly concept called hedge funds or alternative investment strategies.

The road to actually using his hedge funds knowledge, however, started with a big decision for him and wife Debbie. He would open his own financial planning firm, using the pooh-poohed fee-only payment system. It was especially big for the couple because Sumnicht is a quadriplegic and his wife is his main caregiver.

“It was a scary decision,” Debbie Sumnicht said. “People would tell him, ‘You’re crazy; nobody can survive doing fee-based only.'” But Sumnicht saw it as the future, and his wife had confidence in his vision. His income dropped from $30,000 or $40,000 a year to $2,000 that first year his firm operated in 1988. It was tough, but they had seen tougher times.

Debbie Sumnicht said she didn’t really have second thoughts because she had seen Vern go through something much worse — the car accident that paralyzed him while he was in college.

“It’s really hard to explain,” she said. “I saw Vern come back from an incredibly difficult situation and I was there to sustain him through that. So, the money situation and the business are not quite as earth-shattering, after you’ve seen somebody fight back from death and not being able to talk (for a period) and not being able to move.”

Sumnicht wasn’t deterred when his broker manager and others told him he was making a mistake. “They kind of laughed at me; 20 years ago, that (flat-fee concept) was kind of a radical approach.”

He got about 20 of his 400 Howe Barnes clients to come with him and had about $250,000 in assets under his management the first year.

Sumnicht & Associates was just Vernon and Debbie until 1996. They operated out of a home office, and she managed the office and handled even the tiniest office functions his condition wouldn’t allow him to do, besides continuing the several hours a day as his caregiver. She helped with his mobility, made sure he had enough water, provided him with his two to three hours of daily therapy and took care of other medical needs.

For the Sumnichts, the 1990s were steady growing if not spectacular. “We never had any down years,” Sumnicht said.

The 50 percent increase in assets was fairly easy to attain in the early years because the firm was so small.

In 1996 the Sumnichts made a family decision that showed they were growing comfortable with their business success. They adopted a daughter (and last year, a second child, a son), and Sumnicht hired Linda Wanta as his office manager, freeing Debbie Sumnicht to handle childcare.

He wouldn’t take on another employee until 2001, when he hired Heidi Buhler as operations and administration manager. In 2002, Sumnicht hired a chief financial officer named Evan Audette, who had been with Ernst & Young, a large public accounting firm. Perhaps no hire was more important than that of Prateek Mehrotra last year to spearhead his hedge funds program.

Sumnicht brought some clients into hedge funds almost from the day he began his company, but that segment of his investments began to grow as a percentage of total assets in 1997 and became especially important during the stock market slide of the last three years.

Acquaintances who saw him delving in hedge funds had a stern warning for him. “My colleagues, you know, said, ‘Vern, that is a career killer; if you’re wrong (in investment decisions), it’s going to destroy your career.'” Sumnicht held fast. He understood the numbers, the concept, and he knew the market bubble of the late 1990s wasn’t going to last forever, and that’s when his hedge funds would show their worth.

“We’ve had much faster growth (since 1997 and tripling assets since 1999),” he said. “A lot of that has to do with a particular strategy.”

He has a third of his clients’ $300 million in assets under management in hedge funds, which are the fastest growing segment of the portfolios.

“I kind of got a bug on it (during his MBA research) and I’ve always put my clients into it, if it was appropriate,” he said.

Hedge net investable assets and minimum investment requirements are too large for most investors. Sumnicht has created investment pools among his clients so they can invest in hedge, if they choose, and so they can be diversified in their hedge investments, just like any investor should be diversified.

Sumnicht said the rush to hedges today and his own hedges results convince him they belong as part of some of his clients’ portfolios. Hedges go back to the 1940s and 1950s, and early on were mainly used by institutions, which had enough capital to use them properly.

“I don’t think anybody really knew why these strategies were producing superior risk-adjusted return during the 1990s,” he said. “All you knew is the numbers were there; the statistics were there, and you can’t argue with results,” he said.

Hedge funds aren’t foolproof.

Sumnicht tells of his experience with Beacon Hill: That hedge fund’s main investment — and the hedge against the main investment — went bad; both failed after the investment community reaction to 9-11.

“We lost 50 percent of our portfolio in two months,” Sumnicht recalled. “Not a good thing, not a good thing, but, fortunately, we were diversified.”

That mean his hedge portfolio had more than Beacon Hill, so its value dropped only 6 percent in 2002; that compares with the S&P 500, the index of the largest 500 U.S. companies’ common stock, which dropped 23 percent.

“It’s not that there’s no risk (with a hedge investment strategy),” he said. “It’s that there’s a different kind of risk. So, that tells us we want traditional investments in our portfolio, stocks, bonds, international stocks, and we want hedge funds in our portfolio.”

Sumnicht & Associates clients typically have 10 to 20 percent of their assets in hedge funds. The decision ultimately lies with the clients. Sumnicht might suggest hedges as an investment, but only if he believes the client is sophisticated enough to deal with them and can be comfortable with them.

He has surrounded himself with a few key employees to handle the rapid growth of his firm’s portfolio assets in recent years.

Mehrotra’s work involves finding strong and competently managed hedge funds, which he does by evaluating the funds and the managers. He studies everything from past performance to personal economic success to criminal record before recommending putting Sumnicht Associates clients’ pooled-money into a fund.

Sumnicht’s firm was contracted 19 months ago to manage an $85 million hedge fund for Societe Generale, the largest bank in France and 20th largest in the world. The bank’s search for a manager led them across the Atlantic Ocean to northeastern Wisconsin.

Although hedge funds activity has generated most of his firm’s recent years’ growth, Sumnicht said it’s not the biggest factor in the future, in his view.

Predicting his firm’s assets under management will more than triple to $1 billion in five years, Sumnicht said what will drive that mainly is the concept of holistic wealth management or being a multiclient family office.

“I think it’s going to be hedge funds, yes, but I think even more important that you must be able to provide that multi-client office structure,” he said.

That means perhaps handling diverse tasks that include investments, tax filings, creation of a trust for the children, managing a property up north and paying the monthly bills. It may mean the monthly heating bill goes to a Sumnicht employee to pay, instead of to the client’s home.

It also means a firm has to have the talent to pull it off. It requires many people with proven ability in various specialties.

“You get a team,” he said. “Our clients get a team that can handle the big picture (of financial needs).”

Sumnicht said the inherent danger is that a firm can become “a jack of all trades” and master of none, which is why he’s still on the fence about a strong corporate move in the broader direction. He has only a handful of clients (and himself as a “guinea pig”) getting the wide range of services now.

Debbie Sumnicht said if her husband thinks he sees a significant trend, she doesn’t second-guess him. She has known him since high school homeroom, when they ended up sitting next to each other. He has shown her vision and grit more than once –and his business acumen has brought him a six-figure salary today, a long way from the $2,000 in 1988.

She said when he has a 7:30 a.m. breakfast to attend, they must get up at 4 a.m. to begin getting ready.

“To compete with the suits (professionals) of the world from a wheelchair is an incredible endeavor,” she said.

He has to work harder to get clients’ confidence when they walk into his office and see a man in a wheelchair. But she didn’t need his financial success to be convinced.

“I guess I have always believed in Vern,” she said.

ON THE WEB

www.sumnicht.com

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(c) 2003, The Post-Crescent, Appleton, Wis. Distributed by Knight Ridder/Tribune Business News.

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