Home grown

The Appleton Group launches option to keep more 'green' in the state

Posted on Apr 1, 2016 :: Cover Story
Margaret LeBrun
Posted by , Insight on Business Staff Writer

Money will never literally grow on trees, but Mark Scheffler believes the economy would be better off if it grew a lot more like trees do: locally, and naturally.

The Appleton Group founder, principal and chief compliance officer was on a part-time sabbatical last year, filming a documentary on how nature can teach us about growth and prosperity. Filming beach, prairie and forest scenes as well as conversations with people in Door County, Menominee County, in the Fox Valley and throughout the state, he formulated an idea for what would become Wisconsin Select.

“As I was working on the documentary one of the things that kept coming up again was that especially in agriculture, almost all the growth you see is fed by local resources,” Scheffler says. “It dawned on me that nature can be the best teacher for helping us figure out what’s sustainable and what’s not sustainable. I started to think, ‘How can I take some of those lessons and apply them to different units within The Appleton Group?’”

Since he founded The Appleton Group in 2002, a fee-only investment advisory firm managing more than $165 million in assets, it bugged Scheffler that so much money leaves Wisconsin in the form of fees paid to retirement planning firms based outside the state. TransAmerica, Vanguard, Prudential — all the big names have received the lion’s share of the 401(k) fund management business, and often the same companies serve as advisors for their own mutual funds.

What impact would there be, he wondered, if money managers based in the Badger State were enlisted by Wisconsin employers to handle that role?

He looked into it: $3.57 billion in fees to manage retirement funds are going to out-of-state fund managers — only 2 percent are handled here and the rest go to financial centers such as New York and Boston. That represents a total of $294 billion in assets managed for 23,000 private companies, 19,000 nonprofits and 1,500 government employers in Wisconsin.

It translates into some $224 million in lost tax revenue. And if all the retirement funds in the state were managed in Wisconsin, as many as 23,500 good-paying professional jobs would be indirectly created.

“Innovative” is what Fox Cities Chamber of Commerce President Shannon Full thought of the idea when Scheffler met with her and others from the Fox Cities Regional Economic Partnership to introduce Wisconsin Select.

“We see there is a significant opportunity to attract high-end financial jobs associated with the support of a program like this, if it were able to get off the ground,” Full says. “The other thing I thought was really genius about this was that it’s not just one company involved. The Appleton Group has a role but they’re not the sole beneficiary. Other financial service providers in the state will have a role in it.”

While the chamber doesn’t endorse individual businesses, Full says at some point, it may consider asking the Appleton Group to provide a request for proposal for Wisconsin Select for its own employees. “It will be exciting to watch,” she adds.

With “buy-local” all the buzz and such large sums at stake, Scheffler considers his idea a no-brainer. “Last year a state senator introduced legislation that would make it easier for cupcake bakers to sell up to $750 of cupcakes made at home instead of in a commercial kitchen,” he says with a wry smile. He approached a legislator to see if anyone in the state would bite on the idea, but it didn’t go anywhere.

“I was waiting for other people to do it,” he says. “I got sick of waiting.”

Stomping around in nature with a video camera in the mornings, evenings and weekends during his six-month sabbatical (he went to his downtown Appleton office mid-day), Scheffler let his mind ponder a greener approach to money management. Just how many money management firms are based here? After all, Bloomberg News in 2012 had named Wisconsin a “Mutual Fund Mecca.”

He looked into it and found 23 fund management companies were domiciled in Wisconsin that could be reaping the benefits of fees now leaving the state. He identified 20 experienced mutual fund companies with 27 three-, four-, and five-star funds among them. All joined Wisconsin Select, including some well-known managers such as Robert W. Baird & Co. Inc., Heartland Funds and Madison Investment Advisors as well as smaller firms such as iSectors.

“It was 100 percent unanimous,” Scheffler says. “They all said it was a great idea and would love to be part of it.” Appleton Group, which is a 338 fiduciary (with the authority to hire and fire investment managers, select the plan administrator and accept liability) also manages retirement funds. Scheffler’s own fund, the Appleton Group Risk Managed Growth Fund, will not be part of Wisconsin Select because, as fiduciary — he likes to say “the quarterback” — it would be a conflict of interest.

Scheffler and the Appleton Group began meeting with the 20 fund managers in late 2015, announced Wisconsin Select mid-February and expected to begin officially offering it April 4.

CUNA Mutual Retirement Solutions, Madison, has partnered with Appleton Group to administer the Wisconsin Select product, including such work as website access, statement preparation, trading platforms and  payroll deductions.

Jennifer Norr, vice president of strategy and marketing for CUNA Mutual, says the opportunity to take on the plan administration as the “behind-the-scenes team” for Wisconsin Select was exciting. CUNA Mutual is the largest record keeper in the state (and second largest employer in Dane County), administering more than $16.2 billion in assets and 6,700 retirement plans for 260,000 participants.

“As I travel across the country and go to national events I haven’t heard or seen anything like this before,” Norr says. “This is a testament to Mark and his organization in pulling together all the different organizations necessary to pull something like this off. What I like about it is, it’s quality first.”

Mike Kops, vice president of sales from Heartland Funds, was pleased to hear about the emphasis on Wisconsin-based plans. “This has always been a point of frustration for me because I sell our investment offerings to the marketplace and a lot of times people with retirement plan needs would fly across the country to meet with people, and oftentimes someone they know is flying across the country to meet with someone from Wisconsin. The reality is Wisconsin has so many good investment managers I believe there is a good opportunity to build a good portfolio for those with retirement needs right here in the state.”

The way the Wisconsin Select program works is that the 20 participating fund managers provide investment products with assets they manage. Any investment broker can then offer Wisconsin Select as a retirement plan to a company, nonprofit or municipality for their employees.

“The easiest correlation might be if you were to eat at a restaurant, they use produce from many vendors,” Kops explains. “We are the produce. And we think there are plenty of phenomenal homegrown products here to make a great meal for folks.”

Chuck Self, chief operating officer and chief investment officer of iSectors, Appleton, says his firm jumped at the chance to participate.

“This is an opportunity to introduce employers to high-quality services — and keep the funds for those services in the state and local economies,” he says. “There’s a market out there for employers to use the high-quality providers for retirement plans domiciled here in Wisconsin.”

The amount of research that went into forming Wisconsin Select impressed Mark Knipfer and Stew Dybdahl of Madison Investments when Scheffler invited them to Appleton. “He did a lot of legwork on this, and I think even he was taken aback at how many good, quality managers live in the state of Wisconsin,” says Knipfer, Midwest regional director.

The University of Wisconsin-Madison’s Applied Securities Program contributes to a pool of talent that feeds into the fund management firms in the state, says Dybdahl, associate regional consultant for Madison. “It’s one of the most respected programs in the United States and we do have a number of alumni here at Madison Investments.”

Both agree, however, that time will tell how much interest there will be for Wisconsin Select. Companies may not want to make a big change with their retirement funds if they’re content with what they have.

“Some may argue that you’re excluding yourself from a big universe of investment managers,” Knipfer says. “This may not necessarily be a plan that works for everyone, but there is enough business in Wisconsin to react positively.”

Wisconsin State Assembly Rep. Mike Rohrkaste of Neenah, who retired as chief human resources officer of Oshkosh Corp. in 2014 and was responsible for selecting retirement fund management for thousands of employees, admits he was initially skeptical when Scheffler told him about Wisconsin Select.

“At first I wasn’t sure exactly what he was doing,” Rohrkaste says. “It’s a very good idea to help Wisconsin to get more of this business — I applaud what he is trying to do. He’s going to have to compete against these bigger companies to show they can do everything that a company like Oshkosh, Kimberly-Clark or Harley-Davidson want them to do. It’s a competitive world out there.”

Rohrkaste points out that large companies that employ people around the world may not be swayed by the case for managing their enormous retirement funds out of Wisconsin, particularly if they can’t compete on price.

Scheffler is the first to say that a retirement plan must first do right by its employees in terms of value, and being managed in Wisconsin should be secondary. 

“Helping Wisconsin shouldn’t be the top priority,” he says. “The top priority should be offering an outstanding retirement plan experience to your employees. I know from experience we can accomplish that in spades by aligning all of these service providers that are right in state to do a much better job than Wall Street.

“The only people who said it’s a terrible idea are Wall Street firms, because they’re the ones who will see the landscape shift,” Scheffler adds. “But I don’t think anybody will shed a tear about that!”

Scheffler says there’s a common belief that Wisconsin often can’t compete on cost alone, but that it can compete on value. His goal is to offer a quality, competitive plan, not “the lowest cost 401(k) on the planet,” because that could lead to fiduciary lapses, inconsistencies in reporting or hidden forms of revenue.

Peter Mutschler, director of trading and co-portfolio manager at The Appleton Group, manages the firm’s portfolios and spends a lot of time trading. He points out that fees and added costs are often embedded in investments, so on the surface a fund might appear cheaper but the net is a different story. Further, “If it’s cheap and not a great performer, what are you getting?”

Because the cost of living and the salaries for fund managers are lower in Wisconsin, The Appleton Group can pass those savings on to clients. A fund manager in New York City may make $150,000 while in Wisconsin a comparable position may pay $50,000, for example. Not to mention, he adds, a large company such as Vanguard spends enormous amounts on advertising and marketing. (Scheffler points out that during the Great Recession, Vanguard funds dropped by about 40 percent, while individual clients of Appleton Group saw their portfolios dip by only single digits. The average Wall Street bonus recently was $146,000; that money comes out of plan fees.)

“It turns out the cost for Wisconsin Select isn’t too high — the cost is actually just a little bit less, so it’s very competitive. If you look at doing more things locally, in a lot of cases you save a lot of money.”

Scheffler estimates he will have spent about $100,000 to launch Wisconsin Select. He’s proud that it has “not cost one dime” of taxpayer money. The Appleton Group will receive one-tenth of 1 percent (0.001 or $1,000 on $1 million) on the assets it oversees for Wisconsin Select. Scheffler has not projected expectations for the program.

He calculates that based on some $300 billion in retirement fund assets statewide, “If we are one-three-hundredths successful,” overseeing $1 billion through Wisconsin Select, “that would be phenomenal.” He does hope that plenty of people will find the idea a no-brainer.

“It’s no skin off Vanguard’s nose if their funds go down in value,” Scheffler says, “but it makes a big difference if the managers of these participant dollars is in Wisconsin because they are our neighbors. They eat at the same restaurants we do, cheer for the same sports teams, their kids go to the same schools. There’s accountability that just doesn’t take place when you have managers that are thousands of miles away.”

It’s all part of his philosophy on striving for a sustainable economy, a passion that Scheffler feels so strongly about he launched the Foundation for Sustainable Wisconsin in 2012 (see accompanying story).

“One of the key tenants of a sustainable economy is what I call ‘eating our own cooking,’” he says. “If we can buy services from other companies either locally or in-state, it benefits the state and local economy tremendously. Everybody says buy locally and a lot of people think small scale. Wisconsin Select is about the things we can do for ourselves, as a state, to feed our own economy.”

Making the case for greener money

Mark Scheffler has broad interests. He graduated with a degree in music education and music theory/composition from Lawrence University, taught music at an inner-city junior high school in Kenosha, composed chorale music and was assistant conductor and vocalist with the White Heron Chorale (now called NEW Voices) from 1996-2012.

He and his wife, Karen Bruno, executive director of the Lawrence Academy of Music, spend three evenings each week taking their son to Irish dance lessons in Milwaukee. In March they traveled to Scotland where Will, 14, competed in the world championship Irish dance competition.

Scheffler’s current passion is sustainability, and he finds metaphors for the economy in nature.

“Using nature as a model for money management is absolutely beautiful. What can nature teach us about building a more robust, sustainable economy? Can we take ideas from her? The overwhelming answer is yes.”

Scheffler founded the Foundation for Sustainable Wisconsin in 2012, a non-partisan coalition of Wisconsin residents, businesses and local governments to advance the long-term sustainability of Wisconsin’s economy, environment and society.

“When a lot of people talk about sustainability, they think immediately that it’s a job killer, that it’s a growth killer,” he says. “Actually, the opposite is true. The economy exists to promote prosperity.”

Since last year, Scheffler has been working on a documentary film, “The Nature of Growth.” Drawing ideas from nature, its premise questions the notion that economic growth always leads to prosperity.

“We want the film to be a spark of an idea that there’s a time to grow and a time to sustain,” he explains. “We’re looking at what nature has figured out already about growth and decay and renewal. There’s no example in nature of any system getting so large that it just dominates everything; there’s no example of an organism that grows forever.”

He cites examples in which economic growth actually stands in the way of prosperity: Development that relies on tremendous debt and ignores the need to renovate or repair existing buildings or highways. New hotels in neighborhoods where existing hotels experience high vacancy. Urban sprawl that results in long commutes and wasted energy. Economic stimulus that results in a perpetuating need for subsidies. U.S. Federal Reserve interest rate decreases designed to spur growth but actually disrupt the global economy.

“For the last 100 years, growth has been tied to prosperity — but the two are rapidly separating,” he says.

Scheffler pitched the film idea to Wisconsin Public Television, which recently pledged to help complete the project. He has enlisted Lawrence University students to help edit the film this summer.

Foundation for Sustainable Wisconsin
www.sustainwis.org

Margaret LeBrun

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