Building a brokerage firm from the ground up

THE BALTIMORE EVENING SUN

One on One is a weekly feature offering excerpts of interviews conducted by The Evening Sun with newsworthy business leaders. Nathan Chapman is Chairman and Chief Executive Officer of The Chapman Co., a Baltimore stock brokerage firm.

Q. Before starting your brokerage firm in Dec. 1986, you worked for the investment banking firm of Alex. Brown. Why did you decide to leave that firm and its security and venture into the uncertain world of a new company?

A. I loved working at Alex. Brown & Sons. I liked the environment there and I liked what I was doing. But for me, I've always had this dream to own my own business. Ever since I was a kid, I've wanted to own my own business. When I got into college -- well, really, high school-- and I learned about this particular business, it matched pretty well with my interests. I like numbers and I like people, and this is one of businesses that you can put that together. So, at Alex. Brown, once I felt comfortable that I had the support of my clients and I had the technical knowledge that was requisite, I decided to go out there and form the firm. It was a choice of the fish or the fishing pole . . . .

Q.Since you started, how has your firm grown in terms of employees, clients and revenues.

A.When we started, I left Alex. Brown with my assistant and we hired two additional administrative staff. So the Chapman Co. started with four people. We now have over 30 people in five offices. Those five offices are in Los Angeles, Chicago, Birmingham, Dallas and here in Baltimore. When the firm began, my client base was exclusively the clients who transferred from Alex. Brown. These clients were largely retail clients. Now our clients are roughly 50-50, retail and institutional, with institutional accounts such as the City of Baltimore, the State of California, Chrysler and the United Auto Workers. Our revenues have roughly doubled each year we have been in business.

Q.After a number of years, do you perhaps yearn for that security of being an employee rather than being a boss?

A.No. There are rewards in owning your own business that go beyond the hardships-- and there are some hardships. Managing a large number of people, a large number of different personalities, especially in the sales business. I think managing sales is different than anything else that you can do. It's a lot different than managing a group of lawyers or managing a group of doctors. When you manage a group of salespeople, it takes TC lot of time and, I think, a lot of special skills.

Q.The investment banking area, investments in general, are dominated by some of the largest firms around, such as Merrill Lynch and to a lesser extent, Legg Mason and Alex. Brown in Baltimore. I'll venture to say that you're one of the smaller brokerage firms in the country. What advantages and disadvantages are there to being a smaller firm and what do you do to compete with the larger companies?

A.Well, it's interesting. The Chapman Co. is not as well known as a Merrill Lynch or a Prudential Bache or a Salomon Brothers, and usually the way I describe the Chapman Co. to people who don't know what we do . . . I say that we're just like Merrill Lynch, except that last year we made money. So, it's not how big you are really, or how much you gross, it's how you end up at the end of the year, where your market focus is. We're a small firm. Our market focus is a little different than those big guys . . . and because of that and because our costs are much lower, we're going to end up being a much more profitable firm. We look at ourselves as a firm for the '90s, a firm for the 2000s -- what an investment banker has to be. And investment brokerage is not going to be a firm that has buildings and takes on a lot of fixed costs and a lot of fixed overhead. Investment banking firms of the '90s and the 2000s are going to be firms that are very flexible, that keep their costs low and invest in people, that are customer-service oriented.

Q.What are the long-term plans for the Chapman Co.?

A.The Chapman Co. is in basically three businesses: we're in the brokerage business and we're in the public finance business and we're in the investment management business. That's the core of what the Chapman Co. does, and we're looking to spread that along a national agenda. We have branches in different parts of the country now and we're focusing and expanding those branches along those three service lines . . . We're hiring additional people; we're coming out with new, innovative ways of doing finances and providing customer service that is second to none in the industry.

Q.You recently appointed Paul Heid [formerly of Ferris, Baker Watts] as your new head of public finance. Why was this appointment made and what does it show about your emphasis on public finance?

A.Well, first it shows that we intend to be in the public finance business. There are a number of firms out there that have elected to get out of the public finance business for a lot of different reasons. The public finance business hasn't been as profitable as it used to be. The federal government has changed what you can actually use municipal bonds for, so they've cut down how much you can actually use a municipal bond to finance. Then they've allowed more players into it . . . So, you get into a position where it becomes almost a commodity business -- who'll do it cheaper -- but not withstanding that, we think there's some long-term benefits that we can add to the public finance business and that our firm is very committed to the public finance business in the long-term perspective. Paul is an example of that. As a former head of public finance at [Ferris,] Baker Watts, he has the technical credentials that we wanted to add to our firm to strengthen the technical side of our lists. And we've proven that we're pretty good at distributing -- that we can distribute bonds all over the country and that we have a strong retail commitment to the firm.

Q.Do you find the Baltimore financial community pretty much an open club or a closed club?

A.Well, Baltimore is a place that I was born in, I grew up in, I went to public schools -- I went to Polytechnic -- I went to the University of Maryland, then I went to Peat Marwick -- which is one of the largest CPA firms in Baltimore -- and then I went to work for Alex. Brown. So guys have known me for quite a while. I've been very fortunate to have done some television and other things where my name has gotten out there in Maryland, so people know me. Plus, I've gotten involved in a number of charities . . . And they're guys who have opened up to us, and the backing of Alex. Brown and the backing of USF&G; -- USF&G; especially -- and really with USF&G; working with our firm the business community has certainly opened up to us. An example of that is recently the Baltimore Gas & Electric Co. gave the Chapman Co. the opportunity to manage part of its pension fund . . . We feel that we're going to do our best to show that we're going to be the best manager of all the managers that they have. And we're going to show them the best possible return on the assets that they've given us the opportunity to manage.

Q.It's pretty much accepted now that we are heading into a recession. How will that affect the investment firms and, in particular, the small investment firms?

A.I think the smaller investment firms have advantages over the large ones. We're always monitoring our costs . . . We have better capability of knowing what our costs are and doing something about changing them, a lot better than the larger firms do. But what it will mean for our industry as a whole is that if there's a slowdown in economic activity it would certainly have an adverse effect . . . If people are concerned about whether they're going to have their jobs because of layoffs and cutbacks, certainly investing money becomes a secondary consideration, so investment banks are certainly adversely affected in that kind of slowdown. That's not to say that in an economic slowdown there are not opportunities. We've seen economic slowdowns in this country before and if you're a student of history and you look back during those periods and you say . . . and you ask yourself the question, "Where during those periods did people start to make money?" You start to look in those areas. You start to look for those opportunities where you can still advise your investors to take a look at. But there are certain things that become more important when there's a slowdown in economic activity. One thing is predictability becomes a lot more important than growth. When things are going through the roof and there's an economic expansion, what you start to say is I want to invest now, because I think things are going to be bigger and better in the future. When there's an economic slowdown, you don't think that; you think that things may even be worse in the future. So what you look for is predictability of earnings, so even a small amount of earnings that is predictable gets premium in the investment market when you're in the midst of a recession.

Q.What does that mean?

A.It means that you start to look at the larger companies, utilities that are very predictable on what they're going to bring in and what they're going to pay, that you start to look at those companies that have stores that are solid, that you can feel comfortable advising your investors to get into, that the nature of the market changes, that you're not necessarily looking at those high-tech markets where the companies are going to double and triple. You start to look for those companies that you feel have been consistent over a long period of time and that where the market starts to shake.

Q.What is the profile of the client you're going after. What kind of client do you want?

A. Really, the kind of client that we want . . . one of the attributes of this firm that is really different from other firms . . . is that we want people who want to be helped. We don't discourage people who walk through the door with a small amount of money, because the same lessons that you have to teach a person with a large amount of money apply to a person with a small amount of money, except for diversification of assets. You just can't diversify as much, but it's still a percentage gain. . . . So, when clients come through the door, we try to make sure they understand the risk of the business. We make investment decisions and recommendations that are suitable; that they're happy with how our operations support them administratively and that they leave with a good impression of our company. So, with typical clients, we don't, per se, market to a high network, or a low network, or a professional or a non-professional client. We try to say that we're a firm that you shouldn't be afraid to ask a question, no matter how sophisticated or unsophisticated you are; that we're a firm that's here to help; that we're a firm that has your best interest at heart. And that's what we try to get out to the people and those people that appreciate that message are the kind of people that we want to do business with.

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