Wheat, First Securities Inc. is a full-service brokerage company. Based in Richmond Va., the firm has 103 offices nationwide. It employs 2,500 people, including 24 people in retail sales and trading for municipal bonds and 900 brokers.
Most of the firm's clients and offices are concentrated in the states between Georgia and Connecticut - including Virginia, Maryland, New York and New Jersey. The firm is privately held, and municipal bonds account for up to 10% of its business.
The company operates a high-net-worth municipal bond program that offers quarterly portfolio reviews and other services free to clients. Wheat does not restrict the services to clients who purchase bonds only through their firm.
John Molster, Manager, Municipal Bond Department
Wheat First Butcher Singer is urging clients to reinvest municipal bond money now - despite lower yields, according to John Molster, manager of the municipal bond department.
He says investors should put their money to work as soon as possible because the firm expects interest rates to fall even further in the next several years.
"Our interest rate forecasts are for lower rates in three years," Molster said. "Assuming no major tax reform, we are moving into 4.5% yields on longer-term municipal bonds" in a couple years.
He said customers initially balked at rolling over proceeds from redeemed bonds which had yields of more than 6% to those offering 5.2%.
But many have agreed to reinvest when told of Wheat First's predictions for future rates.
"It's been well supported by customers," he said. "If you are holding a bond for 15 to 20 years, 100 basis points can add up to a lot."
To lock in current yields, Molster also said he is suggesting clients swap out of one- to three-year paper and go to 10- to 20-year bonds.
Despite those strategies which have been in place since last fall, the firm saw a decline in retail municipal business - about 10% or 15% - which Molster attributes to the powerful equity market and the uncertainty provoked by discussions of flat tax.
In 1996, "that uncertainty will hold back the volume in municipal bonds until the tax issues are resolved. Then we will resume higher volume," he said.
Molster said Wheat expects that the supply of municipal bonds nationwide will be similar to 1995. He said the firm's retail brokers tend to sell bonds issued in the state where they are located, which includes more than 100 offices along the Eastern Seaboard and other regions.
Professional:
1985 - present, Wheat First Butcher Singer
1983 - 1985, Institutional Sales, Dillon Read & Co.
1980 - 1983, Underwriter, E.F. Hutton Co.
Education:
B.A. in Economics, Hamden-Sydney College
Suzanne Harris, Manager, High-Net-Worth Municipal Bond Program
Most high-net-worth clients are not panicking and pulling out of tax- exempt bonds despite the threats to introduce a flat tax and lower yields, said Suzanne Harris, manager of the high-net-worth municipal bond program at Wheat First Butcher Singer.
"We are not seeing a mass panic or exodus out of the municipal market in reaction to the flat tax," she said. "Our clients - by and large - are not traders. They are conservative investors."
Harris, who has headed the bond program for seven years, said the company tracks the portfolios for 900 high-net-worth individuals, who have $750,000 or more in municipal bonds. The individuals, who are usually over 60 years of age, receive a quarterly review of their portfolios that provides a financial snapshot of income, coupons, maturity breakdown, and other items.
"They want help evaluating credits," said Harris, who added there are still some attractive purchases in municipal bonds for those who are in the top income tax bracket.
She said bonds in the 15-year range were the most attractive and often provide an 89% to 90% yield relative to comparable Treasury bonds - before tax.
"I am not buying 30-year bonds," Harris said. "If clients are heavily weighted in the long end, I am suggesting they shorten up because the yield differential is not that great."
She said the firm will continue its current strategy of suggesting laddered portfolios and recommending more conservative maturities until the tax questions are sorted out.
Professional:
1975 - Present Wheat First Butcher Singer
Education:
B.A. in Sociology, University of Richmond, 1974
Certified Financial Planner
Joe Montgomery, Registered Representative, Managing Director
Faced with an uncertain tax climate and falling yields, Wheat First Butcher Singer is increasing communications to its clients by sending more letters, making more phone calls, and offering more portfolio summaries, according to Joe Montgomery, a registered representative and managing director for the firm.
Last year, "clients were much more squeamish about rolling money over," he said. "When they were getting rid of a 7% yield for a 5% yield, it didn't make them very happy."
However, he said most clients were reassured after discussions with brokers, who said tax-exempt bonds were trading at a favorable ratio to taxable bonds and were a good buy, considering interest rates are likely to go still lower in the long term.
"We are proactively trying to raise our contact rate on the things they are concerned about," he said.
Despite those efforts, he said that some clients have shifted their money out of municipals and into equities, but not a dramatic number.
"It's more of a transitional thing," he said.
In 1996, he expects the bond market to be "reasonably good" if the flat tax proposals are not approved. He also expects the equity market to be strong.
"We may eventually allocate more over to equities," he said. But, "wealthy people still need municipal bonds for the tax break and income flow."
Montgomery said the firm generally suggests its clients make investments on a laddered basis with staggered maturities to get the desired income flow.
Professional:
1975 - Present, Wheat First Butcher Singer
Education:
B.A. in Business Administration, College of William & Mary, 1974
Don Hays, Director of Investment Strategy
The flat tax proposals could be difficult to stop this time, possibly resulting in an eventual phasing out of municipal bonds, said Don Hays, director of investment strategy at Wheat First Butcher Singer.
"I would never have thought the flat tax had a chance two years ago," he said. But, "in truth there is a real snowball that is beginning to build."
Hays said the baby boom generation wants smaller government, less bureaucracy and more control, and that will help fuel flat tax proposals, as well as continued reductions in state and local government debt that will reduce the supply of municipal bonds.
However, he said he believes that some major concessions could be made if a flat tax is enacted, including grandfather provisions for municipal bond issues, which would lose their current tax-exempt advantage. "They have to do something to keep municipals from taking such a hit. They can't have a cold shock treatment," he said.
In addition, some states are balancing their budgets or have surplus money - a trend that Hays believes is precipitating a big transition that will emphasize growth and reduce municipal financing.
Overall, Hays recommends minimal exposure to bonds as interest rates go down or level off, and maximum exposure to stocks, depending the type of financial needs of the client. He does not predict a good year in municipal bond sales for 1996.
In other forecasts, he anticipates 5% to 8% nominal growth of the economy for the next 15 years, while he expects inflation to be in the 1% to 2% range.
Professional:
1984-now, Wheat First Butcher Singer
1969-1984, J.C. Bradford & Co.
Education:
B.S. in Engineering, Tennessee Tech.
