Speaking Logicly Podcast

Join Scott McKenna and Emil Tarazi each week as they sit down with financial advisors, ETF issuers, and other investment professionals to discuss investment research, portfolio construction, and everything else related to the wealth management industry.

Listen on AppleListen on SpotifyFull Episodes and Transcripts

I sit down with Dave Dierking, author of the ETF Focus blog on thestreet.com to discuss our favorite ETF headlines from 2020 and top trends to watch out for in 2021.

Lindsey Tewell, Head of Sales for ETFLogic joins us as guest host to talk with our newest team member Dave Connor, VP Advisor Growth, about his technology pain points when he was an advisor and our goals for advisor growth and adoption with Logicly.

Transcript:
Speaking Logicly is brought to you by ETFLogic, the leading provider of analytics, and portfolio analysis tools for financial advisors. No information within this should be considered trading, or investment advice.

Scott Mckenna:
Hey guys. And welcome back to another episode of Speaking Logicly. My name is Scott McKenna and Emil is actually sitting out today, but in place of a Emil, we have Lindsey Tewell coming in, our head of sales here at ETFLogic. Lindsey, how are you doing today?

Lindsey Tewell:
Hey Scott. I’m great. I’m glad I could finally make it on Speaking Logicly.

Scott Mckenna:
Totally. I’ve been waiting to do this episode where we can dive a little bit deeper into what we’re up to here, and what we’re working on with Logicly. So, obviously you’ve been a staple in the ETF virtual world for years and years, but for advisors who might not know a lot about you, why don’t you give us a little bit of background?

Lindsey Tewell:
Sure. So, I’m originally from Kentucky and for the last 15 years in New York in the financial services world, focused on ETFs, was at an ETF issuer for a while as a salesperson. And then, Dan and Emil, the co-founders of the company, came to me and had the idea of ETFLogic, and it really made a lot of sense. It resonated with me, being a salesperson at an issuer. They were talking about building, building tools and this platform that now it’s been three years and then we’ve transformed and happy to discuss some of our ideas and goals with you guys today. But yeah. It was just a few of us at a we-work office and now we have grown to over 15 people.

Scott Mckenna:
Speaking of the team growing, we actually have the latest addition to the ETFLogic sales team on as well, Dave Connor. So, Dave has joining our team as the VP advisor growth. Dave, how are you doing today?

Dave Connor:
I’m doing great, Scott. Thank you. Thank you for having me.

Scott Mckenna:
Of course. Super excited to have you on. So Dave, for our listeners, why don’t you give us a little bit of background on you and what you’ve been up to before joining the team here at ETFLogic?

Dave Connor:
Sure. I’ve always been in the financial services industry. I started off my career as an advisor, was an advisor for many years. And then, I moved over into the wholesaling field for a mutual fund company out of Boston. And I guess that’s really where I developed my passion for helping advisors. And so, from there kind of moved over into the FinTech side of things. And so, just real excited to be with an organization that is really trying to help advisors.

Scott Mckenna:
So, taking a step back while we’re on the topic of helping advisors, let’s talk about some of the big pain points that we see. In your mind, I’m curious what you guys think are some of the biggest pain points that advisors have when it comes down to investment management.

Lindsey Tewell:
Yeah, I’ll jump in here. So, I think there are a lot of technology platforms out there and I think it’s really trying to understand what works best for your practice as an advisor, what gives you maybe an all-in-one solution where you’re not having to go to several different platforms, knowing what works best for you to communicate with the client. And obviously you want to spend more time with your client and less time navigating technology and spending time on portfolio construction. So, I think that’s one of the pain points. What do you use? We’ve really created a robust, all in one solution. And I think, another thing that clients are facing or financial advisors are facing is really some compliance scrutiny, if you will. For example, Reg BI and suitability requirements.

Dave Connor:
Yeah, absolutely. Lindsey is spot on with the tech stack. And there’s a recent Broadridge study that says 43% of advisors, they will leave the wirehouses in [inaudible 00:04:03] for outdated technology. And so, I think we’re seeing this big shift where tech has become increasingly important for automation and clients are demanding it because they want the advisor to have the latest and greatest in technology out there.

Scott Mckenna:
Totally. But in my mind, sometimes the flashiest new thing is not the one that’s going to be the best for the advisor and the end client, right? When you’re thinking about it in terms of technology, you need to make sure that you have a system that flows nicely.

Lindsey Tewell:
Yeah. You’re spot on. And that’s why we’ve spent so much time in the last few months, working on integration for advisors to pull in their client accounts from different custodians. And streamlining the process going from, “Okay, let’s screen this universe and find an ETF or a mutual fund or a security. And then how does that fit into the portfolio and building the portfolio there and getting all the different risk metrics and cost and exposures that you need for your diligence reports to advisors?” And then being able to report to your clients and client reviews and meetings on the fly. So, that’s been a very important part of what we’ve built for the Logicly Platform.

Scott Mckenna:
Absolutely. So Dave, I wanted to jump back to that stat you mentioned before about advisors at broker dealers, thinking that their tech stack wasn’t up to par. Do you think that that is fueling a lot of the trend that we’re seeing with advisors becoming independent? And as a technology provider, how can you capitalize on that trend?

Dave Connor:
Yeah, no. You’re absolutely right. I think one of the things that we focus in on is, there’s been this evolution of the advisor, right? There’s, they’ve kind of switched over from using model portfolios and a lot of them now are portfolio managers themselves, and they’re deciding to construct their own models. So, one of the things that we can help out with, and I think one of the things that advisors are really looking for is Lindsey mentioned earlier, this all-in-one, cohesive technology that allows an advisor to access model marketplace, find their models or that are based on their investment objectives, and through our portfolio analysis tooling, they can construct their own models.

Scott Mckenna:
I couldn’t agree any more with you, Dave. I also wanted to touch a little bit on the regulatory challenges that advisors face and how we might be able to help out with that, right?

Lindsey Tewell:
Yeah. So, the topic of compliance is never fun. And as most of you are aware now with Reg BI, there are some additional requirements that advisors have to adhere to. For example, a suitability report or a cares kind of checklist, if you will. And so, are you going to create that yourself or are you going to outsource that, what’s the best way to do it? And with the Logicly Platform, using our portfolio analysis tool, you’re getting that due diligence report that meets those suitability requirements. So, it’s an easy way to have that conversation with your client, but also to keep a trail of the decision-making that you’ve made and why you did so, and it’s timestamped and saved, so, God forbid you’re audited, it’s all in one place on the Logicly Platform.

Scott Mckenna:
Well, my hope would have been that advisors were picking the right funds for their clients regardless. And now this is just a little piece of extra red tape for them to go through in terms of documentation, right? I want it to move on though, and talk a little bit about our overall advisor strategy. So, I know we had started off talking with ETF issuers and we quickly realized that our platform was really helping them answer questions that they were getting from advisors, right? About how their funds trade, how do they compare against their peer groups?

Lindsey Tewell:
Yeah, thanks Scott. I think you’re spot on that we had the tools for issuers and now we said, “Let’s level the playing field and let’s give the advisors these tools.” So I think that’s one thing that we’ve definitely been evolving. And I think the evolution going forward is, we’re giving you analysis on, historically, on your portfolios, or helping you screen for ETFs, but now we want to create what we’re calling a portfolio coach. So we can give you suggestions on maybe it’s time to harvest and tax loss, or maybe you should look at putting this different risk overlay on your portfolio, or maybe this ETF is down and maybe consider this competing ETF. So, giving you ideas to help enhance your portfolio for the future is really kind of the evolution of where we’re going with the Logicly Platform

Scott Mckenna:
And Dave, what are your thoughts?

Dave Connor:
I think it all starts with, any successful platform or technology it’s only as good as, like you mentioned, it’s only as good as what the user’s capability is. And I think one of the things that we’re really focused in on is providing a concierge service to the advisors that come onto the platform. Because like you said, Scott, there is that those, those levels of sophistication. So, we’re committed to working with the advisors who want to have complete access to them and they know what they’re doing, everything is there for them. But for those advisors that are looking to, for help, we will work with them one-on-one. Because the adoption of the platform is really the key. So, we’re committed to, to provide that concierge service.

Lindsey Tewell:
So, Dave spot on. The value of customer services is definitely number one in our approach. We know that there are a lot of different tools on our platform, so we can be all or we could be one. So, we take a consultative approach when we’re speaking with advisors and understand what their needs are and we can tailor the experience accordingly.

Scott Mckenna:
And on the topic of what advisors need. Let’s talk a little bit about the press release, right? I think there were a lot of awesome enhancements that we announced rolling out onto the Logicly Platform today, along with adding Dave to the team. Lindsey, why don’t you give us a little rundown on what those enhancements are and what it means for advisors using our platform?

Lindsey Tewell:
So, some of the things that we highlighted in the press release today were some new capabilities, such as advanced charting. We are also adding mutual fund support, which has been something that financial advisors have asked us to add. So, that should be integrated pretty soon. And another thing that we really focused on is the model marketplace. We have some big partnerships with some of the issuers that have models available, and we really thought it would be great to create a place where advisors can come and sift through that universe of models and select based on their investment objectives or certain parameters, and then pull that universe down to something manageable and then quickly pull that model into our portfolio analysis tool. Other integrations include with different custodians, so it’s easier for you to pull your client’s accounts onto the platform. I think those are some key points we wanted to make in the press release too.

Lindsey Tewell:
One of the other things that we didn’t highlight in the press release is that we’re constantly updating our visualizations and our charts to make it more appealing to advisors and make it more friendly for advisors to use with their clients.

Scott Mckenna:
I’ve heard from so many advisors that they’ve love how it looks and that’s because it’s a platform that we developed for the 2020s, not the early 2000s, right, like some of the competing products that advisors are using right now. And Dave, curious your thoughts on this, but how important is it to have the right visuals and displayed in a fashion that clients, it makes it easy for clients to understand what the advisor is showing them?

Dave Connor:
Yeah. It’s extremely important. It always has been. One of the challenges that I had when I was an advisor, and I’m sure very out there can relate to this, is that discussing the investment choices, especially in a downmarket, that could become difficult. So, having the right visual tools be able to explain to a client, this is one of the things that I was taught early on was, “Know what you own and why you own it.” Right. And so, I think that is time tested, as investment choices have changed. So, it becomes extremely important for clients because they react, they react based on what they see, and they’re looking for that advisor to give them that comfort in downmarket, but also to know why they chose the investments that they did, and then be able to, from an advisor standpoint, to be able to document all that. That makes their job that much easier. So, yeah. It’s critical. It’s extremely important.

Scott Mckenna:
Yeah. I hear that from a lot of advisors as well. But Dave, touching on your experience being one, is Logicly something that you would have used back in the days? And if so, what are some of the use cases that you personally would have used the platform for in terms of streamlining your investment research workflows?

Dave Connor:
Yeah. And the day wasn’t that far back Scott. So, one of the things that I love about our platform is the ability to show that all the different risks and costs, the factors, all the things that go into making a proper investment decision. So, use case for me would be the client meeting, whether that’s on a quarterly basis or an annual basis, having a tool like this to be able to show not only the performance, but again, why you chose the investments that you did, to know the logic behind everything and be able to document all of that. It makes the client meeting, again whether that’s quarterly or annually, go that much smoother.

Scott Mckenna:
That’s some really great insight, Dave. And I think it’s really valuable to have someone like you on the team because you’re able to give us a lot, that much more insight into the mind of an advisor, right, which I think is going to be huge for the growth of our platform. But Lindsey and Dave, I’m curious to hear your thoughts. What are you guys most excited about as we’re closing out the year of 2020 and moving into 2021?

Lindsey Tewell:
So, number one, we’re really excited to have Dave and have more of a focus on the advisor growth from bigger partnerships, with larger RAs and an advisor. So, very happy to have someone with his level of experience, join my team. And then, from the platform perspective, as I mentioned earlier, we’re really excited to take this to the next level of not only just analyzing historical performance of our portfolio, but being a coach, providing different ideas for you to enhance your portfolios. So, continue to look out for new developments there.

Dave Connor:
Yeah. And for me, I’m just super excited to be on board. And I think that one of the things that I’m really looking forward to is, what we’ve been doing with issuers for many years, being able to show advisors that capability and putting it in their hands to make some of the decisions that they do and build their own portfolios. That’s really exciting to me, but I’m also just eager to get out there. Like Lindsey said, hopefully there’s some partnerships that we can form that to help power advisors at these firms because that’ll give them more tools to make the right choices. So, I’m excited about that. I’m also excited about 2021, just to get out of 2020.

Scott Mckenna:
Dave, I couldn’t agree more. It’s felt like such a long year, so much has happened. Good things for us though, in terms of our business. We’re super excited to have you on. Lindsey so glad you could finally make it on Speaking Logicly. For advisors who are all pumped up and ready to try out the Logicly Platform for themselves, you can go ahead and request a free trial by going to Logicly, spelled L O G I C L Y.finance/freetrial. And we look forward to providing even more Speaking Logicly episodes where we speak with advisors and other industry thought leaders throughout the rest of this year. Thanks again for listening.

In this episode, I sit with Emil Tarazi to discuss how financial advisors can better navigate the ETF ecosystem and screen for ETFs.

Transcript:
Speaking Logicly is brought to you by ETF Logic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Hey guys. And welcome to another episode of Speaking Logicly. My name is Scott McKenna.

Emil Tarazi:
I’m Emil Tarazi.

Scott McKenna:
And today we’re doing a read along or walk along if you will, episode, where we’re going to talk a little bit about screening for ETFs. So, if you guys are listening to this on any of the podcast streaming platforms, we definitely recommend if you’re going to listen to the audio, to also jump on the platform. So, if you want to go ahead and sign up for a free trial to do that, while you’re listening to this, go to app.logicly.finance/signup. Enter your details and then what you’re going to do, is actually drop in a promo code where it asks you, if you have a promo code, say yes, you have a promo code and enter code logicly, L-O-G-I-C-L-Y 2020. And that way you guys can pull up this stuff as we’re talking about it.

Scott McKenna:
So as we’re talking about ETF screening, some of the best practices, things like that, we’re going to be showing it off the platform, so we want you guys to have a visual while we’re doing this. If you guys are watching on video, no need to do anything, you can sign up if you’d like, but we’re going to show it to you in the screen share.

Scott McKenna:
So, Emil, why don’t we jump into it? What you’re going to do is actually drop in a promo code where it asks you, if you have a promo code. Say yes, you have a promo code and enter code logicly, L-O-G-I-C-L-Y 2020. And that way you guys can pull up the stuff as we’re talking about it. So, as we’re talking about ETF screening, some of the best practices, things like that, we’re going to be showing it off the platform, so we want you guys to have a visual while we’re doing this. If you guys are watching on video, no need to do anything, you can sign up if you’d like, but we’re going to show it to you in the screen share.

Scott McKenna:
So, Emil, why don’t we jump into it? Number one, I think advisors often come to us because they are curious about ETFs and they might be primarily mutual funds. So, on a webinar that we hosted yesterday, I would say about 30% of the people that were on, we had about a hundred registrants, they said they only used about 15 to 20% of their portfolio in ETFs. So they said they had jumped on to learn a little bit more about ETFs. So I wanted to do this bonus episode of Speaking Logicly, to help people like that out.

Scott McKenna:
So, before we dive into ETF screening, Emil, why don’t we just talk a little bit about some of the advantages that ETFs provide over traditional mutual funds or investing in single stocks?

Emil Tarazi:
Yeah. Thanks, Scott. Well, ETFs are, I guess, much more newer, a newer product than mutual funds. Well, obviously the first ETF showed up in 1993, mutual funds have been around for a couple of decades before that.

Scott McKenna:
So let’s talk about how to pick ETFs. So, I’m an adviser, I was traditionally and all mutual funds. Okay, now I’m interested in getting started with ETFs. Where do I start?

Emil Tarazi:
Yeah, that’s a good question. It is a challenging environment, because there’s 2300 ETFs in the US and counting. And the innovation… So, if you think about ETF as an envelope, as a wrapper, and what you can put in there, people are getting more and more creative with that idea. It started out with just equities, we went to commodities, we went to fixed income, and now we have active strategies embedded in ETFs. We have fund to funds, we have what’s been really important and a lot of traction with ETF [inaudible 00:04:29] this year, have been the options-embedded strategies. So, things that sometimes they call them defined outcome, where you can get exposure to the SNP, but up to cap in exchange for some sort of downside protection.

Emil Tarazi:
And these are all super interesting products. On the surface, it might not be easy to understand which products are best for your portfolio. What we try to do is organize all this data, bring all the different metrics that you might be interested in, especially when you’re figuring out which ETF to put in your portfolio, we bring all of these metrics into one place, and then you can easily compare and contrast.

Scott McKenna:
Awesome. So, why don’t we jump into the ETF screener and take a look at some of the ways that we can break down and screen for ETFs?

Emil Tarazi:
Yeah, absolutely. So the screeners, basically the future is on the Logicly platform, which Scott mentioned the URL earlier, it’s app.logicly.finance. And when you go on the left navigation, you can hit screener and there’s two approaches to the screener. The first is the approach that you see right away, which is what we call the predefined filters. We’ve basically grouped ETFs across all different types of categories and it gives you a quick, easy way to see for example, if you care about technology, well there’s eight US technology sector ETFs, and there’s a $100 billion benchmark to it. You can do this across a lot of different themes, dividends, factors, we grouped them all by region, by large cap market, cap exposure, by in the fixed income space, by credit quality investment grade versus high yield. So this is all easy to navigate and explore ETFs.

Emil Tarazi:
But what we really want to show you today is the detailed screener. So, if you click on detailed, what you get is a real powerful tool. First thing you’ll notice is there’s about 9,000 funds in our database. And the reason for that is that we’re a global database. So everything… We’ll focus on the US today because that is the biggest market for ETFs, but everything we do, we do with a global tilt, because this platform is being used around the world right now, for screening ETFs in the 50 plus countries where ETFs are traded, namely in Europe and in Asia Pacific. So Japan, Australia, China, Hong Kong, et cetera.

Emil Tarazi:
So, you want to filter down, you’ve got, I guess on the left side, you’ve got your filters and then on the top you’ve got your views. The left side can help you filter by almost any metric, any important metric. And on the top, you have different views. We can go through them a little bit, but you’ve got your standard metrics. The view is essentially group different metrics together. So we’ve got, for example, a risk button. We’ve got a returns grouping, we’ve got a volumes grouping. We’ve got… Those are all quantitative numbers. We also have a lot of qualitative characteristics of the ETF. So if you want to know, for example, its benchmark, or its classification, we have groupings for that.

Emil Tarazi:
So, one example is, if you wanted to look for all SNP 500 benchmark ETFs in the US, that trade in the US, you would go to the left navigation, you would go to general, you would under trading country, you’d hit US. Those 9,000 funds now whittled down to about 2,700. So that’s ETS plus some other funds-like structures that we monitor. And then, if you wanted to filter down by index, you would go to the benchmark filter and it’s conveniently at the top, because it’s one of the biggest benchmarks. So you hit on the SNP 500. So then you would filter on SNP 500, and there are a couple SNP 500s. Some are net total return, total return, but you just type in SNP 500 and there’s a couple. So, you just click on a few of them, and you’ll see there is about 40 funds that track that. So you’ll notice there’s innovator funds, I was talking about them earlier, they’re called defined outcome options embedded strategies.

Emil Tarazi:
You obviously have the short ETFs, that also track, like the ProShares Ultra, or ProShares Short. So you can get it all here. Let’s see. Let’s try to think about particular use cases. Let’s say that you wanted to look for ESG names that have, first of all, the largest ESG names, and then maybe double up with names that have had strong flows this year.

Emil Tarazi:
So the way you do that, is again thinking about the qualitative aspects of filtering. You can actually go down to… Well, actually in the general tab, roll down to tags… Actually, before we do that, we should probably reset our filters. So again, going back to trading country US, and then filtering down again, down in the tags section you can type in ESG. So we’ve got about 61 funds in the US that have ESG characteristics.

Emil Tarazi:
You can see that the AUM is benchmarked here. So, we’ve got about 10 billion [inaudible 00:11:21] 10 billion fund. It’s the I-Shares, ESG. UEBTF, actually the top three are [inaudible 00:11:29] funds, one’s a USA, one is emerging market, one is EFA. So let’s say we wanted to get a better feel for these funds on flows basis. So we could look at both grouped and trailing flows. So trailing looks at fixed periods back in time from today, and grouped looks at month by month group flows.

Emil Tarazi:
So, this gives you a feel for how much money is going into these funds. Again, ESG is one of the bigger funds you see over the last three months, it’s had $2.6 billion in inflows, and all of these columns are sortable. So if I want to say, “Okay, on a three-month basis, show me the biggest flows or inflows.” Just click twice and ESG usually remains on top actually, the three funds, because they’re the biggest, also have had the most flows.

Emil Tarazi:
If you wanted to see, for example, which three year timescale, if any funds had outflows, for example, surprisingly not much. So, if there’s a blank it means maybe those funds haven’t really been in existence, but yeah, on a three-year scale, there’s been no ESG funds with outflows. [crosstalk 00:00:13:03].

Scott McKenna:
So, talking about ESG since we’re on this tag, I think a lot of advisors that I’ve spoken to are a little bit confused, and I understand why. There’s a lot of different ways that people define ESG. Right? And metrics that particularly they care about. So, looking at this list of 61 funds, obviously they have ESG in name and that’s why we tagged them, but how do we really know how environmentally, which is the E, right? Socially, which is the S, or governance, which is the G? How do we know if those really stack up to those values that we’re talking about when we’re talking about ESG, whoever it is, however you define it?

Emil Tarazi:
Yeah. Great question. And the short answer is there is a tab for that. So, there is an ESG view. Let’s think about a little bit of a workflow here. So let’s say you did want to drill down on some of these funds and understand their real ESG exposure. So again, we are filtered here on this ESG tag, clicking here on ESG will bring up a whole host of different ESG metrics. So I guess, first of all, you can see how many securities are in each basket. So, what we’re doing here is we’re actually taking the individual securities in each ETF, and then using our individual stock ESG metrics in our database, and then multiplying that by the basket weights and then displaying that data here on the screener.

Emil Tarazi:
So what that allows us to do is get, again, those E environmental, social, governance scores on an aggregated portfolio weighted basis. And then you can… Let’s filter this data a little more, because this ESG viewing right now is stocks across the board. So one thing that we want to do is go down to classification. Let’s just focus on US. So US listed, but US exposure ETFs. So under classification, you could do exposure country and then select US. And we bring the 60 funds down to about 42 funds. And then we want to say, “Okay, well show me the one with best, let’s say, ESG environmental score.” So, what we’ll do is we’ll just click on that column and we can filter down by it. We might have to do it twice, because one of them is reverse. You want to do it in descending order. And now you have a relative ranking of those different ESG scores for these US exposure US ETFs.

Emil Tarazi:
And it turns out it’s not the largest ETF with the best scores. It turns out it’s this [inaudible 00:16:22] product, or extractors product now. The other interesting thing about this ESG screen is, there’s a lot of other columns down to the right here, which I’d like to scroll over and show you. One of the interesting things about being able to look at the basket, is now we can tag individual companies for what we call warning flags. Those warning flags, basically we’ll tag individual stocks based on certain warnings. So, here we’ve got alcohol exposure, gaming exposure, court, defense, tobacco. It’s basically looking at it to see if there are companies in these ESG funds that might have features that you may not want to be exposed to.

Emil Tarazi:
So again, let’s say filtering by alcohol, lists Nuveen ESG Mid-Cap value ETF, it’s got about 2% exposure to alcohol stocks. So those could be something [inaudible 00:17:32] or similar. There is a tremendous amount of data on here. So one of the things we should emphasize is that you can just select this Excel button here, and you can download all of this data in just a second or two, to an Excel file, so it might be a little bit easier to manipulate large amounts of data.

Scott McKenna:
Excellent. Yeah, it’s super in-depth. And I think, like I mentioned before, a lot of people have different definitions of ESG, or metrics that they care about. So being able to break that down, for instance, if your clients are religious and they don’t want exposure to pork, you can go ahead and try to edit some of that out of the portfolio too. And that’s a great value add as an advisor, because then it shows the client that you are thinking about their values and implementing portfolios that meet those same values of your investors. Right? Which I think, as an advisor, that’s a huge bonus to strengthening the client relationship.

Scott McKenna:
I also wanted to… I think we should talk a little bit about the newest feature, which I think a lot of people have been excited about. I know some advisors were asking about it and that’s the rankings.

Emil Tarazi:
Yeah, absolutely. So, rankings is a powerful way to filter along [inaudible 00:19:08]. So what we do is we basically look at all of our metrics in our database and basically across the entire global universe that we have, and we rank certain metrics in 10% buckets. So, let’s reset filters here real quick. So again, back to the default view, click on rankings. What we’ve done, is we’ve essentially looked at volume, expense ratio, performance, volatility, yield, and diversification. And we’ve ranked these six metrics across the entire globe. Now again, there’s about 9,000 funds in here. If you wanted to filter that down, what you would do is you would go to the rankings, left navigation filters, and you could say, “Look, I only care about things that are in the top 20%.” Let’s say, “I want the most liquid.” So you would say, I guess ninth rank and 10th rank. That brings that 9,000 screener down about 1,400 funds. And you just keep filtering it down.

Emil Tarazi:
So we want the cheapest funds, so lowest expense ratios. Now we’re down to 263 funds. We want the best performing ones. So, across of one year we have a one-year total return performance look back here. So, we’re going from 263 to 59 funds. And then let’s also say, before we constrain this too much, let’s look at the highest income stuff. So the stuff that yields the most on a… This is a fund dividend or distribution basis, [inaudible 00:21:10] 12 month basis. So again, let’s hit on the top 20% and it turns out there’s no funds in that category.

Emil Tarazi:
So you can’t have the best of all worlds. We might need to relax for example, that income thing. So, let’s just say, we care about the top 50, the top half of exposures. And we get down to about 27 funds now. So that took a while to filter through all that. The lucky thing is that we can save that filter by hitting save filters and then saying, top ranked US. Now that filter will show up here, if you’re logged in. A lot of these features are available when you’re logged out, assuming you’re logged in, you have customization and saved and persistent things that you can come back to when you need to.

Emil Tarazi:
And right now we can’t really see what these actual values are, so that’s where the custom view comes in. So again, let’s go back into, [inaudible 00:22:24] top, you’ve got this add button, which allows you to create this custom view. I can go in here and say, top [inaudible 00:22:36]. And I would say, “I want yield.” So let’s look at that trailing 12 months, regular yield. I want the name of the ETF. I want as AUM, [inaudible 00:22:54] AUM. I want… Let’s see… It’s volume. So like ADV on a 20 day basis. And we didn’t filter for volatility, but let’s say we want to also look at the 20 day risk numbers. So you hit apply and that basically saves that custom metric. It saves up there on the view. And now you can see your top ranked US listed names and actually see what their yields and volumes in AUM are. And then if you want to download all that, it’s quite easy, you just hit the Excel button right there, and in a few seconds you get that.

Scott McKenna:
So what other metrics, I know we jumped to the rankings, but what other metrics do you think are important to look at when we’re talking about screening for ETFs?

Emil Tarazi:
Yeah. So I think one really powerful concept here is the NAV, the NAV tab. So in the NAV tab, what we do is we obviously get daily NAVS for these funds, but we also get the closed prices. And what we can do, is then start comparing the NAV versus the close and calculate the premium and discount. So, as we’ve discussed on maybe on some previous podcasts, one of the most important things and understanding the cost of an ETF, isn’t just the expense ratio, it is also where you’re trading. How much it costs you to get into that name and how much it might cost you to trade out of it when it’s time to rebalance or divest from that? So a premium and discount basically says, at the close, how far was that name trading, versus where the fund was actually priced, versus its [inaudible 00:25:05] price?

Emil Tarazi:
Obviously these are super liquid names. They seem to vary across… There’s some fixed income names here, there’s some large cap names. We should note that this is global, not just US listed. But when you go, I guess the field is a little bit off the screen here, but it was going off to the right, you’ll actually see the calculated premium and discounts. So green number means that, in this case, spies trading at a slight premium, and this is tiny, this is about three basis points. Versus some other names are creating a slight discount. So for example, this one’s trading in at almost 40 basis points discount. These are all fairly… At what point do you start really worrying about how big a premium or discount will cost you? It depends on the market, it depends on the ETF, but generally something in the single digit basis points is fairly good.

Emil Tarazi:
If you were to ask me, without knowing, what the ETF was tracking, obviously things that back international names might have wider spreads, wider premiums or discounts. Also in the fixed income space, ETFs tend to be more liquid than the underlying holdings. So sometimes you may see disconnect there.

Emil Tarazi:
If we go and look at… This is actually a little interesting. This UK listed version of the SNP 500 Vanguard fund has a much larger discount. Well that’s because the Vanguard fund in the UK is closing in roughly morning to noontime in the US and the US market closes at four. So that premium or discount in this particular case, it’s a focus of the timing discrepancy.

Emil Tarazi:
So that’s a little bit of [inaudible 00:27:34] stuff there. But in summary, these metrics are quite important. And you want to watch out for one of these get very large.

Scott McKenna:
Excellent. And I also want to touch on risk. I think when we’re talking about advisor technology, risk is one of the points that is always coming up. I think advisors use a lot of risk tolerance tools, risk questionnaires, things like that. So how do you screen for ETFs using risk metrics?

Emil Tarazi:
Yeah. So, our risk metrics today are the basic things that you would expect. We track volatility along many different time dimensions. On a 20 day basis right now, spies trading at about 16% ball. I think, obviously calculating volatility is the most accepted way of looking at risk. Now there’s a lot of other risk metrics that can help you better understand what kind of risk exposures you’re getting. We’re looking to add more and more of those over time. So, what you see here, we have about 150 metrics at the moment, across all of these different views and groupings. We’ll be adding more risk metrics in time, so things that you may care about. For example are, a sharp ratio, which is a risk adjusted return. So it’s return over risk, but it’s also thinking of it as a normalized return score.

Emil Tarazi:
Also, looking at draw down metrics, understanding in a draw down, peak to trough, how big was the drop? Generally, you want to seek investments that mitigate the rollercoaster ride. Obviously, all of these things all tie back to simple volatility metric, like we have here. And by the way, all these metrics update regularly. So, whenever you see these numbers here, they’re up to date using the latest information that we have available.

Scott McKenna:
Perfect. I think that pretty much covers overview of everything you can do on ETF screeners. I do have one question. So let’s say I’m an advisor, and I wanted to look at some metrics from, let’s say risks, so I want to look at the 40 day volatility. I want to look at the year to date returns. I want to look at, let’s just say, the rankings of costs, the expense ratios. How can I get all of that in one view? Because there’s so many tabs, but I just want to look at three or four key metrics all at the same time. How can I do that on the platform?

Emil Tarazi:
So yeah, Scott, the easy way to do that, again is just adding a new view. I think this is a really powerful feature. We recognize that there’s 150 different data points here and probably in the next couple of weeks, like I mentioned earlier, we’ll be adding more. I wouldn’t be surprised if our number of data points doubles in the next month or so. And again, we’re looking at adding tracking error, adding deeper and more interesting risk measurement metrics. We’ve got ESG metrics now, we’ve got basket analytics. The basket analytics alone are so powerful, because they really allow you to dive into the basket, see what the underlying exposures are, get concentration scores and diversification scores on the basket. So, obviously tons and tons of data, luckily, easy way to bring all the data and data points you care about in one view, save that view when you’re logged in and then download the data in Excel, if you’re comfortable in Excel.

Emil Tarazi:
So, to get to where you wanted to, let’s just say, let’s bring up my custom view. You said, “I want some volatility numbers. I want AUM. I want to know what the benchmark is.” So I’ll put benchmark name. Let’s look at return metrics. So let’s say return over one year. We’ve got six month, three month, one month, and then year to date. So I want to look at one year and year to date. Let’s look at flows. So you could do again, group flows or trailing flows. So, let’s look at year to date flows and let’s look at flows that are in this current month. So, that’s this past October I suppose. And if we’re not sure, we can just keep scrolling down. Oh yeah, let’s add AUM. Let’s add NAV, last close price and the NAV price.

Emil Tarazi:
And then we just hit apply. And all that data updates in about a second. You get all the metrics you need. If you wanted to clear the filters and get everything, you can get all that data, almost 9,000 funds and counting, and see what are the most volatile names? Oops, I might have to click on my custom view again. See where the NAVS are. The interesting thing as well, is for people who are interested in the global data, every price is normalized to USD at the moment, in the future, we’ll be normalizing it to your local currency settings. But this way you have an apples to apples comparison. For example, if you’re looking at flows or looking at AUM, you can easily compare everything, because it’s in dollars.

Scott McKenna:
Awesome. Perfect. I think that wraps up helping advisors better screen for ETFs. I think next time we can jump into, let’s say, once you’ve narrowed down and you have two ETFs, diving into that comparison. We’ll save that for another day though.

Scott McKenna:
So thank you guys for listening. And again, if you didn’t have a chance to hop on the platform and check out some of the stuff that we’ve been talking about and showing, you can go ahead and request your free trial. Go to app.logicly.finance/sign up. Enter your details. Go ahead, check yes for have a signup code. And then go and enter the code logically, L-O-G-I-C-L-Y 2020. Confirm the end user agreement and then sign up, and you’ll be able to access the ETF screener that we just showed you. And if you guys have any questions or need help, feel free to reach out to me, I’m happy to do a one-on-one demo with you guys. My email is scott@etflogic.io. If you want to reach out to Emil for the more technical stuff, Emil’s always happy to nerd out with anybody that wants to chat with him. So you can reach out to him at emil@etflogic.io.

Scott McKenna:
Thanks again, guys, for listening to Speaking Logicly. If you’re tuning in through Apple, Spotify, or any other podcast hosting platform, again, you can watch these videos now on YouTube. So we have a YouTube channel, just go on YouTube, search Logicly, we have a channel. Like, subscribe, follow us there. We’re actually…

We sit down to discuss the launch of our latest ebook, and how important it is to provide education around ETFs to advisors.

Transcript:
Speaking Logicly is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Hey, guys. And welcome back to Speaking Logicly. My name is Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
Today, we wanted to talk about something that we’ve been working on for the past couple of months, and that is a special ebook that we’re putting out. So Emil, why don’t you tell us a little bit about the ebook and what you’re most excited about?

Emil Tarazi:
Yeah, look, the ebook, we’ve been working on it for a little bit now, and it’s a collection of different articles that our team has written essentially to guide advisors around how to use ETFs and find them on our platform.

Scott McKenna:
Awesome. Why do you think it’s so important that we’re putting this ebook out?

Emil Tarazi:
Well, I think there’s just a wealth of different choices out there when advisors are building portfolios or allocating assets for their clients. And there’s just a lot of gotchas around costs, total cost of ownership, taxes and tax loss harvesting. Obviously the backdrop of the markets is a massively shifting risk landscape. The markets economy that we’re in now is very different than the economy from nine months ago. So, how do you navigate this new world? How do you do it with the right tools?

Scott McKenna:
Let’s talk a little bit about the goals for the ebook, right? I think putting it out there, there’s a number of reasons that we’re doing it, but I think the most important one is to help teach. CE, continuing education credits, offering those through our webinars is an important aspect of what we’ve been doing lately, but we wanted to take it a bit further and create a resource for advisors to help out with some of the other stuff that maybe we haven’t gotten a chance to do on a webinar, that we haven’t dived too deep into.

Scott McKenna:
I recently saw a chart on Twitter the other day that says, you always want to out teach your competitors. And it was basically a chart saying, you can sell, you can sponsor, you can promote, but it’s never going to have the same impact as if you teach.

Scott McKenna:
I think the importance of that is really around creating value for your clients regardless of it being through your product. And so if you recreate value around this ebook, I think that’ll kind of drive a community that we’re looking to get through our platform.

Emil Tarazi:
Yeah. I mean, that’s spot on, Scott. I think we understand a lot about sort of the quantitative aspects of building portfolios, how to look at risk, how to look at returns, how to look at costs, and tax loss harvesting.

Emil Tarazi:
First and foremost, what you said, it’s an educational resource that we’re putting out there to help advisors navigate this world. Our obviously secondary goal is to let people know that a lot of the things that we’re talking about in managing your portfolio, you can do through the Logicly platform. We’re not telling you to use the platform, but it will make your life a lot easier when you’re thinking about all the different aspects of what it takes to manage a portfolio of assets of ETFs specifically.

Scott McKenna:
Let’s talk about the first article. It’s one that me and you had worked on a long time ago when I first came on and it kind of fell away, we forgot about it, and then just dusted it off recently, and that’s the true cost of ownership. Talking about the costs beyond the expense ratio of an ETF. So why don’t you just give us a little bit of background on that article?

Emil Tarazi:
Yeah. I mean, total cost of ownership, the way that we’ve put it forward is a way of explaining a lot of the times when people think about investing in an ETF, they think, okay, well, what’s the expense ratio. And immediately you’ll sort by lowest expense ratio to highest, and you’ll say, okay, the one with the lowest is the best. But let’s put that in context. You know, if you’re talking about a three basis points, large cap ETF versus a nine basis points, large cap ETF, sure, that’s a pretty big difference relatively speaking, six basis points. But on a $10,000 investment, we’re talking the difference between $3 and $9, which of course, over time, there’s a drag, but we need to put that $3 and $9 in context against all the other costs involved. So things like trading costs, around trip, paying the bid-ask spread could be already three or four basis points right there.

Emil Tarazi:
If you go for the three basis points expense ratio ETF, but your paying three basis points to get into the ETF, well, that’s six basis points right there. We can go through all the different costs, like taxes, and dividends, and also the fund management, for example, you know how the fund is managed and whether those dividend yields or capital distributions are properly being disseminated.

Emil Tarazi:
If the fund manager, for example, sends out a short-term long-term distribution, then if that ETF isn’t a taxable account, you will pay taxes on that, and you may not want that. A lot of people go to ETFs because of that innate, inherent, embedded tax advantage. So being aware of how the fund is being managed and whether it’s paid these special short-term long-term gains or distributions, you’d want to be aware of that.

Emil Tarazi:
Anyway, that’s part of the total cost of ownership. And I think what we’ve provided is a very easy to read checklist. You can go through and say, hey, does this ETF… Is there a green check mark next to each of these points?

Scott McKenna:
Yeah. Awesome. So for article two, the importance of choosing the right benchmark, obviously when you’re searching for ETFs a benchmark is one of the first things that you’re think about, but we dive a little bit deeper in it to talk a little bit about why it matters so much and not for just the regular reasons that you might think about, right?

Emil Tarazi:
Yeah. I mean, choosing a benchmark is always important, especially when you’re running a back test or you want to see how your portfolio is performing going forward. So we’ve done a lot of work on that on the platform with the ability to create customized benchmarks that really maybe suit the style of risk exposure that that portfolios policy is following. So I think there’s a lot of important details there.

Scott McKenna:
For the rest of the articles, we kind of dove more into the portfolio analysis tools and some of the topics around there. Obviously there’s so much to cover given almost every grid that we have in that tool is almost like its own software in itself.

Scott McKenna:
One of the other really important ones that I wanted to talk about was around tax loss harvesting. So obviously this year we saw a lot of volatility in the markets. Right now, the investment outcomes that clients might have might not be the most ideal ones that they thought they would be at right now, given at the beginning of the year, right?

Emil Tarazi:
Yeah. I mean, a properly tax managed account can boost after tax returns by substantial amount. Tax loss harvesting is a way of generating tax credits that you can use and carry forward to boost those future returns. With ETFs, because there are so many of them, there’s 2300 plus in the US and counting, there’s a lot of opportunities to take losses, basically do tax pairs trades, get out of one name, get in another, that’s basically very similar, maybe not identical, but similar, and maintain your policy, maintain your asset allocation exposures in a way that stays in line with the client’s risk profile or expectations.

Emil Tarazi:
Tax loss harvesting is something that people start to think about at the end of the year because of the tax year coming to a close. But in reality, it’s also something that you should be doing constantly whenever there’s any losses. Maybe below a certain threshold, you need to have tools that can go in and look at your portfolio and see that there may be potential tax credits and suggest potential tax trades or tax swap trades that you could do.

Emil Tarazi:
The article’s goal is to talk a little bit about how to use ETFs for this and how to leverage our platform for identifying these types of trades.

Scott McKenna:
Awesome. And you mentioned the risk profile before that kind of leads into the other article that we wrote, and that was all about the shifting risk landscape and whether or not you need to take more risks to maintain income target. So why don’t you tell us a little bit more about that article?

Emil Tarazi:
Yeah. I mean, we’re certainly not suggesting people take more risks, but what we are bringing to the forefront is that income yields have dropped substantially. We’re near zero rates. The Fed just announced near zero short-term rates until 2023. So we’re in certainly a low rate environment because of the way that the economy is progressing.

Emil Tarazi:
When you think about traditional like 60/40 portfolios, that 40% of fixed income exposure is no longer yielding what it did 10 or 15 years ago. And when you look at that sort of overall income generation from a portfolio based on risk of those different components you’re basically falling short a little bit from an income perspective. Sorry, let me do another take.

Emil Tarazi:
When you look at your portfolio from a 60/40 perspective, let’s say 60% equities, 40% fixed income, what you’ve seen is that 40% portion yielding a lot less, so to maintain sort of income expectations in the future, especially if you’re nearing retirement, you may want to think about higher yielding assets.

Emil Tarazi:
There are situations, for example, looking at some preferred shares, there’s ETFs that pool different preferred equities. Preferred are kind of hybrid equities and bonds in a way. And some of these preferred ETFs are yielding 5-6% with a lot less volatility than the S&P 500, maybe a fraction of that volatility and risk exposure.

Emil Tarazi:
May be possible to shift slightly your fixed income exposures towards preferred equities. And we have some other ideas in the article that we mention.

Scott McKenna:
Awesome. And another grid that I see a lot of traffic from advisors is the factor exposures, right? And so we did an article where we broke down the factor exposures and how they’ve performed over the past year, right? So year to date going back even before the pandemic. But we were really focusing in on how they reacted once the pandemic hit. Why do you think that advisors should be thinking about factor investing? I know some of them are, but-

Emil Tarazi:
Well, factor investing is something that’s been talked about for quite some time now. With ETFs, you have, maybe you can think of it like you have all these surgical tools where you can say, I want a drop of momentum and you can pick out one of the 10 plus different momentum ETFs, and add that to your portfolio. So you almost have like this toolbox of different things that you can put together.

Emil Tarazi:
Our factor view on the world is, first of all, you need to know what you have in that toolbox already. So for example, if you’re long the S&P 500, you’re already long growth because of sort of overweight tech exposure. You want to know that. So if you think to yourself, well, I’d like to have more growth in my portfolio, well you should probably already know that you’ve got already a substantial growth exposure and adding more may overexpose you to tech. That’s the first sort of aspect sort of understanding what you have.

Emil Tarazi:
The second aspect is okay, now that you know what you have, you want to be able to manipulate it. So if you think that value is going to make a comeback after it’s been beaten down so much in these past few quarters, then we have the ability to not only go and screen for those 15 different large cap ETFs and 10 different mid or small cap ETFs, but you can compare how they perform against each other.

Emil Tarazi:
They all have different levels or different exposures of value or growth. In turn, they also have different exposures on a sector basis, on a dividend yield basis, so you want to see how all those different interactions work. So, that’s kind of what our angle is, know what you have, and then be able to navigate all these different options once you decide you want to make a move.

Scott McKenna:
Moving on from some of the topics we covered that deal with our portfolio analysis tools. We also covered an article where we talked about model portfolios, right? And as many know, model portfolios are new, but they’re becoming more and more used by financial advisors for a number of different reasons. So we broke those down in that article, but Emil, what do you think is the biggest driver, in your opinion, of advisors leveraging model portfolios?

Emil Tarazi:
Yeah, I mean, I think that advisors need ways to streamline their workflows and the rise of models is really kind of two stories. One is that relentless focus on sort of optimizing and reducing the amount of time on, let’s say, portfolio asset allocation and increasing your time as an advisor with your client and focusing on their financial planning, which is maybe a much bigger task than just portfolio and asset allocation. That’s the first driver.

Emil Tarazi:
The second driver is obviously ETFs. Models have been around for decades, but ETF models have also been around for decades, but we’ve seen more and more of them, because, again, there’s 2300 ETFs and there’s just so many ways… The possible combinations are infinite of how to put these different things together. So it’s been a great way to take advantage of the low cost, the tradability diversification of ETFs, while also optimizing your workflows in advisory.

Scott McKenna:
Some of the other articles that we covered in the ebook were a little bit more practice management related, right? The first one being about how you can leverage technology. So, in this new world that we’re in, no longer can you go and take your client out to lunch or take them out to coffee, right? So everything is on Zoom, right? Everything is video screen-sharing or via telephone, right? And when you’re having so many Zoom meetings, if you’re like us, you’re probably pretty Zoomed out. So we talked about some ways that you can go ahead and leverage the visuals from our platform or from technology in general, to kind of spice up those meetings and keep your clients engaged.

Emil Tarazi:
Yeah. I mean, you mentioned it, it’s all about the charts and the numbers. The space can be overwhelming. There’s just a ton of stuff that… You feed some system your portfolio and you can get this flood of analysis, so we want to be careful. When we built and designed the platform we wanted to make sure that the most important things were brought to the front.

Emil Tarazi:
If you’re looking for a quick understanding of what the risk and return is on your portfolio, what just the expense ratio is on on a blended basis, you can get those numbers pretty snappy. If you’re a power user and you want to drill down and look at sharp ratios and Sortino ratios, we’ve got that too.

Emil Tarazi:
We have all these little bits of information, but we’ve also kept it all very highly visual. So you’ve got pretty bar charts and pretty line charts that look really good on an iPad if you’re on the road and you want to show someone what portfolio A looks like versus portfolio B, and all that stuff gets generated out in PDFs so you could print it out and have all those visuals, have all those charts, or even just select the charts you want, so you can customize that PDF.

Scott McKenna:
The other thing that we talked about too, which I think is super important and probably advisors are already doing it, figuring out what level of understanding a client has, right? And then being able to customize what you share with them.

Scott McKenna:
If you showed a client the full portfolio analysis, I’m sure a lot of them would just be completely overwhelmed. There’s so much stuff to look out, which is great for an advisor and especially when you’re diving deep into all the different aspects, but for a client it’s kind of overwhelming. So we talked a little bit about how you can parse through that.

Emil Tarazi:
Yeah, exactly. Spot on. That understanding of how to build those user interfaces and making sure the user experience is a positive one, comes through working with advisors, sitting with them, seeing how their existing tools are failing them and figuring out how to do better. And that’s kind of how we built Logicly.

Scott McKenna:
I agree with you 100%. The other article that we talked about that was a little more practice management was talking about technology. Obviously, being a tech company, we help to streamline a lot of the investment research and portfolio construction stuff for financial advisors, but we talked about some other tips as well to kind of go through time management, how to streamline basic tasks. And one of the most important things we talked about was procedures, right? And so curious, you’re take, Emil, what are some ways that advisors could create procedures around some of the aspects of the platform?

Emil Tarazi:
Great question, Scott. One of the things that we’ve done is make it easy to pull portfolios into the system. So you can do that in multiple ways. You can upload a portfolio manually, just type in a few tickers. You can upload a CSV. But then we also connect too your brokerage account to your account that allows you to pull that portfolio in in an automated manner.

Emil Tarazi:
Once you have that in, then you can compare that portfolio against anything. So you can run it through a portfolio analysis. You can take down a model portfolio from any one of the providers that we’ve partnered with that essentially they feed their models to our system, to the Logicly model marketplace, and now you can say, okay, I want to see how my custom portfolio compares versus so-and-so’s 80/20 moderately aggressive portfolio.

Emil Tarazi:
We have a tool called side-by-side, which essentially is a side-by-side portfolio analysis. So all the different risk metrics and down to the holdings level exposures are visualized in bar charts, pie charts, line charts, in a side-by-side fashion.

Emil Tarazi:
I think when you think about, again, the advisory workflow, if you’re an advisor, you’re speaking to a prospective client, this is a tool where you can very easily load up portfolios and show them maybe how your portfolios are better.

Scott McKenna:
That kind of wraps up all the articles. For advisors who are interested in any one of these articles, you can download the ebook by going to logicly.finance/advisorsguide. Alternatively, if you wanted to talk a little bit further about any of these topics, you can also reach out to us via our website. There is a place to book a demo, and you can book a demo with our team.

Emil Tarazi:
Cool, Scott, thanks for your time today.

Scott McKenna:
Thanks, Emil, for coming on and super excited to be getting this ebook out.

Emil Tarazi:
Oh, I am too. It’s been a long time coming.

Scott McKenna:
Well, thanks again, guys, for listening as well to the Speaking Logicly podcast. For those who are listening, we are launching it via video as well, so super excited to be offering video through this Speaking Logicly series as well.

In this episode, I sit down with Johnny Sandquist, Founder and Owner at Three Crowns Copywriting and Marketing, to discuss how the pandemic has changed the way that the advisor industry thinks about marketing.

In this episode, we speak with Michael Gennawey of SoCal wealth management. We talk about the unique challenges advisors face when part of a credit union, how he thinks about portfolio construction, and also some of the parallels between investing and video games.

In this episode, I sit down with Liz Simmie, Co Founder of Honeytree Investment Management, to talk about ESG and some of the big differences between the US and Canadian markets.

In this episode, we speak with Michael Gennawey of SoCal wealth management. We talk about the unique challenges advisors face when part of a credit union, how he thinks about portfolio construction, and also some of the parallels between investing and video games.

In this episode, we speak with Michael Gennawey of SoCal wealth management. We talk about the unique challenges advisors face when part of a credit union, how he thinks about portfolio construction, and also some of the parallels between investing and video games.

In this episode, we speak with Michael Gennawey of SoCal wealth management. We talk about the unique challenges advisors face when part of a credit union, how he thinks about portfolio construction, and also some of the parallels between investing and video games.

In this episode, we speak with Michael Gennawey of SoCal wealth management. We talk about the unique challenges advisors face when part of a credit union, how he thinks about portfolio construction, and also some of the parallels between investing and video games.

We sit down with Chris Hempstead, Director of institutional business development at IndexIQ, to discuss ETF distribution and some of the challenges that ETF issuers face when it comes to getting the word out on their product.

Transcript:
Speaking Logicly is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Hey guys and welcome to another episode of Speaking Logicly. My name is Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
Today we are joined by Chris Hempstead who’s the head of Institutional Business Development at Index IQ. Chris, how are you doing today?

Chris Hempstead:
I’m good, thanks. How are you today?

Scott McKenna:
Excellent. Got to say, we’re really excited to have you on the podcast. Obviously, you’re a pretty well known name in the ETF issuer space, right, but for some of the advisors who are listening that might not know about you, why don’t you give us a little bit of background?

Chris Hempstead:
Sure, thanks. Yeah, I mean, critically, I probably made a name for saying yes to everything, so that’s probably, willingly, why some of my colleagues in the industry, we’ve done a lot [inaudible 00:01:08] over the years. I started out as a trader, liquidity provider market share, like many in the ETF industry. As automation and technology advancements in the market [inaudible 00:01:24] continued to evolve, the role of an actual trader changed significantly, and probably adversely for someone in our skillset back in the early days of ETF trading.

Chris Hempstead:
However, it opened up a massive opportunity for education, and [inaudible 00:01:46] in a consultative kind of way as it relates to ETFs and trading of ETF implementation. All of these things, there’s still so much that needs to be taught and understood on the consumer level, with respect to ETFs, and trading’s only one part of that. That’s sort of where I’ve evolved into, from origination of ETFs, from seeing in market making, secondary market making, and sales of ETFs, themselves. Everything and every part of that experience has revolved around consultation, education, and getting people comfortable with the process.

Scott McKenna:
Yeah, couldn’t agree any more. I mean, education is so, so important. It’s a big part of what we do here at ETFLogic. With this podcast, we’re trying to educate advisers based on experiences that ETF issuers, other advisers, model providers, anyone within the ETF space has had. And then also our CE Webinars, Chris, I know you’ve been on those before. That’s a big part of what we’re trying to do to help educate advisers about ETFs. Talking about education, why don’t we dive a little bit deeper and talk a little bit about ETFs, and use this episode almost as like a level two crash course on ETFs. Right, Emil?

Chris Hempstead:
Right.

Emil Tarazi:
Yeah. I mean, I think that’s touched on all the different sort of aspects of how ETFs are made, and we usually say “how the sausage is made.” We’d like to kind of do a little light walkthrough of those different stages. So, ideas for ETFs obviously start with ETF issuers, and in your former role, you were in a capital market’s desk at one of the big banks. Let’s talk a little bit about how that process starts. How do you go from, issuer coming to you, and then what’s sort of the role of the capital market’s desk? How do you help in the process of getting ETFs out there and to a wider audience?

Chris Hempstead:
Well, yeah. I mean, it’s important to know how they came to be and then walk the line as to how they’ve evolved and progressed. If you think about what early ETFs did for investors, they provided [inaudible 00:04:26] a daily liquidity vehicle on exchange. It was not available prior to ETFs in the US. Index space product [inaudible 00:04:37] mutual funding were now in this other wrapper that people could access from a trading account, and so most [inaudible 00:04:44] obviously [inaudible 00:04:45] S&P 500, the SEC providers and the [inaudible 00:04:51] a lot of those were right behind it, the [inaudible 00:04:54] products.

Chris Hempstead:
So, familiar indices was number one the big [inaudible 00:05:02]. That’s the good side of ledger. It’s something that our investment advisers were familiar with in terms of the index. The new vehicle, which is the con is the ETF, is something that they were not familiar with.

Chris Hempstead:
So a couple of things needed to happen. We needed to structure products that practically index accurately, efficiently at a competitive cost. And one that would be in some kind of a structure that would be simple enough for investors and their advisors to understand how to use them efficiently. I remember with mutual funds, you buy in a mutual fund, you get that, there’s low fees and all of this, that people can talk about in the front or the back end for instructors, but now where they need ETF what people needed to get most comfortable with was pricing of ETFs. You’re at the mercy of the efficiency, of the secretary Mark, in a sense. So the best price you can get when you’re buying an ETF price that someone willing to sell and may not be net asset value, maybe net asset value, plus some, deviations and FIPs or pennies.

Chris Hempstead:
But there are also times where you may be able to buy an ETF [inaudible 00:06:19] those books. Again, this is what market, market makers and liquidity providers compete vigorously to provide competitive exchange [inaudible 00:06:33] don’t go too far into that, but again, the tax efficiency and the cost structure of ETFs in the early days in the early days were just enough to get things to a much bigger environment, which we’re in today.

Emil Tarazi:
So when an issue has come to you, like, I know you’re at an issue now, but in your previous role and issues came to you, what were some of the major pain points? Like what were their challenges in getting out?

Chris Hempstead:
Well, you know, it’s interesting fast because generally over the, over the course of my career, the original pain points for all, we need seed capital. We need someone to put, whatever it was 2,500,000 or 5,000,000 bucks into the ETF to get first units of ETF pairs created, right? So that it would meet the listing standards on the New York stock exchange. So oftentimes that would be, somewhere between 2,500,000, and 5,000,000. And there weren’t, there’s not a long list of participants that are equipped or have the ability to provide that there were a handful of, and we would do it all. And we have a service that we can provide to become valued and build franchise opportunities for our business. So that was one of the early pounces but over time seed capital became easier to keep her both internally at the issuer level and externally with their partners.

Chris Hempstead:
So that became less of a challenge. And then the other challenge that remained and persistent for some time was having a lead market mix for, who would be out there on the secondary market, ARCA or NASDAQ for bats or XE. They would be out there bidding an offering competitively at good prices, real nice out a lot of premium and discount, ample liquidity for advisors and their clients on the secondary market with more and more products coming to market. There were there’s 2300 plus products. And at one point it just seemed like there were another 20 ETFs they were coming out. And so the writers and marketing experts were like, Hey, look, I’ll bet anything, but if it’s not trading every day, I really can’t take the time to invest in technology and the staff for products that don’t trade.

Chris Hempstead:
So the issuers VCF, we’re challenged with incentivized anchors to make a market because it became a chicken or the egg problem, right. Where, well, if there’s no really good market maker out there and my product, I’m never going to be able to convince my product because the more quality of the markets wasn’t good enough. So, again, I bring that up as there was a period of time where there were challenges in finding really willing participants in the lead Mark making arena, something that issuers need to have. I don’t think we’ve ever hit a breaking point in the ETF industry. I don’t think we’ve ever gotten to a point where couldn’t find one, everyone always won one, but it did feel like there was a period of time where, the phones were ringing and it was like a little bit about what was going to pick up their hand and say did a lot of that to the pain of a lot of my colleagues over the years who had to pick up, I guess the other thing is if their workers would come to us, Hey, look, you have some capital capabilities.

Chris Hempstead:
You have some lead market capabilities. We would love for you to be a partner. And here’s our idea. And this is when we would take out our notebooks and we, as the market niche provider, we’re looking for a few things other than the relationship aspect of it, prop itself, we’re looking for what are the costs with being able to maintain the market in this product? What are the costs to create it and redeem it? How liquid is this going to be? Am I going to be able to make up five basis points wide? Or is the design going to have to, so what are you putting into it? And so they would usually come in and treat us like clients, which we’re not. And they’d say we have an idea blow away, the S and P 500 products.

Chris Hempstead:
We’re going to be monthly or weekly rebalance. You never consider that. And we’re going to use all kinds of instruments. And our back test says, we’re going to be great. And they look at us, we’re going to be a mess. We’re not market recruiters. Arbitragers say, look, we don’t care what, but if you want us to be able to make a nice spread on exchange where the bid and offer the spread of where people can buy and sell is narrow enough to give them comfort. And we need to have comfort that we can actually manage the product in that way, because we’re the ones that are actually manufacturing when we’re creating ETFs and destroying the shares when we’re redeeming ETFs. So we need to be able to deliver to you the secure, when we’re manufacturing the shares and be able to sell those securities you are giving to us. Over the years they would learn to build a product it’s really hard to assemble products that can be supported efficiently and regularly in the secondary market by these independent market participants, which are liquidity providers and marketing who are acting independently.

Chris Hempstead:
And so we’ve seen great advancement there. I mean, so much so that someone would come to us and say, well, this is the portfolio that we’re working with. This is the index that we’re based off. And, often times we would do analysis of that index and say, well, six or seven names in this index that are extremely, extremely costly to trade.

Chris Hempstead:
These are things that are probably going to become pain points for you. Are they that important to have in your product? Because if they’re not, you may want to consider taking them out and buy them out. You might see there’s a, with an ability to make a tight market to make a deeper market, if you will. Those are just some loose examples of things. But I think to sum it up issuers by and large are very sensitive to what they put into an ETF because they want to maximize performance and alpha generation. And they also want to minimize complexity and inefficiencies. So they have to, they have to carefully balance whether they’re going to get the most performance and they’re going to get the highest amount of secondary market liquidity and efficiency.

Scott McKenna:
That’s an excellent, very thorough description. Chris really appreciate that. So moving on, now that you’re on the other side at an ETF issuer, what are some of the things that you do at index IQ and your team does to overcome some of those challenges when it comes down to distribution?

Chris Hempstead:
Yeah. I mean, that’s the other member. I kind of alluded to the fact that, managers would come to the market and be very excited about a product. We’re not investigators, right. Now I’m on the other side of the other side of the table and, distributions are a huge part of that. ETF constantly asked, who is this market? Who are you targeting? It’s not our job to sell, but who are you targeting with the product? And do you have some level of expectancy that you’re going to be successful and raising assets? And we do that because we don’t like to speak to them as closed down. There’s no big deal closes down. Everyone gets their money though.

Chris Hempstead:
And ETF closing is there’s a liquidation process. They probably liquidate the assets and return the money to the shareholders. So it’s not a doomsday scenario for investors. Maybe it may be a little bit up. I may have to be deployed into another product, but they’ll get the money. But at any rate, distribution is incredibly important and having a sound distribution plan. So, what are you selling? I am particular right now, I’m trying to sell liquid ETFs into an institutional panels, but there’s a number of challenges as you can imagine. First of all, our institution, using liquid are probably an easier access point to have a temper station, but many are familiar with them, but not using them. So there’s a barrier to getting the knowledge where it needs to be, or that you may be, probably about at an institutional level in distributed, but it could involve the clients.

Chris Hempstead:
It could involve their consultants. There’s a number of things that come into play. So the other part is the retail audience, do you have a good captive retail distribution plan? Are you going to be able to get approved on some of the major platforms like UBS or Morgan Stanley or Wells Fargo or bank of America? It’s not so easy where you just call them up and ask them to put the product on the platform and that can be sold. It doesn’t work that way. There are a number of things that need to be done. There’s due diligence that needs to be done and research. So issuers need to be thinking about that before they bring a product to market and be real in what they’re day one, month one, in year one, or even years one, two, three distribution channels looked like because they might look different than then the channels won’t look at your track record, which often times opens up more opportunity.

Chris Hempstead:
The other hurdle is asset one of the biggest, one of the biggest headwinds, one of the biggest, pieces of negative return for ETF sales is, Oh, there’s not enough in the ETF. There’s some asset levels that people like to see. So it only has a 100,000,000 dollars or only has $50,000,000. I can’t use that ETF. It’s just that. So what all that does it requires an ex conversation that the AUM and an ETF is really some insignificant measure of if the ability gives you some level of performance.

Chris Hempstead:
Now, there are some things that have happened in the ETF world where maybe they’re, they’ve been out for several years and there’s only one unit, or there’s only the minimum number of shares allowed outstanding in the ETF. And we’re really talking about, it has a few 100,000 dollars in it, the odds of that owned being owned by an individual investor, and there being some confirm there that you can redeem it or sell it, it’s almost not, most ETFs have, once they hit the .500,000 Mark, or once they hit a certain number of unique owners and units out there pretty much a going concern at them.

Chris Hempstead:
And then what you need to be thinking about is what, how much can any ETF in the strategy handle? Could you put a 100,000,000 dollars to work in a day or a week and not have it disrupt the underlying asset class? Certainly in the S&P 500, several billion dollars to fund 5,500 stocks and not really disrupt the market in any way, shape or form that being said, if you’re looking at a micro cap ETF, or a specialized micro cap ETF with a lot of less liquid stocks in it, you may not want to invest a 100,000,000 or a 1,000,000 dollars in a single day because you will have impact in the market. It could have adverse consequences to your performance. So these are all things that could be thought about when you’re thinking about product design.

Chris Hempstead:
Are you thinking about distribution? Who is your audience today? And, when we talk to clients about an ETF, not so much, it’s not always about also how big your order is, but what is, do you need to have this money? You need to have this done right this second there’s time in the market, or sort of something that you’re looking to work in chief portfolio, doesn’t have to be done with an immediate trade. These are all ingredients that lead to the perfect and right, but you can’t just take one soundbite, one piece of those, of all of those ingredients and have that answer for your client or for the advisor. You really need to ask curious questions, what are you looking to achieve? How much? When? How long are you going to be in it? That’s another one.

Chris Hempstead:
If you’re gonna buy, security and you’re only gonna be in it for a day or two, you might want to look to the most liquid or the most actively traded index products, because the idea of using something that’s a little more esoteric for going with a boutique manager who provides alpha over time, the thought of them being able to provide that out two days or then outperformance in two days is also probably not listed. So again, these are all questions that sort of need to be asked before people like us, go back with found recommendation on how to move forward.

Emil Tarazi:
Yeah, Chris, actually, you touched on something that interesting to me, you mentioned the word liquid alts for, I’d like to know more about that product, especially like, kind of what’s the pitch when you go to advisors and how does it fit in your portfolio? And maybe just for a little background, maybe you can define it for our audience.

Chris Hempstead:
Yeah. Well, I mean, look, there’s a bunch of products. I mean, the one that we talk about the most with, with respect to liquid offs would probably be QAI which is a multi-strat macro tracker, right? And it encompasses long short, global equity, hedge fixed income. There’s a number of hedge fund, like strategies, that sit within the ETF, uses the other each guest to achieve those hedge fund strategy outcomes. Look, if you were a fund, a fund manager, or if you’re a fund to fund client, if you will, if you look at you have several X bonds, your return is going to look similar to the hedge fund index. The HFRI index, this product builds off of all the components of that index and then replicate to the best of its ability strategy, that mindset.

Chris Hempstead:
So if you look over time and keep it high over and over, again, really fairly on the average performance, in their category. In terms of where it fits in the portfolio and you look at the bigger institutions, if you will pride themselves on doing lots of due diligence and hiring managers and private equity and all kinds of things that are at the end investor, the retail investor we really don’t have access. So there’s a different conversation. And when you look at retail versus traditional, when it comes to, they certainly serve a volatility dampening sort of leave, the question is what are you getting in terms of uncorrelated market above risk-free right? And so what do you expect to get from that, your best performance might be 50% greater than some other, if your worst, my 80% worse so, and that’s where a lot of this, you see a lot of the outliers making a lot of noise.

Chris Hempstead:
So for someone to implement a liquid ops strategy and their portfolio over a long term, they’re going to see some dampening they’ll have uncorrelated assets or uncorrelated strategies. Now, another area of conversation we’ve been kind of talking a lot about this year in 2020 is in transition management, with managers, closing down headphones, alot of them this year, returning capital to investors, other institutions, doing certain strategies and managers, some strategies, while that process takes time, that’s not an overnight start, the search and the due diligence associated with the recommendations that are made to these institutions can take three months, six months a year. So the question is what are they doing with their cut? While they’re sitting and doing those searches and those challenges of not being invested to AI in particular, those that are in the middle of the hedge fund searches for so well, maybe you don’t use this as a core allocation.

Chris Hempstead:
Maybe you do, but at a minimum, you might want to think about using this because this is going to, spit squarely in that, on the strategic allocation. If you can put, because it’s made up of so many liquid instruments, you can put a lot of money into a fund like that. Like you go AI and have it done very efficiently and sit on it as long as you need to and get out on the same day that you want to get up and get through no lockup in ETFs, no penalties for getting out early or anything like that. So we see multiple uses completion. We also see multiple uses for transition management. Yes. Does that sort of answer a little bit, that’s where we’re occupied right now. There will be, the merger are another emergent AARP strategy, very popular strategy in our old space. Think of that as M and A.

Emil Tarazi:
I mean, I think it’s just such an exciting part of obviously with ETFs, you can really put almost anything inside of them, and it’s just a segment of the market that’s growing more. And as there are better tools out there. I mean, as you know, what we’re trying to do at ETF logic and with the logically platform is show people how these 2300 ETFs fit in a portfolio. So that’s why I’m curious to hear, how are those all products? What’s your pitch to people because that’s also informing me as portfolio and analytics provider, well, this is how people want to see these things, right? There’s a core and satellite model, if you’re trying to build a portfolio, but people also may want to include these products to, dampening volatility or potentially enhancing income or enhancing yield in some way. So those are all different views on products.

Chris Hempstead:
Yeah. With your platform in particular. I mean, this is, again, I hinted at it earlier asking questions before you pitched a solution. It’s critically important here in Q4. We just asked you for, in one of the craziest years, any of us in our careers can ever remember in market social and science worlds, this has just been one heck of a year, and we’re only three quarters of the way through it. And we’re heading into an election cycle. I mean, this is it. It really is. It’s just like, wow, what else could happen? Eddie van Halen died. I mean, just off, like worst year ever, but at any rate. So when we look and you have to ask, well, what are you looking for? A lot of people don’t know how to start and how to make sense of all the products that are out there.

Chris Hempstead:
So, okay, fine. There’s 2300 ETFs, 500 and they’re not all high yield. So there’s, there’s hundreds and hundreds of variations of product types within certain asset classes, tilts and liens long short there’s some with leverage. So you really want to find an easy source of information to help make sense. That’s what platforms like ETF logic provide to consumers and advisors managers, right? So we look at what is coming up in the pie for the year end, we’re expecting more volatility, the market without making a call of markets going up or down, just let’s just say we expect them to be bouncing around a bit and be very headline expensive. That being said, if you are invested in a high yield and you want to take some of that high yield volatility off the table, are there other high yield products out there that can help keep you would, I would assume in ETF, logic in particular is type in high yield and see what’s available.

Chris Hempstead:
And then you can start to break down the different metrics of those ETFs. And by the way, again, if I’m leading, found purpose, notice that the first thing I’m not asking people to do, or I would never ask people to do is search for ETS by their volume or their assets. The first thing you should do is search for ETS that are designed to give you what you want, what your client wants going into this at a certain time. Do you want to reduce volatility? You want to reduce drawdown. You maybe have some sensitivities different piece. Do you want to stick? These are the kinds of inputs you’ve been, and then see what the best roster looks like when you are drafting a team, we talked through, fantasy football. You can draft last years players, but there’s a lot of good rookies and up and comers coming up that have no data associated with them other than they look good.

Chris Hempstead:
Right? Well, we all know how that works out, right? You’re going to pick them up. ETFs are, are infinitely useful. And again, I can’t stress enough. Look under the hood first, find the ones that are in a perfect world make the most sense for you. This looks like a diamond in the rough. This is a gem. This is exactly what I need. Then think about implementation. Then think about, are going to treat. Is there a secondary market in this product where I can get in and out my clients without costing them too much money in trading cards, work with your trading desk at the various platforms that you’re associated with after you’ve done your homework on some, on a platform like ETF project after you’ve done all that homework and you’ve come up with the purpose portfolio or the perfect, then go and start asking your trading desk. Hey, I’m looking at this fund. Can you do an inquiry and see how much I can get.

Chris Hempstead:
On the last day or whatever is work with the ETF capital markets. We have one, every other store in the world has one they’re very qualified and who are there to help you navigate what you don’t know. And most of the time and rating or trading world, what we know really well and the capital markets teams at the issuers are designed to help find comfort in that process. Again, it’s important to do it in reverse. Look at the funds first, find the ones that make the most sense for you in that perfect world. And then try to find a reason not to check it. I can almost assure you that 99% of the cases you’re going to find that you can actually invest comfortably in an out of nearly all 2300.

Scott McKenna:
Chris that is such great advice. And in over a 100 demos that I’ve done with advisors, that’s the exact issue that I see a lot of the times, they immediately when we’re talking about ETF screening, they go and they say, I only want to have funds that have certain volumes or, over a certain threshold. And I always try to explain to them that, that’s not the case. And they’re narrowing down the universe of ETFs that they can invest in to the point where it’s not really beneficial for their end clients. There’s a lot of great products out there that they can still get into, especially when you’re talking about a long-term investment horizon. So I really love that advice. Super helpfull.

Chris Hempstead:
Yeah. I mean, there’s look, I mean, there’s a, I’m willing to admit that, that some of the funds that are household names that sprayed a lot they’re commodified and some, they trade super like water and there’s a use for that, but remember these are passive, very low cost, plain vanilla products in a sense, we use the words plain vanilla. So yeah, you could throw, a whole lot at it and get a whole lot out of it and use it strategically. That’s fine. But that’s usually for liquidity management and it’s usually for, maybe a hedge fund or a strategist needs to pull money out of the market very, very quickly. They may gravitate to those products just because there’s a good use case for that. But in terms of building core allocations for longevity and really looking at the longer term objectives of your clients, investment cycle, how long are they going to be in the products?

Chris Hempstead:
What are they looking to get out of it? Well, how much risk do they want to have in terms of equity, fixed income in terms of high yield investment grade, in terms of small cap and micro cap versus large cap growth value, all of these things are important and you really need to figure out that you’re going to be in there for two seconds, then fine, use the most liquid, most accessible water down product that you could find. That’s, there’s nothing wrong with that. But if you’re talking about building portfolio for your clients and a strategy for your clients, it fits them specifically fits their needs, fits the objectives you’re probably going to get a lot more bang for your buck by using other products that strip out a lot of the noise that might be in the most popular products.

Emil Tarazi:
Well, okay. So as you’re getting in the final stretch here, what are the current trends that you’re seeing? And then let’s extrapolate that into the future. So where, things that are happening and things that are moving right now, I know weve spoken about active non-transparent or..

Chris Hempstead:
Yeah. I mean, with respect to active non-transparent some of us have really moved to semi-transparent really because there they’re really, none of them are really non-transparent. Right. So again, we definitely see more of those products coming to market. We see early on a patient by a few of the issuers that are from the market. I think the challenge there is going to be performance. They’re going to need to, they’re going to need to step up from employers. I’m one of them in particular out, but like one of the checks that came out, it’s an exceptionally well benchmark. And as we see more and more of that, then I think the investment community is going to find comfort in these products as new versions of ETFs, in a sense, this is new access to active managers who were previously only others. So the ETF wrapper is not going to magically give a manager some kind of a boost in performance.

Chris Hempstead:
That’s not what ETFs do. They might give them some tax, but they’re not going to automatically make a losing fund, a winner. That being said, if there’s a winning strategy out there and they launched it in an ETF wrapper in a semitransparent active way, there’s no reason to think that they won’t continue to be able to provide that out performance and provide that octane. Look, I think that fixed income space is definitely poised for more attention in fixed income, obviously with rates as low as they are looking for opportunity, looking for yield, looking for the value of our invested in what’s going to get the best return. So there is opportunity out there. And typically in active management, active high yield managers through what they do for a living, they can recognize when paper is discounted, way more than paper is relative class or something is very expensive relative to other debt, peer group, active managers in the fixed income space.

Chris Hempstead:
They’re very good at. And I think that’s where you’re going to see more opportunity. I think you’re going to win with rates as low as they are. One would think the active managers are going to really start to shine because they can avoid, picking up some of the stuff that you might not want to pick up an index based product. What else is trending? Education continues to trend obviously a huge part of a business, constantly providing content webinars. I think we’re going to continue to see that, evolve, and more as years coming to market that hadn’t been in the market before. There’s big platforms that don’t have products that are, that are still in the process of coming to market. So don’t be surprised to see new suites of products coming out, strategically positioned on major platforms.

Chris Hempstead:
And don’t be surprised to see assets go that way. Because again, there’s something to be said for brand familiarity. If you and your family and your colleagues have been invested with a particular family of managers for decades or generations, and now they have an ETF, you might find it easy to just keep your money and they don’t have an ETF well then, and you want to be in it yet. So I think you’ll, you’ll continue to see, large managers coming to market with products. So they have solutions for those clients that are looking.

Scott McKenna:
I mean totally makes sense. The landscape right now is very unique in terms of the situation we’re in. We’ve seen a lot of ETF closures this year, almost 150, but we’ve also seen a lot of ETF launches. And it’s something that we monitor given it’s a part of the data that we feed into the platform. And I saw recently a lot of names that don’t have ETF products that are now filing for them or launching them. So curious your viewpoint, being an ETF issuer, do you think there’s room to grow for everyone or do you think they’re kind of entering in overcrowded?

Chris Hempstead:
Well, look, I mean, there’s definitely room to grow. There’s still plenty of money on the table and there’s still a seismic shift, into ETS, now will the largest issuers continue to get bigger? Yeah, probably, but I think their market share will continue to slivered away a little bit at a time as, other managers come to market and retain a piece of the pie. Look, I mean, there’s ESG. We didn’t even talk about ESG. That’s a huge new segment of the market in a sense, not new to the market, but certainly feels new for 2020 in ETFs. There’s been, phenomenal growth in ESG TFS assets this year, that trend we expect to continue. We think that investors and managers are pressured more and more through at least be able to talk ESG at least to have a solution or two that fits certain mandates, be it impact investing or some sort of disruptive investing.

Chris Hempstead:
That’s another trend that we’re seeing. And there’s certainly opportunity there for managers to step up. Again sifting through all that information as an issuer, is hard. We certainly, if we’re going to position our ESG ETFs into a client or a segment of the market, we want to know who we’re positioning it against. And I don’t magically have the answers to all of that information. I don’t have a email that comes out every day and says, this is what we did. This is what they did. I’m leaning on ETF logic to build lists of ESG ETFs that are like ours and see how we stack up using the data. And I want to make sure that our portfolio managers know how we stack up and how we’re stacking up, what the metrics look like.

Chris Hempstead:
Because if we’re asking people to do this homework, if you will, we’re asking people to look under the hood and they see that, Oh, we’re ranked fifth out of 15, if that were the case, it’s not the case, but if we were, I want to know why aren’t we number one. And how do I answer that question? Getting that data and getting access to information is one of the things that, that we as issuers are constantly looking to obtain, and look, there are times when certain segments of the market, underperform others where you’re doing exactly what you’re supposed to be doing, but you should at least know why. Right.

Chris Hempstead:
You have to at least have that answer and that, explanation as to what were the contributors to a lack of performance or what were the contributors to the excess performance? Look at Tesla, anyone that had Tesla had, all kinds of a positive attribution in their funds that could easily be explained by saying, well, we were overweight Tesla. Great. But know that you have to do a little homework to find that out sometimes.

Emil Tarazi:
Cool. Anything else you want to mention or add, or like,

Chris Hempstead:
I mean, look, if I had, think about some of the things we talked about. I mean, again, I stress, look at the macro big picture, put those macro big picture input into your purchase, into your due diligence and find, the products that make the most sense based on what they’re designed to do. And the very last thing you should do is think about, all right, now, can I trade this and invest in this to get my money out when I want to get it out and all of that, because the answer is yes, all of those things, but you need to know that yourself. You need to be convinced yourself, do that, go in reverse. And if there’s something you don’t like about the product because it doesn’t have the right volume or the assets rule out a product for those reasons, then you can go to that one, but just do it that way. And I promise you’re going to find opportunities. You didn’t need to know were right under your nose the whole time. Yeah.

Scott McKenna:
Great words of wisdom. I think very, very helpful advice for financial advisors when it comes down to improving their ETF screening processes. Love it. It’s what we try to do here for advisors. That’s the whole point of our lives with your platform, right? So Chris really appreciate you coming on. I think, great takeaways overall, and for advisors who want to set up another chat with you, what’s the best way to reach you.

Chris Hempstead:
Yeah. If there’s anything you can hit us on our LinkedIn page, you can hit us on our home, but you know, I’m easily reachable at emails, inbound that want to jump on a call with myself or one of our PMs.

Scott McKenna:
Awesome. Well, thanks again, Chris, for coming on, for the listeners again, if you guys have not claimed your logically free trial, yet you can go ahead and go to our website, go to logicly, L O G I C L y.finance/free trial. There’ll be instructions as well as the sign up code for you to go ahead and access that free trial and check out the logicly platform for yourself. And again, thank you guys for listening to the speaking logicly podcast. If you’re listening on a streaming platform or a website also wanted to let you know that all episodes are now available via our YouTube channel. So again, you can just search logicly or speaking logicly on YouTube to find all of the videos of previous episodes and upcoming episodes, as well as some other great video content that we’ve produced on that channel. Thanks again.

Scott McKenna:
(silence)

Emil Tarazi:
Cool. Well, thanks Chris. All right. Thank you.

Michael Policar, Fiduciary Wealth Manager at Hightower Bellevue, joins us to talk about his experience moving from a big wirehouse firm to a more independant advisory business, why he chooses ETFs for client portfolios, and what the word “fiduciary really means to him.

Transcript:
Speaking Logicly is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Hey guys and welcome to another episode of Speaking Logicly, my name is Scott McKenna and today I’m joined by Michael Policar, who is a fiduciary wealth manager at HighTower Bellevue. And also host of his own podcast 15 Minute Financial Advisor. Michael, how are you doing?

Michael Policar:
I am doing great Scott. I am honored to be here. I really appreciate you inviting me to be a part of your show.

Scott McKenna:
No problem. So first question I have right off the bat, I noticed you have fiduciary in your title. Right? A lot of people usually probably just go with wealth manager. Why did you decide to add that? And what is being a fiduciary mean to you?

Michael Policar:
Great question or questions, I should say. I added it because when I made the decision to move on from the wirehouse side of this business, the big banks, it was important to me to have and carry that legal obligation to put my clients best interests first. So fiduciary to me is more so than just a word, but it’s actually how you operate, it’s a system of how you operate as an advisor and really how you operate as a human being.

Michael Policar:
My goal is to always put the best interests of my clients first. And in life my goal is to really put the needs of those around me first, because I think when you put that energy out into the world, it comes back to you so much more than what you could do if you were just out there trying to grab, grab, grab. So to me, it’s almost a way of life, which I know it sounds cliche or nerdy to say that, but I left the wirehouse world very deliberately to seek out this fiduciary obligation. So to me it’s really important most people probably just say wealth manager, but the word fiduciary means a lot to me.

Scott McKenna:
Awesome. And let’s talk a little bit about your transition moving from a large wirehouse where you had a lot of resources, right. But also there were some constrictions, can you just walk us through what it was like to go off and move more independent?

Michael Policar:
Yeah, boy, what was it like? I was almost three years ago now. So it was January 2018. It was a little bit not scary, but just unknown, kind of like jumping off of a boat at night into a lake where you can’t really see anything in the water, which is not advice that I would give to anybody. Right. If it’s nighttime, don’t go swimming, wait until the sun comes out the next day. But I didn’t know what I didn’t know. So at the wirehouse we were the custodian. I didn’t know there was a thing called a custodial relationship really, because when I was at Wells, Wells was the custodian or first clearing. When I was at Merrill, Merrill was the custodian. They had their own financial planning software. You didn’t have to build a tech stack. You didn’t have to choose other vendors.

Michael Policar:
It was all done for you. And that can be good or bad, right. In that you don’t have the control over what you want, but you also don’t have to worry about, Oh, what am I missing? What do I need? What are the pieces here? So the move from a business perspective on operating or operations, I guess I should say, that was much, much easier because… And when I say operations, I mean, the things that I was doing for clients are the things that I do for clients. That was easier because it was just about the client. So on the wirehouse side, you have to do what they tell you to do essentially. I remember one time we got an email that said, we’re lowering your grid rate. Your grid rate is obviously what you get to keep out of the revenue you generate.

Michael Policar:
We’re lowering your grid rate by 2%, but you can earn 1% of it back if you sell X number of dollars worth of mortgages. And so I responded to that, just into the abyss of whatever the 250,000 employee email chain was, I hit reply. And I said, so you’re mandating that we sell mortgages. And the answer came back was, well, no, we’re not mandating that you sell anything. We’re just not going to pay you as much unless you do. And to me that never sat well. And so things like that don’t exist on the independent side, things like that don’t exist at HighTower.

Michael Policar:
We are able to find the clients what they need, go out and find a good solution for that. Whether it’s a product or an ETF or a mutual fund or an insurance product, it doesn’t matter. It’s whatever is going to get the clients further down the road toward where they want to be. That’s how we operate. And that’s how I’ve always thought this business should be done. I just, because I started in the wirehouse channel, didn’t know that there was this other world out there where you could actually put the client’s needs first.

Scott McKenna:
Yeah. It sounds like duh. Right. But when you’re at these larger firms and curious your experiences as well, personally, I was thinking about becoming a financial advisor, but some of the bigger firms that I had interviewed with were those sell insurance, sell mortgage to your friends, family. And then if you get enough, maybe we’ll sponsor a series test for you, right? What was your experience like coming up in the wirehouse world?

Michael Policar:
Great question. It wasn’t quite as blatant go sell this, go sell that. It wasn’t on the insurance side, I interviewed with a couple of those types of firms as well, that are whole life focused or permanent life insurance focused, investment planning second, financial planning if there’s time. That wasn’t good for me, it wasn’t a good fit just from the get-go. But the wirehouses they had… Essentially, they had the money, they had the training program, they had the resources to take somebody from a totally different industry, which was me. I was in advertising and broadcast advertising and move me from that career to this career, train me on how they wanted things done. And I say that very deliberately, try to get me the education that I need to be able to go out and gather assets. And that’s really what the focus was, or at least my feeling of what the focus was on the wirehouse side is investment planning doesn’t really matter.

Michael Policar:
Let us do that. Let the firm do that. The wirehouse can do that. You just go out get the clients, plug their money into these pre-packaged programs that we have, and you’re off to the races. To their credit there are a lot of those pre-packaged programs and managed portfolios, and there’s a lot of things that work pretty well that are not… I don’t want to get to say anything negative about that, but the focus was really how much money can you extract out of the accounts of these people that you’re bringing in and how much revenue can you generate for the firm? And the biggest issue that I had at the end of my wirehouse time was that the DOL fiduciary rule had just come out, and for the firm that I was at the time was really, they dove in. They said, okay, well, we’re going to adopt this. We’re going to be all in on it.

Michael Policar:
And so they made big moves. And then when the rule fell apart or was dismantled, they went away from that. And that was at the time that I decided to move on, shortly thereafter I left and went to the fiduciary side because the writing’s on the wall at this point, if you’re not putting the best interest of your clients first, why are you even in this business? Otherwise your fiduciary responsibility at a publicly traded firm, like the ones that I worked for is to the shareholders. So for me, that didn’t really sit well with me. So I started exploring ways to move into a role, into a position side of the industry that would really engage me to act or oblige me to act in the best interest of my clients, which is how I think this business should be done.

Scott McKenna:
Awesome. You mentioned the pre-package products, right? Obviously the wirehouses have been doing it for many, many years, but we’ve seen it a lot, especially on the independent side, advisors leaning more towards things like model portfolios, whether it’s a paper model or fully managed. So curious your process, when you switched over, obviously HighTower has a ton of resources that you guys are able to use, but when you switched over what processes did you get into to help circumvent some of the loss of those resources that you had at a wirehouse?

Michael Policar:
Good question. So what I did was instead of leaving the firm I was at and starting my own team within HighTower. I joined an existing team that was already within HighTower. And our team today one of our advisors is our portfolio manager. And he works with some clients, but his primary focus is really managing the money, creating the models, making the trades happen. He runs our investment committee meetings and the investment committee involves several of the folks on our team, but he puts it all together.

Michael Policar:
So I give him a lot of credit and a lot of the responsibility for performance so that I don’t have to focus on that. My goal is client focus and returns are important to clients, of course, but what I’ve found is that regardless of what the returns are, if I can help a client buy their beach house that they’ve been wanting for 25 years or 10 years or whatever it is. If I can save the client $12,000 a year in taxes by pulling money from a certain place in their first four years of retirement, those are the things that really, really seem to be a difference maker.

Michael Policar:
So I was lucky in that I didn’t have to reinvent the wheel. I have somebody there that is already replicating that strategy from before. It’s not perfect, but it’s pretty good. And I have a lot of faith in the people around me to manage the money in a way that is proper for all of my clients. And I do have some flexibility within that structure to add or subtract things from our model portfolios. So it’s you don’t just get a one size fits all portfolio based on your risk level. There is some tailoring that goes on and we have the ability to make one-off trades here and there, add exposures that certain clients may want, or that we think clients may need to help them achieve their goals in the long run.

Scott McKenna:
Awesome. And it falls in line with what a lot of advisors we’ve been talking to, it’s more and more about adding value around things like tax and that’s one of the things that we’ve been working on a lot. Recently is helping to optimize tax using ETFs, right? So a lot of advisors look to ETFs for making tax loss swaps for the obvious reasons, right? They’re more tax efficient than a mutual fund that liquidity. So I definitely agree. I think more and more the future of the advisor where they’re going to be adding the value is going to be on that fiduciary side and with the financial planning and tax strategies, et cetera. Curious your thoughts on, what do you think the future of the financial advisor’s role is going to look like within the next 20 years or even further down 50 years?

Michael Policar:
Oh boy, 50 years I don’t know. That’s getting down there on the calendar. I think what’s going to happen is we are going to continue as advisors. We are going to continue to adapt and adopt to technology. I think most advisors on January 1st of 2020, were come into the office. We’ll sit down, we’ll talk with you, we’ll get you a cup of coffee, we’ll get you an espresso. Let’s go over this. Let’s do our review. What else has changed in your life? A lot of that. I think that is still going to exist, but that’s going to become what video conferencing was in 2019, 2018. That’s going to be, if we need to, we can meet in person. There’s a couple of reasons for that. One, I think traditionally, most advisors, niche or niche, or however you want to pronounce it was geography.

Michael Policar:
So, Hey, I’m in Bellevue, Washington, I’m in Seattle, Washington, or even North Seattle or South Seattle or whatever, that was what their defacto niche was. I think now we’re having people that are specialists in certain areas. You see it all over the place. You see there’s an advisor in Indiana who only works with optometry doctors and actually optometry doctors who check several boxes. It’s not just any optometrist. There’re several advisors that work with just doctors. Some of them might be in residency, some of them might be whatever it goes beyond that. I’m not sure if that means attending or… I don’t know. I’ve learned most of that terminology from TV shows. But I think the specialized advisor is going to be… It won’t matter where they’re located. So I’m located in Western Washington, right? The Seattle area. But I would say at least 50% of my business comes from outside the State of Washington and it’s because of having that niche focus and getting really good at one thing and becoming referable to more and more people that meet that criteria.

Michael Policar:
I think there’s going to be a lot of virtual first meetings like this over some video conferencing technology, whether that’s Zoom or Riverside or Skype, which I don’t know if people are using that anymore because of Microsoft Teams, FaceTime, I think is still an appropriate way to-

Scott McKenna:
I don’t know anyone who is using Skype.

Michael Policar:
Yeah. Google Hangouts, which used to be G Chats, which used to be whatever, whatever, whatever, all of these things are morphing and advisors are adopting the technology and becoming more and more comfortable with it ideally. Some people aren’t sure when their camera’s on or off, but ideally that it becomes something that is the go-to.

Scott McKenna:
Yeah, that’s totally interesting. And it’s not just financial advisors, it’s the whole industry. Also, as a company like we were as a marketing director, we were gearing up and we were ready to hit every advisor conference in the U.S. and then some even in Canada, in Europe, and then now everything’s totally flipped. So the whole industry and every industry is completely flipped on its head. Everything is now digital first. So it’s interesting to see, like you said, I think a lot of advisors were using playing golf, for coffee or dinners, like steak dinners, right. To meet and prospect, and that’s gone away. For you, how have you switched up your strategy in terms of meeting with clients, getting time on their calendar and getting their attention? Right. Because it’s so much harder now to get anybody’s attention given there’s 100 Zoom calls, so many podcasts, videos, et cetera, all fighting for their-

Michael Policar:
Yeah. That’s a really interesting question. I’ve been doing a lot of the Zoom calls. I’ve been doing a lot of video conferencing. I started to do that when I left the wirehouse channel, again, as somebody who has a lot of business, that’s non-local, I needed that. I wanted that for a long time. So the shift from having those coffee meetings, flying all over the country to meet clients and potential clients, that’s slowed down for me quite a bit. I used to travel not frequently. When you say you’re gearing up to go hit all the conferences. I don’t travel like that, but I would probably average, I don’t know, maybe 20 flights a year, so 10 destinations, something like that, mostly for business. And it would be probably five or six different cities. And sometimes I’d visit those cities twice.

Michael Policar:
So if I’m going to Los Angeles or the Bay Area, I may go there once or twice a year, instead of just once, because there’s so many people that I need to see, or so many folks that I need to get on their calendar. So that’s just been a regular part of my business. This year I’ve only flown to three different cities and it was all pre COVID. Really, it was just the month of February, I think I went somewhere in January, but I can’t remember, but February I was gone three out of four weeks seeing clients. Now it’s all been virtual a lot on the phone. I’ll let clients and potential clients know that I’m available for a video call, or if they want to just jump on a phone call that I’m good with that too.

Michael Policar:
So allowing the client to dictate what is convenient for them and what their preference is, is just a further extension I think of what being a fiduciary means. I’ve had client calls on Saturdays, I’ve had client calls at 8:00 p.m. To me, it doesn’t matter, work from home has actually helped that I believe. Because if I know I have a call coming up at 8:00 p.m. on a Thursday, then I might take some time to spend with my son or my wife and my kid, and go for a walk or whatever, which by the way, at this time of year is pretty difficult in the Seattle area. Although it looks like the sun’s peaking out right now, but we’re pretty much in the rainy season until July now.

Michael Policar:
But really, I think it’s just allowing the client’s preferences to dictate how we meet. To me, I don’t mind, there’re a lot of advisors when I was… Earlier in my career, a lot of older advisors would say, you have to have them come to you. You can’t spend time driving all around to go visit people and this and that. And I think it’s just a preference for the advisor, but to me it’s less about me and more about what do my clients want? How do my clients want to engage with me? And if it’s over the phone, then we’ll get on the phone. If it’s over a video chat, we’ll get on a video chat. It makes no difference to me.

Scott McKenna:
Awesome. I want to go back to… You’ve mentioned a couple of times. Number one, is it niche or niche?

Michael Policar:
I think it’s supposed to be niche, but I go with niche because I’m lower class, I suppose.

Scott McKenna:
Yeah. Niche sounds a little uppity to me. I don’t know

Michael Policar:
It does. Like you’re drinking tea with your pinky out.

Scott McKenna:
Yeah, exactly. Number two, what is yours? Your niche and number three most important. And I’m always really curious about this one. How did you figure out that that was going to be your niche?

Michael Policar:
Yeah. Very good question. Anybody can choose any niche they want, right? Theoretically a lot of the training we’ll talk about, what’s your natural market? What are the things you like to do? What are the hobbies you have and this and that? Well, my niche is people who work as W2 employees for publicly traded companies who earn 50% or more of their annual income in company stock. So you hear there’s a lot of people, especially on Twitter, which is how you and I met that are equity compensation experts. And a lot of them focus on startups because equity is such a big part of recruiting and retaining talent for startup companies specifically in tech, but really in a lot of different industries. I’m more on the public side of things. And I understand a lot of what the equity compensation concerns are in private equity and prior to companies being public.

Michael Policar:
But my focus, my niche is folks that work for publicly traded companies, established blue chips. There’s two things that got me involved in that. One, the team that I was a part of at my previous firm, a wirehouse, managed or facilitated, I should say a pretty large, I would say probably top 50 companies, equity compensation plan. So it’s not the biggest company in the world and it’s not the second biggest company in the world of which one is headquartered in California, one is headquartered in the Seattle area. But by getting to know the tax issues, the estate planning issues and the functional issues on how specifically RSUs can be used, how they’re effective, how they can be less effective.

Michael Policar:
And then I’ve morphed that into understanding employee benefits and coordinating employee benefits. So when you work for a big company, like the second biggest company in the world by market cap, you can’t call somebody and say, Hey, I have questions about my 401(k), my deferred comp, my RSUs and my XYZ, whatever other employee benefit, ESPP. You have to call one person for the 401(k), a different person for the RSUs, a different person for the deferred comp, a different person for the ESPP.

Michael Policar:
So the need that I feel is I take all of that information, all of that expertise and clients can call me and I can say, we need to do this with your 401(k), this with your deferred comp, this with your RSUs and this with your ESPP. And this is how it will work in concert towards what you have told me is important to you and your family. And so that’s how I fell into the niche that I’m in.

Scott McKenna:
I wanted to go back. So you mentioned before getting into being a financial advisor, you were in advertising broadcasting, right? So obviously that helped you with the development of your podcast. We talked about it a little bit before, you’ve seen a lot of success from it and curious to pick your brain a little bit on what made you start it? And how you think about it in terms of your business.

Michael Policar:
Yeah. I think creating content is one of the more important things that an advisor can do if they’re actively seeking new clients. And the reason I think that has just been reinforced because I got a cold reach out from somebody on LinkedIn. And they said they came across the podcast and they like the way that I think about personal finance issues. And to me, that really reinforces creating content. I’m not putting anything out there that nobody knows, right? It’s original content because I’m writing it in my voice or creating it in my voice or speaking it literally in my voice, but it’s not original. I’ll talk about taxes in an episode, and all that information comes from the IRS website or Google or whatever.

Michael Policar:
As a financial advisor, there’s nothing that we know that the public can’t find out by Googling it. It’s just that they don’t want to, and they’re willing to pay for the convenience of just coming to us. So I think content creation is a part of that. It’s a pre-interview if you will. So it’s kind of like my resume or my cover letter for somebody who may become my client in the future. It gives them a chance to study me to a certain extent before they decide they want to bring me in for an interview. If that makes sense.

Scott McKenna:
That makes total sense. I totally agree with that. It’s almost like you can go ahead and by watching a video of someone or listening to their podcasts, you get a sense of who they are in their voice. I have an uncle that sells insurance and he was like, how do I get into this video stuff? I have no idea how to do it. He works for one of the big agencies. And I said, don’t try to reinvent the wheel. You don’t have to think about anything new or crazy, you could literally just take the content that they send you because it all has to be approved anyways. Right. Just take those written things and say it on video. And I bet you get two, three times the engagement on any of that content.

Michael Policar:
I would agree with that. And I would say, just turn the camera on. Everybody has a smartphone now, mostly everybody. So flip it around, turn the camera on and start recording don’t necessarily go live right away. I don’t do a ton of video stuff. I’ve done a few videos here and there. I think they’ve been okay. But for me, the audio is a lot easier because I can cut out the ums and the aahs and all of that stuff. On a video you really can’t. On a video you have to be buttoned up, you have to know what you’re going to say, how you want to say it, and then say it, especially if you’re doing it live. And I get that there’s a lot of room for being human, being natural and being authentic. But like you said, kind of your earlier question.

Michael Policar:
How does my background in broadcast media affect this stuff? Well, one, I’ve never been afraid to get on a microphone because regardless of how many people are listening, I shouldn’t say never. I was definitely afraid to do it, the first time I did it which was probably… I was 21. And I was brought into the morning show for the radio station that I was working at. But anyway, to be put on the spotlight that at 21, from a radio station that reaches 700,000 people that was nerve wracking. But now when I’m at home here, just recording in my studio, which sometimes is my bedroom closet, sometimes as a corner of my office. And once in a while is my car. There’s no fear, you’re not nervous because you know that whatever you record, you can go and edit and make it sound a little bit different.

Michael Policar:
You can clean it up if there’s audio issues, you can take out things that you don’t want to say. So that has really helped, but I think just getting your thoughts out there as an advisor, if you’re looking to attract new clients, it’s going to find the people that it resonates with naturally. Now you have to do some promotion and get it out there. And I’m probably not really good about doing that sort of thing. I tweet about my episodes and Facebook posts and LinkedIn posts, but that’s really it. So if I wanted to reach more people, I would be a little bit more aggressive with SEO type stuff. And things that little tips and tricks that you can do. Taylor Schulte, who has several podcasts and started the Advisor’s Growth Community. And he has a podcast about advisor marketing.

Michael Policar:
He is really good at all of that stuff, I think because he’s been doing it for so long, but he thinks about it from a really strategic position and says, how can I make what I’m doing more and more effective? I didn’t really do that. I got started because I feel like I have a lot to say, unfortunately, I don’t think I have the greatest voice in the world for podcasting, but I do have kind of a… I suppose, a deeper maybe voice that resonates well.

Michael Policar:
So that’s the thing that helped me, and I felt like I had a lot to say. I’m 108 episodes in now, 108 just came out today in fact, and I still have a lot to say, I could probably do another 108 episodes without thinking about it too much. So I think getting your thoughts out there in a way that is easy to understand and is accessible, I guess. But no, if you can explain it in a way that’s accessible to people, compounding for you and me is an easy thing to understand, but for somebody who’s never heard of it before, how do you explain it in a way that they can understand it?

Michael Policar:
So that’s what I think something like podcasting, blogging videos, it’s all the same. It’s all content creation, it’s all your voice, your personality, who you are coming through. And when people see that and hear that and watch that it gives them an idea of, you know what? This is a person that I might be able to get along with, a person that I might be able to work with. So that’s been the biggest benefit, I think.

Scott McKenna:
Awesome. So we’re at 35 minutes. Is there any other topics you wanted to cover?

Michael Policar:
One of the things that’s important that we didn’t really talk about when it comes to models and really for me, for my clients, it’s tax efficiency. So we didn’t go down the rabbit hole of ETFs, which obviously you guys are much better educated on than I am, but I’m a big fan of finding ETFs that fit for what the clients need, the right exposures that the clients need that are more tax efficient. Mutual funds have traditionally been probably the realm of most financial advisors and models. And I’m talking years ago, right? ETFs aren’t new anymore, but the tax efficiency and educating myself more so than anyone on how they can be so much more tax efficient, allow my clients to keep more of the money that they’ve earned and that they earn as rates of return. To me is an important thing.

Michael Policar:
So I’ll talk to a client that’s worth $7 million and I’ll try and find a way to save 250 bucks or 450 bucks or whatever. It’s a number that is really inconsequential to them. But that’s, again, the fiduciary duty that I have is how can I do better for this client? How can I take what I’m doing and move the ball forward for them? And the more I can do that, the better it gets for everybody. The client’s happy, they’re sending me referrals, so I’m happy and have phone calls or Zoom meetings or whatever. And they’re always good. They’re jovial. Even in March and April this year, everybody came to it with a good attitude. I don’t know what’s going to happen, but here’s what our plan says. And we’re going to take it one step at a time. So I think understanding the difference between a mutual fund and an ETF from a tax perspective is huge. And those are the types of things that I look for to add benefit to my client’s lives.

Scott McKenna:
Awesome. What’s the website for your podcast?

Michael Policar:
I actually don’t have one. That’s part of the SEO issue, but if you Google 15 Minute FA or Michael Policar, any of that you’ll find me. If you Google Michael Policar, you’ll probably find a doctor in California. That’s not me. That guy has a lot more years of experience in his field and schooling than I do. But if Google Michael Policar, 15 Minute FA, or just 15 Minute FA, and you’ll be able to find it, it’s on all the podcast channels, Apple, Google, Spotify, iHeart, whatever, it’s on there somewhere.

Scott McKenna:
Awesome. For those who are interested in learning about ETFs a little bit more and screening for them, you can go ahead and go to logicly, logicly.finance/freetrial. And you’ll have some instructions on how to get a free trial of our platform. We have plenty of tools to screen for ETFs and also do some tax loss harvesting, prospecting. Thank you guys again for listening to Speaking Logicly, and again, if you haven’t checked it out, all episodes are now available via video on our YouTube channel.

Zach Ashburn, founder of Reach Strategic Wealth, has built his business around getting clients to ask better questions. Zach joins to discuss how to weave portfolio management in with financial planning, the importance of apprenticeship when starting out as an advisor, and how technology empowers independent advisors.

Zach can be reached at https://www.reachstrategicwealth.com

Transcript:
Speaking Logically as brought to you by ETF Logic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Hey guys, and welcome to another episode of Speaking logically. My name is Scott McKenna, and today I am joined by Zach Ashburn, the founder of Reach Strategic Wealth. Zach, how are you today?

Zach Ashburn:
I’m great, man. I’m happy to be here. How are you doing?

Scott McKenna:
Doing pretty good. So, for our listeners who might not know a lot about you, can you give us just a little bit of background about who you are and your business?

Zach Ashburn:
Sure. So, I’ve been in finance since graduating college. I started out in banking, as pretty much plain Jane banking can be. Had an office, help people with accounts, things like that. And getting my start there was great. It let me touch a lot of areas of the world of finance, so the deposits, lending, insurance, planning, things like that, and just see what was going on in that setting where banks are doing everything. I was there for a few years, but didn’t take too long to see that planning and investing was where I was seeing people changing their outcomes and making big steps, and I really liked that. I got interested in the investment world there. And so, I started considering what that opportunity might be like, and I guess as fate would have it, I had a client who I knew personally, who was also a client at the bank, who had just gone on board at a independent wealth management firm.

Zach Ashburn:
And so, I started talking to him just like, “Tell me about your world,” and ended up, eventually after along a series of conversations, coming on board with he and the other guy who had founded that firm and I got my start there. It was fantastic. It was a great place to learn the business. We were affiliated with a small broker dealer. There was three of us at the time, and they came from different backgrounds so it had a lot of mixture of perspectives on how to do the business and how to grow a business and things like that. And it was there that I cut my teeth and learned the industry and what was going on, what the different, I guess, aspects of the financial advice world are. And then, naturally, a long series of things have happened since then to lead me here, and I’m happy to fill you in if you’d like me to.

Scott McKenna:
Yeah. So, when you started Reach Strategic Wealth, what spurred you to want to do your own shop?

Zach Ashburn:
Sure. So, when I joined this independent firm, we were affiliated with a small broker dealer, and after a little while there, we were looking at, “Maybe we should be looking at an RIA setup to hit the next level.” We were transitioning a lot of business to fee-based setups where make that transition easier. And right when we were getting close to pulling the trigger on that, a larger broker dealer actually bought the whole network that the small BD we were with as part of, and so we were left with this really challenging decision of do we really go full throttle and on short notice start an RIA, which of course has all the disruption and question marks, especially having never done that before. What’s that like? What’s it going to be like? Or go along with this transition that they promised to be smooth and moving accounts easily and hopefully maintain business as usual and, at the same time, move from a small broker dealer to a large broker dealer and, theoretically, see what benefits come out of that transition?

Zach Ashburn:
And when that move happened, it kelt pretty quickly like, “Okay, even at a large broker dealer, I’ve seen this play before.” The differences weren’t quite what I was hoping they would be. And the change to start my own firm came out of… I guess it was, I was working on some content for our website at the independent firm I was with and started doing some research on the competition in the area, seeing what they were offering, and it really struck me that everyone was offering the same thing. And of course, that’s not really true, but in a nutshell, what people were saying was, “We’ll develop a portfolio tailored to your goals, needs, and risk tolerance, and we’ll develop a financial plan to help you achieve your goals.” And I was just really struck with, “Well, yeah, but shouldn’t you? Isn’t that the thing we do?”

Zach Ashburn:
And having that hit me the way it did, I really started thinking, “Okay, what is the thing that we’re offering that adds value? Really, what is the thing?” And that was a question that was the driving factor behind everything that’s happened since. And so, as I really started to think through that question, “What’s the thing?” I was left with one thought that ended up being the top of my business plan and really integral to everything that I’ve done. Whether I’m right or wrong, we’ll see, but it’s been a guiding post for me, that advisors who want to offer value in a world where Google exists, can’t be banking that value on answers. Instead, we should probably be looking at helping people ask better questions and lending them the will to act on the answers that they find.

Zach Ashburn:
And so, as I thought through that question, that was so important to me, it became a good project to say, “Okay, so what’s the product or service model that I offer to meet that question?” And I developed a modular planning process that I was planning to put people through and said, “This’ll be a great setup for us to use at the firm I was at, and we can still do investment management, everybody’s happy.” And I packaged it up, and I knew in the broker dealer world there was, excuse me, some restrictions on how we’re going to charge, what we’re going to charge, things like that. And I packaged it all up and took it to the compliance, and they really just said, “No, thanks. We’re not interested in that.” And to be clear, there was nothing so extreme about this other than the nature of just charging for a ongoing or a termed planning project, that they just didn’t want it.

Zach Ashburn:
And I definitely am aware that that’s changed somewhat and it wasn’t entirely true. Like I probably could have done certain things to make it work okay or fudged the setup a little bit. But by that time, I had built this process I was really excited about, and so being told no really led me to this, “Okay. I can either not do it, or I can leave and do it on my own,” and I chose the latter, which was bittersweet because I was leaving my partner who still is an awesome guy and a great mentor to me. And he wished me all the best in the world. It was just a scenario where he wasn’t prepared for another move right after changing broker dealers, so it was left to me to, if I wanted to do it, do it on my own.

Scott McKenna:
That’s really interesting. And I’ve heard that from a lot of independents. When you’re not able to do certain things, like especially for a lot of independents that we’ve talked to, it seems like the social media and content stuff, that’s really difficult to do at some of the larger networks. So, that’s a point of contention to the point where, “I want to build a personal brand, I’m going to have to leave.” Similarly, it seems like you were in that situation with your modular planning.

Zach Ashburn:
Sure. So, I really started with the, “What’s the way I think is right to do financial planning? And then, what is the business model that backs that up?” So, I think that this is the right surface to offer, and then we can figure out, “All right, what do we have to charge? How do we have to charge it?” Things like that. So, the planning process that I use is 10 modules, and we do it over a calendar year and it just walks through. A lot of the work we do is anchored in vision and behavioral work, so the whole process is anchored in the first module being vision statement, vision casting. And then, from there, we progress through the things you’d expect, largely. But what I’ve done is just interweave a lot of deliverables and a lot of relationships between what we did in this one to what we’re doing in this one, and happy to talk about the things that I’m really excited about, about that process.

Zach Ashburn:
But that was the theme, is how can we construct something that with rhythm and sense, put someone through a financial planning process over an extended period of time, such that we can both do the planning, of course, and the implementation, rather than saying, “Here’s a plan. Now let’s implement”? And that was a big goal that I had in this consideration of how do we offer value, and one of those things being better questions that we need to ask ongoing and the will to act that we need to be there for. It’s not a best of luck interchange.

Scott McKenna:
Yeah. That’s interesting. And talking about some of the themes overall, as we’re evolving in the industry, technology is playing more and more of a position, so the value that advisors are adding, it’s really more on the planning side of things than anything. Right? And it’s interesting you say like asking those questions and how do you pull those out? That’s super important, too, when we’re thinking about what’s the future of the financial planning industry. Right? So, talking a little bit more about who your ideal clients are, i know some advisors, they have a niche or they have a specific type of client that they work with. When you’re talking about the modular planning, is there anyone that you’re targeting with your business? Right? Yeah. It’s interesting. I always wondered how advisors go about picking that. Maybe some of them, it just falls in because their network. How are you going about picking that niche?

Zach Ashburn:
Well, I think the standard story is either it’s what my spouse does or it’s what I used to do, and I don’t think that either of those will probably be how I pick mine. I mean, there’s a geographic component that I live in a big medical town. I live around several big universities, so there’s opportunities there. Yeah. A faith-based approach would be appropriate for me, too, like working to combine your faith and your values into your financial life. So, all those things are options and open that I’ve considered. I think that the beauty of the process that I like so much is that I could really feasibly make very small changes overtly or covertly that say, “Hey, this process is built for you, dentists,” or whatever, and be using fundamentally the same steps with a few different things, just like anyone would with a financial planning process, with the added benefit that we’ve got a rhythm to it. And so, hopefully, increasing that sense of purposefulness when you approach the niche conversation. I’m open to being wrong about that, too, but that’s my current perspective where I’m at right now.

Scott McKenna:
That’s awesome. So, I wanted to dive a little bit deeper into moving away from the financial planning stuff into on your website, it says you guys do also portfolio management, so can you talk to me a little bit about what you offer there? And I know it seems like, for instance, you guys are very fee conscious, right?

Zach Ashburn:
That’s a fair statement. I mean, it blends into this experiment that I feel like I’m doing on what will work and where my perspective of the future of the industry is, but absolutely. So, in the modular planning, the strategic planning program, investment management is included in the fee you pay, so it was always a service we were going to be offering. The question was, do we offer it as a standalone or some kind of complimentary service? That was something that I wrestled with for awhile. I included it because I existing clients who had been clients for a while who were used to an investment management or normal advisory type setup, so I don’t want to betray the trust that they’ve put in when I’m starting my firm, if I can help it.

Zach Ashburn:
And so, where I landed, again, related to my perspective on the industry, was that if I’m offering a standalone investment management service, I can in fact do that at a pretty discounted rate and define that relationship as your focus, as indicated by you, is on portfolio management. What you’re really trying to do is outsource your portfolio management, and you’ve chosen to do that to an individual advisor. And so, because of that, we can probably charge less than that 1% industry standard where we’re kind of saying we offer advice, but we’re really trying to get the portfolio, but also, “We’ll manage the portfolio, and call if you have any questions.” And maybe we can define that relationship. Again, like a theme has been, let’s not conflate business problems with planning problems, and let’s say, “This is a business problem that we can probably define this relationship and charge an appropriate amount, investment management scales really well, and do that appropriately.”

Zach Ashburn:
And it’s been good. Honestly, it’s been an appealing offering for both prospective clients and myself to say, “Absolutely. If what you want to do is open an account that I manage for you, and you go into it with an agreement that says, ‘And the moment we broach a further financial planning topic, the dynamic of the relationship has to change,'” because I can manage your portfolio in like a relative vacuum. I can say, “Based on what you’ve told me, and based on the information we’ve gathered, this is all what we know.” But if you are going to ask a deeper planning or tax or whatever question, well, then, of course, we got to go further on everything. Right? And that’s my perspective on the industry. Just like the reason a bank cares about your deposit account is not because they need your $200, it’s because they want your whole relationship. So, instead of, “Hey, we’ll offer a financial plan, please move your portfolio,” “Hey, we absolutely try to do a great job at portfolio management, and when it comes time to do the financial planning, we’re here for you, too.”

Scott McKenna:
That’s awesome. That really makes sense. So, why don’t you walk me through the process? Let’s say I wanted to go ahead and start having you manage my portfolio. Right? What are some of the considerations that you have when you’re putting together that portfolio?

Zach Ashburn:
Sure. I guess I can probably answer it in two parts, though. I mean, the workflow of it is pretty standard. It’s not super glamorous. We have an intro meeting that we try to define that relationship a little bit to say, “Are you moving towards a financial planning relationship? Are you really here for portfolio management only?” and generally try to just be a faithful guide to those people and say, “Look, what you’re looking for is this, and here’s why you might need to consider, or when you might need to consider, a different offering.” Assuming they go the portfolio management route, we do a client info sheet where we can open an account, we do a risk tolerance questionnaire, and we open the account. Once the account transfers over, that models that are set up at the custodian we use, and from there, the clients are in discretionary portfolios.

Zach Ashburn:
So, we’re able to really focus on what is the value we can deliver in relationship to a portfolio management arrangement? And I actually think it’s awesome because if you’ve come to me and said, “All I want to do is outsource my portfolio management,” and I can really easily just drip on you about, “Here’s some better questions to ask about your financial life,” that value is just stacking up at really no additional work to me. And I like that a lot, so that’s a good probe from that side of things.

Scott McKenna:
Awesome. So, you’re saying you’re leveraging model portfolios, which we’ve heard more and more, and we’re working with model providers. So, when you’re talking about implementing model portfolios, that’s something that you’re doing at the level where maybe it’s a paper model such as like WisdomTree where they’ll tell you it’s time to rebalance things, like that? Or are you going to someone who’s going to manage it for you and charge a couple of bips?

Zach Ashburn:
Yeah. No. So, I think it’s an awesome time to be getting into this world, as a young advisor especially, because there’s so many awesome tools out there. So, I, in my practice, manage the models myself using securities, largely ETF portfolios, and it’s able to be done pretty streamlined through… I [reval 00:16:35] in my case, but irrespective of what custodian you’re at, the tools are there. But to your point, the same applies, like there are model portfolios, there’s research tools, there’s paper-style portfolio providers that just give you the cues. And all of those are exceptional offerings that sat at… And there’s tamps you could outsource entirely, and you can satisfy the same itch that says, “We believe that investment management is a core competency, not a value add, and here’s how we’re going to meet that.” And you can kind of take your pick, more or less, once you’ve made that decision, I think. Would you agree with that? I’m interested in your opinion, actually? Would you agree with that statement?

Scott McKenna:
Yeah. And for us, the biggest thing is our mission statement and why we started working with advisers was, we wanted to streamline that process. So, there’s a report, I think, from Cerulli Associates that says, “Advisors spend about maybe 17% of their time managing investments if they’re constructing their own portfolios.” And then, that number drops down to 8% if it’s advisors who are using models, so that’s a huge amount of time. And I think when we’re thinking about the future of the industry, like I said earlier, it’s going to be moving more towards, how can you provide more of the relationship? Like you said, how do you ask better questions, get them to ask better questions? And a lot of that other stuff is going to be more and more automated. So, as an advisor, your time is going to be more focused on the end relationship and working with the client and less about some of the investment management stuff.

Scott McKenna:
And so, that’s what we’ve actually been working on for advisors who maybe don’t want to use model portfolios, is we like to call it portfolio coach. So, it might be telling you situations where you’re in an ETF that you can be in a similar one that has lower bips. Right? And maybe it’s about tax. For us, we’re seeing the value that advisors are adding around tax and some of the tax implications, how do you lower your tax liabilities, things like that. So, it’s interesting to think about where the industry is going, and I think you’re spot on with the fact that there’s so many tools out there and there’s so many things out there that advisors can get in and can scale their business a lot easier, leveraging all these different tools.

Zach Ashburn:
Yeah. When it comes to investment management, you could make the analogy like it’s not even the same as at a broker dealer if you’re picking… I guess the normal starting point is using just their model portfolios, and the same at a wirehouse, or even picking how you’re going to manage a mutual fund portfolio. And you step into this world, whether it’s at an RIA or not, and you realize, “Wow, if we’re asking the question, ‘How do we add value to people’s lives?’ all these options become open to you to fit into your process however adds the most value to your people.” And that’s super exciting, I think, to say, “Hey, maybe we can use a tamp, and that’s okay. Let’s figure out how it adds value to people,” instead of having to say or deal with the, “I’m not a wall street expert. What do I do?” kind of questions. And I think that’s a cool place to be at in the life cycle of the industry.

Scott McKenna:
Yeah, definitely. So, moving on to content, you have your own podcast, right?

Zach Ashburn:
I do. You can check out The Dollar Derail anywhere you get your podcasts. New episodes every Tuesday. Our whole shtick is that we’re here to ask better questions to help you change your financial train of thought. My co-host is another firm owner, Ben Wacek. He’s fantastic. So, we just have good conversations about some of the questions that we get. It’s been a really fun project to have, honestly.

Scott McKenna:
Awesome. And what made you start doing a podcast?

Zach Ashburn:
Oh, man. Honestly, it’s because I was so bad at blogging. I love to write, I went into this like, “Oh, finally, I’m at an RIA. I’m running the show. I can blog to my heart’s content. It’s all good.” And I would sit down to do it, and it was just this monumental task every time. And so, I had to find something else. So, I had this whole schpiel I was running about asking better questions, so I pitched Ben to say, “Hey, what if we just did a podcast where our whole formula was, ‘What’s a normal question we get? We’ll offer a better question and work through it.'”

Zach Ashburn:
And he was on board, and again, he’s just been fantastic. And that’s become the anchor of my content, marketing to say, “Now it’s a little easier to do a blog post when our episode today was how much house can I afford?” And later this week, I could write a blog post real easy on taxes when you sell your home, or something like that. But it’s already anchored and I’ll just come up with it and stick to it because… Full transparency, I was not doing a good job at that blogging aspect, so it was out of finding another option.

Scott McKenna:
Yeah. That’s funny. When I first started at ETF Logic, I was doing a lot more writing and the same thing, I was like, “I’m going to become a writer, and I’m going to get featured. I want to get in Financial Times. I want to get my pieces in all of these magazines.” And I emailed it to a bunch of people, and of course, it just fell dead in the water. And then, I spent so much time and effort, and at the end of it, I was like, “Oh my God, I just spent two, three weeks on this one article and no one even picked it up.”

Scott McKenna:
And my background was I used to sell video production, so I was like, “All right, let’s get back into doing the video.” And I resisted doing a podcast for a while. I don’t know why. I just felt like everyone and their mother [inaudible 00:22:14] podcast, and then we fell into it. And it’s actually done a lot better than I thought it would. I was a little bit of a podcast hater, but you can’t sit down and interview someone. Right? I’d love to be able to be at what event would be this week and do this in person, but that’s not the world we live in.

Zach Ashburn:
Yeah. So, before I started my firm, I didn’t have personal social media, just because I just didn’t care to. It wasn’t a big deal to me. Starting the firm was a business call to say, “All right, it’s probably good to have exposure out there. And what does that mean?” I tell people all the time that the value in the podcast has nothing to do with, “Can we get to 1,000 or a million downloads or listeners?” or whatever. It’s that I can constantly have this thing that I can expose my second circle of people to, to say, “People that I know but wouldn’t talk to on any given day are constantly being reminded, ‘Zack’s asking good questions.'” And at some point, maybe that intersects. And I think it’s like, there’s an old maxim that’s like, “Always have something to invite people to.” Always be hosting a dinner seminar or always be having a webinar, or something like that. And the podcast is just that. It’s just always there, and if you do it right, then you’re always inviting people into that conversation.

Scott McKenna:
I like that. So, ABI, always be inviting.

Zach Ashburn:
Yeah. There you go. Yeah. The worst thing you could do is have the conversation and somebody’s like, “Do you know anything about this?” And you’re like, “I do, but I’ve never said it out loud.” Instead, you can just say, “Yeah, absolutely,” and here we go. At least working towards that end. I’m not there, but we’re trying.

Scott McKenna:
Yeah. No, I totally agree with the consistency. It’s so important to stay consistent. It’s tough starting out, so for younger advisors who are just starting out, you’re a little bit along in there now, do you have any tips for them?

Zach Ashburn:
Do what you’re good at. So, when I sit down to write, even if I’m sitting down to write about a technical subject, what’s coming out is emotion. Right? That’s just how I write. It’s going to sound like I’m journaling. And you know what? That’s okay, but it probably should inform what I’m actually writing, which bends me a little back towards podcasts, where we can be quippy and we can talk through different things and that can be a little bit easier to inflect than just having to write one blog post a week or something like that. So, do what actually expresses your voice? I mean, I don’t need to be the 10,000th person person to say, “Actually use your voice. There’s a limited impact to canned marketing, so don’t create your own canned marketing if you’re going to do it.”

Zach Ashburn:
The one thing that I think if you’re a young advisor starting out, or if you’re somebody in transition, who’s considering starting their own firm, along with that, “How do we add value?” the other thing that was written on my business plan was, “We’re not just starting a business, we’re creating a platform from which to speak.” And you should probably define that platform. So, for me, it was things like we’re going to eliminate as many conflicts of interest as possible and we’re going to conduct this process with rhythm and sense, and we’re going to speak to the entirety of your financial lives. Those are the platforms that I can be obnoxious about and say, “Hey, I don’t want to have more conversations that are like, ‘I’ll manage your portfolio. Great. Just give me your money and trust me.’ I wanted to be delivering value right away.” And so, you’re constructing that platform, and just do it consciously and do it flexibly to say, “This is really where we want to speak from,” and figure out how to equip that into your awesome product that you’re putting together.

Scott McKenna:
Yeah. So, Zach, I know we touched on it before, but why don’t we talk a little bit more about your personal vision of what the industry is going to look like in the future.

Zach Ashburn:
Sure. I mean, that’s a big question. I reserve the right to be as wrong as possible about everything, but I do think about this, what’s the future of the business? And of course, naturally, it informs what we want to do in our own businesses. I tend to be a believer that, broadly speaking, business trickles down from high-end consumers to retail consumers, and I think in our industry, that’s basically banking to retail consumers. And we’ve seen that, right? The general public now has openings to most fields of investment, where at the time that was not true. You can buy most kinds of products in some fashion or another, as an individual investor, most likely. Financial planning’s been the same way, where this white glove approach that we would bring out of wirehouses and big banks, and now it’s been brought down to this big push for subscription plans and working with people who have low net worth and are just starting out. And that’s awesome. So, things just, generally speaking, tend to trickle down.

Zach Ashburn:
In my current operating opinion, at least, is that where we’re heading towards will be a more family office style approach to the masses, and I think that, as we talk a lot about fee compression in the investment world, we’re going to see a lot of efficiency compression in the broader financial planning world. I like to think of it like financial planning will ultimately just be the discipline, and it will not be this segmented financial services market we see. Instead, financial planning will mean something truly on its own, and that thing will probably be something that looks a little bit like a family office to a high net worth individual right now where… I mean, we’ve already seen there’s tax planning softwares that you can implement really well, and there’s coming of age, at least, estate planning softwares that do similar things and bringing on experts.

Zach Ashburn:
And I hope, my sincerest hope… I made a joke on Twitter recently that I started taking really seriously after I made it, and I said, “Hey, can we just establish a financial planning guild that has an appropriate apprenticeship program?” Right? And some firms do that really well, and I love that they do, but we don’t as an industry. And maybe there’s opportunity to say there’s a maturity level in our industry that can go up, and that would involve a broader approach that touches more things and the opportunity to come in and increasingly specialize without having to go from here to here to here, and that that is just a defined path that you can progress through. And ultimately, that pendulum swings back to, “Hey, are we just creating banks again? Is that where we’re heading?” But then they’ll serve their own purpose.

Zach Ashburn:
That’s what I see and hope for, honestly, because I would love to be part of a great apprenticeship program, and I would love to bring on professionals that actually specialize in different areas and keep it in-house in a way that works for the business. And that’s a challenging prospect right now.

Scott McKenna:
Yeah. I love that you say that because, for me, when I came out of school, I had an economics degree and always really interested in marketing. I’ve always been someone who loved helping people, and that’s what drew me towards maybe becoming a financial advisor. But one of the biggest barriers to entry was places where I got interviews, where the places that I even thought to apply to, were the big ones, where their programs were very much, “Call everyone you know, sell them an insurance product, and if you cut your teeth, you bring us enough people, maybe we’ll move you up and you could get your series and whatnot.” Right?

Scott McKenna:
And for me, that just was not appealing at all, and that’s why I switched into selling video advertising instead. And it kind of sucks because I feel like I definitely would have loved to be a financial advisor and be a part of the community that is on Twitter and outside of it. Right? And I think as an industry, there’s just so much… I know it’s changing, but there’s still so much of that where, like you said, having a guild, that would have been awesome. 100% I would have been a financial advisor if there was a guild. You know what I mean? And taking and really learning to do that instead of just saying, “Hey, sell it to everyone you know, and then maybe we’ll teach you the other stuff after.” Right?

Zach Ashburn:
Well, and we have this pandemic of imposter syndrome that gets talked about all the time, and I think a lot of that comes from we’re in this field which has such a low barrier to entry and such a large skill gap. And you spend all this time in the middle where, yeah, you actually do know more than your clients and the general public, but you can see very clearly how far there is to go. And that pathways kind of process at least speaks to that. And I’m so grateful for my experience in banking, where I got to see, “All right, what’s insurance really look like? And what’s financial planning really look like? And what’s lending really look like, and risk and all these different things?” And that meant a lot to me to pick up path.

Zach Ashburn:
But then I entered this other branching decision tree of, “Okay, do I want to analyze, or do I want to sell or do I want to plan?” and things like that. And that’s not going away. Right? There’ll be, even if there’s a software that is doing estate planning for you, someone will be coordinating that kind of element of your firm, and that person should be passionate about the role that that plays. It’s clear from, I think, from what I’ve said, that I’m a big believer that we’ll be moving towards a life planning style model and behavioral coaching style models, but that’s not irrespective of the hard sciences of the industry. It’s just going to change how we conduct them, and I would love to be on the front end of how we conduct those things.

Scott McKenna:
Yeah. I love that. And how do you personally see technology playing a role in that life planning process?

Zach Ashburn:
Oh, I think it’s completely vital because technology is the thing that frees up the advisor to do that. I mean, we talk about the conflicts of interest side of it, but currently, the business models that back up the planning processes are not great, necessarily. If you just took a random sampling of advisors, whether they’re wirehouses, broker dealers, or RIAs, a good portion of them aren’t going to be running great businesses, and you don’t necessarily have to if you’re at a broker dealer. Right? You’re in this bucket, or in this shell, and it’s okay. And some people are, and they do fantastic jobs. But because of that perspective, implementing technology is what frees you up to be able to do a good job and to reach these other areas that are so important if you’re going to transcend from, we’re really, even if we’re talking about financial planning, we’re focusing on investments, or even if we see ourselves as financial planners, we have to then touch these other areas. How do we do that? I think it’s through technology.

Scott McKenna:
Awesome, Zach. Well, thanks so much for coming on the podcast. For those who are interested in learning more about Zack or Reach Strategic Wealth, you can go ahead and go to reachstrategicwealth.com, or you can hit up Zach on Twitter. So, thanks again for listening, guys.

We sit down with Justin Castelli, Founder of RLS Wealth, to discuss:

  • Why content is king
  • The importance of personal brand
  • What does a subscription model for financial advice look like?
  • What the role of the advisor will look like in the future

Transcript:
Speaking Logicly is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Welcome back to Speaking Logicly, my name is Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
Today we are joined by Justin Castelli, Founder of RLS Wealth Management. Justin, how are you doing today?

Justin Castelli:
I’m doing great today, guys. How are you doing?

Scott McKenna:
Can’t complain. Living the life in this new world. Justin, obviously pretty well known name in the advisor space, but for maybe some people who don’t know you, why don’t you just give us a little bit of background on who you are and your business?

Justin Castelli:
Sure. Well, my name, Justin Castelli, as you already stated. I’m the Founder of RLS Wealth, RIA-based in Fishers, Indiana, so about 25 minutes outside of Indianapolis. Been in the profession since I graduated college, which was in 2004. So, it’s crazy to think that I’m coming up on 16 years this winter of being a professional. Started my firm five years ago after bouncing around like so many of us in the profession do. Started at an insurance-based firm, went to a bank, spent seven years at a 403(b) company, two years at an independent firm, and ultimately realized that to run the business and work the way I wanted to work, independence, fully independence on my own was the best way to go. So, launched to be able to work with the retirees I’d always worked with, but also be able to work with young professionals as well.

Justin Castelli:
Adopted a subscription model to work with those clients, and then have been loving life ever since. Just recently, hired a young advisor this summer, so there’s three of us now, myself, my director of operations, and then Thomas, our other financial advisor. Then, in addition to being the advisor role, do a whole bunch of other stuff. I’ve gotten into the content game. That’s the big way that I’ve chosen to grow my business and then have also ventured off into helping other advisors, so launched a community called the AGC with Taylor Schulte, which is a private online community for advisors, do consulting when it comes to branding and strategy for content. Then I’m actually working on building a subscription model course on how to help advisors build out their subscription models as well. So, trying to do whatever I can to help our profession move forward and have fun at the same time.

Emil Tarazi:
Tell us more about the content game. I think that’s increasingly important to educate people about how advisors work, but also is also good for marketing. Can you speak a little more about that?

Justin Castelli:
I think going forward, content of some sort, you get to figure out what’s right for you is going to be table stakes. I think everybody’s going to need to have some type of presence beyond just a website. I’ll go back to finding the reformed broker back when I was working at the 403(b) company. I found Josh Brown’s blog and immediately fell in love with it. I was reading it and I just told myself, one day, whenever I have my own company, or I’m out on my own, I want to write a blog. I want to write to try to help educate people. Then I realized through reading him, his stuff, as I kept on reading Josh’s work, I started to like him more and more. It’s like, oh, not only am I able to educate, but I can help people get to know me.

Justin Castelli:
The beauty behind content is it allows you to share your beliefs, it allows people to see you as an expert. You can do Goodwill by educating people who may never become a client, but you’re giving them good resources and good information, but then, from a growth perspective, it allows people to decide whether or not they like you. So, you get to share a little bit of personality and move from being a suit, if you will, the stereotypical financial advisor avatar, to a human being, so you can share your interests and build this relationship with people before they ever become a client. Now you kind of build a fan base, and over time, some of them reach out to work with you. You’re going to be on top of their mind when the time comes for them to want to financial advisor.

Justin Castelli:
Whether you want to blog, whether you want to do a podcast, whether you want to do video, whether you want to do all of them, like I do, that’s up to the individual, but I think you need to pick one thing to be able to tell your story and let people know who you are and what you’re about.

Emil Tarazi:
Yeah, that resonates a lot with us at ETFLogic. We have this platform, powerful data analytics tools, but we view that as not enough. You need to be out there educating the investor public about how to use those tools. A lot of what we do as ETFs, and in some sense, ETFs are, well, they’ve been around since the ’90s, but they’re still new for some people, especially if it’s about getting it into your workflow. Some people are worried about liquidity, some people are worried about factors or themes, and we try to churn out some content in that space, and like you said, it’s education first.

Justin Castelli:
Well, and the beauty behind that is you’ve got a great product, right? How’s anybody going to know that you even exist if you’re not out there talking about it. If you have a great product and you feel that you can help your audience, then you should have no problem telling your story and let people know what you’re doing. At the same time, people don’t want to be sold. If everything you’re talking about is look how great we are, this is our great product, product, product, product, you’re going to turn people off. But if you’re telling me about how I can evaluate factors, or you’re educating me on how I can use ETFs to streamline my process, or how the … maybe your tool works into some of the content, but you’re educating me and making me better, now you’re on my radar, and now when I come up against something where I actually need your product, because now I’m aware of it, you’re top of mind.

Justin Castelli:
The same thing for financial advisors. There’s the opportunity to educate. We know financial literacy in the US is not very good. Take it as opportunity to help fix that, position yourself as an expert, and then build that audience. I think it’s smart. I like to look outside of finance to get my inspiration, and I’m looking at tech, I’m looking at direct to consumer brands. What are they doing? How are they building these huge brands? I don’t know if you guys have been following the company fast. Matthew Kobach from the New York Stock Exchange doing their social media when he worked for them, and they just launched their product and did a bang out job. Built all this excitement, build this huge following for a one-click checkout, and it was all done through social media and content and engaging.

Justin Castelli:
I look at that and I’m like, why can’t we in finance do the same thing? Now, I know bigger corporation’s compliance kind of limit some of that, but why can’t we put measures in way that instead of it being about the corporate world and the corporation and the bigger company, it’s not about the individuals who are actually going to be … or it becomes about the individuals who are going to be helping the clients, whether that’s Scott or whether it’s an advisor with their potential clients. Make it about the individual, and what from owners, and I think bigger corporations need to realize is, it’s okay for your team to have personal brands. It’s good. I think it’s good, in fact, because if it’s good for them to build their presence and their brain and their reputation, at the end of the day, that’s going to feed back to your business.

Justin Castelli:
Instead of it being about the company, instead of it being about the CEO, or the founder, make it about the individuals, elevate your squad and let them shine. Because if they’re shining, that’s going to be good for your business, and it’s hard for the old school advisors and business owners to come to grips with that.

Scott McKenna:
Yeah. That’s funny. We actually discussed this a little bit in one of the previous episodes, talking about the fact that advisors aren’t able to have something like a Google review, right? Yelp, you can … every restaurant has a Yelp page. If you’re going to go out to eat, you’re going to go and look at the ratings and see other people’s reviews. But there’s a lot of regulatory challenges that block people from doing that. Do you think that the bigger firms need to take a step back and try to allow for a little bit more of that personal brand development, or do you think they really have to be so on top of it to make sure that there’s no violations to [inaudible 00:08:24] regulations, because it’s kind of a tough position to be in, right?

Justin Castelli:
Yeah. I’m optimistic. I think that people are inherently good people. I don’t think most advisors are going to go out saying things that they shouldn’t be saying. I think that the bigger corporations should allow … I would operate under, we’re going to allow you to develop your brand, tell your story until you prove us wrong, until you show us that you’re not capable of doing it responsibly, then we’re going take those rights away. I would rather give you the rights and then have to fix that. That could backfire at some point. I also think if the business model of the firm is more about taking care of clients and doing the right things when it comes to clients, as opposed to a sales environment, eat what you kill, I also think you’re going to attract a different type of individual who’s really going to use this platform as a way to educate and do better and build a brand rather than try to get the next sale.

Justin Castelli:
I think if we changed the business model a little bit, and that incentivizes people to do things for the right reasons, as opposed to making the next dollar, that, that might make a little bit easier. Now, going to the independent space, we have a little bit more flexibility. Technically, I am my chief compliance officer, whether that’s a good thing or bad, but being independent, that’s the rules. Technically, you can have Yelp reviews, you can have Google business reviews, but I’ll tell you to check your compliance officer. But what I have read him and told is, you as the advisor just can’t solicit those. You can’t ask people to leave a review, but you can let people know that that’s allowed, and then they can go. Because it’s on a public forum, you can’t control that, it is okay from the regulatory standpoint, as long as you’re not incentivizing people to do that.

Justin Castelli:
Taylor Schulte has done a lot of great research on that, on his Experiments in Advisor Marketing podcast, and he’s actually talked about kind of how you can go about doing it, but we are able to kind of build that presence. You just have to be careful about how it gets built, but then it is out there. But I do think that is a smart thing to do because if people search you and you’ve got reviews up on your Google business page, that’s not a bad thing.

Emil Tarazi:
In your experience, which platforms are the best ones out there for outreach for distribution of your content for lead generation?

Justin Castelli:
I’m going to take the financial advisor answer of everything. It depends. Should I max out my 401k or my Roth? Well, it depends. When it comes to the channels, it’s going to depend on who your audience is. If you’re working with retirees, then I would say Facebook might be the place to be. But if you’re working with young professionals, maybe it’s Instagram, maybe it’s LinkedIn, if you’re working with a specific niche like doctors, like where do doctors hang out? That’s the channel that you’re going to go to. There is some thought that needs to go in where you want to distribute it. I love Twitter. I’ve made a lot of great friends. That’s how I know Scott is from Twitter. I don’t look at Twitter as a business generator at all. It’s a place for me to network with other advisors, see what other people are doing and learn.

Justin Castelli:
But I think if you have an audience that spends time on Twitter, it might be a way for you to do it as well. So, it really comes down to who you’re trying to reach, where are they at, and how are they consuming? I think the other question is not just the channel, but the type of content. Do you want to write? Do you want a podcast? Do you want a video? I like doing it all because I’m weird and I love this stuff in the first place, but I also know that I can have an avatar that I want to work with, ideal client. But within that avatar, people consume content in different ways. They could fit that professional, they could fit that mindset that I want to work with, but some people would rather read, some people would rather watch, some people would rather listen.

Justin Castelli:
If I need to be on Instagram, but I can put a combination of audio and video and some reading as well, I’m hitting my avatar no matter how they might consume content. I know it ends up seeming like it’s a lot of work, but I just posted a video or a picture on Twitter before we hopped on of my video studio. It’s not very much. It’s a camera, it’s a halo light, and that’s it. I edit and I move. If you really believe in this, and this is how you’re going to move the needle for your business, you’ll find the time, and it’s not that hard. We were talking about editing podcasts. I chop off the beginning and the end, put the intro outro, and unless there’s something bad, it stays in.

Justin Castelli:
The same thing with my videos, so you can go back and find videos where I’ve sneezed, I forgot my words. I’m not going to start over, and I’m not going to edit it out, and the cool thing about that, when we think about building brands, our personal brand, those types of things bring a layer of authenticity to it. People see you as a human and that you do make mistakes, but it doesn’t fluster you. You can operate under pressure and you keep going and you bounce back real quick. I just think it allows people to relate with you a little bit more, because who doesn’t stumble over their words, who doesn’t make a mistake? If you can see me, I’m real and people identify with it.

Emil Tarazi:
Nice. I like it.

Scott McKenna:
Going back to your avatar, how have you mapped out your ideal client?

Justin Castelli:
It’s been a process. When I started my firm, I go back and forth between niche and niche. I can’t decide which way I want to go. I’ve said niche forever, but then I’m hearing it’s supposed to be niche. I was anti niche. I wanted to show that you could build a good business, not having to dial in. Part of the reason I’ve realized is there was not a avatar at that time that really excited me that I was so passionate to work with. My avatar was, do I like you? Are you somebody I want to work with, somebody I enjoy being around? Great. There’s a way for me to work with you in my business. We just recently did a rebrand when I hired Thomas, and we spent a lot of time thinking about who we want to work with going forward, and who do we want the firm to grow with?

Justin Castelli:
I want to make sure that … I want to work with people that excite me. Today, what excites me are other creative entrepreneurial people that want to take charge, they want to write their own story. The messaging on our website, and our avatar today, it’s not a profession, it’s not even an age, it’s more of a mindset. We want to work with trailblazers, creatives, entrepreneurs, people that want to write their own story, and they want to live like a non-traditional life. They want to start a business, they want to go on sabbaticals, they don’t want to be confined to a 30-year career and retire. They want to leave an impact. One of the latest things that I’ve kind of come across is that we want to help people avoid regret.

Justin Castelli:
We don’t want our clients looking back saying, I wish I would have done this, but I didn’t because I didn’t know if I could afford to. Let’s figure it out and let’s build a plan because that lets us do some more creative planning that’s more fun. Figuring out how much to save in Roth and doing those things, that’s important, but I get way more excited about like, how do we build this business? How do we make it so that you can quit your job so you have more time at home with your family because that’s more important? That’s going to take some creativity. That’s going to take some sacrifice, but we can build that, and if we do it properly and you achieve that goal, I think you’re going to live a happier life, and you’re not going to have those regrets.

Justin Castelli:
I don’t have that definition of a profession, it’s more of a mindset. That is some ways harder to identify, but I think, through the language we use on the website and the language we’ll be using in our podcast and other things, it’ll resonate with those people that understand that, which will attract them to us. If it doesn’t resonate with them, it’ll just go over their head and it won’t be anything that’ll excite them.

Scott McKenna:
Got it. Can you walk me through your processing, onboarding a client? Specifically, obviously we’re a portfolio analytics company, so what we’re most interested in hearing about is a little bit about your portfolio construction processes. Maybe if you could walk us through the process, all the way from prospecting to onboarding, what does that look like at RLS, and maybe some actionable takeaways that other advisors might be able to take on since I know you consult other advisors too.

Justin Castelli:
We’ve spent a lot of time lately, and when I say we, I mean, Darlene, my director of operations, automating as much of the process as possible, because we want to try to streamline things, and also with our subscription model, we’re trying to make that as efficient as possible, which allows us to keep the fee we charge clients down low because we’re efficient. Get to know meeting, we schedule that, we wait to hear back if they want to move forward. If they say yes, then a series of emails that gets kicked off through … we use ConvertKit. Darlene has gotten real good about using Zapier’s as well. A lot of these companies we use are connected by Zapier’s, which kicks things off. If somebody gets entered into Wealthbox, our CRM, that kicks the Zapier off to put them into ConvertKit, which kicks them off into this email thread.

Justin Castelli:
It’s very automated. We just have to do one thing to trigger it, but they’ll get an email that says, we’re excited for your planning meeting. We’re glad to be working with you. Here’s a link to write capital for financial planning. Please go in, create your profile, put in as much as you can, and here’s a video to how to do that, and here’s how to link up your accounts. Here’s a link to Riskalyze, to your risk tolerance. We’ll review that. We’ll have a discussion over that. Then another video of me welcoming to the family, if you will. Then a few days later they’ll get another email that will have some questions that we want them to think about, along with a checklist of things we want them to bring to the meeting.

Justin Castelli:
I mentioned George Kinder, when we were talking about the phone going off, he has three questions in his life planning process we’ve kind of taken and made our own versions of them. We want them to think about that ahead of time so we can really spend some time talking about that in the planning meeting. List of your 401k statements, wills, trust, all these things, upload them ahead of time if possible, so we can review them, and then we have the meeting. The first meeting is really just about learning more about their goals, spending a lot of time talking about those questions and really figuring out what is this client’s purpose? What are they trying to accomplish in life so that we can go back and crunch the numbers to build out a plan to help them lead that way.

Justin Castelli:
Then we go back, we crunch the plan. We have another meeting where we go over it. Then in that meeting where we go over the plan is where the investments would come in. It depends on the relationship that we have with the client. I mentioned we have a subscription model that has one portfolio that we use with our wealth management clients, your traditional assets under management relationship, we do a different portfolio construction. Now, they all have the same fundamental beliefs. When I started the firm, using DFA, I believe in small cap, I believe in value despite what’s been going on as of late, so we use DFA funds with some ETFs as well with our wealth management. Our young professionals subscription models are just ETFs, but they have the small cap, they have the value, they even have a momentum tilt into them.

Justin Castelli:
The way the portfolio construction is for young professionals, Riskalyze score determines which model portfolio you go into. Again, the goal of the subscription model is to scale things down and make it more efficient so we can deliver a great relationship, but cut out a lot of the deep dive we do with our higher price model, if you will. It’s basically core ETFs with a couple of outliers that give us the value, the momentum and some global stuff in there as well. Then with my wealth management clients, the core right now is still DFA, but we’re actually getting ready to transition away, not because of performance reasons, but just replicating that strategy with ETFs that lower the cost, is the main reason for making that transition away.

Justin Castelli:
Then I do, with my retirees, have a sleeve of the portfolio that we use, five ETFs, use Meb Fabers favors IB portfolio book as the blueprint for it, but it’s a 10 month moving average, tactical strategy, if you will. I look at, at the end of the month, is it above or below its 10 month moving average. If it’s above, it stays invested for the next 30 days. If it’s below, it goes to a short term bond fund, and we just use total stock market, international XUS, emerging market, small cap, and then real estate. Then that way, those retirees, when the markets are good, if we go through another 11-year bull market, we don’t have to sacrifice growth for safety.

Justin Castelli:
But if things are real bad, we’ve transitioned over to a more conservative portfolio. We have ample liquidity to meet their retirement needs and they can sleep easier at night. I like this strategy because it’s not my gut making the decision. I’m letting the triggers tell me what I need to do. For any advisor that’s thinking of adding a layer of complexity like that, it is a layer of complexity, but it is fairly simple. It’s five funds, black or white responsive what I need to do, and it’s once a month. Now, no tactical strategy is ever going to be perfect. There are times where we do get whipsawed, but by and large, the last couple of years, it’s moved my clients more conservative when I would want them to be. We miss a little bit of the snapback, but then we get back in for growth mode. It hasn’t had a negative impact on the expectations of the portfolio.

Emil Tarazi:
That’s a really good overview. It’s really interesting to hear sort of how your process works. I’m curious how you handle, if a client comes to you and tells you they really want to invest in Tesla, what do you do? How does that fit into portfolio construction, and do you tell them, well, wait a minute, I’m going to move you too far away from your target allocation, or do you entertain it? I’m curious how that works.

Justin Castelli:
My first question to them is why. I want to know why do you have a reason that’s valid for us to do this, or do you just have FOMO? If you have FOMO, let’s talk about that. I’m not opposed to it. I don’t want to get in the business of having a thousand individual securities amongst all my client’s portfolios in trying to keep an eye on that, but I also don’t want a client to become disengaged because I won’t let them have some Tesla. We’ll talk about the reason why. We’ll see if it makes sense and they understand the risks of it. How can we make that fit in, and what’s an amount that’s appropriate that doesn’t blow up the plan. If they just want to have some Tesla to say they have some Tesla, let’s take a couple of thousand dollars, buy a few shares and you’ve got your Tesla, and I’m going to put the responsibility on you to tell me when you want to sell it.

Justin Castelli:
We’re going to be in agreement of this. I’ve logged into my CRM, so there’s trace that we’ve talked about this. I’ll still keep an eye on if I see something crazy, but this position is on you. I don’t know if I’ll ever go to the point where I will tell somebody, “Hey, go set up a Robinhood account for that and let’s move $5,000 over and knock yourself out.” Maybe I would in the future, but right now, I’ll just incorporate it, and I’ll just take it from the appropriate fund to try to keep it in line. For Tesla, I would take it out of the total stock market fund and put it in there because it maps over that way. I wouldn’t take it from an international, I wouldn’t take it from small cap to fund that position.

Justin Castelli:
That way, the overall allocation still stays kind of in, but most of my clients aren’t wanting to do that. They hire us, so they don’t have to think about it, but I have a few. Personally, I enjoy those conversations. When I first got into the business, the investment side is what I love the most. But I also know I’m not a portfolio manager, so I don’t want to do that too much.

Emil Tarazi:
Great. You used the word disengagement, and that’s interesting to me because if a client wants to be part of how his investments are working, you don’t want to say no, you want them to have a stake in it and follow what’s going on.

Justin Castelli:
Most of the time, what they want to do is nothing crazy. They want to feel like they’re participating in that. Even if it’s one or two shares, then that makes them feel good and that keeps them in their plan. Then to me, that’s successful. If I say no, and then they deviate, and again, they disengaged and they don’t follow their plan and now they’re not on track anymore, just because I wouldn’t let them own a couple shares of an individual security, then I’ve done a disservice. I’m not going to let them do something that’s going to blow things up, but I’m also not going to keep them … it’s their money. I’m not going to keep them from doing something that makes them happy, and maybe makes them pay a little bit more attention and maybe they become a better investor because of it.

Justin Castelli:
It’s all about finding that balance, I think. Now, I know there’s advisors that would say, “No, this is the way it is.” I can’t argue there’s anything wrong with that, but I just feel like, in a situation like that, I’m not going to allow it to be a position that causes harm. Then I also don’t have to worry about if Tesla keeps on blowing up, then coming back, being mad at me that I kept them because they could have made some money, because they’re going to be calculating what they’re missing. Then if it goes south, I’ll be a good advisor and I won’t throw it in their face. I’ll just smile when we talk about that Tesla piece.

Scott McKenna:
Yeah. That’s interesting. No, we’ve had a lot of advisors who’ve come across that issue, that’s why Emil asked, when it comes down to their clients, they’re like, oh, I want to buy a Tesla. We’ve had that where this guy was like, “I don’t want to just throw a lot in there.” We actually created a tool to help them with that. So, you can find ETFs with high exposure to it, so you can still get a little bit of exposure. Then on the other end, you can say like, if your client’s like, “Oh, I want to be in Microsoft.” Well actually, if you’re in all these ETFs, you actually have, in that whole portfolio, 15%, 20% of a Microsoft exposure, so that’s a huge amount. It wouldn’t be wise to put even more in.

Justin Castelli:
Sometimes that’ll work and sometimes they just want to see that hole, and they want to feel like they’re a part of the ride. Again, if it’s not an amount that’s too detrimental to the plan and you have the conversation, educating them on the risks and the what ifs and you talk about some risk management measures, say, okay, if it drops 20%, let’s get out, I view it as an opportunity to educate. Our clients come to us because we have expertise that they don’t have. Talking through that, educating them on why, after you get done talking to them about all the stuff we need to do to make sure it’s not a bad decision, they might decide it’s not worth it. Like, okay, I’ve got it in my fund. You showed me it’s a top 10 holding. I have exposure to it. I don’t want to worry about it. Let’s not worry about it. It’s okay, I have it. I think it’s an opportunity to educate as well.

Scott McKenna:
Overall, it seems like your strategy for your businesses, automation and streamlining everything. Is there anything though that is nearly impossible or impossible to automate?

Justin Castelli:
The personal connection, the FaceTime with clients, which is why the whole robo-advisors and Vanguards and the Schwabs of the world, and what if Apple comes into it? Doesn’t scare me. Maybe I’ll come back in 20 years and look back on this and be like, oh, I was so foolish. But I think that there’s a component of what we do with our clients that is emotional and behavioral and relationship-based that technology can’t take away. For some clients, they don’t need that. They have the expertise, they have the desire, they can do what they need to do with the software and the technology that’s out there, and that’s great. But I think, by far and large, most people will want a person to at least be quarterbacking it. I know that a lot of major surgeries, they’re using robots to do it, but there’s still a doctor there in case something goes wrong, and the doctor is still overseeing it.

Justin Castelli:
That’s where I think things keep going. We have technology that can do things better for us, but I’m still there making sure that it’s going into what my clients need, and helping my clients figure out what they want. I think that the big thing that can’t be automated is just, it’s the FaceTime, it’s the personal connection. I do think there are some things that you can bring additional FaceTime that you can automate. I think you can leverage your content to give more touches throughout the year and your clients feel like they’re talking to you a lot when they’re not, and you leverage a video that you record and email to your clients, you leverage a podcast that they get to listen to. So, they’re seeing you, they’re hearing from you, they’re getting your thoughts, but you’re actually only still seeing them two or three times a year. I think you can enhance it, but we’re never going to get away from that personal connection, I think, but otherwise, everything can be automated.

Emil Tarazi:
Yeah. Well, let’s take that thread of automation technology, and I’ll also add to it changes in the regulatory landscape. Also, demographic changes, the average age of the advisor is trending downwards, as are the clients and investors that those advisors work with. I guess my question to you is, looking forward 10, 20, 30, maybe 50 years forward, what’s the role of the advisor? How do you see it change?

Justin Castelli:
I think the role of the advisor is going to evolve to be more of like a life coach. That may not be the right term, but I don’t think that financial planning itself is even going to be enough. We’re still going to be there to coordinate the financial plan, but we’re going to need to be bringing more value to the client, and I think it’s going to be deeper relationships. Going back to my avatar, financial planning software can run the numbers. It can come up with the projections, it can tell you if you’re on track, but a financial planning software is not going to think outside the box, or help you figure out what it is that you really want out of life. I think that that’s where the advisor is. I think the advisor becomes more of a consultant, more of a guide, as opposed to do this and this is the projections because that’s going to be done.

Justin Castelli:
I think there’s ways to enhance the relationship beyond the financial world. One of the things that I really want to crack, I’m a big believer in community, in building communities, building out an online community platform for our RLS Wealth clients. On this online community, if you’re a client, you get access to it. You don’t have to use it, but there will be nothing financial on it. Compliance reasons are one of the reasons, but I also want it to be a way that I can drive value to my clients, enhance their lives beyond money. So, it’s going to have sections for mindfulness and meditation and entrepreneurship and productivity. As I think about the people we want to grow with, what are the topics they’re interested in and let’s bring resources, let’s get them together to communicate, so I’ve also given you a community of like-minded people for you to hang out with and learn from, in addition to the financial planning work that we’re doing.

Justin Castelli:
Maybe it’s not community, maybe you incorporate wellness into your relationship with your clients. So, you’re doing the financial planning, but now you’re looking at a health component to it, because health is a very expensive component of retirement, and how can we minimize that? I think there’s ways to add value outside. Maybe it’s deeper tax planning, but the financial plan itself is not going to be enough. Now, I do think we have some time because so many financial advisors don’t really do financial planning. They say they do, but they’re still investment focused only. When I say financial planning, that means you’re analyzing cashflow. You’re talking about insurance, you’re talking about estate planning, you’re talking about tax planning, retirement projections are there. It’s everything. It’s not just, here’s a document that says you need to invest this way. It’s going deeper.

Justin Castelli:
That’s why I liked the life planning approaches. When you incorporate all those things along with what the client is really trying to build out a life, it’s more of a life plan as it is, just a financial plan. Let’s build the life you want, let’s align your dollars with your values and your goals, and that’s different than just a financial plan. I think it’s going to move more of that direction.

Scott McKenna:
Do you see that being, like the subscription model that you’re running right now that it’s more, you pay a monthly fee and you get these things, or is it going to, an hourly rate like you pay a lawyer or?

Justin Castelli:
I think it could still be all of the models we have today. I think that the subscription model is good for young professionals because they may not have the assets to be managed, to be charged on, which is why I’m doing the course. I don’t think that any one model disappears, I think AUM will continue to live. Now, I do think that it may become more balanced. I think we may see more flat fee, whether that be, it becomes a flat fee divided monthly, so it’s a subscription model or it’s an annual flat fee, I think that may become more of it. I think the AUM model, we’ll start to see caps at how much the AUM fee goes up to. So, we’re charging 1% up to a maximum fee of X. I think that may become … because I think clients are going to become more aware of fees.

Justin Castelli:
As we see the compression on the investment side, I think the compression on the advisor side becomes well, what are you doing this year that makes your fee 10% more just because the market went up. I think that there’ll be maybe a leveling of the field there. I don’t really love the hourly model. I think that there’s a right situation for it from time to time. I offered it when I first started. The main reason was I didn’t want to tell anybody I couldn’t help them. They didn’t have the assets. The subscription model didn’t make sense, but they valued help, they wanted it, so I could do an hourly plan. But ultimately, I want to build long-term relationships, and not even just from a building revenue for the future of my business, I want to work with people that I’m invested in time and everything and energy, and the hourly plan just doesn’t afford that.

Justin Castelli:
I also think that clients are less likely to call with questions that might actually have a big impact on their plan because they don’t want to pay like they would pay for an attorney or for a CPA. How many times do you sign something that maybe you would want to run by an attorney, but you don’t because you don’t want to be billed for it? I think that that happens on the hourly model. I think that more people will go to the subscription model. I hope so. I think AUM was still live. The way that we’re structured, it kind of steps up. We’ve got a robo-advisor, if you will, that I don’t really market that hard. It’s just there, but it’s basically investment-only, real cheap, 35 basis points. You get the model portfolio our subscription clients get, but to differentiate ourselves, we do want to give you something.

Justin Castelli:
We have a monthly newsletter we’ll send out via email. We’ll allow them to send questions in via email that we can answer in a video, but they don’t really have any access to us. We don’t do a plan. But that’s a way to get in and we can help out a little bit. They can have their portfolio taken care of. Then the first level of the subscription model is $150 a month after the one-time fee to get started. Then if you want investment management, it’s the 35 basis points, so it matches the robo-advisor. 150 a month really is designed for a single young professional or a married couple with no kids. Then it jumps to 300 a month, because now we’re getting deeper. The relationship deepens as you move up the ladder. Then at 350 in AUM, you transition to the AUM model 1% world.

Justin Castelli:
You can see there’s a progression of how we can help you along your life as it gets more complicated. You don’t pay for services I don’t think you need at that stage of life. As it gets more complicated, yes, the fee goes up, but yes, you pay more, and then you transitioned to the AUM model, which most people are most familiar with. I think we’ll see more of those things. I think it makes sense. If you’re building a business for the long-term, young professionals, the millennial world, they’re the ones that stand to inherit $68 trillion, I think it is, in the next 30 years. I don’t think you want to wait until that happens to try to get them as a client, because if I’m working with them today and I’m building a good plan for them and I help them improve their situation, I give them attention when no one else would, and again, I do good work, when they inherit whatever they inherit, maybe I’m overconfident, I don’t think they’re going to leave me.

Justin Castelli:
I don’t think they’re going to leave any advisor that worked with them when no one else would, did good work for them, helped them build and make progress and now they have all this wealth. I don’t think they go leave for the higher price model, because now all of a sudden, they want this proceed. I think they’ll be loyal to the people who helped them get where they were, and now you have this inheritance that they received and now it’s in your firm. Then the final thought on that is, if you already have older clients and you want to build a firm that lives beyond yourself, you’re thinking about legacy planning for your business. Why not have a subscription model for a young advisor, who’s your succession plan, that can work with your clients, kids, and grandkids? Now, they already know the firm, they already have somebody to work with, and if their parents and grandparents pass away, they’re already there, and it already stays in. I think that that builds the long-term plan for your business, if you’re thinking that way.

Scott McKenna:
Yeah. I was just going to say, it sounds like that model you’re able to get in and start developing the relationship a lot earlier, which just gives more time for that seed to grow into a big tree once they get to a certain level of wealth, right?

Justin Castelli:
Yeah. I just don’t think you want to wait. I think you want to be ahead of the game. I’m a big believer in doing things for the right reasons and being genuine. Yes, that’s the long play. You hope that that’s what transpires. I don’t think you go into offering the subscription model. I don’t think you go in to finding a way to work with young professionals, just to get the inheritance. I think you do it because you know these people want help, they need help, you can make an impact on their life. Then the icing on the cake is you’re positioning your business down the long-term to be the beneficiary of these inheritances that come.

Emil Tarazi:
What else should we talk about?

Justin Castelli:
Anything you want. I’ve done multiple podcasts. I enjoy them. I mentioned, I like doing this stuff, so content has become a hobby for me, and I’m just so lucky that my hobby also feeds into my business. I started All About your Benjamins, the podcast about four and a half years ago now. To be honest with you, it’s kind of tapered off. Part of that is, it doesn’t feed into the growth of my firm the way I would want it to, but the reason I started is, it was a way for me to have cool conversations with people that probably wouldn’t talk to me any other way, and it’s allowed me to meet people I look up to and have relationships now with them, so it was real cool.

Justin Castelli:
But now that I’m getting more intentional with the growth of the firm, I want to make sure that the content we create feeds into our growth initiatives. Thomas, the advisor I hired, we recorded his first episode. He’s got two more pre-ones to launch, and is just going to be call The Long Game because that’s the name of his podcast or his blog, and that podcast is going to be centered around information for young professionals, and really highlighting people who have followed their dreams and taking risks and the positives of that, to try to encourage people to think about what is it you really one, and then how can you chase that? Then hopefully, some of those listeners realized that we could be the people who could help them figure out the finance side of things and build the plan to help them go.

Justin Castelli:
The podcast that I want to start, and kind of the planning phase for, I’m just going to call, Money and Purpose. It’s just going to be short conversations, maybe a few interviews just about finding your purpose in life. What makes you ticks, and then how can you make your life centered around that and the benefits of it. That one will be more of a broader audience. Thomas’ will be folks focused on young professionals. I used to have a podcast called Reversion to the Mean that a friend of mine from Twitter and I started, kind of like Animal Spirits, Ben Carlson and Michael Batnick. We were just talking about some headlines and kind of have fun with it. Again, he got busy with his work, I got busy with mine, it didn’t really feed into what we were doing.

Justin Castelli:
So, it became more of my time, and his time was better set somewhere else. But we actually thought about doing a reunion episode and running it through All About Your Benjamins soon. I think podcasts are fun. It’s a great opportunity. For anybody thinking of doing a podcast, don’t go into it trying to dethrone Joe Rogan and have the highest listener count as possible. Think of a podcast as a way to communicate with people who are interested in what you have to say on a regular basis. How much would you pay to fill a room of a hundred or 200 people on a regular basis to talk to them and they want to hear what you have to say? That’s what a podcast is. Don’t get caught up in the numbers, just get caught up on consistency and doing it and driving value.

Justin Castelli:
Yeah, you want to see the numbers trend up, but don’t get disappointed. I think I read somewhere, if you have like 100 downloads an episode within three months, it puts you top 20%, 25% percent of some of the podcasts. Most podcasts you see on Apple podcasts are dead. No one’s recording anymore and they don’t have very many listeners. It doesn’t take much to be a player in the podcast game. My final thought on podcast is there can’t be too many podcasts. You have a unique voice. You’ve got to think about, what is it that you have to say, who are you wanting to say it to, and no one else is going to say things the way you want to say them. Again, you’re not trying to get everybody to listen to you. You just want a decent amount of loyal people who care what you have to say, and you can build from there.

Emil Tarazi:
Yeah, I say that to a lot of people. I tell them, we live in a golden age of podcasts right now. It’s never been better time to just search for whatever topic you want, and there’s someone chatting about it, and you can learn a ton from it. I guess you’re right. There’s not necessarily $100 million Spotify deal in our future, but we do these things because we enjoy the conversations and communicating about the topics.

Justin Castelli:
You can be strategic with the way you do it. If you’re an advisor, you’re having to work with small business owners, make your podcast kind of like, how I built this, but on a local front. So, interview small local business owners about how they built that, what they learned, what would they share with other business owners? The cool thing about it is you’re giving them a platform to tell their story and bring attention to their business. You’re making a connection with the business owner who is your end client. I almost guarantee that, at some point, what you do will come up in conversation with at least one or two of those guests. You’re going into this saying, okay, I want to educate other business owners, I want to be a resource for business owners, let me highlight other business owners and elevate them so they benefit from it as well.

Justin Castelli:
Then, people are going to make the connection to that you’re a financial advisor that works with business owners, and conversations just come up from that. There’s cool things you can do with it. The podcast doesn’t have to be all about financial planning strategies. I think that it’s better off if it’s not. Be the financial advisor that brings value on something else beyond their mind. They’ll learn from you. Every once in a while you have an opportunity to tweak some financial planning stuff in there, but make it 90% not financial planning.

Scott McKenna:
Yeah. That’s kind of our approach, I feel like with the podcast. Obviously we’ve been going after advisors since the launch of the advisor workflows in January. Really, we just want to highlight financial advisors, their businesses, if we want the advisors who are listening to have actionable takeaways. So, learning how to automate things, how to improve portfolio construction, tax planning, things like that, the whole spectrum, even if it’s not something that we provide value on the platform, we want to add that value to the marketplace.

Justin Castelli:
I think it’s smart. I think, Gary V. says, give, give, take. I subscribe more to the give, give, give, give, give, take. I would rather give a little bit more before I have to take. I have a mentor that told me that. All the content, all the things we do to help educate and putting others first, we’re just making deposits into the bank of goodwill. Then every once in a while, it’s okay to go to the bank and take a withdrawal. You’re doing these podcasts to help advisors learn, you’re doing this to help elevate advisors, because every advisor that gets to come on your podcast is going to share it with their network. It makes me look like I’m somebody special to my clients, that somebody wanted me to come on and talk about something.

Justin Castelli:
Then later on, you go to the goodwill bank and say, hey man, you have this need, we have this product, let’s talk about it. It works because you’re doing this genuinely and people pick up on that. I’m much more likely to have a conversation to learn more about it because we have a friendship, we have a relationship and you helped me, rather than you’re DMing me on LinkedIn all the time about this tool you have. Advisors can do the same thing. I think you guys are doing smart.

Emil Tarazi:
Cool. Thanks for your time today.

Justin Castelli:
Hey, thanks for having me. I enjoyed it.

Emil Tarazi:
Did you want to wrap it up, Scott or?

Scott McKenna:
Yeah, Justin, we really appreciate you having coming on to the podcast today. For those who are interested in learning more about Justin and RLS.

Justin Castelli:
The best place probably is, I’ll send them to justincastelli.io. That’s my website that’ll take you to everything. If you’re an advisor, it takes you to my newsletter. It can take you to RLS as well. That’s the hub to get you to everything, all the blogs and everything. So, justincastelli.io is the best place to go.

Scott McKenna:
Awesome. For advisors who were interested in the Logicly platform, you can go to Logicly, it’s spelled a little funny, logicly.finance/freetrial, and you can get a free trial of our Logicly platform.

We sit down with Ryan Shanks, CEO and Co-Founder of FAMatch, to talk about advisor trends, the importance of building a personal brand, and how the industry can adapt to better recruit young advisors.

Transcript:
Speaking Logicly as brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
What’s up, guys, and welcome to Speaking Logicly. My name is Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
And today we are joined by Ryan Shanks, CEO and co-founder of FA Match. Ryan, how are you doing today?

Ryan Shanks:
I’m well, how about you?

Scott McKenna:
Can’t really complain too much coming off of a long weekend. How was yours?

Ryan Shanks:
Good. It was good. As I like to say, there are five Mondays in the week typically, and we get four this week. So it’s a good week.

Scott McKenna:
Yeah, that’s a great point. It’s funny, I always see a debate on social media. Does it feel like a Monday, Sunday, or Tuesday? And I think it basically is saying, whatever is your least favorite day of the week, it feels like that on repeat like Groundhog day. Well, anyways, Ryan, let’s jump into it. For those who don’t know much about you or FA Match, why don’t you give us a little bit of a background?

Ryan Shanks:
Yeah, thank you for that, Scott. I’ve been in this business for 20 years, trying to help financial advisors make transitions from one firm to another. And through the years, a lot of that’s become launching their own independent firm. And when you get knee deep in that work, and I love that work, it’s not scalable. And so that’s really why we created FA Match. There’s a multitude of reasons, but the big drivers are, we wanted there to be a standardized process that would allow for advisors to evaluate their options discreetly. And we wanted there to be the ability for that to scale so that it could apply a benefit to tens of thousands of advisors over an annual basis. You’re not capable of doing that when you’re doing it on a one-to-one and it’s really no different than an advisor working with their clients. You get to a certain capacity point and you can’t scale without hiring and bringing other folks into service.

Emil Tarazi:
Can you give us a little background on how big is the market? How many advisors are out there at any given time? How many people are coming to you for, ballpark numbers let’s say, coming to you for advice or looking to make a move?

Ryan Shanks:
Yeah, the annualized number changes, but it’s typically anywhere between 25 and 35,000 advisors make a move every single year. Be anxious to see how it shakes out this year although I’ve seen some pretty decent movement trends. And so, again, the advisors that are coming to us, oftentimes they don’t know what they don’t know. They know that they’re not happy where they are. They don’t like the folks they’re working with. They don’t like that their compensation’s being cut. They want more control. They want to call the business what they want to call it. So it’s a multitude of reasons that drive the advisor to us. And what we’re saying is, is that there’s not a silver bullet. There’s not one firm that stands alone in the entire industry that is the right fit for all advisors.

Ryan Shanks:
And so what happens there is, you end up having this network of traditional third-party recruiting that is oftentimes doing self-dealing. If an advisor goes to one of them and says, “Hey, I need help,” what’s really going to happen is that recruiter’s going to put them in front of the firms they have contracts with. So it’s just like, if an advisor were to say, “Well, I can put you in this product that I’ve got the ability to do,” it doesn’t mean that it’s what’s best for you. But that’s the volume. And so you think about that. That’s, call it roughly 10% of the advisor population, makes a move on an annualized basis. That’s significant. And I think what underscores that is, it’s a problem. I think that if advisors move to the right firm, at some point that number starts to shrink if it’s being done right. But that just hasn’t been the case.

Scott McKenna:
Retention is so important, there’s no doubt. Do you have any strategies for advisor firms that they can implement to maybe better retain their advisors or for advisors who are looking to make a move?

Ryan Shanks:
I mean, I think for retention, and I always say to folks, that’s what’s most important. I don’t care about your recruiting numbers, I care about your retention. Because if you can’t keep the good folks you’ve brought in the door, why are you trying to bring additional ones in? It becomes a one-to-one, we’re going to replace everyone that’s leaving. So for the firms, it’s being really vulnerable and honest with themselves. Do they actually have something that’s of value for another advisor to consume, as it relates to technology, compliance, oversight, et cetera, marketing programs. Do you have ways that can help me grow? You have ways to help me deepen the relationship with my clients. So as far as being really honest there, and it’s also looking at the comp structure, is how you’re paying the advisor competitive and what does that return going to feel like for that advisor? Do I feel like that I’m getting a fair payout for the services and solutions I’m receiving from you or not? That can drive a lot of that.

Ryan Shanks:
On the advisor side of the ledger, it’s doing the same exercise. Looking yourself in the mirror, analyzing the business that you have today. Will those clients follow you if you make a move, because that really seeds your business in that transition. If you move over and none of the clients come with you, most firms in the industry are going to terminate that relationship. It’s all based off of goodwill that we’re going to put this in place with the assumption that your clients at this level are going to come over to our firm, which drives their profitability metrics. That advisor needs to be truthful about that. And they need to think about, not only the needs that they have today, but they need to try to envision two, three, five years out, the advisor they think they may become. They may need to ask some of those questions and that can solve for them not making another move in five years, if they can… As I tell folks, it’s not checkers, it’s chess that you need to apply when you’re evaluating this landscape.

Emil Tarazi:
So on the advisory side, what are some of the skills that, especially when you see people moving from one place to another, what’s on their resume that really resonates with adviser firms?

Ryan Shanks:
So, it’s different than your traditional recruiting. They clearly have a skill. The skill is working with clients and helping them with their investments. Some firms, it’s a function of, you’ll need to bring a certain amount of those clients over. That’s the number we’re looking for. The more sort of well thought out firms, we see most of these in the RIA sector where they’re independently owned and they’re at a certain size, where they’re saying we don’t need someone to come with a book of clients. So at that point, they’re really looking for designations, are they a planner, a CFP? And so they’re saying, “We’d like to bring you inside of our organization. We have current clients of the firm and we would like for you to apply your expertise to and planning.” And oftentimes that’s to support maybe a senior advisor, which is interesting.

Ryan Shanks:
So, again for the advisor, that’s like, I have been really over here working my tail off, helping to support this business, but the clients that I’m interfacing with, they’re not my clients. I’m not happy, I want to leave, but I have no clients that will come with me. So that’s an opportunity that presents itself for them. So for advisors who are listening to the podcast and you’re thinking about wanting to be independent, maybe you don’t have clients. Your best route is going to be to find an established RIA and communicate with them about coming in and being a part of that team.

Scott McKenna:
Diving a little bit deeper into that trend you mentioned before, about 10% of the advisor workforce making a move every year. I’m curious what the general trend is. Is it generally that advisors are looking to make a move to becoming more independent or does it not really matter what type of firm they move to, so long as it has the right fit?

Ryan Shanks:
Yeah. Those numbers have continued to climb. It’s interesting, when I got into the business 20 years ago, an independent broker dealer just wasn’t commonplace. An advisor knew about other wirehouses, banks, regional brokerage, et cetera, but not so much about the independent side. And that was why, you’re going to go over there, that’s so risky. The pendulum has swung where now there is so much awareness about it. There are resources out there that work with a lot of these companies that are trying to engage with those advisors to entice them, to move their business there. So I think it’s not all tracked as cleanly as I’d like for it to be, and what I mean by that is, there are advisors that aren’t necessarily leaving a wirehouse and going and starting their own, and they’re plugging into one.

Ryan Shanks:
And I think what we’ve seen with the exodus to independence over the last, call it the last seven years, have been what I would think are kind of the earlier adopters. Folks that were captive that said, “No, you know what, I’m going to jump. I’m going to go do this, I’m going to build it.” Now, we’re dealing with advisors on the captive side of the industry that are, they’ve been more reluctant for a longer period of time. You could also articulate it this way. They have a higher pain tolerance, and they’re just getting to the point to where enough pushing has gone on that they’re like, “I’m done and I want to go and I want to explore.” And the independent landscape has caught up to the wires and these captive firms that have historically had really solid infrastructure technology. The independent technology today, I would stack up against any captive wirehouse type firm in the industry, all day long. And when you see the output of that and that client experience, it’s second to none. It comes down to the risk that advisors are comfortable taking.

Emil Tarazi:
So, on that point, that’s one of the key trends is where people are going and which firms they’re going to. Curious about some of the other trends that you’re seeing because obviously you’re in a prime spot to see where people are moving. I guess, one of the things that’s often mentioned is that generally advisors skew older, and that there are more and more sort of younger advisors coming online. Curious about that. And then on the investor side, as millennials gather more wealth, there’s a broader base of millennial investors that need to be catered to. I view that sort of as a complimentary trend there, so I don’t know. What are your thoughts on those trends and other trends in general?

Ryan Shanks:
Yeah. I mean, I think, for the millennials, sort of the younger perspective client if you will, I think one element, and it’s funny, I just got to wrap it up on Zoom with an advisor talking about this, when you’re trying to kind of define what’s the client segment that you’re trying to go after. The younger generation, so much of their DNA is do it yourself. I know my three kids, I’m certainly raising them to be able to be competent, that they don’t need someone else. They can go and they can do it themselves. So you’ve got that element where it’s do it yourself and where it hits a tipping point is whenever they’ve accumulated enough money in savings or in investments or their income level gets above a certain threshold where they start to really look in the mirror and go, “You know what, I could do it myself up to a certain point. Now, it really hurts if I screw up. I want to go on, I want to kind of find someone, to target someone.”

Ryan Shanks:
I’d like to think that there’s going to be an interest in aligning with a peer. So a millennial working with a millennial adviser. You are able to look at one another to see that, hey, we’ve got some of the same philosophies around life. We’ve kind of grown up with some of the same circumstances, sort of all digital versus very little for the older consumer or the client. And they’re able to look at one another and see, hey, we’ve got a long runway together versus going and working with an advisor that’s in their sixties. And so I think that’s an element that’s going on there.

Ryan Shanks:
When you go upstream, the older advisors if you will, the irony is the rule of thumb that typically plays out is, the average age of the advisor, call it above 55, equates to a very similar average age of their client. So you’re able to really look at that advisor and you can actually glean quite a bit of insight into their client customer base, unless they’re doing something unique and different and they’re working with a next gen, which folks are still struggling to try to overcome. That business, it gets to a certain point of distribution to where the overall value of it, it depreciates. So I think you’ve got kind of both ends of it. We’ve got the average advisor getting close to 60, of which most of them don’t have an executable succession plan in place. So in the event something happens, there’s not anything that can be monetized from a transaction to a next generation.

Ryan Shanks:
So they’re really not putting their clients in a position to say, “Hey, I’ve thought about you and if I get hit by a bus, here’s exactly what plan I have in place. Here’s, what’s going to happen. Here’s who’s going to step in and continue to take care of you.” They’ve not done that. And frankly, between you and I, I think that is one of the most significant voids we still have in this industry.

Scott McKenna:
Like you said, the average advisor is over 50 now. The baby boomers in their seventies, they really have to start thinking about who’s going to take over their business next. And in my mind, I think that is a huge issue in the community and from my own experiences, I wanted to get into the industry right out of school. But the places that I had interviewed at, it was eat what you kill model, where you come in, you’re going to call your friends, your families, we’re going to give you this cold call list. And if you generate enough revenue for us, maybe you can stick around. And that’s just a model that I was not comfortable with at all. And had I been given a different model, I think would have become a financial advisor in another life. So I’m curious to your thoughts. Is there a big issue when it comes to getting new people involved and interested in becoming a financial advisor, or is that something that’s really being worked on and will be solved by the time all of these baby boomers are ready to retire?

Ryan Shanks:
Yeah. No, that’s a really great point. The days of the really robust training programs, which are really brokerage and insurance, where a lot of folks came into the business, they learned the business, they cut their teeth, the business spit them out frankly, because they didn’t cut it. Maybe they had enough friends, but the friends weren’t willing to come and give them an investment, because think about that. If you and I were the same age and we just came out of college and you became an advisor and came to me, I’m going to say, “Scott, look, man, love you. We’re good friends, but I’m not giving you a dime because you don’t know what the hell you’re doing. You’re still figuring that out.” So I think that’s tougher today for folks trying to get into this profession because there’s still some of those training programs, but a lot of it is very much structured the same way.

Ryan Shanks:
I think that as the independent firms gain traction and create more robustness, and what I mean by that is a stability, they’re actually operating like a company, it’s no longer a practice, that creates a destination for some of the next gen folks to come into. And I think the people that are running those companies that are smart, see where the puck is going, are able to understand that if we can bring in some of the younger advisors, they can communicate with our current clients’ kids and allow for that continuation, that transfer of wealth. We want to be in a position to continue to advise on it. And I think that gives an opportunity there. We don’t have enough folks coming into this business. You alluded to that, that is true. I think about that a lot. What can we be doing as an industry to try to attract advisors?

Ryan Shanks:
I think that one huge benefit we have is the younger generation that’s coming out of college now, they’re not so concerned about the income as they are of the impact. And I think that if we can somehow articulate that, that we can draw them to this profession. But I think the industry as a whole needs to elevate itself to create a welcoming environment for those folks to come in and find a spot to work. I think colleges around the country, they’re starting to… I mean, the financial planning, the finance departments, they got plenty of folks that are coming into it, but they may be popping out to some other… investment banking, some other role in the industry that’s not specific to what we’re doing around planning and financial advice to an end client.

Ryan Shanks:
And then I think, on the tail end, I mean, if you think about it, the average advisor being where they are, the irony that you’ve got there is, is that the most valuable businesses are tied to the older advisors. And so think about that, think about that sort of weakness, if you will, or that handicap. For those who don’t have a continuity plan in place to ensure that that book of 200 million or 300 million of client’s assets have some other advisor to step into to service. It’s a shame, frankly. And what it really says is, you’re able to give advice to clients, but not able to consume it yourself. And I think that as a profession, I’d love to see frankly, it get to a point to where it’s mandated that when you get above a certain threshold in age, you should be required to put a documented continuity plan in place to show that… You talk about fiduciary, in my view that is the greatest Testament to being a fiduciary for your clients, is thinking about how you take care of them when you’re no longer in the equation.

Emil Tarazi:
Ryan, I wanted to touch back on the technology trends and specifically what technology platforms or skills you see advisors having that really helps propel them through the industry. The technology is central to everything we do at ETFLogic. And going through your site as well, I can tell that technology drives a lot of the matching process. So obviously, technology is quite important, but I’m sure you can pick up on some sort of general skill sets in the technology or platform specific area.

Ryan Shanks:
Well, again, if you think about technology, what is its overall purpose? It’s its overall purpose I think is to scale, it’s to empower people to be able to scale. And I think as it relates to this business, there’s somewhat of an overwhelm that’s going on right now, especially with sort of this COVID. I don’t even want to call it the new norm. It’s the norm, this COVID environment that we’re all functioning and working in. I mean, my goodness, I had spent so much time on Zoom, I’ve spent more time on Zoom since this took shape than I have in the last 10 years combined. And I think everyone is doing that. And so, I think more than ever technology is more important because you realize we all miss sort of the in-person component, but we’re realizing that we are fast forward on a virtual environment and a virtual world for everything.

Ryan Shanks:
I’ve had experiences with music and bands and cocktail parties and it’s all virtual. You’re not with your friends hanging around in a room somewhere, it’s your home. So I think that that is one of the elements though by the way, with the younger demographic coming in, because they’ve sort of just grown up, consumed wholly by technology, that it’s second nature. I mean, I look at my kids and it’s getting to a point, I feel like I’m pretty savvy, but it’s getting to a point to where I’ll sort of just bring something up occasionally around some of my kids and they’ll pop off and I’m like, “Wait a minute,” and we’ll go a little deeper and they totally understand what my question is and they have the answer, and they’re 14, 11 and nine.

Ryan Shanks:
So, you think about where we are today and think about how technology is continuing to propel us. I think that we’ll see some of these younger advisors coming in, I think that is an element and that’s how I coach some of them that if they want to get into this business, it’s a way for them to bring immediate impact to a firm, is that knowledge, that ability to be so dialed in with social media and technology and the value of integration.

Emil Tarazi:
Yeah. So on that last point on social media, we think a lot about how we market ourselves, obviously as a technology platform, but how important is social media and that aspect of marketing yourself, or is it still sort of in the early stages?

Ryan Shanks:
Without a doubt, it’s in the early stages. You can just see when you’re out and about on social, you can see the folks that are pretty engaged and active and the folks that are every once in a while. I’m not on it sort of all day. I know I’ve got friends that are on it all day, every day. I think it depends on you. I think it’s a preference. I do think that because of COVID, I think that if you were getting into this business as an advisor, you are going to suffer, not being able to grow the way that other generations prior to you have, because you could go and meet at a coffee shop with a prospect. You could have them come and meet you at your office when the convenient time worked out. Those things have been eliminated and so I think now more than… I think social media, we’re going to continue to see that become even more involved.

Ryan Shanks:
Where you struggle with it in our industry, is on the captive side of the fence. It’s restricted very heavily. There’s certain technologies that financial advisors are not allowed to use because big brother’s saying, “Hey, you can’t use that. We’re going to monitor this one and you can use it, but only in this way.” And then when you sort of see the opposite extreme, you see folks that are running independent wealth management firms and independent advisors having carte blanche. They’re on there and they’re active and they’re engaging and they’re having fun. So I think it gives the captive side something to look forward to. And I know some of the advisors I’m talking to, that’s one of their elements.

Ryan Shanks:
They’re like, “Look, I want to be able to use social media the way I want to use it, to engage with my current clients and prospects.” So they see that as a means for them to be able to scale and grow their business. But I think the personal preference is going to come down to, frankly, it’s just like what we’ve always seen. What would be an interesting study and this is something kind of fun is, could we identify, are more folks engaging with social media, introverts or extroverts? I’d be really curious about that stat, to see what that level of engagement would be. Because if it were the case that it were introverts, then you could see that maybe they have a more profound impact in engaging with prospective clients that they otherwise couldn’t in a normal world. So that could be an advantage for them.

Scott McKenna:
Yeah. I’m a big believer in developing a personal brand and more and more, I think, having that personal brand and allowing your personality to shine through is going to be really important to developing the overall company brand. And I can see how advisors would want to be able to do that and be on social media to give their own voice. Because as we’re talking about the value of an advisor changing over the next generations, it’s really more going to be about the behavioral finance stuff that they can offer, the relationship building, the financial planning. And it’s so important to have that personal brand as part of that.

Scott McKenna:
And Ryan, I can tell you the first thing that I would do after having an initial phone call with you, if you called me, would be to Google you and for an advisor who’s restricted like you said before, they can’t even have a Google review. So if I’m not able to find anything about you or even understand who you are a little bit more, the likelihood of me as a millennial working with you, is very slim.

Ryan Shanks:
Well, when you think about that, you talk about Googling and pulling somebody up, typically what you’re shooting for is, target number one is a website and that website is meant to drive intel, information flow back to me, I’m going there. But it’s also meant to validate, is it validating this person’s, their competency, their ability to provide what I need for them to provide. And I got to tell you, that’s step number one. And there’s a lot of folks that aren’t even getting that right. It’s having a proper website that articulates who you are, but you nailed it. If I’m captive as an advisor, I’m really not meeting you and saying, “Hey, I’m Ryan Shanks.” I’m really meeting you and saying, “Hey, I’m the brand and I just happen to be somebody that’s going to sort of champion the process on behalf of the brand. So it’s not important that you know a whole lot about me. I’m just here to kind of exercise off of this.” And then when you get onto the other side…

Ryan Shanks:
I love watching that. I love watching advisers that have gone from being captive and restricted to being independent and just feeling like they’re jumping off of the roof into a swimming pool. They’re just celebrating, they’re excited. And they can go about articulating in a way that they always wanted to. And I think it resonates with their current clients, but I think it also gives them the ability to win new business because they’re able to be more authentic. And I think that’s really the key. Are you able to be authentically yourself in a captive environment?

Scott McKenna:
So Ryan, you use the analogy of jumping into a pool, but I’m sure for an advisor who’s moving from a big network to becoming independent, it more feels like jumping into an ocean in that, used to have all these resources and now, you’re kind of on it alone. And my question for you, Ryan, is, if I’m thinking about leaving a network and becoming independent, what are some of the questions that you’d ask me to help gauge how independent I really want to become?

Ryan Shanks:
Essentially it’s what do you want. Do you want control? Do you want brand? Do you want the financials, compliance? You have this vision that you think you could build the wealth management firm of the future and you want to be the architect of that? All those different elements come out. You could say, “Well, I do want to have the brand and I want to have my own website, but I don’t want to be responsible for the compliance and all the…” So it’s up to you and so, what I challenge every advisor is, go look in the mirror and tell yourself what it is that you want. If it’s you just want to be away from where you are now and the environment that you’re in, okay, that’s fine. You’ve outgrown where you are. You don’t like the people you work with, the clients aren’t what’s being put first. It’s something as simple as you can’t charge for a planning fee and you want to. You want to justify your value and you think that that fee articulates that, and you want to be able to put that in place.

Ryan Shanks:
So it comes through all of those elements and some of what I challenge them with is, okay, well, so let’s run through here. You got young kids, it’s a Friday and we’re in a normal world, we’re in a post COVID world and you want to be able to go coach your kid’s game. Do you want the ability to be able to bounce out early to go do that or are you comfortable knowing they did swell? You got to make sure that you’re doing your reporting and your billing to the clients and it’s payroll for the employees. What do you want to be doing in this business? And I think that’s really important. I want to take care of my clients and I’d like to go out and see if I can’t harvest more of the same and take care of them, but I don’t want to be in all these other areas. Okay, that’s great. There’s a solution for you. I want to go and build it on my own. Okay, there’s a solution for you.

Ryan Shanks:
So it varies and again, the issue that you’ve got is if you go out there, depending upon who you go to, to get the advice, oftentimes that advice is self-serving. They’re going to guide you to a destination that might profit themselves in doing so. And it may end up being that it’s not the right fit for you. Those are some of the elements that you can get into. Do you want guarantee and compensation? All right. That’s going to be more of a W2 structure. Are you comfortable with a little bit of that risk and you’d like to get a little bit more of every dollar? That’s a 1099 independent structure. Sometimes I’m like, do you have expenses that could be allocated to the business for you to operate it? All right. Well, that’s going to be 1099 because you can not do that as a W2. So again, it just depends upon their current circumstance, what they’re looking to go and do. Here, we just try to guide them down the right path to ensure that they’re no longer in the moving business, they do at one time and they do it right.

Scott McKenna:
Awesome, Ryan. Well, we’re coming up on our time. I hate to cut it short, but is there anything else you wanted to say before we close it out?

Ryan Shanks:
No, again, we hit on a lot of the things that are really important to me, so you nailed that. It’s the younger generation coming in. What is the path into this industry? For the older folks, what is the path out of the business, handing off the business to a younger generation. It’s the nuances around sort of qualifying opportunities for an advisor. For a firm, it’s sort of taking ownership and taking stake in what you really are putting on the table for advisors and is there of any value there. This has been a great discussion.

Scott McKenna:
Yeah, I totally agree. Thanks for coming on again, Ryan. And for those who are interested, if you’re thinking about making a move, you could reach out to Ryan Shanks at ryan@famatch.com. And if you are interested in streamlining your investment research and portfolio construction workflows, you can reach out to me at scott@etflogic.io, or you can go to logicly, spelled a little funny. It’s spelled L-O-G-I-C-L-Y.finance and you can go ahead and request two week free trial access to our logicly platform. Thanks again and we’re looking forward to offering a whole bunch more of these Speaking Logicly episodes to close out season one. We’re running all the way up until December. Thanks again for listening, guys.

CoFounder and CIO of Roundhill Investments Tim Maloney joins us to discuss what it takes to make a viral ETF, the importance of social media for the future of investing, and how Roundhill navigates some of the distribution challenges of being a smaller ETF advisor.

Transcript:
Speaking Logically is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information with in this should be considered trading or investment advice.

Scott McKenna:
Hello, everyone and welcome back to speaking logically. I’m Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
Today we are joined by Tim Maloney of Roundhill Investments. Tim, thanks for coming on.

Tim Maloney:
Of course. Thanks for having me. I’m excited to be here.

Scott McKenna:
So Tim, for our audience that might not know much about Roundhill, why don’t you tell us a little bit about your role there and how you guys … how about the ETF marketplace?

Tim Maloney:
Sure. Thanks Scott. So Roundhill is ultimately an ETF advisor. We started the business, my partner Will and I, in 2018. The idea was really to focus on what we think is an underserved audience within the ETF space and to do that by focusing on a self-directed audience and reaching them on the channels that they’re on in a way that perhaps, some of the larger peers in the industry aren’t looking. I will say this, audience skews younger, but that’s more of a result of focusing on self-directive.

Tim Maloney:
All ages are welcome with our funds, obviously. So, and then as far as what our products, it looks like we have the NERD Esports and digital entertainment ETFs, the best sports betting and iGaming EFTs. There’s a third one under our umbrella. I think we’ll get a little more into a deep value ETF around tele-acquired deep value ETF. So that’s kind of a little bit about Roundhill where we’re currently a three-person team as of yesterday, with a fourth joining in a week or two and definitely have our sights set on continuing to create compelling fanatic products for this kind of underserved audience.

Scott McKenna:
That’s awesome and congratulations on reaching 100 million on bets as well. That’s really huge, especially how recently you launched.

Tim Maloney:
Thank you. We’re very excited about what we’ve seen there and I think frankly, it’s an indication of the excitement of the investing public about the opportunity in sports betting and more broadly, iGaming, as legalization comes online across the United States and frankly elsewhere.

Emil Tarazi:
So maybe you could tell me, walk me through kind of how you think about both video games and sports betting online. With the backdrop of this new economy and the pandemic that we’re living through people are at home and they need to be entertained. So in my view, both of these sort of themes have massive tones.

Tim Maloney:
Sure. So I’ll take what I think the easier one first which is the video game fund, the Esports fund. To your point, people are hungry for content. I think that, in a way, the lockdown and everything related to COVID has actually brought people back to gaming who maybe didn’t have the same time for it previously. We saw, right out of the gate, some of the more public and kind of faster disseminated data points around the industry, whether it’s the amount of people watching others play video game on streaming services or the amount of people actually playing and registering.

Tim Maloney:
We saw those numbers tick up materially and then kind of on the back end, now that we’re starting to get earnings from the companies involved in the gaming industry, we’re starting to see it feed through there. So I think sometimes you get lucky, I guess, in times like this. I certainly don’t mean to make light of what’s going on in the world, but for a gaming ETF, it’s a pretty good time to be in the market for the industry. The sports betting side is a little bit more nuanced because obviously, we didn’t have sports for a little while there. I think that as sports are coming back, that the trend is beginning to move in the right direction again.

Tim Maloney:
I do think that sports are going to continue to come back and even if we do see bumps in the road along the way, I don’t think anyone’s of the opinion that sports are going to go away in the longterm. The trend that I think is more important, frankly, underneath it with, as of 2018, it was no longer illegal at the federal level to the sports bet and now the states are kind of pushing the agenda across the country to legalize. I think that trend continues and continues to be really interesting moving forward, even more so in light of potential budget issues that the states are feeling as a result of COVID. So I think in both cases, there’s a story to tell there and we’re excited about both themes on both the short, medium and longer term.

Emil Tarazi:
Where do we stand today with, in terms of legalization for online betting, in terms of number of states that have passed laws allowing it?

Tim Maloney:
So the states typically will differentiate between sports betting and iGaming more broadly. So sports betting is kind of a part of the broader umbrella of iGaming, and I think there’s a, I’m certainly not a legal expert and I don’t want to get too far into the nuance there, but sports betting is moving more quickly than the broader iGaming umbrella. There’s various stages depending on where you look. So for example, New Jersey, we have legal sports betting, in New York, not yet, but the thesis there is that they’re going to be moving it forward so that people aren’t just crossing over the bridge or tunnel into Jersey just to place their bets as it were. So it’s a long-winded way of saying it really varies depending on what specifically you’re looking for, but the progress is certainly being made. I think it’s going to continue, is kind of my core thesis.

Scott McKenna:
I definitely think a lot of people agree with you on that. I know I do and ETF issuers as well. We’ve seen a bunch of thematic ETFs specifically come out around video gaming. I’m curious, how do you guys differentiate yourselves in that marketplace and in terms of your fund construction processes?

Tim Maloney:
Sure. So I think the key difference for our process more broadly against other sematic products is, we don’t go with the market cap weighted. We actually go with what we call kind of a tiered weight or a modified equal weight we’ve also called it or heard it referred to. What I mean by that is when we go through and look at the basket of companies involved in the space, whether if the space is Esports and digital entertainment or sports betting and iGaming, we look to weight companies with a higher weight at these quarterly rebalance if they’re more involved in the industry in question. So what you end up with is you could have a four or 500 million market cap company, that’s getting a 5% weight, assuming it’s sufficiently liquid, rather than the top five holdings being Apple, Amazon, Google and Nvidia.

Tim Maloney:
So the idea behind it is if you’re going to create a thematic product, it really should have the highest possible kind of correlation to the underlying industry. The way you get that is by weighting companies that are more exposed to the theme with a higher weighting. So at the highest level, that’s the idea where you end up shaking out in terms of exposure differences is really we don’t have the same exposure to those kinds of large cap tech space and historically as well, semiconductors, which are important to the gaming industry, but we think are less closely tied to the themes we’re looking at, which is really the Esports and digital entertainment, so more around the social component of gaming. So that, hopefully, is a good, higher level and more specific answer to your question.

Emil Tarazi:
Like Scott mentioned earlier, you hit 100 million in the bets ETF. How did you get there? I’m sure a lot of smaller issuers are out there looking on enviously. What’s your strategy for distribution? How’d you get into people’s portfolios?

Tim Maloney:
Sure. I think we were, frankly, very excited. I don’t want to say surprised because it sounds like I don’t know what I’m doing, but I think the initial reaction to the bets, the sports betting in ETF was, I think, a fascinating case study. Really at the end of the day, our thesis is that you can create a viral ETF. How you do that, there’s kind a number of factors and frankly, it’s hard to measure, which is most important, but you need to have a theme that’s interesting to a kind of broad audience of people. I think a good ticker is important, although I probably shouldn’t say that cause it’s hard enough to find good ones that aren’t being used. Then, I think the most important piece where we differentiate beyond the audience we’re focused on, is really related to the audience we’re focused on.

Tim Maloney:
We’re not focused on the more traditional distribution model of getting in front of financial advisors and there’s a few reasons for that and we can talk a little bit more about it, but instead, where we’re focused is reaching as many people as we can with compelling content about the theme that we’re covering and kind of trusting them to be smart enough to figure out, “Hey, the guys Roundhill sure talk about Esports and sports betting a lot. I wonder if they have anything that can help us invest in that industry.” We trust them to make that connection and our strategy is focused around content creation and then content creation feeds earned media and earned social media, which then brings more eyeballs to our content and then kind of that’s the circle we’re working with. So we’re really focused on a one to many channel that I think is underused and hopefully stays that way because right now I think there’s space to do that and it does work for the right type of product.

Scott McKenna:
Yeah. I follow you guys on social media and I got to say, I’m amazed at how much I can learn about the space just from looking at the content that you guys put out. I actually, while we’re on the topic of social media, I wanted to talk about a specific tweet that I saw from your account that I thought was really interesting and it kind of sparked my interest of having you on and that was about the challenges as a smaller ETF issuer, specifically as it relates to ETF institutional distribution. I think you know what I’m talking about, right?

Tim Maloney:
Yeah, sure. I was surprised about how many feathers were ruffled, not to say that you were in that camp, but definitely got some attention from that post. I want to start by saying, it’s not that we don’t want the advisors to buy our funds, it’s just that the landscape for getting in front of them is really tilted against the small issuer and that’s not to complain. It’s just, we’re working with the opportunities that we have. What I was alluding to with the sort of model for distribution is, so we’re a startup advisor, right? So we had the one ETF. Now we have two and we’ve actually reached some critical massive assets, but for the first call at six months when we did try and build out a more formal distribution channel with the kind of advisory community, there’s too much red tape, I think, for advisors to be able to make decisions independent of their organization.

Tim Maloney:
So what I mean by that is I could call 15 advisors and have a really good set of phone calls with all of them and they work at a large wirehouse and they all say, “This is great. The content is helpful. I’d love to put your funds in front of my clients. Let me come right back.” All 15 of them will basically find that internally, they’re not allowed to buy it because we’re not an approved issuer and the fund is not an approved fund. I understand why that happens, right? There’s a lot of choice out there. Some of these larger platforms want to make sure that advisors are investing in things they understand. I’m not really faulting anyone.

Tim Maloney:
I do think it’s going to change because it doesn’t necessarily work for the benefit of all parties in the ecosystem, because limiting choice for the client is not necessarily a good thing, right? That’s what I was kind of getting to and there was one particular example where, I won’t name names, but I basically did a panel for someone and found out after that my funds weren’t available there and that instead of introducing them to our funds, they’re trying to push forward the approval process or something to that effect, they actually were recommending a competitor’s fund if they were interested in this space.

Tim Maloney:
Again, I don’t even really fault the people involved. I just don’t even think they had thought about the fact that they can’t buy the Roundhill funds because of this sort of due diligence process. But you can’t even find out about if you’re us, right? It’s impossible to get the right people on the phone without bringing on consultants who happen to have their phone numbers at the bank. So anyway, long answer, I think that the system’s really a little bit broken for smaller advisors like ourselves, but more importantly, it’s not benefiting the end clients or the industry in the more medium to long-term in my opinion, so it’s going to have to change. I think we’re starting to see that with the migration of financial advisors from wirehouses to the more independent channels. So long answer and I probably opened up more jars than I closed, so I’ll let it go back to you guys.

Scott McKenna:
No, absolutely. The industry is changing very quickly and it’s something that we work a lot with independent advisors, giving them the same caliber investment research and portfolio workflow tools that they would get from having a team of analysts at a home office. I think technology definitely, obviously, pays a big part in being able to allow advisors to get to that next level, but I think there’s definitely more to that as well. Right, Emil?

Emil Tarazi:
I agree with that. We do see those same trends towards self- directed investors. A lot of people talk about ETFs as being a democratizing force, but a lot of these sort of traditional shops have gatekeepers preventing ETFs from being part of the investment process, certain ETFs are being part of the investment process and that’s serves as a detriment too, for some advisors. So certainly taking that into account as part of your distribution strategy and how you get out there and how you market yourself is really important. I guess the results speak for themselves in your case.

Tim Maloney:
Thank you. I think that to take it a step further, one of the previous podcasts, I forget which one, you had on, I think there was a number thrown around that 17% of an advisor’s time is spent on picking investments.

Scott McKenna:
Jeremy from Wilshire had quoted a report from Cerulli Associates about the use of model portfolios and how advisors who are using model portfolios spend 17% of time on managing investments.

Tim Maloney:
Exactly. So my personal view of what’s going to happen is the role of a financial advisor’s really going to move away from the investment decisions, whether that’s because they’re working more with models or because they’re giving some level of discretion to the end client and then kind of managing around that. More of their time is going to be spent on some of the other things that a financial advisor can help with, whether that’s estate planning tax, to the extent they have the right designation and some of these other pieces of the ecosystem. My personal view is it’s going to move more towards that and I think the most important one to us is, I do think that clients want to have, or I’ll just say people because I don’t have any financial advisory clients. I think people in general, like to have sort of a stake in what they’re invested in.

Tim Maloney:
Now, you’re not going to put 100% of your investment into the NERD ETF because you like video games, but I think it can help to have a portfolio that maybe has some of the more traditional elements of a diversified portfolio with a kind of target retirement date in mind, whatever that looks like, but also has some kind of satellite positions that are more interesting and help keep the person engaged with what it is they’re investing in and frankly, who they’re supporting with their investment. That’s not referring to ETF advisors, but what industries they’re supporting. If they’re fans of the gaming industry, maybe they do want to have a little bit of exposure to a gaming ETF and that may not fit into a model necessarily, and I understand that, but it makes up for it in portfolios. That’s kind of longer term where we think there’s a space in the more institutional channels for us.

Scott McKenna:
Awesome. So really kind of playing the long game to get into that institutional client base, really unique strategy. I hope it works out for you guys and from what I’ve heard of, I’ve never heard of any other ETF advisor doing that strategy. Diving a little bit deeper into the future of being an advisor, what do you think that’s going to look like in terms of the value that’s added to the end investor 10 or 20 years from now?

Tim Maloney:
It’s a great question. For the shorter term for us, we’re going to keep putting these thematic products into the market. That’s the plan. We haven’t filed for anything, not that I’d be able to discuss it if we had, which is kind of a whole separate topic we can get to on the state of our regulations. But our plan for now is really to focus where we think we can be different and win, which is building a brand with this self-directed audience, many of whom will eventually have financial advisors. Our hope is that that can open that channel up to us. If these people are starting to get advisors and they’ve used our products before and they like us and they follow us on Twitter and they’d like to continue kind of being a part of that, that’s a little bit more medium term. In the longer term, honestly, I don’t know what the financial advice business is going to look like.

Tim Maloney:
I will throw one thing out there, which is we’re starting to sort of see already, I would argue, but I think there’s going to be almost financial influencers where, whether it’s specific to investments or just more broadly to building your finances, I think that that channel is going to, for a lack of a better word, potentially explode. How that manifests and what that looks like up compared to the more traditional model financial advisors, I honestly don’t know, but that’s something we’re looking at. I think there could be an opportunity in, in the more medium term to help kind of cultivate that ecosystem where you can maybe invest alongside a personality whose views resonate with you and there’s some way for compensation to be kind of passed along that channel. Again, I don’t know what it looks like, but I think something to potentially think about and it ties back to the regulation stuff, which I’ll leave here and then we can jump back into, if you’re interested.

Emil Tarazi:
Oh, well yes, we are interested in all the regulation stuff. The regulatory changes certainly affect the way that we do business and obviously, the whole ecosystem does business. So I’m curious on what you think about the recent changes, for example, do you have any thoughts about REG BI?

Tim Maloney:
Sure. So I think I’ll start from kind of where we look at it most often, which is a lot of what I do, I’m regulated by the SEC and FINRA and someday they may hear this and that’s fine. But really, the rules that I get quoted when I talk about regulations are from 1933, 1934 and 1940. Those were being applied to offer guidance as to how I should use Twitter to talk about an investment product. So I understand that rebuilding from scratch is hard and I also understand that they’ve offered guidance over the years to try and apply these rules. But the reality is if someone goes on Twitter and says, “The best ETF doesn’t own PEN and that’s a crime.”

Tim Maloney:
That’s just one example. I can’t reply to that. I’m not allowed, from a regulatory point of view, to reply to that. That, to me, is just not in the best interest of anyone, right? I’m a little bit taking a shortcut. Technically, I can reply, but I’d have to take the original post, put a response together, submit it to our broker dealer and they’d have to review it and file it with FINRA. So for all intents and purposes, I can’t reply. I think that has to change before my vision of financial influencers takes off, but I do think you’re starting to see a little bit of a difference with large firms and smaller firms, right?

Tim Maloney:
If you’re working at a large wirehouse, most of them have rules that say you can’t have a Twitter presence. So that’s going to disadvantage, in my mind, people who are thinking one step ahead from being able to build their business, because there are plenty of people, I always come back to Twitter. There are plenty of financial advisers on Twitter who have really used that platform to help build their audience and have in a lot of ways, build very important relevant businesses leveraging that, right? That’s going to continue and if they don’t change the rules to apply to what’s actually happening in the world at some point, you can only imagine where it’s going to go, but it’s not really doing anyone any favors, right?

Scott McKenna:
So, if you’re a listener in a compliance department, but I don’t think anybody really enjoys compliance, right? I think that’s another driving force for advisors leaving larger networks. I think they’re not able to build any kind of personal brand and I think that that’s very important when we’re thinking about what’s the future of adding value as an advisor?

Emil Tarazi:
That’s interesting. It’s kind of related to the regulation around ratings on advisors as well. We live in a world where we have reviews and ratings on everything under the sun on Amazon, on different online retail sites, but you can’t rate advisors and put that online.

Tim Maloney:
Exactly. I think a lot of it is there’s just been, not to get into my sort of broader views on rulemaking and lawmaking, but there’s just so many rules at this point that it’s hard to even imagine calling it in the best interest of clients, right? So if you’re building an advisory business, sure, it’s probably not great if you’re cherry picking reviews that are maybe even not real and putting them on your website, but at the same time, if you’re looking for a financial advisor, how do you find one? It’s not like the most straightforward thing and everyone in the process is hamstrung from being able to actually have a real conversation about it. That’s not doing anyone any good.

Tim Maloney:
Another example is there’s rules around having disclosures in prospectuses, right? So for our ETFs, we have prospectuses that are like 80 pages long with a 400 page supplement. I think there are probably four people who’ve read our prospectuses. It’s myself, my business partner and the folks over at U.S. Bank. That’s not a practical tool for making disclosures to a young demographic of people who hardly get through a full tweet most of the time. It’s not going to work and it’s not doing anyone any good. So again, I get a little animated when we get into this stuff, but some of it blows my mind.

Scott McKenna:
So on the topic of Twitter though, while there’s a lot of great stuff, there is also a lot of trolls and misinformation, right? So when you think about that in the terms of a regulatory landscape, is that something that we should think about the end investors have to do all the due diligence and kind of make their own decisions based on the assumption that they are getting the correct information? Or is that something that we need to focus more on, making sure that the advisor is on top of misinformation and kind of reporting it, things like that?

Tim Maloney:
Again, I don’t know that I have all the right answers, but I think to the first question, I think you need to put some onus on actual individuals to make intelligent decisions. I said earlier that we like to trust our audience to make the right decisions, right? I think that you can only protect them so much and the rules at a certain point do more harm than good. I don’t have the policy answers. I’m not going to get into that, but I think sometimes less can be more. Then the other thing is, yes, there’s a lot of misinformation out there and it’s hard to stop it and again, in a way, trust your audience to kind of do their own homework, right? So when you see all the posts about how Apple and Tesla are doing a stock split, which makes your position worth five times the amount. First of all, that betrays common sense. Second of all, do a quick Google.

Tim Maloney:
You’ll find plenty of resources that say, “That’s not true. Please ignore that TikTok.” But then, the other thing on the other side of this that I think is a little bit, I don’t want to say inconsistent, but there are products out there that in my opinion are in no one’s best interest and they still got signed off on by the SEC. So there’s a whole class of products, and I don’t want to point any fingers. So I won’t get into the details unless what you guys think we should, but there’s whole class of products that the intended use case is to never hold them overnight, yet businesses that make ETFs cannot make any money unless people hold them overnight. So these products got approved and the only way that the business model works is if people hold them overnight, which is not the intended use case. So sure, in the prospectus, there’s a disclosure that says, “These are not intended to be held for long periods of time for the following reason.” I don’t think anyone reads that.

Emil Tarazi:
That’s actually a topic that’s that I felt quite strongly about as well, with the leveraged products I think you’re referring to is most people are surprised especially when they on social media and read about how people are investing and sort of there’s the basic questions. “The market’s up 10% this in two weeks, but why is my double leverage ETF only up 15%?” Well, that’s exactly what you’re saying and unfortunately these products are labeled under the ETF umbrella. They really should be, I think they should be called trading tools. There should be another class of products that are not for investment purposes; they’re for maybe tactical or just like options, you have different levels of permissioning, right?

Tim Maloney:
Right. I think for me, it’s like just make rules that are consistent, right? Don’t allow people to buy 3x leveraged short ETFs, but then tell that same person that they’re not sophisticated enough, even though they are a CFA charter holder to invest in a private company because they’re not accredited. There’s a serious disconnect and I sort of get the feeling that the only ones who aren’t catching it are the actual kind of lawmakers, not to be overly critical. I think some of them are actually doing really good things, Hester Pierce, in particular, I’m a big fan of, but it’s just not consistent and optically, from the outside it’s like, how did these rules come to be?

Emil Tarazi:
So on your last point, we saw that last week, the rules around accredited investors were changed after, I guess, a couple of decades. What are your thoughts there?

Tim Maloney:
I think having a rule saying individuals can’t invest in private companies is a little bit of a stretch more broadly. That’s probably at the edge case of what people would say about this. But I think too, I don’t think they made enough of a change, right? They basically said, if you have a series, what was it, 7/63 and one of the other ones, you can invest? How many new people is that really bringing into the fold because to have those exams or those licenses with the exception of one, I think, I was recently told, you have to work for a broker dealer?

Tim Maloney:
So if you’re already working for a broker dealer, how many more people are now able to access it and why wasn’t something like the CFA included? The curriculum you go through to, I’m patting myself on the back a little bit, but to become a CFA charter holder, it’s pretty robust. To say that those people are not knowledgeable enough about the risks associated with investing in private companies to include them, it’s like, I don’t know. I read the comments. I don’t know how that couldn’t have been included. So again, it’s a lack of consistency.

Scott McKenna:
I’m not really sure. You probably know more than me, but I wanted to go back to a point you made before about the investing influencers. Obviously, there’s one in particular that has been taking over the headlines recently, even for some of the really old school investing guys and that’s like Dave Portnoy and the whole barstool scene. They pivoted pretty quickly when sports went out with COVID and now they’re all about day trading. I’m curious to your thoughts, is that a net positive for the investing community or is it exposing people who need better financial literacy to get into the markets before they’re really ready?

Tim Maloney:
Yeah. It’s a great question. Again, this gets into where the exact right answer may escape me. I will say, on the barstool side, regardless of how you feel about his move into stock trading, you’re looking at it from a business point of view for them. It makes a ton of sense, right? They all of a sudden had no sports. Most of their content engine gets shut down and I can see why they made that decision. As to whether or not what he’s saying is responsible and doing a net good or bad to the overall community, I don’t know that I want to take a strong stand there, but I will say this. I think a lot of the financial services industry rhetoric to younger investors is, “Get started investing, but do so with a professional financial advisor.” Unpopular opinion, but that’s not really a great economic decision at certain levels of wealth, right?

Tim Maloney:
So basically, the official party line from the industry is, “Wait until you have an advisor to help you make decisions.” So as a result, you get a lot of people who don’t think at all about investing and then they get to the stage where they’ve accrued enough wealth that they speak to an advisor, they’ve got like 10 years worth of not investing in there, call it. More importantly, they haven’t had any time to sort of make mistakes with less at risk, right? So net-net, I think people need to be introduced to investing earlier. They need to get involved, put a little bit of money in and learn, the best way to learn not to use a 3x leveraged ETF is to buy one in college and hold it for three months and be like, “Okay, that wasn’t great, was it?”

Tim Maloney:
So I think like net-net, more people getting involved with investing at a younger age is going to be better for them because they’ll learn as they go and they will reach a point where they’ll probably need professional help, but they can at least become self-sufficient enough to that point that they’re asking the right questions when that happens, right? So, and look, it ties in a little bit with what we’re doing. We want to introduce people to ETFs in a way that they get excited about where I don’t think that works so much if you’re pitching them on a broad market ETF, it’s not the same kind of engagement. So anyway, it’s a long answer. I think that it’s important to get people paying attention, to investing more broadly at a younger age, because it’s an important skill and if you don’t have to be the best at it to be better than you otherwise would be.

Emil Tarazi:
I wanted to touch base on your third fund, I guess the deep value ETF. It has an interesting history and value’s been beaten down, especially this year with everyone’s kind of chasing technology and high growth stocks. But there’s another theme out there which is looking for yield or people are trying to figure out how to keep the income generation high in their portfolios and just looking at deep on our site, you’ll see that it’s kind of yielding around 7% or more. Now, how do you view that ETF? How do you view the value versus growth debate right now?

Tim Maloney:
So the value versus growth debate is a dangerous minefield that I don’t want to try and time the market and make any crazy predictions here. I think there’s value for our audience to be exposed to different investment topics and that’s part of the reason that we took on the value ETF this year. We’re actually working with Toby Carlyle who’s kind of an expert in the space for lack of a better way to put it, to make sure that we have a product that’s consistent with its objectives. Excuse me. But part of the thesis here was let’s take a different type of investment strategy that your average kind of gamer or a sports betting fan that owns one of our other funds might not be as naturally inclined to, and see if we can put it in front of them and educate them on the opportunity and maybe some of them will buy it, because having a portfolio with balanced exposure is a good thing to learn about, right?

Tim Maloney:
You’re running a little higher risk, whether you know it or not, if all you own is growth stocks and it might work for a little while, but there may also be a period, and again, I’m not going to try and time the market here, where it doesn’t work and over the longer term, at least knowing those other options are out there, is important. My personal view within deep value is that, at some point it should reverse in my mind to an extent, I don’t know when that will be, but the thesis behind value investing does make sense over a long enough window. Being able to then offer that to our audiences, it’s another choice and that’s another kind of piece in the process of them learning more about investing.

Scott McKenna:
Awesome. Well, we’re coming up on our time here. Tim, was there anything else you wanted to add before we close out the podcast?

Tim Maloney:
No, I think this covered a lot of stuff. I could probably hang up and talk about my issues with the global regulatory environment for hours, but I don’t think we want to bore anyone. Who knew I would get excited about that? I had no idea when I started in ETF business that I was going to become a regulatory nerd, but what can you do? No, this has been great. I think it’s always fun to talk about these things. I love what you guys are working on and I’m glad that you asked me to be on and we’re going to keep churning out products over here at Roundhill over time and hopefully they can be a value to the audience you have, assuming they’re turned on wherever those advisors are.

Scott McKenna:
Excellent. Well, again, Tim, thank you so much for joining us. For those who are interested in their Roundhill products, you can learn more by following Tim or Roundhill on LinkedIn or Twitter, or going around to roundhillinvestments.com. If you’re interested in learning more about what we’re up to with our Logicly platform, you can go to Logically. It’s spelled a little funny. It’s spelled L-O-G-I-C-LY.finance. You’ll find all the information about our product there as well as a free trial code to try it out for yourself. Thanks, you guys, again for listening to Speaking Logically, have a lot more great episodes coming up. We are now rolling it out every single week an episode. We’re filming on Tuesday, releasing them on Thursday on a regular schedule. I hope you guys are ready for even more awesome content.

Brad Shepard and Ryan Krystopowicz of WisdomTree join us to break down their recent model portfolio survey and share their experience from working with advisors as a model portfolio provider.

Transcript:
Speaking Logicly is brought to you by ETFLogic, 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:
Welcome everyone to episode five of Speaking Logicly. I’m Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
And today we are joined by Ryan Krystopowicz and Brad Shepard of WisdomTree. We’re super excited to have these guys on. As you guys may know, we recently partnered with WisdomTree and now are offering their model portfolios on our Logicly Model Marketplace. How’s it going today, guys?

Brad Shepard:
It’s going great. Thanks so much for having us on today.

Ryan Krystopowicz:
Yeah, thank you.

Scott McKenna:
Yeah. So before we dive into it, we’d love to hear a little bit about… Brad, obviously your title is head of advisory innovation, very exciting title, but why don’t you tell us a little bit about what your day to day looks like?

Brad Shepard:
Sure. I call it the best title in asset management, because you can never really pin me down on anything, which is pretty good, but so my role at WisdomTree is, if you think about our, obviously our core business that are ETFs, and then we’ve got all these other things we do for advisors in our growth and advisor solution. So I sort of over in that section, helping build all that out and making sure we stay ahead and all the value added services that we build, bring to advisor.

Brad Shepard:
So on a day-to-day basis, it goes from figuring out what tools we’ll build next to help make the life of the advisor better in different ways, or presenting the research and speaking out to groups, to other advisors to help educate them on topics that we research, similar to the stuff we’ll talk about today.

Scott McKenna:
Awesome. And Ryan, obviously we’ve worked very closely to get your models listed on our Logicly Model Marketplace, but for our listeners, why don’t you tell them a little bit more about your role on the model portfolios team at WisdomTree.

Ryan Krystopowicz:
Absolutely. So my name is Ryan Krystopowicz, and I had joined WisdomTree about four years ago and then had the, really the honor and the privilege of working on our asset allocation team and specifically our efforts into model portfolios. So WisdomTree’s been doing or constructing ETFs rather since 2006, but in 2013, we started essentially creating asset allocation ETF model portfolios, and really been commercializing those efforts over the last three years.

Ryan Krystopowicz:
And so I would definitely say I wear a lot of different hats as far as researching the markets, being a part of our model portfolio investment committee. Asset allocation is in my title, but then I also get to work with advisors across the country, as well as different platforms, supporting those model portfolio efforts, everything from making sure that our strategies are up operationally, running smoothly, as well as communicating those strategies to advisors as well.

Scott McKenna:
Excellent. And so on a previous episode, we sat down and we were talking about why model portfolios are such an important tool for advisors, but what really caught my eye with this recent study that you guys put out was that you were really focusing more on the adoption and looking at it kind of from the view of the investor. Can you tell us a little bit more about how you guys first conducted that survey and maybe some of the results?

Brad Shepard:
Yeah, so first off we have no prop, we have no issue with, there’s a lack of models in our industry, right? And there’s a lot of models just like there are a lot of ETFs. So we stepped back similar to some of the stuff we’ve done in other areas like growth for advisors and said, “What is missing? And what I saw missing was, you know what? There’s a lot of talk about models are coming, models are coming, but the hardest part about any kind of new technology or any kind of anything is change management, right? So we really looked at from the investor to the FA, to the model provider that entire value chain to understand what hurdles existed.

Brad Shepard:
And to give you an example. So one, we use a multidisciplinary research methods, so we don’t just do quantitative survey work. We do qualitative work in the form of lots of different types of interview techniques and that sort of thing. We also incorporate in some of our research biometrics. So we actually do eye-tracking studies and that kind of thing as well. But for models specifically, we had over 2000 high net worth investors come through the process, which gives us a confidence level of right at 98%. And that’s, for those of you who are research minded, you’ll know that that’s a really high confidence level, small error rate, and we have hundreds of advisors, so about a 5% error rate. So I guess the summary on that is we were really exhaustive in the way we perform the research to make sure it’s valid versus a lot of times you see research and then I go to the footnotes because I’m a footnote kind of guy.

Brad Shepard:
And I’m like this has no validity really because it had, the statistical sample size was too small and the methods they use were too singular. So with that, what we were wanting to do was understand adoption. And I’ll give you one, before we get deeper, give an example. So between the investors dollar and an actual model, we identified right at 45 specific hurdles or opportunities that exist that were leading to might not getting to those models. So now it’s our job to translate those hurdles or opportunities and how can we solve them internally with WisdomTree or with our partners like yourselves.

Emil Tarazi:
Did you say 45?

Brad Shepard:
45, yes. Clearly I could probably break those into a lot more, but those are sort of the big buckets if you will.

Emil Tarazi:
Yeah. So that seems like a high number, but I’m actually not too surprised. A you may know, at ETFLogic, we’ve been also looking at a lot of different ways to simplify model delivery for advisors, but let’s dive into that 45 number a little bit. How do you think about those hurdles? How do you group them or which ones are the top ones that you think are kind of low hanging fruit, let’s say in terms of getting models distributed in a wider way.

Brad Shepard:
Yeah. So let’s start with kind of the talk would be communication. I mean a huge bucket was communication issues and examples. As an example, when we would talk to the end investor about, “Do you understand what a model is?” Or some version of those words? Their confidence was very high that they knew what we were talking about, but when we actually tested the definition of asset allocation so forth, not shocking, not surprising here, but they really didn’t understand. Right.

Brad Shepard:
So one, the investor just doesn’t really understand many times what we’re talking about and that’s a problem. Right? Second thing that I just thought that I think is really interesting is, again, I’m going to paraphrase a little bit, but if you said, if you as an advisor said to an investor and you would may not say it this bluntly, but if you said some version of, “One of the things I do is I let somebody else manage your investment management. I outsource that.” Whatever words you choose, the acceptance level of that was less than 36% from the investor.

Brad Shepard:
But if you changed it to, and I think you guys’ll like this. If you changed it to, “As an advisor, I have access to technology that allows me to see the best of great thinking from hundreds of good minds in our industry,” the acceptance rate went to almost 90%. So we didn’t say anything different, right? We literally just changed the context of the communication to of using technology, to access a greater set of minds. And you know what I think is super important as an advisor, your job should be to know the investor intimately, know everything about them and then use models and asset allocation to find the right fit for them. Right? So I just think that’s interesting. So communication was a huge one.

Scott McKenna:
Yeah. It’s all about how you market it. Right? I think there’s a certain amount that that’s down to execution, but how you say things is almost more important than what you say sometimes. That’s really interesting. So in terms of that miscommunication, how do you think as an industry we can go about bridging the gap? Is that something that needs to be on the shoulders of the advisors, the model providers, or kind of the in-between marketplaces like what we do?

Brad Shepard:
Oh, I think it probably comes from the asset managers and the technology providers providing the resources to the advisor because listen, their job, they’ve got plenty of things to do, right? It’s our desire. And for the whole ecosystem of models to grow, because we think it’s good for every constituent, right? The invest with the FA [inaudible 00:09:38], but I think it’s our job to build out the tools to make that easy for them, that transition, if you will. So that’s what we’re working on at WisdomTree is, how do we help our partners make it easier to adopt models by filling in some of these gaps that we saw within the research that, and it’s out there?

Brad Shepard:
Another one is I think an analogy that works really nicely for this context is we looked at, we used an analogy of a physician and what we found was, applying a model to a investor’s portfolio is very similar to a position, leveraging all the available technology to make the right diagnosis. 63% of investors absolutely agreed with that strongly. So I think it’s, again, it’s just very contextual how we talk about what we do and the role of the FA and the role of the strategist, and the third party asset manager and so forth.

Ryan Krystopowicz:
Yeah. I’m curious about some of the trends in the model portfolio space. So obviously, models have been around for quite some time, maybe a couple of decades, depending on how you measure it, but what are some of the more recent sort of tailwinds, I suppose, that have made models more popular and brought more interest from financial advisors?

Brad Shepard:
And Ryan, I’ll let you tag on to this too. And I’ll tell you sort of from our standpoint and my standpoint from a research standpoint, it’s a couple of things. One, growing is never been harder, right, as an advisor. So I think anything that we can do to allow them to have greater time to spend communicating with their current clients and our new clients is helpful. I think models are a key part of that, quite frankly. I think it’s pretty obvious that the compliance, the regulatory environment for this is only getting tougher. So with Reg BI, I believe models can play a role in that. That’s helpful as well. I think we know that it’s, again, if your time is already stressed, having a thousand different conversations is very tough. So, how can we help the advisor have more similar conversations based on the model or asset allocation models they use?

Brad Shepard:
So, I think there’s a lot of reasons why, but, if I back up from sort of those, I think the bottom line for me anyway, is that the old adage, two heads are better than one. Listen, nobody’s ever going to say that the advisors shouldn’t have a critical role in the investment side of their customers, but an advisor, depending on the size of their team and the firm they’re with and so forth, they just, they can’t, they don’t have the time to put it a hundred percent just on the research. Right? That’s not their only job. In fact, they have a lot of jobs, right? So partnering with groups that have people that are dedicated to that 24-7 if you do it the right way. I mean that’s the win for everybody, quite frankly.

Emil Tarazi:
Yeah. And on that point, saw in your latest survey that actually clients prefer advisors that use models. I’m curious why that is.

Brad Shepard:
Yeah. So when the key on part is when its communicated properly, right. That’s the big caveat here. Right? But yeah, so what we saw was that if, when a and if a prospect was looking at two advisors who they might hire, they were 20% more likely to select the advisor that when the advisor properly communicated the partnership and use of third-party models and the reason, so dot, dot, dot, that seems very self-serving. I get it, the big elephant sitting in the room staring at me. Right? But it’s not, if you think about it, because if you communicate it properly, that I have access to hundreds of good minds thinking about this 24-7, my job is to know you and pitch you to the perfect strategies makes total sense, right? I mean, it’s just, it’s leverage it to me. This is leveraged expertise, leveraged technology, nothing more. It’s leveraging technology like we do in most, every other part of our life.

Emil Tarazi:
Right. Go ahead.

Brad Shepard:
One other thing will happen. It’s interesting. I mean, when one of the things we looked at everybody’s, I think probably a lot of people are familiar with sort of hierarchy of needs, Maslow’s hierarchy of needs, life-changing emotional and functional. And I can tell you, we sort of overlaid some of that thinking with our work and listen, the actual investment management piece is considered a functional kind of thing, right? It’s a functional something that you, as an advisor offered the investor, but those life-changing and emotional things, things like helping me reach my goals, keeping me motivated, my financial health, reducing stress and anxiety. Those are all upper level needs. Only the advisor can deliver those a hundred percent. The advisor has to deliver those. The functional stuff, to me, this is functional. It’s like a lot of things you. You realize that my job shouldn’t be [inaudible 00:14:40] part in the functional, it should be in the life-changing and emotional. So I just think that’s a good fit for an advisor.

Ryan Krystopowicz:
Yeah. Yeah, no, I had a, I guess a few kind of comments to that, largely agreeing with everything, obviously that Brad had mentioned, I would say it kind of comes down to offense defense. On the defensive side, we think about the markets and you think about the trend towards advisors charging a certain percent say 1%, one and a half percent on AUM and we’d been in a bull market. It’s certainly been a creative for that. But we’ve obviously seen with what happened with COVID and I know markets are back now, but with the compression entering into the market space and advisors thinking about how they can kind of lower their cost structure, going into lower cost ETF model portfolios, this is certainly been a trend. And then it comes down to what Brad had been talking about as far as, “Well, what can what do I want to do in house and then what do I want to outsource?”

Ryan Krystopowicz:
And Brad can certainly speak more about this, but when they realize that it’s not like they’re just outsourcing a hundred percent of it, but they can still retain control and things of that nature, it kind of changes the advisor’s perception of really how to incorporate model portfolios into their business and Brad’s done some post volatility that we’ve seen in March and April to kind of highlight that and how the advisor or the advisors end clients really value their advice, but the advice on the emotional aspect and of the advisor, the investment side still.

Emil Tarazi:
Let’s talk about that volatility this year. I mean, obviously unprecedented market gyrations and in February, March, April, how did model portfolios performance?

Ryan Krystopowicz:
I mean, the key is to have an institutional process and stick with that, and then communicate to the advisor who is using these models so that they can do what’s best interest for their clients that they serve. Right? We work with the financial advisor and then they ultimately know their clients best. And so you can certainly believe that as the volatility was hitting, I mean, each model portfolio that are model portfolio investment committee and global research team manage has a benchmark and has a very once again institutional process where we have objectives that we’re managing these models too.

Ryan Krystopowicz:
And we’re making sure that we’re doing that because that’s what the advisor expects from WisdomTree, and then we’re communicating with them. So they might have one-off questions about how can I tax loss harvest, or what should I be doing within these models that we we’ve had an extreme spike in conversations around what’s going on?

Ryan Krystopowicz:
But ultimately it just comes down to once again, managing the models as they were designed to do. And we’ve certainly, from a performance perspective, our global tilts and our tilt towards value versus growth can do well against the benchmark that’s apples to apples. And when an advisor’s looking at you Tesla and Zoom, it’s completely different, but that’s just the benefit of once again, taking a holistic approach and having deep communication with advisors so that they know what the golden objectives of the models are, and then they can tailor that to their end clients as needed.

Emil Tarazi:
Yeah. That’s interesting that you mentioned Tesla and Zoom. We think a lot about given that we have these portfolio analysis tools and portfolio construction tools on our platform. I’m often thinking about, “Okay, how do we take models, which reflect a large body of work around asset allocation and how do you customize those products?” So I guess do you work with advisors one-on-one when they want to diverge from the model?

Brad Shepard:
Yeah. I can tell you [inaudible 00:18:48] that Ryan, a couple of things tied to the research too. So one of the things that we looked at was how well the models connect over to the risk profile or behavior of the investor in the WisdomTree world, we’ve done an enormous amount of work in behavioral finance with the partnership we’ve got. And so we’re working on how to correct the behavioral traits of an investor over to a model. Right? And that was seen by the investors, or sorry, the advisors as a pretty big need area. Right? Because many times you’ve got those antiquated risk profile sitting in one place and the model center or model sitting somewhere else. Right?

Brad Shepard:
So one, how do we connect those two that makes the job easier of the FA, that makes the hopefully outcome better for the investor. I think that’s really important for that. And then one of the other things that probably some of the things you have is we also have a portfolio of development tools that are built for the FA to help them use our open architecture policy, make changes as needed, based on their discretion of what would fit the investor and look at what the outcomes might be and that sort of thing. And Ryan, if you have anything else. I don’t know.

Scott McKenna:
Yeah.

Ryan Krystopowicz:
I was just going to just very quickly, Scott. I was just going to highlight that. Yeah. That’s exactly how we work with advisors to your point, Brad. A lot of them will customize the models and when they have a client that says, “I don’t want any small cap access to small capitalization stocks,” that’s usually something they’ll do on their own that we’ll have no idea about. But when it comes to specific model objectives that we might not have off the shelf, we absolutely work in a customized fashion.

Scott McKenna:
I mean, for me, I’ve done a couple hundred adviser demos since we launched our Logicly platform in January. And it seems like maybe 30% are using models and the rest either constructing their own or there’s been a lot of people advisors that I talked to that are actually, they’re very interested in the model marketplace because what they say they like to do is, is kind of take a model and then try to customize it further. So I was definitely curious about how you guys interacted and worked with advisors that maybe wanted to take your model, but tweak it in some way.

Scott McKenna:
And I think that’s really a lot of what we do and when we’re talking to advisors where we’re developing our portfolio, coach concept is taking that and how do I improve certain aspects? How do I lower the costs? I think it’s very important for advisors to keep into account their portfolio costs at the fund level because they’re getting fee compressions and investors are becoming more fee conscious.

Brad Shepard:
Yeah. I mean there’s been a lot of good work recently. Morningstar’s put some stuff out around sort of the cost of an ETF model comparative to a lot of other things. It’s pretty astounding how much could be saved pretty quickly. Something else that we looked at in the research, which I thought was interesting is 53% of the advisors were using a model that they built over 10 years ago with the customers. So I guess the point is, there’s probably a lot of opportunity because especially now after this year we’ve had for advisors to assess and look for other ways to potentially work on their core business. And even more, I think also interesting was that if we ask you, if you could, if this larger set of third-party models was available when you started, would you have tried it or done it? I mean, the answer was 82% said, “Yes.”

Brad Shepard:
So I, you asked some of the tailwinds, I just think we found, like we’ve got a little bit of a reset right now in the markets based on what’s gone on this last year, there’s a lot of opportunity for harvesting and so forth, so hopefully that will be good tailwinds for model growth across the industry and the whole value chain.

Scott McKenna:
Yeah. And on the idea of harvesting, that’s something that we’ve been really focused on with our portfolio analysis tools. How do you guys interact with financial advisors and help them out with that process of potentially making some tax loss trades?

Ryan Krystopowicz:
Yeah. So WisdomTree has a distribution team where we cover institutions, RAs, wirehouses, independent broker dealers across the country. And so there’ll be handling the relationships and then those relationships were one solid unit where they will interact with the asset allocation team that I’m a part of. And then it’s really just kind of like a hands-on approach. Now we don’t give tax advice per se, but what we do is, we’re very knowledgeable in different indexes and the ETFs that track those indexes and understand kind of the like-minded securities and opportunities that based off asset classes in our views of which might be a creative to swap into.

Brad Shepard:
I was just reading a paper. It was about, called An Empirical Evaluation of Tax Loss Harvesting Alpha. It basically found that on an annual basis, you could potentially find 82 basis points of excess returns by doing that properly. I mean, that’s pretty powerful right, in the world that we’re all living in right now from a turning cost perspective. It’s huge. So I think, as Ryan said, the better we can get it, making that easy and the better that you can get from a technology provider making that easy, that’s a win for everybody.

Emil Tarazi:
No, absolutely. I think that the, especially with, again, the market moves tax credit and generation has been on everyone’s mind. And even now, I mean, the market’s rallied quite a bit from its lows earlier this year, but we’re not at where we were at in January of 2020. There is no wide divergence in a lot of different sectors and factor exposures. So there’s still opportunities out there for tax-type trades.

Emil Tarazi:
So I’d like to focus a little more on the technology side of things. So what are some of the obviously as the market, as the model portfolio market continues to, to expand and advisor adoption, which is, I think still fairly low, but hopefully that continues to grow. What are some of the sort of technology hurdles or technology gaps that you think can be filled? Yeah.

Brad Shepard:
100%. So let’s start, we’ve mentioned a couple of these already, but let’s start with the overall workflow. And to me, that is how do we tie risk assessments or behavioral finance concepts over the models, right? Because there’s a gap there and I think that’s really important as an industry we think through and figure out. And then also you mentioned it earlier, just that the ability to customize. Listen advisors, aren’t going to use the models if they can’t customize. That’s why at least at WisdomTree, we focused a lot on our tools to allow customization of our models and made them open architecture.

Brad Shepard:
And then sort of finally, and I think this is super important. And some things that people will hear more from us on here pretty soon is, is communications to meaning communication from if an advisor is using some, one of our models or some of our models of how do we help them communicate more effectively with their customer based on what’s going on, both in the marketplace and within our models? So I think all of those things are sort of tech related, right? They’re all very tech centric and the more of those that we can answer and help the advisor make their job easier, the more likely they are to use us.

Emil Tarazi:
Are there challenges in the delivery process? Getting or communicating re-balances to the end users?

Brad Shepard:
I’ll start. And then I’ll let Ryan tag on to this because he spent a lot of time with our partners. What I would say is it can be maddening from my perspective of an advisor on how do I even get to a model, right. Because there’s, depending on where you custodian, what channel you’re in, there’s so many different ways and I think it is improving, but it’s not easy sometimes. Right? And Ryan on our team works with all of our partners, so he sees every flavor of this, of how can you get to a WisdomTree model if you choose to. So Ryan, I’ll let you tag onto that.

Ryan Krystopowicz:
Yeah. I mean, that’s been the goal of WisdomTree as we’ve commercialized our efforts since really 2016 as far as making it as easy as possible for advisors to access our models, and one thing that we’ve… And so what we’ve done and there’s been press releases by WisdomTree, as of recent is just landing on more and more model market centers. And to once again, make it as easy as possible for advisors to access. As Brad will say, assessability doesn’t always lead to adoption. And that’s definitely something that the industry is finding out.

Ryan Krystopowicz:
But I would just say that it’s not hard from my perspective, as far as communicating to model market centers and communicating the rebalanced and the changes that we make, but the advisor, they can ignore those trade instructions. They could do it at their own time. There’s a lot of wiggle room in there that’s certainly interesting and varies on different platforms.

Emil Tarazi:
That’s interesting. Yeah. I mean, I’m curious to understand how advisors reconcile performance. So if you have particular models that you’re showcasing performance, but the implementation is completely different advisors choose to skip a rebalance or customize or tax loss trade, and maybe switch into other ETFs that are highly correlated. But I wonder what that does to performance and matching the performance that you may publicize on your models and what actually happens.

Brad Shepard:
I think what you’re hitting on is really, really important because what you just said, there are obviously parties that are attempting to grade models they do everything else, right? But for a model to be successful, it’s going to be open architecture and customizable and what we found was, in the research was that really, I look at our models are more of a starting point for an advisor’s asset allocation, not the end point in most cases, if we’re being reality. So what you just said is absolutely accurate is we can be great or report what we want, but the reality is advisors are going to customize our models and what they do at that point is not within our control many times. Does that make sense?

Emil Tarazi:
Yeah, absolutely. I like the word you use, open architecture and that does make sense and characterize it as a starting point. So I think that’s, at least for me, when you talk about communication, that seems to me to be an important point that people need to understand when they use models is that this is not the end decision. This is probably a very good guide on how to allocate assets and potentially match that models risk profile with your client’s risk profile.

Brad Shepard:
Really, that can be very channel specific, right? There are clearly channels in our industry, where there are no modifications, right? For a lot of different reasons from the home offices. And there you are getting a pure play if you will, but in many cases, you’re not depending on the channel.

Emil Tarazi:
Scott, did you want to add anything?

Scott McKenna:
Yeah, actually there was one step from the survey that really stood out to me and it was about millennials and gen X or so. 90% of millennials and 87% of gen X were extremely accepting of their advisors if they used a preset investment model portfolio with their funds. I thought that was pretty interesting and it makes sense. I feel like the younger generations definitely are more open to the idea of digital advice, but for older advisors that stat might almost seem threatening, right? Because it’s almost taking a little bit of their job away and maybe that’s going to compress fees even further on their end.

Brad Shepard:
I would say again, you have to read, evaluate what you think your value prop is because it’s really not investment management. It’s knowing your customer better than anybody else. And having the ability to use technology to access lots of other thinking and in this case models to come up with the best solution. I mean, if you’re competent in what you’re doing, you’re confident in your relationship with your customers, then they should see this as you’re being a very modern advisor is you’re using technology to go out and diagnose me and find all the right solutions to give me the best outcome. Right?

Brad Shepard:
And I do think it sometimes it can be a little bit of an older school mindset to think I have to go make every decision, do all the research and et cetera. There’s just not enough hours in the day and there’s stuff and really what the customer needs from you is really frequent communication and making sure that you’re always aligned with where they’re trying to go and then finding the right solution to get there.

Scott McKenna:
Technology obviously helps to reduce that time spent on investment management as well. That’s kind of our value prop to advisors is streamlining those processes and workflows. But what are your thoughts on where the financial advisor value proposition is going to be in the next 20 years?

Brad Shepard:
Listen, investment management is already in my mind, I’ll be controversial, I guess, but it’s already been commoditized, right? I mean, you can go get a lot of investment management for free or near free. So what are those higher level values as an FA that you can bring to the investor, right? Because you know what? When March hit and the markets went crazy down, if you were on your own, did we see you selling, selling, selling, right? Versus having a human that’s the only thing that’s going to stop you is a good advisor, who knows you and has been in it long enough to keep you from making bad decisions. I think it’s all that stuff that’s critically important. It’s all the value added services. It’s whether it’s lending and other things, right. And by the way, you don’t want to be a single threaded advisor, right? Because you can be replaced if you’re single threaded versus if you’ve got your tentacles in lots of ways that you help your client.

Brad Shepard:
And I think that’s really, really important. I think that’s really important. So I do think that is sort of the future of the modern advisor is somebody that leverages all of these different things to end up with the best outcome for the investor. For sure. Because if you’re, if you believe that your only value, your number one value is making investment decisions, I just think that that’s really shortsighted and there’s going to be a lot of advisors who understand that it’s not, and they’re going to use all these other tools to have a better offer to the customer at the end of the day.

Emil Tarazi:
Cool. Well, we touched on a lot of topics.

Brad Shepard:
I really just appreciate you guys having us on today. You’ll see more of our research come out in press releases and so forth and some things that WisdomTree will be working out in the future. We’re excited to bring some of our thought leadership, but also tools to market and collaboration with partners like yourself. I think we’ll have a really strong value prop with the adoption as well as our models, obviously.

Emil Tarazi:
Yeah. Where can advisors go on the WisdomTree website to get more information on models? I’m sure it’s linked at the top.

Ryan Krystopowicz:
Absolutely. So financial professionals can sign into WisdomTree’s website and at the very top, we have a tab, model portfolios and you can see our current lineup right there. Very easy.

Emil Tarazi:
Yeah. I just visited the site and I can attest to that ease of use.

Scott McKenna:
And for advisors who are on our Logicly platform as well, they can look at the WisdomTree models via the Logicly Model Marketplace.

Emil Tarazi:
Very cool. All right, guys.

We dive into 13F filings to see where investors were placing bets on sector ETFs in Q2.

Transcript:
Speaking Logicly is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Hey guys, you’re welcome to episode four of Speaking Logicly. I’m Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
Today, we are joined by nobody. We actually have no guests today, but we did want to talk about something that is very near and dear to our hearts and very timely, and that is 13F filings. Emil, I know this is one of your favorite things to nerd out on, isn’t that correct?

Emil Tarazi:
That’s right. Who doesn’t love 13F filings, Scott?

Scott McKenna:
Yeah. I always find it interesting on Twitter that whenever 13F filings come out, there’s a lot of different ways to slice and dice it in little tidbits that people like to promote. But I know recently, you spent a lot of time looking at 13F’s last week, and you actually put out an article which people can find on our logicly.finance blog? Why don’t you tell us a little bit more about it?

Emil Tarazi:
Yeah, sure. I’d love to chat about it, I did a little bit of digging. Just a little bit of background on 13F filings. The SEC has requirement for institutional investment managers that basically manage over a $100 million to list their holdings, and publish those holdings once a quarter. So typically what happens is, that investment manager will snapshot their holdings at the end of the quarter. But then, they also have about 45 days to make the file, and what you’ll notice is that most money managers will hold on to that filing, and then file at that deadline.

Emil Tarazi:
We’re recording this podcast on August 20th, 2020, and the filings came out over the weekend on August 15th. August 15th marks 45 days after the end of Q2, 2020. So one thing that I find interesting is that, obviously 13F filings have been coming out for decades now, and people pour over them to see what Warren Buffett is holding, and what positions activist investors are starting to build up, and what’s overlooked or not really paid too much attention to is, what’s going on in the ETF space.

Emil Tarazi:
So what we do is, when we pull these filings, obviously we’re pulling them live. They are public filings on the SEC website. We’re pulling them into our database, and we’re doing a little bit of analysis from an ETF specific perspective. What we did this time around was look at… Obviously, you can slice and dice this in many different ways, but what we’re looking at this time around is specific ETF sector shifts. So we’re looking at what kind of US sector bets people are putting on, in their portfolios, and how that shift has moved between Q1 and Q2. Obviously, super interesting, Q1 was obviously March 31st. End of March, market was just beginning to… It was the beginning of that implosion of the market, and then April, May, June were fascinating months, massive recovery in the market at least, as the pandemic situation continued to play out and stimulus played out. So super interesting to see what happened and what kind of positions people put on.

Scott McKenna:
When I think of sector ETFs, I immediately think of the State Street’s sector SPDRs, but there’s a lot more players in the space, right, than just State Street?

Emil Tarazi:
Yeah, that’s right. What we did for this specific analysis is, we looked at all sector ETFs, so a few things. First of all, at ETFLogic, we do our own similarity grouping of ETFs, based on a lot of different dimensions. We’re going to look at what an ETF says it does, but we also look under the hood. We look at the holdings, whether they’re sector specific or market cap specific, and we group ETFs along those different dimensions. So what we did for this analysis is, we looked at the 11 sector groupings there, so you have healthcare, technology, utilities, telecom, industrials, consumer discretionary, energy, basic materials, financials, real estate, consumer stables, and we essentially bucketed a handful of ETFs into each of these groupings, and we were looking at not just share changes, but also dollar increases. Now, a little note on the dollar amounts. Dollars are hard to count in the 13F’s, because of the lag nature of the reporting. We don’t know.

Emil Tarazi:
If we say there was X dollars in or X dollars out, we don’t know when that position was put on. So what we do to measure notional amounts is, we take basically one price at the end of the quarter, and use that price for that position. So most interesting things that stand out are, the biggest dollar inflows ranked are healthcare, technology and utilities, to the tune of $5 billion, $2 billion, and $2 million respectively, and those are big moves. Basically, healthcare were not a surprise with the COVID-19 backdrop that we’re facing. We’ve had significant shifts into healthcare space. Now, who are the losers? The losers are financials, real estate, consumer staples. Now, that’s at the high level. What’s really interesting is, to dive a little deeper into what we are actually holding in each of those peer groups.

Scott McKenna:
Going back to the winners, obviously healthcare and tech makes sense when you’re thinking about placing bets in a specific sector, more people working from home, using technology to do business and communicate. Healthcare, obviously driven by biotech or masks, et cetera, dealing with the pandemic. But utilities is interesting to me.

Emil Tarazi:
Oh, well, so the utilities is a typical yield play. Utility companies are companies like Duke energy, dominion energy, these are the biggest positions, for example, in the XLU Sector SPDR. So these are energy providers, Con Ed, if you’re up in New York.

Scott McKenna:
Not a big fan of Con Ed after the week long power outage that I had last week.

Emil Tarazi:
Yeah, I heard about that. Luckily, I’ve not been in the New York area for some time. But the view with utilities is, we’ve got rates at near record low levels, and people are just chasing yield now. People are looking at moving into riskier equities, out of fixed income, into riskier equity positions, and in exchange for that risk, obviously there’s a little higher yield. Energy companies, and utility companies tend to trade almost like bonds in a way, a very high fixed cost and a lot of assets on their books.

Emil Tarazi:
In fact, if you look at a typical factor profile for an energy company, you’ll notice there’s actually a lot of fixed income term risk in how utility stocks trade. So I think the big inflows we’ve seen there, then have been yield chasing. But going back to why we saw almost a billion dollars in outflows in 13F holdings in consumer staple stocks, that’s interesting. I wouldn’t have guessed that. I would have figured that people are staying at home more, and they might need more products, but I guess consumption in general has probably fallen off a cliff, so it makes sense as well.

Scott McKenna:
Yeah. I guess, outside of your weekly Costco runs and Amazon deliveries, you’re probably not spending as much as you were before the pandemic. Right? But your article, going back to that, you did dive a little bit deeper than just looking at the sectors. Correct?

Emil Tarazi:
Now, if we dive into the sector specific changes, there’s a couple of interesting things. Now, we’re opening up the peer grouping buckets, and looking at the 13F shifts, so we’ll just go through some of them that we find interesting. So in the U S healthcare space, again the peer grouping with almost $5.2 billion in inflows between Q1 and Q2, who were the major winners? Well, obviously XLV saw almost 18 million shares increase in holdings, but that’s on a base of 156 million shares already being held.

Emil Tarazi:
Some of the bigger jumps that we saw percentage-wise were in IHI. IHI is a US Medical Devices ETF, and very interestingly we saw 7.6 million shares held in Q1 and 12.9 million shares in Q2. So massive increase over the Q1 number, and similarly we… Actually that’s it, that’s the only one that’s in the healthcare space. That’s really the big standout one. Interestingly actually XLV and IHI, so XLV being the healthcare SPDR and IHI being the iShares Medical Device name, I don’t know a lot of overlap between the two, only about 30% similarity in terms of basket components. So very, very different plays on the healthcare sector.

Emil Tarazi:
Moving on, I think the other standout moves were in the energy sector. It’s interesting, because overall, obviously the energy sector has had oil. Oil has been at historic lows, and we even saw oil futures go negative earlier this year, a surprising turn of events in the futures market. So it’s been an unhappy story for energy, for a very long time, but there’s one standout thing. If you open up again the peer grouping, and that’s IEZ, that’s the iShares Oil Equipment & Services ETF. The interesting thing here is, in Q1 we saw about a million shares held and in Q2, we saw 8.6 million shares held. This is a massive increase in shares held, and it’s a low-dollar stock, it’s only about $10 right now. So not a lot, in terms of notional, but certainly a big move for a small name that only traded about 37,000 shares a day.

Emil Tarazi:
So we dug into this one a little bit more, and we noticed a couple of interesting patterns. The first one was that… Well, the interesting pattern is that, in this particular case, there were a lot of holders that were reporting holding shares in Q2 who had never held this ETF in Q1, and that stands out, why would that be? And when you look at the types of firms that are holding it in Q2, it’s your Envestnets, your Raymond James, your Ameriprises of the world, so that’s interesting, how did seven million shares suddenly pop up across all of these firms? Well, we went back to the history of the trading of this name, and back on June 16th, we saw that there was an 11 million shares traded on the tape. So this points to how the model portfolio rebalance game works.

Emil Tarazi:
We suspect this was a ETF model portfolio that rebalanced, and basically made a bet that these oil equipment and servicing companies undervalued, and went in and decided to make a purchase. But what’s more impressive is the size of that purchase, and how many people are tracking this model. So that’s something we’re still investigating. It’s certainly very interesting to see how these things play out.

Scott McKenna:
Emil, I’m just curious, one of our big focuses recently has been tax-loss harvesting, with the addition of our tax-loss prospecting tool. I wonder if any of the big changes, especially like moves into IYE, or IEZ could be attributed to tax-loss harvesting, since every time I pull it into that portfolio analysis, past couple of months, it’s down 30, 36%. XLE is actually my go-to, to show off the tool, and what it could do, right? So I wonder if there’s any way to figure out, if there were a lot of people that were actually doing a tax-loss swap, maybe out of one oil-related ETF into these names.

Emil Tarazi:
Yeah. I mean, we do have our tax-loss harvesting tool on the app. With that, it brings all these little data points together in a few seconds. So you can type in any ETF, and you can get the historical holdings quarter-over-quarter for correlated names. To that exact point, the other interesting thing that we saw was XLRE. XLRE and what was the other one? VNQ. So in the real estate sector, we saw an interesting shift. We actually saw about $1.5 billion in extra holdings between Q1 and Q2 into the Real Estate Sector SPDR, XLRE, and very surprisingly, we saw almost a billion dollars out of the Vanguard, VNQ Vanguard Real Estate ETF. Now, they’re not exactly the same type of fund. They are 99% correlated with each other, but VNQ’s active share with XLRE is about 41%.

Emil Tarazi:
So certainly not tremendous amount of overlap, but I think this could be an example of a tax-loss trade that people did between Q1 and Q2, seeing money out of VNQ and into XLRE. That sounds to me like someone was rotating, and capturing that loss, and actually when you look at these real estate names throughout the year, everything peaked around mid Feb, and if you look peak to trough, we’re looking at drawdowns in excess of 45% around the March timeframe. I’d certainly expect this type of trade where you don’t see a tremendous amount of money on the surface, moving around across the real estate sector. But when you open it up, you’re seeing billion dollar moves in and out of names. This type of stuff can all be pretty easily captured on the tax-loss harvesting app on the Logicly platform.

Scott McKenna:
Yeah. So on the topic of tax-loss harvesting, obviously we had to do a little shameless plug of our platform, but I think for our podcast listeners, maybe we could talk a little bit more about why ETFs and why they’re such a great tool, when you’re doing a strategy like that.

Emil Tarazi:
Oh, yeah. I mean, with ETFs, you just have… It’s a dimensions problem, right? If you’re tax-loss harvesting with single stocks, and Exxon is down and you want to replace it with Chevron, well, you can, but they are two very different companies. But in the ETF space, you can find… There’s 2300 ETFs out there, listed in the US. So if you’re invested in one ETF, you can find… Because of the index effect, and because of how ETFs are constructed, you can find another ETF that’s 99% correlated, and doesn’t necessarily track the same index. So why is that important? Well, it’s important, because you don’t want to shift your asset allocation targets too much and also, you want to stay on track. You don’t want to pay too much in tracking error, but you want to be able to harvest tax credit or tax-loss, and that’s a huge boost to you.

Emil Tarazi:
Harvesting a loss in a downmarket like what we saw earlier this year, can boost your post-tax alpha in a tremendous way. I think this year, especially we heard a lot about tax-loss harvesting, and it’s still a very manual process. It’s still a process where you need to look at what your positions are, and look at where the market is, and come up with your own ideas using the screener tool or whatnot. There’s no tool out there that’s really giving you ideas on how to make the switch, and linking the peer groups with the correlations, with the index which that ETF is tracking. So if I were to sum up, whereas the ETF’s one dimensions, you can stay on track in terms of target allocation, and you can minimize your tracking error risk, and steer clear of the wash rule.

Scott McKenna:
Awesome, Emil. I think that pretty much wraps up our time today. But for our listeners who are interested in checking out our tax-loss harvesting tools for themselves, you can go ahead and go to logicly.finance/freetrial, and we’ll actually give you a code for two free weeks access to the platform. Again, you do have to request it, but we will give you free two weeks access to the platform. Thanks again so much, you guys, for listening.

In episode three, we cover everything from fintwit to being a fiduciary, and hear from Vance Barse, Wealth strategist and founder at Your Dedicated Fiduciary, about common gaps that financial advisors leave in financial planning for their clients.

Transcript:
Speaking Logically is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott:
Hey, guys, and welcome to episode three of Speaking Logically. I’m Scott McKenna.

Emil:
And I’m Emil Tarazi.

Scott:
Today, we are joined by Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary.

Vance:
Thank you very much for having me on. It is a sincere pleasure to be here.

Scott:
Yeah, Vance. We met in person at Inside ETFs, right? But a lot has changed since then. Why don’t you give us a little bit of background on you and your experiences in the industry?

Vance:
Sure thing. So I founded Your Dedicated Fiduciary as a fiduciary financial planner after almost 10 years of consulting financial advisors around the country. If we wind the clock way back to 2007, there was an institutional alternative investment platform that had access to big names such as SAC Capital, John Paulson, Winton Capitals, Citadel, KKR, and a number of others. That particular firm, whose name I don’t think I can mention, because for some reason, compliance hasn’t caught up to the way business is doing in 2020. But nonetheless, they had this side project idea of bringing these investment strategies to intermediaries, broker dealers, RIAs, custodians, etc. So I was hired originally to build out the infrastructure of that platform and ultimately to travel the country and consult advisors on how to use those managers for their high net worth and ultra high net worth clients.

Vance:
So I have spent thousands of hours with financial advisors in wire houses, independent broker dealers, registered investment advisors, and last, but certainly not least, family offices. I learned a lot more than I had originally bargained for in that role, because I was in meetings when selling agreements were procured and was able to meet with several heads of home offices because of that role and because the firm I was with was, for all intents and purposes, small. It wasn’t a major household name in the long [inaudible 00:02:58] ETF space or mutual fund space, for example.

Vance:
So I lived out of a suitcase. I loved it until I didn’t. A few things in my personal life changed, and I decided to resign from that role. Took some time off, and I did something that I think most of us fantasize about doing at some time in their life. I grew a great big beard and really long hair, and I rode around the country on a Harley Davidson for about a year, and it was an absolute blast. Now that I am a happily married man and father of two kids, I will tell all of the listeners you should never, ever, ever ride a motorcycle. It is remarkably dangerous. It should be avoided at all times, but back then, I thought it would be fun to do. I did that, and then ultimately moved back to San Diego and founded my firm.

Emil:
Good to cross some things off your bucket list, I assume.

Vance:
What do they say? YOLO, you only live once.

Emil:
What kind of motorcycle was it? What kind of Harley?

Vance:
It was a Harley Street Glide that belonged to my biological father, whom I had never met. I’ve never actually shared that publicly on any podcast, but I grew up having never met my natural father, if you will. We were supposed to meet a couple times. He didn’t show up, but as luck would have it, when a family member of mine had a pretty massive stroke, my grandmother had a massive stroke back in 2014, resigned from my former career. She was living in Morgantown, West Virginia. So I went to Morgantown, and as luck would have it, his widow reached out to me and said, “Hey, I would love for you to have this bike.” So I met her and met many of his friends, and they ceremoniously gave me this Harley Davidson. Then ultimately when my grandmother transitioned to the spiritual side, I thought, “You know what? This is my opportunity to throw a leg over this thing and ride around the country.” It was the experience of a lifetime.

Emil:
Oh, that’s actually a really good story.

Scott:
I’ve heard that story about three or four times now, just from hanging out with you in person and listening to some of the other media stuff that you’ve done. I love it.

Emil:
Yeah, so your origin story is fascinating. So today, I guess you have a breadth of clients. Can you talk to us a little bit more about who your clients are and what kind of problems do they come to you with?

Vance:
Sure. So I don’t really have a typical client, per se. Commonly, they have a particular pain point. It might be that they have an upcoming business sale, or they are tired of the banking blender, or they are related to or friends with a current client who says, “Hey, there’s this guy. His name is Vance Barse. He founded Your Dedicated Fiduciary, and he really starts with a clean slate, tabula rasa, if you will, and takes all of your estate planning, your tax returns, your business planning, your investment accounts, your insurance policies, and really looks in the thorough way to figure out if you have any planning apps.

Scott:
So there’s a lot of different types of financial advisors, right Vance? How do you define yourself, and how do you fit within that landscape?

Vance:
In the near decade that I spent consulting financial advisors, there are brokers, there are true fiduciaries, there are investment advisors, there are whole life insurance agents whose business cards say that they’re a financial advisor. There’s really no standard minimum value that a practitioner needs to bring to the public. The public is often confused. So I realize that trying to on board clients by inventing a better mouse trap, which in my opinion doesn’t exist. It’s all about low cost, it’s all about tax efficiency. It’s all about tax smart planning.

Vance:
The “I have a better mouse trap”, in my mind, was not a viable strategy for client acquisition, but by sharing that I used to consult financial advisors around the country, many of whom are so-called “award-winning” or “leading”, there are many strategies that they typically don’t provide, either because they’re not specialized in those types of strategies, for example, advanced planning, charitable planning, how to leverage an estate planning attorney to transfer really complex businesses and properties and so forth, or because those advisors are with firms where they just simply don’t offer that. It’s gather assets, gather assets, gather assets, charge the RAD fee. We’ll see you in three to six to nine to 12 months, and onward they go. So I wanted to create an entity where the clients served by that entity understand that the goal is to be authentic, transparent, and bring value in a meaningful way.

Scott:
In general, what do you think are the biggest gaps that most advisors leave open?

Vance:
That is a million dollar question, and I really appreciate you asking it. One, the gap that commonly exists between the tax world and the investment world. You take your right hand and you open it in front of you. Take your left hand and open it in front of you. Your right hand represents the investment world. Your left hand represents the tax world. You would think that at the core of our industry, those two worlds would come together, because for non-retirement assets, investment decisions, buys, sells, etc, can have tax implications, much in the same way that retirement planning, how much you contribute per year can have tax implications.

Vance:
One of the things that I noticed is that CPAs were often reactive. Meaning they got the tax data from the client, they went over to typically [lissert 00:10:22], which is the program that many of them use. They plug and chug, they spit out the return, they go, “Here you go. This is [inaudible 00:10:30] client. Here’s the invoice.” Secondarily is the estate planning that clients need, not because financial advisors and/or financial planners are estate planners. I’m sure that someone out there is both, but commonly they’re not, and it’s not the advisor’s job to serve as an estate planner. In fact, they’re not qualified to do that unless they go to law school and pass the bar.

Vance:
But when you’re a financial advisor, you get to know your clients. You get to know what makes them tick. You understand what their passions are. You hopefully will have access to their tax returns. You can see if they have loss carry forward. You can see if they have highly appreciated concentrated stock. You can see data and information that when paired with what you know about the family, can bring value to that family. So if there are two areas where I hope financial advisors spend more time and provide particular emphasis with respect to serving their clients, it would be in bridging the gap between the tax and investment worlds and really looking at their estate planning to make sure that the documents they need to have in place are not only in place, but also reflective of that which the family desires.

Emil:
That’s a very good point. You say that when you look at tax planning, you have to look at really not just the assets that you’re managing, but really the big pictures. That’s, I think, hard to do. That’s hard to manage and really hard to understand. Have you found software or processes out there that make that easier for advisors?

Vance:
No, I have not. I’d love to invent one so that maybe then we can all hang out on my private jet and my private pool and enjoy the private lifestyle. I’m just kidding. My understanding is that there are a couple that exist. I have yet to truly ascertain academically how a bot or an algorithm can understand the tax laws, harvesting opportunities available and the human’s desires, in so far as what they want to do not only with respect to their investments, but also their estate planning.

Vance:
For example, let’s say that you have a theoretical, highly concentrated tech stock. If you purchased multiple lots of that, often times software will report it as an average cost basis. Now I’m an investment advisor representative who uses Commonwealth Financial Network’s Corporate RIA for several reasons. But one of the things I really love about Commonwealth, and there are many, is that they have a software that allows the conversion of the average cost basis to the very specific tax lot cost basis.

Vance:
So let’s take another example where you have a family who’s an advisor, or as the case may be, former advisor, loaded them up into high cost, tax inefficient mutual funds. Most people, unless they have a pain point, like their financial advisor. One of the things I’ve noticed in onboarding families is that they might look at me and go, “Oh, you want my tax returns? Well, my current gal or current guy hasn’t ever asked for that. But sure, I’ll give it to you. By the way, I seem to have this really annoying capital gains drag every year.”

Vance:
Sure enough, I can look at the schedule D, and I think for compliance purposes, I have to share I’m not a CPA, I don’t offer tax advice, I don’t offer tax preparation services, etc, etc, etc. I do, however, look at tax returns typically daily to really understand the fact pattern for the estate. So if I look at the schedule D and I see that every year there’s 10,000, 20,000, 30,000, 50,000. I had a client with 85,000 in capital gains because of the tax inefficient mutual funds that the former advisor had put into their non-retirement accounts. I can take that investment account and those specific holdings, and I can convert the average cost to the tax lot specific cost, because then I can look at which of those specific tax lots are at a gain, which are at a loss, which are roughly break even.

Emil:
Yeah. No, that does make sense. I think it’s certainly stuff that’s near and dear to what we do at ETFLogic, things that we’re studying more and more. Certainly gets into the weeds, but we love the weeds. I guess jumping around a little bit, very curious about where you see some of the big regulatory headwinds or tailwinds that there are certainly a lot of regulatory changes that have shown up over the last year, notably things like Reg BI. Curious what you think about that. How do you see it shaping the industry?

Vance:
I think the Reg BI was a step in the right direction, but my personal opinion is that it was a baby step. In medicine, you, as a licensed doctor, have to take the Hippocratic Oath, which is first, do no harm. It boggles my mind that we don’t have the same thing or a very close equivalent in financial services. The public doesn’t know what the public doesn’t know, to quote the famous Rumsfeld quote, which was not a very good one, but the point is the public doesn’t know about financial services. So when Reg BI was passed, depending on a financial advisor’s affiliation, for example, are they an RI only? Are they an investment advisor representative or IAR only? Are they broker dealer and RIA? Are they a hybrid? Are they dual? The client doesn’t know the difference between those two typically. Like overwhelmingly typically. To allow financial advisors the opportunity to provide a form, but have additional and multiple pages of disclosure that the client is to read and thoroughly understand, I just can’t really wrap my head around that, because let’s back away from the ivory tower theoretical universe and come back down to reality.

Vance:
You’re serving a busy client or you’re serving a retiree. Are they going to want to sit around and read through pages and pages of legalese that use very contextually specific nomenclature and information that they’re more than likely not familiar with and go, “Okay. Well, this is regulation best interest.” So I’m not bashing Reg BI. I think it’s a step in the right direction. My personal belief is that we should have a true fiduciary standard that requires financial practitioners to adhere to the absolute highest degree of integrity, morality, and ethics. I don’t know if we’ll see one any time soon. I know that not everyone agrees with me, and that’s totally fine. Sometimes I think that there are institutions that don’t want a fiduciary standard, because for example, it might not be in the best interest of their clients to charge them an advisory cost and simultaneously put them into an asset management company, or said differently, investment products of an investment firm that they own.

Vance:
I just go, “Come on.” That’s almost like the barber shop model, right? So we’re going to charge the barber time for the chair, and we’re also going to charge the client walking in. So let’s go ahead and charge for investment advisory and, theoretically, financial planning and possibly some trust planning or trust administration, etc, etc. But while we’re doing that, we’re going to also put you into our portfolio models, which conveniently might have investment products that are managed by a company that we own. I think that educated consumers are realizing the inherent conflict in that model, although I could make the argument that if those products are in the best interest of the client, and that’s a whole separate conversation, then it might make sense. But I think you catch my drift. I would love to see the day that the financial practitioners are required to bring maximum value and serve clients in a way that is truly in their best interest, not just with respect to products, but also strategy implementation and in between.

Scott:
So I hate to get political, but it seems like in this administration and recently a lot of the rules that have been coming out are very pro putting the due diligence on the end investor, right? So Reg BI and the ETF rule, for instance. Do you think that might change with any kind of political shift that might happen?

Vance:
It could, and I love politics. I find it academically fascinating. I have yet, in my 40+ years to see a politician campaign on a number of things and then deliver 100% on those things. You hit a certain point of disillusionment. Having grown up right outside of DC, you also become acutely aware that many politicians might say one thing and do another based on funding and campaign contributions. For me personally, it doesn’t take too long to feel grimy.

Vance:
I would hope that if we have a shift in the political winds, or said differently, and I guess more pointedly, if the pendulum went to the left, I would hope that the next administration, whenever that is, would take the initiative to bring a true fiduciary standard to the industry. Scott, I have not made friends in some circles because they go, “Well, just because you make a commission doesn’t mean that you’re a bad person or that you’re violating what’s in the best interest of the client.” You know what? Look at it on a case by case basis. If doing an A share in a 529 plan where the investment holding period is going to be 7, 10, 15, 20 years, 18 years, whatever the case may be, then what does the math say, right? Forget opinion, forget conjecture. What does the data and what does the math say is in the best interest of the client? I would hope that we would see something to that effect.

Emil:
That’s a good retrospective on some of the recent regulatory changes shifting the industry. Beyond regulatory and regulations, what are some of the big themes that you see in the coming years?

Vance:
Potentially higher taxes. The Freasury, which I have dubbed as the shotgun wedding between the Federal Reserve and the Treasury. Eventually that has to get paid, in theory, although we could continue to deficit spend. I remember 20 years ago people going, “Oh, the national deficit is so terrible. We’re going to get crippled in taxes,” and here we are. Right? With respect to the industry, I think we will continue to see fee compression. That’s an obvious one. I think that we will continue to see the regulatory landscape evolve toward a fiduciary standard, because remember, there’s also state level or state specific regulations. I would hope that our industry learns how to maintain compliance but also allow financial advisors to do business like so many other businesses in 2020. I understand the issue with endorsements.

Vance:
I look at other industries and I go, “People use Yelp. People use Google. It’s 2020. West Virginia has high speed internet, for crying out loud. With all the smart people that we have, particularly attorneys, making as much money as they do, we have to have the ability. It has to exist, in my mind. It’s go to exist to allow our industry to conduct business in ways that other industries conduct business.”

Vance:
You know what I did today, gentlemen? I got my hair cut. Yes, I wore a mask. Yes, I wore gloves, and yes, I was careful. It was amazing. I’m like, “Wow,” I went from shaggy dog to current day Vance, and it was truly a wonderful experience. How did I find that barber? I simply went on to Google and I typed in “best rated barber near me”. You know what I did? I read through reviews. I’m like, “I can’t believe we can’t do this in this industry, within reason.” So I hope that the industry provides the infrastructure to not only maintain compliance with standards and regulations, but so that we can, as an industry, conduct business like it’s 2020, not 1987, if that makes sense.

Emil:
Absolutely.

Vance:
Number four, I think as wealth transfers from Boomers to next gen, financial advisors are going to need to learn how to have a meaningful conversation with women, because statistically, men die first, and one of the things I used to see commonly is male advisor, male client, with female spouse. The two men would just talk at and with one another, and it was as if the female had no voice whatsoever. That’s a problem. I think that will affect advisors, and concurrently, advisors need to learn how to have meaningful conversation with the younger generation. We all love to bag on millennials. “Yeah, bruh, I got my headpiece on, bruh. Hashtag, bruh. I’m trending on Twitter, bruh.”

Scott:
Not headset. AirPods, not headset.

Vance:
I hope I didn’t offend you, Scott. Free hugs at Vance’s house, bruh.

Scott:
[inaudible 00:27:47]

Vance:
Anyway, I sit back and people make jokes about it, and they’re largely funny, but that generation is going to ostensibly inherit a lot of money. They are a purpose-driven, meaning-seeking, and very commonly philanthropically-oriented generation, which is interesting, because so many of them grew up staring at computer screens or phones. I’m part of the latchkey generation. Mom and dad both worked. We’d get off the bus. Back in those days, you could just walk from bus stop to your house. It’s like a quarter mile uphill both ways through the snow and the sleet and tornadoes, right? Life was tough, man. But now you have a generation that is very social media savvy, very smart, and they like to see meaning in the things that they do.

Vance:
This is why we’ve seen things like ESG and impact investing really become of interest among millennials. It’s not just millennials, but I’ve noticed that when I receive questions on ESG and impact investing, it’s either from families that really want to make the world a better place, or it’s from younger members of multi-generational families who go, “Look, I realize I’m fortunate that we had a business, or we had real estate, or we had both,” or mom or dad worked for decades at a company and were able to save. “I want to make sure that I do my part to give back.”

Scott:
That’s really interesting. ESG is a big thing that we’re looking at, in terms of our portfolio analysis tools. I feel like every time I do a demo, it’s either a younger advisor under the age of 40 that’s like, “Wow, that’s really cool,” or it’s an advisor that it seems like they’re getting into ESG or even starting to look at it just based on a client request. Like their client is saying, “I want to know what kind of impact my investments have,” maybe based off an article that they read or something like that.

Emil:
Yeah. Those are, I think, a really good overview. One of the things you touched on was this intergenerational wealth transfer. I guess you touched on one of the nuances there is that a lot of that transfer will happen to women, towards women. So very good point about the advisor relationship towards women.

Scott:
Yeah. Your anecdote before about the male advisor only talking to the husband and ignoring the wife, that seems so old school to me that people are still behaving and operating their businesses in those fashions, whether it’s financial services or any other industry. But I guess that kind of goes along with what it is that financial advisors need to do to adapt in order to meet the new demands of this new generation, right?

Vance:
But it’s important for financial advisors to take a step back away from the portfolio management, if they’re even doing that. Many of them, again, plug and chug, put it in a home office model, “See you in three to six to nine, and come to our holiday dinner soiree. We’ll see you then.” But if they’re focusing on the investment, I invite them to take a step back, look at the big picture. Who is the family? What makes them tick? What are their pain points? What are they passionate about? What planning strategies? Very specifically, what planning strategies can you bring into their lives to help them live a more meaningful life of fulfillment, because ultimately, that’s what we all want. What’s the point of jumping on the wheel and trying to run faster and faster and faster to get our heart rate and blood pressure up to go nowhere? People don’t want that. People want fulfillment. In my mind, that’s the job of a comprehensive financial planner.

Scott:
So I have one more question. Obviously we met on [inaudible 00:32:22]. Social media is a very powerful tool to connect with people. I always see a lot of people getting… Advisors especially, you guys are always complaining about getting these messages from these guys who are promising all these leads, right? “I’m going to get you qualified leads.” I’m curious, and I’ve always been a little bit curious about advisors and prospecting. For you, what’s been the most proven strategy for getting new clients?

Vance:
Oh, I love it. I absolutely love it. So I have been seeking the silver bullet, the one thing that takes me from 50+ families to 100 to maybe 150 as fast as possible. I have been seeking unobtainium. I just don’t think it exists. I have a few thoughts to share on this. One, the number of clients I have acquired through social media is slim to none and slim left town. It is rapidly approaching zero, because that’s what it’s always been. I think about this, and I think it’s so funny that social media is so regulated, not because it’s funny, and I understand the point, because the reality is so many of the regulations that we have in this industry are because people were doing those things.

Vance:
It’s not a crime to be a good human, but you can’t, in my mind, on a moral level, you can’t take a full testimonial that was contrived and blast it out to the public. Stop. Come on. Let’s get back to earth. Let’s be levelheaded. Let’s be good people and lead with integrity. Some people might be rolling their eyes, and that’s fine. But again, in my mind, if you are a practitioner in the financial services industry, you, me, and all of us should be held to the equivalent of the Hippocratic Oath in medicine.

Vance:
In fact, Andrea Riquier of MarketWatch reached out to me for a story on this very subject as it relates to Reg BI when it was passed. So on social media, I can’t imagine that the “ideal client”, however people define it, million investable, two and a half million investable, 500,000 investable, 50 million private wealth [inaudible 00:34:59]. People, in my experience, no one’s sitting there over breakfast on a Sunday scrolling through LinkedIn going, “Hey, Janice, get over here. Bring your cup of coffee. I saw this really, really great post. Who is this? Vance Barse. Sent me a LinkedIn message. I only got 39,000 other ones. This is our guy, honey. This is the dude. Where has this guy been all our lives while we have been in the banking blender? Hot dang, hallelujah. Prayers are answered.” I don’t see it happening, right?

Vance:
The same thing, if you’re running a huge company or even a small company, you’re busy. You got kids. You got travel. Your back hurts. You got a mortgage. Maybe two of them, because you got a Lake House. Are you really sitting around and thumbing through Twitter at the risk of wearing your thumbs out and getting some type of medical disease in your joints? Probably not. I fought joining Twitter for so long. I remember when Twitter was the go-to social platform over 10 years ago, and everyone’s like, “You got to go on Twitter. You got to go on Twitter.” I’m like, “One, I can’t edit it. Two, originally, I think you couldn’t delete it.” I’m like, “Maybe I have a misspelling. Maybe there’s a grammatical error. Maybe I just changed my mind.”

Vance:
So I really only started using Twitter about 18 months ago, and I have found it to be very helpful, in terms of meeting other industry folks. The main reason that I joined Twitter was to follow an economist friend of mine. She lives in Dallas. Fantastic thought leader and just I love all the content that she produces. Her name is Danielle DiMartino. That was ultimately the genesis for me joining Twitter, but I never really used it until about 18 months ago, and it’s been largely wonderful. I say largely, because sometimes I’ll tweet something out, and these random people you don’t even know just come chiming in with gallons of negativity. It’s like, “Whoa, I don’t even know who you are.” It’s just so bizarre to me.

Vance:
But getting back to client acquisition, no. I have never onboarded a client through social media. If I do, you’ll be the first person that I call. Most of the clients I have onboarded in the last three years, it’s just been an idiosyncratic, unexpected, unique kind of experience. For example, I hopped on an elevator, and Scott, you know me, I’ve never met a stranger. I get on an elevator. I’m at the University Club in downtown San Diego, and this woman gets on right behind me. I looked at her and I go, “You look happy.” She looks at me and she goes, “I’m fresh out of a divorce and I’m about to sell my company. I am as happy as happy can be.” I’m like, “Well, look at that. Sometimes the universe just has a way of working itself out.”

Vance:
She ended up coming on board because her former advisor, who was at a wire house, had never given her a voice and never talked about charitable planning, and never discussed her tax return profile, and on and on and on. She felt very underserved, not only because she didn’t have a voice, but because in her mind, she had not been provided the value for which she and her former husband were eligible.

Vance:
Another client, I hopped on a flight from San Diego going up to Oakland. It was a 7:00, 10:00 AM flight. Very last person to get on the flight is this woman who sits down next to me and she goes, “Why are you dressed so nicely on a Saturday?” I said, “Well, I’m headed up to the Bay Area to go help this tech family with their high-level money problems.” She goes, “Well, I have a high level money problems.” We just started talking. So there’s been no real science. Again, it’s not a very specific profile. Some financial advisors have a very specific profile that they serve. Railroad executives, that’s it. I don’t have that. The universe has not provided that to me.

Scott:
Yeah, that’s something that I always see debated on Twitter and other social media between advisors, but more and more, it seems like everyone is kind of behind the idea that you should get a niche, and having a real specific investor type is going to lead to more success, because you’re ingraining yourself in a very tight-knit, specific community that has very specific problems, and therefore you develop a specialty in how to understand and navigate those issues for that specific type of person, right?

Vance:
That’s fantastic. I know that there are advisors that are very successful bloggers. People read them. They subscribe, and if they have that funnel to go out into the internet and have people funnel in and reach out to them, that’s fantastic. That’s just truly wonderful. I have not spent much time writing or vlogging simply because I’m just busy doing other things in my professional and personal lives. One other way of acquiring clients has been you do something great for somebody, they like you, and they’re at the water cooler, or they are at the polo match, or the car show, or on a Harley, and someone close to them mentions a financial planning related item, or they ask them, “Who do you have?” And it’s their cue to introduce me, and that has happened. It’s great, but I look back, and I don’t have a very specific client profile that was specifically and consistently acquired through leveraging a media platform or the internet by way of blogging. I think it’s a fantastic model. It’s just not one that I have tried.

Scott:
Fair enough, and I think like any business, you kind of just have to do whatever works for you. If you have a specific way that you’re doing it, you have a niche that you’re in, you can draw people off of social media, by all means, that’s awesome, but I don’t think for financial advisors, it’s that cut and dry that you can just do one thing and everyone will come flocking to you, right?

Scott:
Before we close out though, I wanted to see did you have any questions for us?

Vance:
So my question is when is life going to return back to normal? I’m good on time. You guys can go.

Scott:
Yeah. I meant to ask you that before. It’s been pretty funny now. There’s a virtual event going on this week that I’m participating in, and there’s a whole bunch of them coming up. It just doesn’t feel the same, and it just feels very weird. I hope it’s not the new normal. I think a bit part of our industry is those conferences, right? Now having to do it virtually, and we’ve had to adapt a lot. I think for us, being a tech company, it was pretty easy, but all of our stuff was on the cloud. So it was really quick and easy for us to just start working from our laptops immediately.

Scott:
But curious for you, Vance, being a financial advisor, obviously, I don’t know if you were, but a lot of them were using dinners with clients and in person meetings, having them in your office and stuff like that. How did you adapt to that change?

Vance:
I love this question for many reasons. For me and my practice, the COVID regime in which we have found ourselves is one during which I have made zero changes in terms of how I serve clients. So what’s somewhat unusual about my practice is that while I have an office in San Diego, the majority of the 50-ish families that I serve are not in or based in San Diego. Using Zoom, of course the telephone, and in person meetings where I travel to them is something that I have been doing. So when air travel ceased to exist for a hot minute there, obviously I wasn’t getting on planes, but I was conducting Zoom meetings. Nothing new there.

Vance:
Many of the families that I serve are headed by folks that are on the right-hand side of the age bell curve. They were used to talking on the phone. All my clients have my cell phone. It can be 5:30 in the morning, and as you know, I’m a very early riser. I get east coast calls at that hour, and it might be 9:45 at night, and I can get a call from a west coast-based client. So operationally, there’s been no change.

Vance:
I went to my office only twice in four months, and that was just to college mail, the majority of which was just junk. Any checks and so forth, we had someone going in every day to make sure that any urgent items, specifically client-related items, were being processed. But I just didn’t go to my office. I had 37 voicemails from wholesalers that I just delete, delete, delete, delete, delete. But I did travel to four different cities in the last month by plane, very carefully, I might add. I flew up to Oakland to sponsor the Silicon Valley Horse Show for a client who’s active in that community. The flight was fantastic, because one, there was zero line at TSA, which was a first, and two, most of those seats, like the majority of the seats on the plane were vacant. I simply wore a mask and a face shield and gloves. I had 90,000 gallons of hand sanitizer with me, and you just kind of make the best of it.

Vance:
So I am meeting with clients in person where I travel to them by plane. For me, there’s really been no change, but I do know that for many advisors that have that conventional model of office down the street, all clients go to them, it’s been a challenge, because… Imagine this, you’re an advisor. You’ve been an advisor for 25, 30 years, maybe more. You have all your staff there. They’re at arm’s length, multiple human beings right there in person. That’s what you’re used to. All your clients come to you.

Vance:
All of a sudden, all your staff is remote, you got to pick up the phone? Oh man, I got to dial. Number, number, number, number, number, number, number, number, number, number. Then hope that they answer. I’ve got to click on this Zoom meeting. You look at some of these Zoom calls, and it looks like the phone’s on their chest and [inaudible 00:47:43] you can see right up their nostrils. Like hold the phone out in front of you, please. But it’s been challenging for some, but for me, no issue.

Scott:
So that concludes episode three of our Speaking Logically series-

Emil:
Just a quick note. Vance, thanks a lot for input. Clearly you’re a wealth of knowledge in this space.

Vance:
Of course. Gentlemen, I sincerely appreciate the opportunity to hop on the podcast and share a little humor, and hopefully bring some levity to the day of listeners.

Scott:
You certainly did. For those who are interested in getting in touch with Vance, you can go to VanceBarse.com. There’s a link there to sign up for his newsletter, as well as his personal contact details, if you want to talk to him about any of the stuff mentioned in this podcast. If you’re interested in our Logically platform, which we talked a little bit about some of the ESG and tax stuff that we’re working on, you can go to logically.finance and check out the platform, that way you can get a free trial code for two free weeks right off that website.

Scott:
So thanks again, you guys, for listening. We hope you guys are investing logicly.

In this episode, we chat with Jeremy Heffernan, VP and Head of Model Portfolio Distribution at Wilshire Associates, about model portfolios. We cover why they are an important tool for advisors to save time, why Wilshire was excited to partner with us on our Logicly Model Marketplace, and what the future looks like for the model portfolio marketplace.

Transcript:
Speaking Logicly is brought to you by ETFLogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advise.

Scott McKenna:
Hello, everyone. And welcome to episode two of Speaking Logicly I’m Scott McKenna.

Emil Tarazi:
And I’m Emil Tarazi.

Scott McKenna:
And we are excited to talk today about model portfolios. So Emil, as we know, model portfolios are becoming more and more used by financial advisors. And we have a very special guest. We have Jeremy Heffernan who is the vice president, head of model portfolio distribution at Wilshire Associates. How are you today Jeremy?

Jeremy Heffernan:
Doing great. Thank you guys for having me.

Scott McKenna:
Yeah, great to have you on. So to get started, why don’t you just tell us a little bit about your role at Wilshire?

Jeremy Heffernan:
Yeah, sure. So I’ve been with Wilshire now since 2012, so eight years. I lead our distribution efforts for Wilshire’s model portfolios. Essentially Wilshire builds model portfolios. We build them using mutual funds and exchange traded funds, ETFs. And we make them available to financial advisors through various investment advisory platforms. My team and I spend most of our time educating financial advisors on the benefits of those model portfolios and why they should work with a firm like Wilshire and why they should consider models.

Scott McKenna:
So why do you think models are such an important tool for advisors?

Jeremy Heffernan:
Yeah, I mean, models are an important tool because they can assist advisors in creating a scalable and efficient portfolio construction process. So just to give you a few examples of why advisors should consider models as a part of their business. First, let’s look at some of the ways advisors spend their current time. There’s a recent Cerulli report that stated that financial advisors currently spend about 17% of their time on investment management, while only spending about nine and a half percent of their time on financial planning and nine and a half percent on prospecting for new clients. Now, if we just look at financial planning, advisors are being asked by their clients to provide more and more complex financial planning advice.

Jeremy Heffernan:
I think part of that comes down to the regulatory environment we’re in. I think investors are becoming more and more familiar with the idea of having a fiduciary provided advice and they aren’t just looking for products. So advisors are being asked by their clients to provide holistic advice that isn’t centered on just growth and accumulation. As an example like baby boomers are entering this decumulation phase in their lives where they’re drawing down their portfolios more and more. Millennials are asking for advice on how they can pay down their student loan debt. High-net-worth clients might be asking for more guidance on charitable giving. So if an advisor wants to provide a wide array of planning advice, they probably need to spend less time on that investment management activity.

Scott McKenna:
Yeah, totally. And that’s really why we started the Logicly platform in the first place. Was to help advisors cut down on the time that they are spending on fund screening and portfolio construction. So they can focus more time on the planning and relationship aspects.

Jeremy Heffernan:
Another good example is the other one I just mentioned which is the rule that prospecting plays in the business of a financial advisor. I just mentioned that boomers are now in this decumulation stage and as boomers are going into retirement, pulling out their assets, this is going to lower the AUM of advisors who covered this segment of the market. So they’re going to have to find new clients, but competition is getting more difficult. As one example, third-party digital advice providers, aka the robo advisors. They’re now competing on the traditional turf of advisors. And they’re also all starting to offer financial planning advice. But also some of the big asset managers, mutual fund and ETF companies, they’re beginning to provide packaged portfolios and financial planning.

Jeremy Heffernan:
Additionally, just look at the time we’re in today. We’re recording this at the time of the COVID-19 pandemic. And RIA is on average are in their mid fifties with many of them in their sixties and seventies. And this is a high risk category. It would be very difficult for these advisors to meet with their clients. So there’s more competitors that there is potentially their AUM are being lowered, not just the market movement, but because of the goals that their clients have and meeting with clients is more difficult. So all of this reinforces the notion that prospecting is getting harder.

Scott McKenna:
What about for an advisor who’s older who might not really be concerned about bringing on new clients or prospecting right now?

Jeremy Heffernan:
Models can play a big part in a succession planning for advisors. I mentioned that a lot of advisors are in their fifties, and this is a time of life when the retirement plans begin to crystallize. Traditionally advisors with fee-based businesses, they see their valuations increase in value versus their commission-based counterparts, but a fee-based business model alone isn’t the only factor in driving valuations higher. The more process driven and advisor’s practice is the more attractive their business is going to be. In a world where advisors are having to focus more on financial planning, where prospecting is getting more and more difficult and where succession planning is not only important to the future of an advisor’s practice, but it’s also important to their clients. They want to know that they’re taken care of after their transitions. Advisors really should consider the benefits of model portfolios.

Emil Tarazi:
So going back to that Cerulli report Jeremy, I’m just curious, were there any stats to kind of show how much time advisors can really save by using model portfolios?

Jeremy Heffernan:
Current model users spend about eight and a half percent of their time on investment management activities compared to like I said, that 17 and a half percent of advisors who tend to insource or create models.

Emil Tarazi:
Wow. So basically advisors who use model portfolios are able to save a pretty large percent of their day and they’re able then to use that for other things such as financial planning and working with their clients? Is that the right way to think about it?

Jeremy Heffernan:
Yeah, no, that’s the exact way to think about it. Is free up more of your time to meet with clients, understand their goals and objectives and develop those financial plans for them to help them meet those goals and objectives. Using models provides an advisor with a more efficient way to accomplish those tasks.

Emil Tarazi:
Yeah, we totally agree. I think at the end of the day, that’s why we started our model marketplace was to help advisors sort through the noise of what strategies are available and what’s going to be the best fit for their clients.

Scott McKenna:
Jeremy, models aren’t a new thing. Maybe they’re becoming more popular, but they’ve been around for decades, right? And I think Wilshire has been pretty deeply entrenched in offering models for many years. But how did it first come about with your business at Wilshire?

Jeremy Heffernan:
Yeah. I mean, we’ve been in the model business for a long time now, maybe it’s like… I don’t think we’re not doing anything different that we haven’t always done. I think one of the reasons why advisors are using models more today is a lot of technology solutions are empowering the use of models. And for us, we have been a user of technology to solve investment related problems since our very origins. I mentioned at the beginning that part of what our team does is educate advisors on why they should work with a firm like Wilshire. And part of that is telling them the Wilshire story, telling them about why we started in the industry and how we work with our clients. And so what I like to tell them is that Wilshire was founded in 1972. Is one of the pioneers using technology to solving investment management problems.

Jeremy Heffernan:
This was a time when the most powerful computing technology in the world was at institutions like NASA. And we were able to tap into that technology. We created products like the Wilshire 5,000, which is probably the solution that probably most people recognize from us. But one of our other really early products was a commercially viable way to calculate equity beta. Essentially Wilshire was applying really strong math to solving investing challenges. But another example is our multi-factor risk attribution model. This helps us decompose manager returns into the component pieces and isolate factors that help us determine if a manager is probably skillful or if they’re just lucky. And then we also developed one of the first asset liability models for pension funds to match their future liabilities and obligations against their current portfolio. So all of these things were created back in the seventies and they didn’t exist before then. But collectively all of these tools demonstrate our foundation in risk management.

Jeremy Heffernan:
That’s something that we kind of consider a foundational aspect to our firm, is risk management. But beginning in the eighties, we launched one of the first full service consulting firms and the intention here wasn’t just to provide tools, but also to provide advice to pensions and foundations and endowments on how to apply those same risk management tools to create asset allocation policies to select managers and to help them build portfolios. So when my division, I worked for Wilshire funds management. When we were formed in the early two thousands, what we wanted to do is… The idea was to take the firm’s risk management expertise and capabilities and provide investment advisory solutions designed for financial intermediaries, such as burns companies, broker dealers, and their own financial advisors.

Jeremy Heffernan:
We wanted to take those same best practices at the institutional level and provide them to those in financial advisors. So that’s how we first started getting into building and developing model portfolios for in financial advisors. We actually started working with insurance companies and then we started working with broker dealers. Today we manage around $65 billion in assets under management. And a lot of that is in multi-asset class portfolios. We’re diversifying them across stocks, bonds, and alternative strategies.

Emil Tarazi:
Can you talk to us a little bit more about that process, or maybe just in general, like how how does your portfolio construction process look?

Jeremy Heffernan:
Yeah, well, with the portfolio construction process, we typically are going to start with underlying asset allocation, right? Establishing strategic profiles for each of the models. As an example, a moderate portfolio, we will typically balance around 55% into equities and 45% into fixed income. But one of the things that sets us apart in our process is we can tap into those risk management tools that we developed back in the 1970s. We will try to align our underlying asset allocation with the best thinking from those same institutional investors that we’re working with.

Jeremy Heffernan:
Additionally, we have a dedicated manager research team located within Wilshire whose task is just identifying the best investment managers to work with. And then our portfolio managers are going to marry that asset allocation and that manager research process together and intelligently craft the portfolios in a way that makes sense. Finally, we monitor the portfolios on a regularly basis and we dynamically tilt the portfolios to take advantage of short-term opportunities in the marketplace, so that if we see dislocations among major asset classes, we will slightly overweight or underweight some of these asset classes to provide the portfolios with the additional opportunities.

Emil Tarazi:
So on that last point, what’s the right way to think of that from the active management lens. Will you potentially deviate from like a set rebalanced schedule if there are opportunities to take in the market?

Jeremy Heffernan:
Yeah, we can. Typically we tend to work on a quarterly cycle. However, I mean, just this year alone, we saw big dislocations within the fixed income markets. And so we didn’t wait for our quarterly cycle to play out. When we saw spreads widen within the bond markets, we took advantage of the opportunity and we moved to take overweight positions into high yield, fixed income. We knew that the way it spreads and widened out historically when they had gotten as wide as they were, that they were going to come back and that this was going to generate some positive momentum within that asset class. So we went to an overweight position in high yield relative to investment grade fixed income to take advantage of that opportunity. And over the course of the second quarter, that generated positive returns for our portfolios.

Emil Tarazi:
That’s interesting. Talk to us more about ETFs. How have ETFs evolved as sort of a building block and the model portfolio construction process?

Jeremy Heffernan:
Yeah, I think we’re definitely seeing model portfolios using ETFs becoming more popular portfolio among financial advisors and their clients. But I think one thing that’s important to know is there’s different types of model portfolios. They’re model portfolios that some broker dealer home offices construct and several tamps, turnkey asset management platforms. They have their own models. A lot of asset managers, ETF managers have the accelerated deployment of their models.

Jeremy Heffernan:
Wilshire as an organization we consider ourselves in the regards of ETF model portfolios, as a third party strategist. What we’re doing is we don’t have our own family of ETFs. So what we do is we go out and we try to find the best underlying ETFs for our model portfolios. And in that sense today, when we use ETFs, we’re using the traditional passive ETF portfolios. We’re not restricted to using any one family. So historically we’ve used ETFs constructed by Vanguard, iShares, State Street, Dow Jones, VanEck. So we don’t limit ourselves to anyone ETF family for the use of our portfolios, but we do have criteria that we use when deciding which of these ETF providers to work with.

Scott McKenna:
So why don’t you tell us a little bit more about what that criteria is?

Jeremy Heffernan:
I mean, one that comes to mind right away is expense. We do take into account what’s the underlying cost of the ETF. Generally we want to use the cheapest available ETF. But expenses the sole lens that we look at, we’re also going to look at say tracking error. We want to make sure that the tracking error, the ETF relative to its underlying benchmark is minimal. And then finally, another example is trading. What’s the bid asked spread, is it narrow? Is it wide? What’s the daily trading volume? Is that actively traded? Market cap of the ETF. We want to make sure that when we purchase and sell ETFs for our model portfolios, that they are highly liquid and that investors are going to be able to get the best price for those underlying ETFs.

Scott McKenna:
What about the non-transparent active ETFs? Is that something you guys are looking at and how would you rate those?

Jeremy Heffernan:
[inaudible 00:17:38] we’re also keeping an eye on the active non-transparent ETF space as well. I think this year we’ve seen a lot of managers… I think we’ve seen more managers launch active ETFs this year than passive ETFs. I think it’s the first year where that has happened. And so in situations like that, we want to apply more than just metrics associated with liquidity, tracking error, expenses. We want to look at the qualitative metrics associated with the underlying active managers to those ETFs and those can be taking a look at the firm and the team behind the active management. Making sure that there are strength in the firm and strengthen the investment team. We want to take a look at the information. What’s the edge the managers have in gathering and processing information. What’s their ability to forecast markets.

Jeremy Heffernan:
And then how seriously do they take the attribution process. These are all qualitative aspects that we apply to active managers. Right now, we’re not using any actively managed ETFs in our model portfolios. We think that that space still needs to mature a little bit more before it gets there, but we are keeping open the possibility that as that marketplace matures, we might start using active ETFs in our model portfolios.

Emil Tarazi:
That’s really interesting. We’ve been monitoring the ANT, the active non-transparent trajectory over the last year or so. And we do agree, it looks like it’s going to be an interesting ride as more providers adopt the model with the benefits of ETFs as well. So you had mentioned some of the kind of screening criteria that you use. I’m curious about the tracking error one. With the recent ETF rule, which kind of basically decouples the need for an index, with the rise of self indexing. A lot of ETFs may not have an index that is necessarily measurable. How do you think about that? How do you think about tracking error in that scenario?

Jeremy Heffernan:
I think in that scenario, we would still want to get a strong sense of what the manager is trying to accomplish in that space. When we think about tracking error, by the way, it’s not just one number that we want to keep in mind. Because I just mentioned earlier about how fixed income markets became dislocated earlier year. And we saw a lot of fixed income ETFs have significant tracking error to their underlying benchmarks. So with tracking error, we’re going to take a look at what’s the tracking error on a one, three, five and 10 year basis as well as the rank of providers in that asset class to see who has the best tracking error. That’s how we take a look at it.

Scott McKenna:
You mentioned earlier why advisors are using models to save time, make it easier for their day to day, spend more time with their clients. But specifically talking about your models, how do you see advisors utilizing them?

Jeremy Heffernan:
Yeah. For our models, since they’re diversified across size. So they do come with large cap, mid cap, small cap equities, they’re diversified across various factors, such as growth and value. And then within the fixed income space they’re diversified across investment grade, treasuries, high yield. So, given that these portfolios not only are they diversified across several different asset classes and we have different risk profiles for these models so that we can meet the needs and objectives of say conservative investors to moderate investors, all the way to growth or aggressive growth investors. We typically see a lot of advisors using them as a core investment solution for their mass affluent clients. They tend to serve as the majority of a client’s portfolio or even act as a standalone total portfolio solution.

Scott McKenna:
All right, I’m an advisor, let’s say I’m sold on using models. What’s the first step in researching the models? What are some good resources to get started?

Jeremy Heffernan:
Well, I think one of the things that is missing in the model portfolio space is a resource that helps advisors do research on model portfolios. And that was actually one of the things that made me excited about working with Logicly. A marketplace on the Logicly platform can be an independent source of research for advisors that will allow them to do research on the various model providers out there. Just to talk about how much of a challenge it is for advisors to research models. If you just compare the model space to traditional ETF by itself, or an ETF has a ticker symbol as a CUSIP, and there are several different research providers out there that you can plug those symbols into and pull up information on that underlying vehicle. But that type of resource, doesn’t exist for the model portfolio space by enlarge.

Scott McKenna:
And that’s really why we created the Logicly model marketplace in the first place. But I’m curious, you have ETF ratings, you can have stock ratings based on performance and earnings, things like that. But how would you provide a rating at the portfolio level for a model?

Jeremy Heffernan:
Well, I think within our investment process, when it comes to evaluating managers, there’s kind of six qualitative approaches that we take a look at. But two of them really stand out among the six with the first one being that the firm and the team. Being able to understand who the people are better actually managing the money. And what’s the history and the strengths of the organization, making sure that the people and the organization are aligned together. I think that’s one very important part of that anyone in the business of doing due diligence will take a very serious and hard look at. So the firm and the team, getting to know those people, I think are very important. And then the forecasting. The ability to understand the competitive advantages that the organization has in regards to the rigor and the repeatability and accuracy of their forecasting process. So being able to have a conversation with the manager about those two aspects, I think that’s something that everyone who is in that kind of due diligence space needs to consider when evaluating model portfolios.

Emil Tarazi:
I see. And that’s interesting you say forecasting. I suppose that means that if a manager were to make changes in a portfolio, do those changes provide a benefit in either boosting performance or capturing tax opportunities? Is that what you mean by forecasting?

Jeremy Heffernan:
Yeah, exactly. The ability to like… I think a good example of that might be the position that we took earlier this year in regards to high yield, fixed income. When we saw that the spreads widen out the way they had our portfolio management team recognize that as an opportunity within the space. And said, historically speaking, when spreads have gotten this wide, they compress and this ends up being a positive effect for this particular asset class. So we are going to move to an overweight position in high yield relative to investment grade to take advantage of that. And so that was a good call that they made [inaudible 00:00:27:01].

Emil Tarazi:
I see. And then on a sort of post trade basis, do you look at attribution of measuring the effectiveness of those decisions?

Jeremy Heffernan:
Yeah, absolutely. In fact, I mean, attribution, I think is another kind of core aspect that we’re going to take a look at in regards to assessing a manager. But I think within the world of model portfolios, you mentioned there’s a lot of different [inaudible 00:27:31], right? So I think one way to consider would be, it can become three components to attribution for a model portfolio. One would be the strategic asset allocation. Was the model overweight equities relative to fixed income? or the overweight fixed income relative to equities? You can start with kind of how much attribution, how much performance returns were generated just by the kind of the strategic asset allocation of the model. And then the second aspect that you can take a look at is the manager selection effect. How much benefits in the model portfolio gain from the underlying managers chosen. Were the underlying managers chosen? Did they beat their benchmarks that they not beat their benchmarks?

Jeremy Heffernan:
Now with passive ETFs, manager selection is somewhat minimized though, just because passive ETFs are trying to beat their benchmark, right? They’re trying to replicate them. So manager selection effects on kind of an attribution basis, are usually typically minimal, just giving kind of if you’re using a passive ETF. But then the third thing that you can take a look at as far as attribution goes, is that kind of, is any sort of like dynamic tilts that you applied to the portfolio. Any sort of overweight or underweight that you apply to that asset allocation.

Jeremy Heffernan:
As an example, you can go overweight value relative to grow. Or you can go overweight large caps relative to small caps. If you apply one of those tilts, you want to be able to measure, did our overweight to large caps, did that pan out. Did our overweight to grow pan out, et cetera. So when you look at say attribution, you can start with how much performance did we get from the strategic asset allocation? How much did we get from manager selection effects? How much did we get from any sort of dynamic tilts we applied to the portfolios. That’s a little bit about how we think about attribution in regards to the model.

Scott McKenna:
So the next step after you do the research on the models, whether it’s through our Logicly model marketplace or some other provider, is model delivery, right? And implementation. So that can be done through a tamp or other provider. But wanted to get your sense on the landscape and where do you think that’s going to go in the future?

Jeremy Heffernan:
When it comes to implementation, I do think you’re seeing the landscape evolve in ways where advisors are getting more control over the models. The traditional tamp landscape that I kind of came up in was one where if an advisor was on one of these advisory platforms and they were outsourcing to a model provider, they were taking the model as it was built by the model provider. And they didn’t have very much in ways of control of that model. The model provider wanted to make a change to the model. They did so and the advisor was left accepting that change. And in most cases they are okay with that, but there are certain times where an advisor wants more control over the portfolio for the end client.

Jeremy Heffernan:
And so I think one of the things that you’re seeing within the advisory platform landscape today, the world of tamps, as I like to call them. Is that you’re seeing more and more model marketplaces emerge where the advisor doesn’t just fully embrace the full model, but instead they tend to subscribe to the model and they end up deciding which parts of the model updates they want to apply and which ones they want to overrule.

Jeremy Heffernan:
So in effect, I’m open to starting to see this bifurcation of the model marketplace. One where it’s the full tamp model. You just subscribed to the model and the model provider makes all the changes and the advisor just supports the relationship with the client versus a kind of what I kind of call like a tamp light. Where the advisor subscribes to a model provider but then before the model is implemented at the client level, the advisor decides which parts of the model to accept, which parts to overrule or whether they want to make slight changes to the model. So I’m starting to see kind of two different ways to apply models within the industry today.

Emil Tarazi:
Yeah, that’s interesting from the customization. I mean, I can imagine there may be some difficulties if you customize too much. How does rebalancing work in those scenarios? You may move the portfolio substantially away from what the model providers intended and then you may be stuck with low cost basis items that pick up a significant chunk of your portfolio. I mean, how does that work or do people just live with it I suppose?

Jeremy Heffernan:
I think it is a challenge because like we said, at the beginning, one of the advantages of the models is to create that kind of scalable process. And when you start to add customization, you do you start to kind of deviate from that process somewhat. So I think there has to be some sort of rhyme and reason behind these customizations, as far as maybe there is a certain fund that the model provider has chosen, that the advisor just disagrees with on some sort of fundamental level and decides that they’re going to replace this fund… Place one of the model providers funds with a fund of their own, and they can do that across all clients.

Jeremy Heffernan:
Or maybe you could be one of those dynamic tilts. Model provider maybe says, I’m going to overweight a certain asset class. And the advisor says, you know what, I think that despite the model providers best thoughts and research, I disagree. Maybe I think that this overweight isn’t called for right now. And I’m just not going to accept that overweight and keep the model in line with the strategic view that the model provider starts with. So I think those are two areas where an advisor could customize or tweak the model that the mobile provider provides without getting away from the objective of having a scalable process.

Scott McKenna:
Well, Jeremy, thanks so much for taking the time to speak with us today. For those who are interested in our model marketplace, you can sign up at app.logicly.finance. And if you’re interested in learning more about the Wilshire model portfolios, you can reach out to Jeremy Heffernan at jheffernan@wilshire.com. Thanks everyone.

Emil Tarazi:
Thank you.

Jeremy Heffernan:
Thank you.

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:
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 Logicly 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 Emile Tirozzi, 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 RIA based out of Long Island. So xJeff, 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 logicly.finance/freetrial. 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.

Speaking Logicly Podcast