Listen in to our very first episode of Speaking Logicly with Jeff Higgs of 3 Dimensional Wealth Advisory. We chat about how advisors can add value during volatile times in the market, the differences between older & millennial investors, and the new actively managed ETF structures.
Transcript
Speaker 1:
Speaking Logicly is brought to you by ETF Logic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information with them should be considered trading or investment advice.
Scott McKenna:
So welcome, everyone, to the very first episode of Speaking Logicly. I can’t tell you how hyped I am to launch this. With the new launch of our Logically brand and platform, we’re launching this new series. As you all know, the world has changed a bit in the wake of COVID-19. No longer are we able to go to all of the wonderful conferences that we had planned. And so we decided to put together Speaking Logicly, in order to sit down and talk with our industry peers about some of the most important topics in wealth management. My name is Scott McKenna and I’m the sales and marketing director here at ETF Logic. And I’m joined by Emil Tarazi, co-host, CEO, and co-founder of ETF Logic.
Emil Tarazi:
Hey Scott, nice to be on. I’m really excited about Speaking Logicly I think that we’re onto something pretty big here and I’m really excited to be your co-host.
Scott McKenna:
Awesome. Yes, me too. And for our very first episode, we have a very special guest, Jeffrey Higgs of Three Dimensional, an RAA based out of Long Island. So Jeff, to get kicked off, why don’t you tell us a little bit about yourself and 3D.
Jeffrey Higgs:
I’ve been working with Three Dimensional Advisory for the past 12 years, since I finished college. We’ve seen a number of iterations throughout those 12 years, but we are primarily an RIA with a broker dealer affiliation. We’re an independent RA, the broker dealer we cleared through is Vanderbilt Securities. About 80% of our business is independent RA work, predominantly with what I would call high net worth, but not ultra high net worth. Our best clients are typically $2-$10 million in investible assets, usually closer to retirement age. So a lot of small business owners and pre-retirees between 55 and 75.
Scott McKenna:
So Jeff, obviously the world has changed a lot in the past few months. How have you made adjustments to your business in order to adapt?
Jeffrey Higgs:
In terms of running our business day to day, we’ve tried to think like many businesses, engage and just connect with our staff on a daily basis. We typically have an 8:30 call for roughly 30 minutes. I think we definitely saw it helped connect our staff, helped connect our advisors to our staff, and just make sure that were checking in. Obviously, working from home can be difficult, depending on your circumstances. The whole situation around COVID, it has been difficult. So I think that sort of daily connection definitely helped people, and probably much the same for our clients. We’ve been trying to send out more regular emails as a firm. Typically, that’s something we’ve left to the advisors to try to be just on their end, let them connect as they see fit. But between the volatility in the market, the concerns over people’s health with COVID, and just where they were at, we’re here in New York.
Jeffrey Higgs:
So it was a pretty touch and go situation in March and April, in terms of the numbers, and so just really trying to be with people as they kind of handle this. And a lot of people have a lot of time on their hands. And so they’re reading, and when you want to read something, you can basically find anything nowadays. So we found our job became, it usually is, but it became even more of sort of an armchair psychologist trying to help people see the volatility through, and to not sort of get off the course that they originally charted before all of February and March happened.
Scott McKenna:
And kind of jumping into the volatility, we saw such a big spike. I’m sure you had some clients who freaked out a little bit, right? But what’s one of the best strategies that your firm or any advisor can use when we see a big volatility spike in the markets?
Jeffrey Higgs:
I think that for us, there are two types of people in that situation that come to mind right away. Obviously, always trying to make the right investment decisions, but specifically, I think that we have clients broken down so that we know who’s a long-term investor, who’s a short term investor, in terms of maybe they’re in retirement getting distributions, versus someone who’s 35 or 40 years old and has a long time before they’re going to use the money they have invested. So trying to make sure that people with long-term money took advantage of the pullback in the market, even if it did add some potential risk to the portfolio, if we weren’t rebalancing or readjusting the portfolios, say, before the bottom, knowing that long-term, we feel comfortable with how markets are going to perform, that was something that we definitely tried to focus on with any long-term clients. We do also have a number of clients who have legacy positions.
Jeffrey Higgs:
And so, either being able to take losses and offset those with their legacy positions that typically have some gains, or to be able to shed some of the legacy positions with gains that are less than they would have been, say, a month before or two months before that, I would say are two of the big things. I can think of a couple of people where we took 25% or 30% off their legacy position, especially because those are often, at least in our experience, they’re often blue chip stocks, not necessarily the stocks that are going to come out of the pull back as fast as maybe other stuff. So we’re able to sort of both, take them from that individual position and get them into something that’s more diversified, find an ETF that might be in that sector, but is going to have more than just the one name in it. And then also, take advantage of potentially getting a little more growth on the upside as they come out of the market bottom.
Scott McKenna:
And Emile, having the perspective of a former trader, do you have any other tips during these situations?
Emil Tarazi:
Yeah. Well, whenever there is higher volatility, well, I’ll speak from putting on my former market-making hat. Volatility is great for market makers. That’s generally because spreads get wider, the bid offer spread widens, and that’s part of how market makers make money. They also make money because there’s generally more volume, there’s more people trading, more people buying, more people selling. And then there’s obviously, in ETF world, there’s premiums and discounts, wider premiums and discounts would mean that the ETF that you’re buying or selling would be essentially, disconnected from its underlying basket.
Emil Tarazi:
So all those numbers get larger and wider, and for a market maker, that’s great. But if you’re sitting there managing your portfolio, your nest egg, you’re paying a lot of money to trade during those times. You can think of it as you’re paying that premium to be able to get in and out for whatever reason. So that’s an added cost, and a lot of those costs are obviously, you can think of them as hidden or implicit costs in the market. So Jeff, you mentioned psychology behind investing, and here’s another reason, trading costs do go up during these periods. So I would be very cognizant of that.
Scott McKenna:
Awesome. Jeff, when investors get a little spooked in volatile times, how do you guys identify some of the problem areas, and going beyond that, how do you correct some of those issues?
Jeffrey Higgs:
I would say that the number one concern I always have in volatile markets is where our clients who are taking where their cash position is, because those are the people, as much as market drops hurt, and they’re not helpful, and they can set a portfolio back, what’s way worse than a market drop for a long term investor, is a market drop for a short term investor who needs to raise cash on some sort of monthly or quarterly basis. So we’re very cognizant of that. And at the same time, it’s a good reminder as to why we are, because sometimes we won’t see pandemics coming, and that’s a good reason to always have plenty of cash as an allocation intentionally for that.
Jeffrey Higgs:
So for people who, it feels like it’s a shorter term thing, I try to raise less cash and use the cash that we have available, rather than taking distributions out of it. The second thing I try to look at, I referenced it earlier with long-term investors who try to take advantage of the dips. I think that one thing that is a sort of simple way to help people stay on track is, if you rebalance someone in those times, we saw bond prices rise dramatically because of the drop in interest rates. We had equities way down. So someone who might’ve been 70/30 to start is now into something that’s 55/45 or 60/40, or something of that nature.
Jeffrey Higgs:
So they’re actually now in a more conservative allocation at a time when they probably should be in a more aggressive allocation. So just trying to make sure that people stay with their original investment allocation, or just in that rough risk tolerance, I think is really important. And the thing that’s probably the most interesting to me from an advisor standpoint is, who do I get calls from when the market volatility hits and the big dips hit? And not just who I hear from, but what they’re saying, because I think that people can answer questionnaires, you can have conversations in depth with them about what they think about the markets, how they’re going to react if certain things occur, but there’s nothing like actually it actually happening, and experiencing it, and really getting a feel for what their real risk tolerance is.
Jeffrey Higgs:
I can think of a couple of newer clients I had that were probably invested in what I’d call a moderate, to maybe moderately aggressive allocation. And they kind of talk the talk with that, but they couldn’t really walk the walk, and it took multiple conversations to talk them off the ledge. They still wanted to shave some of the portfolio down, in terms of equities before the market came back. So that’s something where we’re going to do more harm than good if we can’t get people on the right allocations to make them comfortable through volatile times. So I think that getting a chance to talk to your clients, paying attention to who it is that’s calling, and what they’re saying to you, and what their concerns are is a really good way to identify problems in your overall allocation, or in your client’s portfolios, specifically for the individual clients.
Scott McKenna:
Got it. You said newer clients, does that mean younger? Because I imagine older clients, they’ve experienced something like the 2008 situation. But for newer clients, it’s their first time experiencing an event like this. Do you handle a millennial client any differently during these kinds of times?
Jeffrey Higgs:
I definitely think that younger investors, millennials are not used to this kind of thing. I feel that most of them, I would say, handled it okay. They were used to sort of a really nice uptick for a really long time, and then they started logging into their 401ks or their IRAs or whatever it might be. And they kind of got a bit of shock with that. I think it’s the nature of everyone, and they’re not much different in that respect, when they see a bunch of red numbers for a few days in a row on the news, or in whatever application they might be looking at, or website they’re going to, they start looking at their account all of a sudden. And so rather than just picking up the quarterly statement or the monthly statement, they started looking at it on a daily basis.
Jeffrey Higgs:
But I would say overall, they handled it okay, and most people understood it. I mean, there’s so much tied into this particular market volatility, just with the pandemic and politics and regional, and all of those different things that come into it, that it definitely is a little bit of a challenge to speak to people and make sure you’re kind of speaking to them on the same wavelength. But they definitely were calling more than I typically hear from them. It might be once or twice a year we’re talking about their portfolio, and it felt like it was once or twice a week with some people
Scott McKenna:
Touching on young millennial clients, versus older ones, what are some of the biggest differences that you notice in working with the two different types?
Jeffrey Higgs:
I would say that the biggest differences are younger clients are more fee conscious. I think there’s been enough branding and marketing around a Vanguard type of place, or ETFs, and their understanding of that is pretty good. Not all of them, but a lot of them understand that they can buy indexes or funds that have relatively low costs, that it doesn’t take a ton of active management into it. And so for them, it’s definitely more about being conscious of the fee. And I think that in a lot of ways, it sounds crazy, but because their fees are typically lower on a dollar amount basis, but they’re more interested in me being a resource for them. So they have a lot of first time events, whether that’s their first mortgage, or their first car, or trying to pay off student loans, maybe getting married. But there are a lot of firsts out there for them where they feel they need advice.
Jeffrey Higgs:
And it’s not always something that you can just Google, or it’s not something that you sort of trust Google for. Whereas, older people, they tend to now consider the fee a whole lot. I think they’re pretty used to seeing a bunch of fees on there, and that’s what they’ve had their whole life. And so it’s not to say they don’t know what it is, or not that they don’t care about it at all, but I feel like they’re less fee conscious. I think specifically, if you look at the demographics, most older clients have older advisors, so they’re kind of uncomfortable with even talking about index funds.
Jeffrey Higgs:
I know that’s definitely when I bring on a new client who’s an older client, say, over the age of 50, there’s a number of them that are just not very familiar with ETFs, because their advisors have never spoken to them about ETFs. They’ve had variable annuities or mutual funds for 30 years. They have no idea what an ETF is, they’ve heard the acronym. They probably associated with Vanguard, but they don’t really understand that it’s extremely similar to a mutual fund in the sense that it holds a bucket of diversified stocks.
Emil Tarazi:
Jeff, I’m not sure about that last point. I mean, obviously, big differences in terms of how younger and older investors approach fees. What about how they approach specific products, specifically ETFs? You mentioned older folks may not know what an ETF is. Do you see that younger folks will have better understanding of ETFs and come to you with more questions about them?
Jeffrey Higgs:
Yeah, I would say that the majority of them, I would say they almost have a view on ETFs that they are better, that, why would you pay for a mutual fund? I feel like by and large, that’s sort of the question they would ask. If I was to present a portfolio of mutual funds, I think a lot of the younger people I speak to would be like, “Why are we buying mutual funds? I’ve read that mutual funds are too expensive, or they don’t perform, the active management doesn’t work.” A number of things like that. Whereas, an older person would ask the opposite question and they would say, “Why do we have these ETFs? They’re not mutual funds, who manages them? What is it, how does it work? Why would we do that? Why wouldn’t we just keep my mutual funds or something of that nature?”
Jeffrey Higgs:
Even if that mutual fund has been a dog for 10 years, it won’t matter. There’s a comfort level to having those sort of names that they’re used to, whether it’s an American funds or something like that, versus the ETF names are not as commonly known, I think, in their world
Scott McKenna:
Talking about ETF brand names, obviously, a lot of people associate Vanguard, BlackRock. Do you personally, and do clients have a notion to move more towards those big names, as opposed to using maybe a smaller boutique ETF issuer that offers similar exposure?
Jeffrey Higgs:
I would say probably the biggest challenge that I see in the ETF world is trying to understand some of the kind of hybrid ETFs, I guess, for lack of a better term. There’s probably an actual term, but I’m not familiar with it. But the index ETFs, mostly it’s pretty easy to understand what index they’re following, which securities they’re going to have, and what type of exposure you’re getting with them. I think some of the different things we’re seeing with either some sort of strategy that’s maybe passive strategy with some sort of algorithm or filter, things that have, sort of like a mutual fund in an ETF body almost, in some ways. I think those are going to be the things that could really make a lot of sense for a lot of people.
Jeffrey Higgs:
It gives you some of the tax benefits that ETFs give you, in terms of capital gains and dividend distributions and things like that, where you’re able to substitute rather than sell, how a mutual fund does. But I think that, at the same time, you’re getting it for cheaper than a mutual fund. You don’t have to pay an A share load, or a C share trail, or all the different things that come with that. So I do think the world, that’s going to be the next thing is to really be able to understand and sift through, and see how those ETFs stack up. And are they just more active managers that don’t perform the same way the mutual fund active managers often don’t, or is it that, since it’s in a different fee structure and it’s a different cost structure to the client, are those people able to perform and help the client, even if they’re not following a specific index and there there’s a little more cost, but there’s also more active management with it?
Scott McKenna:
That’s interesting. And kind of touching on the active management, these new ETFs called active non-transparency, I think they like to call them ANTs, right? It’s going to be very interesting once we see a lot more of those come to market. And I think a lot of people from our conversations, we’ve seen a lot of people who have offered a traditional mutual fund with active management are starting to eye these new structures, whether it’s Presidian, or [inaudible 00:20:41] Structure, or Blue Tractor Group. There’s a whole bunch of them out there now, right? So I think it’ll be interesting to see, and maybe Emile, your thoughts on whether, do you think these are going to really take off, or is it going to take a little bit of pushing to get the industry to really adopt them?
Emil Tarazi:
Yeah, it’s a good question. I’ve seen a lot of ideas and concepts pushed in the ETF marketplace over the last 10 years that everyone says is going to be the next big thing. And then the next year, no one’s talking about them. It definitely feels that way with ANTs, with the active non-transparent stuff. But I think there’s a couple kind of tailwinds that might actually support the ANT products into the future. Kind of what you said, Scott, the traditional mutual fund players are looking at these ANT products, and have already issued some ANT products, issued and listed, and currently trading these products on the open markets. So it’s still early days, it’s really only been trading for maybe a couple of months now. And as more of these products come to market and start building a track record, we should see where it goes.
Emil Tarazi:
I’d say an interesting thought, one of the big trends or headlines in the ETF space has been the ARK ETFs. ARKK and ARKW, those are effectively, actively managed products. They are transparent, though. They don’t have that special structure that shields their internals from potential front runners, let’s call them. And those products have been wildly popular, primarily because of the investing acumen of fund managers. They’ve managed to capture a lot of the interesting trends. I think some of those ETFs are up 40% or 50% year to date, which is phenomenal. And yeah, maybe a lot of it’s Tesla, but if you can encapsulate good fund managers in ANT structure, and that ANT structure helps the fund manager better navigate the markets, then you’re going to see these products growing quite a bit.
Scott McKenna:
And Jeff, what are your thoughts? Are these ANT products something that you would see your clients being interested in, or is it something you’d like to kind of stick with your mutual fund wrapper with?
Jeffrey Higgs:
I think it’s difficult, and it’s something that we are still trying to work through, as far as how to figure out which ones work, which ones don’t, which ones we like, which ones we don’t. It’s funny to me, because the sort of non-transparent ETF is, I mean, it’s not like mutual funds are super transparent. But somehow I guess we’ve sort of put this title on ETFs, in that sense. And so I don’t think it’s such a bad thing. I think that active management is important. I always say to people that when I’m talking to other advisors, I think you need to really toe the line with talking down active management. I think that was a big thing in our industry for a couple of years. And you’re charging a fee to actively manage your client’s portfolio of passive investments. So if you are not either providing other services where they feel they’re getting a benefit outside of just pure investment management, then if your client’s sophisticated or intelligent, they may see through the idea of you’re actively managing a passive portfolio.
Jeffrey Higgs:
So I do think active management is important. And for me, it’s more about trying to understand which ones work, which ones don’t, similar to the idea of, which mutual fund managers have good track records, which ones don’t? Why would we be picking PIMCO, versus American Funds, versus MSS? Why are you making those decisions? So I think the same thing will go with ETFs where it’s, “Okay, how can I understand both what they’re doing, what they say they’re doing, what they’re actually doing, and how their performance stacks up, relative to a risk adjusted return, or a peer return, depending on the particular ETF you’re looking at?”
Scott McKenna:
Cool. We touched on older advisors are weary of using ETFs. I’d like to kind of expand that and understand maybe the different kinds of advisors. So we talked about older advisors being weary of using ETFs, right? But I wanted to expand maybe the different kinds of advisors, how do they differ and do business?
Jeffrey Higgs:
From what I see is I find that older advisors, I think it’s a lot for them to get their head around. I mean, I feel like just with how much ETFs have changed in the last five years for me sometimes, it’s hard to keep up and it takes more than just kind of half paying attention. So I think that for a lot of them, it’s not something their clients are asking for, so they’re not necessarily paying attention. But at the same time, I know in my own experience, the easiest thing to do to get a new client is to find someone who has a bunch of mutual funds in their portfolio, because they tend to be not looked at, they tend to be a little bit overpriced, relative to an ETF. And so it’s a pretty simple setup.
Jeffrey Higgs:
So I think that even though it’s not something they’re familiar with, it’s something they need to get familiar with in order to retain business. And I think that it will give them the edge in the longterm, but it’s hard. I think that they’re more used to a commission-based product. I mean, it kind of, maybe in some ways, mirrors what I talked about earlier with younger people being more fee conscious. It seems like younger advisors are more understanding of how a fee-based plan is going to be the best thing for both the client and the advisor, in terms of trying to align their best interests.
Jeffrey Higgs:
If you’re selling a bunch of commission products, typically, the first three months are the most important than after they’ve bought the product, and then it’s kind of, move it on and go to the next person. Whereas, if it’s in an asset based account where you’re charging an annual fee, I think that that tends to help the client the most, because they’re constantly needing to be supported, and it helps the advisor because it keeps the client’s best interest in mind, which is ultimately why, in my opinion, you should be doing this.
Scott McKenna:
What are some steps an older advisor wakes up and now they want to get started investing ETFs? What are some of the first steps, do you think, to one, start learning about them and then picking the right ones? What are some actionable steps that they could do?
Jeffrey Higgs:
I think like anything, it’s probably best to read, speak to other people who might know more. So whether that’s, if you’re at a big office, speaking to younger advisors who might be using ETFs would be more familiar with ETFs. Obviously, trying to find stuff from different news outlets so you can see, and read about, and understand, and just learning how they work. I mean, I remember, I don’t know what it was, to be quite honest, but a ways back I remember how the first person that explained to me how they are able to not take capital gains within the ETF because of the way that they could basically substitute the stocks, rather than sell and buy and sell the stocks. They’re substituting and sort of trading the stocks, rather than selling one and buying another, and how that helped with the tax efficiency.
Jeffrey Higgs:
And that was eye opening to me, because that’s something that I’ve always had sort of a keen interest in, is trying to help clients keep their tax rate low, and something like that is really, really important. I mean, I remember that one of the first things I did when I first started was in 2008, was trying to help clients get out of mutual funds that were going to send these big capital gain distributions, even though the client suffered 30% losses. So I think that just talking to the right people and understanding all the benefits that are there with ETFs, both in terms of cost, in terms of tax efficiency, is a huge thing. I think that what you guys are doing is awesome, and I’ve never found Morningstar to be particularly helpful with sorting through ETFs.
Jeffrey Higgs:
And that was always something that I just felt like it took me too much time to figure out what I should be doing with ETFs in certain… Especially when it wasn’t something that was sort of down the middle, traditional type of sector or allocation. I always found that it was really hard and you try your best to find stuff, but there isn’t a place to just get the filters, run them. You’re running into articles that say these are the five best emerging market ETFs, and probably half of them are paid for or sponsored or something. And you don’t really know what’s real or what’s not real. Whereas, the platform you’ve built is something that, it’s just really easy. I love being able to have the other names that are right there, that are most similar to the name you’re currently looking at.
Jeffrey Higgs:
So I just really appreciate being able to go through and find what it is that I am looking for, and then add a couple more items pop up. And then I can just get sort of down a little bit of a rabbit hole sometimes, even on there, because you can look at so many different things. And I probably think that, honestly, the best thing about it, if it was mutual funds, it wouldn’t even matter if it was ETFs or mutual funds. But just the way it’s presented is very simple. It’s not a lot going on. It’s something that’s easy to show a client, or show someone what’s happening on the screen, where that can be difficult to generate that on other platforms sometimes.
Emil Tarazi:
Jeff, thanks for your kind words about our platform. I think we’re running out of time here, but something you mentioned earlier in the show, and just now as well, is the tax optimization strategies. And that’s also something that’s very much of interest to us, in terms of adding overlays on top of portfolios.
Scott McKenna:
Jeff, thanks again so much for joining us on the first episode of Speaking Logicly. Any advisers who are listening in, if you are interested in potentially checking out the platform for yourself, as Jeff said so kindly, a really great resource for you to find ETFs and construct portfolios. You can go to app.logicly.finance/signup. And if you would like a free trial, we offer 14 days. Feel free to reach out to sales@etflogic.io, and we will provide you with that code. Thank you guys for listening.
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