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Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg

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Speaker 1: Radio Today. My special guest is gonna be a little

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Speaker 1: inside baseball. For those of you who either work in

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Speaker 1: the asset management business or our r I as registered

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Speaker 1: investment and buyers or Series seven broker dealers, this is

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Speaker 1: gonna be a fascinating question. Rick Ferry is a really

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Speaker 1: interesting guy. He's going to tell a fascinating story about

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Speaker 1: when he was a retail broker in the nine nineties.

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Speaker 1: Uh the at Smith Barney. The head of his company

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Speaker 1: was Jamie Diamond, and he went to Jamie and said, Hey,

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Speaker 1: this low cost et F thing is going to be huge,

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Speaker 1: we should do something, and uh, Diamond kind of blew

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Speaker 1: him off. Ah, he still had a few years left

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Speaker 1: in his contract, so he thought carefully about it and

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Speaker 1: mapped out what became Portfolios Solutions, which was very much

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Speaker 1: ahead of its time, one of the first low cost

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Speaker 1: asset allocation all et F portfolios or mostly t F portfolios,

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Speaker 1: and launched with a modest amount of money and built

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Speaker 1: it into a billion dollar business. What I found so

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Speaker 1: fascinating about the conversation is that Rick is really one

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Speaker 1: of these people who basically identified a need, a shortcoming,

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Speaker 1: and what Wall Street was offering identified it offered it

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Speaker 1: to his company. They turned him down and said this

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Speaker 1: is too important. I'm going to go do this myself.

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Speaker 1: And UM he's also you know, a quite a gentleman.

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Speaker 1: He's just a delightful person. After the interview, we went

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Speaker 1: out to breakfast. I had some of my office mates

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Speaker 1: join us, and he basically, UM gave us just a

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Speaker 1: fascinating UM Beyond the hour and a half we talked

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Speaker 1: here even more inside baseball details of what it was

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Speaker 1: like leaving setting up. He tells the story in the

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Speaker 1: show about Hey, we I pulled a desk out of

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Speaker 1: the garbage and set this up in my living room.

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Speaker 1: My wife was my first employee. And that's how he

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Speaker 1: did this and built it into a billion dollar business. Uh.

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Speaker 1: They have one point four billion in assets. And it's

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Speaker 1: really fascinating to see how, Um, a person with an

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Speaker 1: idea can say here's how I'm gonna manifest this idea

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Speaker 1: in a business and make this real and it turned

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Speaker 1: out to be really, really substantial. Um, he was way

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Speaker 1: way ahead of his time. He's still ahead of his time.

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Speaker 1: I think he's been very insightful in how he constantly

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Speaker 1: evaluates and constantly analyzes the data that his business produces

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Speaker 1: in order to improve that business. For those of you

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Speaker 1: who work in the industry three or are just curious

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Speaker 1: as to how the business of asset management works, I

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Speaker 1: think you'll find this to be a fascinating conversation. Without

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Speaker 1: further ado, here is the Master's in Business Chat with

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Speaker 1: Rick Ferry. This is Master's in Business with Barry Ridholts

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Speaker 1: on Bloomberg Radio Today. My guest is Rick Ferry. He

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Speaker 1: is the founder and chief investment officer of Portfolio Solutions.

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Speaker 1: A little background about Rick. He is a retired Marine

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Speaker 1: Corps fighter pilot. Is that correct? And and from there

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Speaker 1: he somehow transitioned into finance. We'll find out specifically how

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Speaker 1: that took place. He's the author of is it seven

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Speaker 1: books on investing? Uh? Six books myself and then a

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Speaker 1: co author. Oh and then a seventh with a co author. Great,

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Speaker 1: And here's the your your background as you follow a

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Speaker 1: low cost et f based asset allocation form of listening.

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Speaker 1: But the story is that twenty years ago you were

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Speaker 1: a stockbroker at Smith Barney and you had an idea that, gee,

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Speaker 1: this is way too expensive and too much turnover. So

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Speaker 1: you went to the head of the company, some guy

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Speaker 1: named Jamie Diamond, and said, Hey, I have this great

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Speaker 1: idea for us. Let's offer a low cost asset management plan,

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Speaker 1: really low turnover, very very client friendly. And uh, he

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Speaker 1: basically gave you a flat out no, that's not what

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Speaker 1: we do. You quit and said, I'm gonna take this

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Speaker 1: plan and do it myself. Is that a fair description,

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Speaker 1: That's a very accurate description. Only I didn't quit right away.

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Speaker 1: I had a I took upfront money when I switched

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Speaker 1: from Kidder Peabody over to Smith Barney, so I had

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Speaker 1: a five year contract. And if I left after two years,

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Speaker 1: which is when I had the conversation with Jamie, I

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Speaker 1: would have had to pay back all of this money.

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Speaker 1: And I had redecorated my house. We bought a pop

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Speaker 1: up Emperor, and so I wasn't able to pay it back.

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Speaker 1: But I took the three years to plan my company,

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Speaker 1: create a business plan, right my first book, so that

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Speaker 1: when I left Smith Barney, I was ready to go.

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Speaker 1: And so you launched Portfolio Solutions. What year that's for

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Speaker 1: two of this timing. Now now you manage one point

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Speaker 1: four billion in assets, is at a ballpark number. That's

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Speaker 1: correct and so so somewhere between being a fighter pilot

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Speaker 1: and getting turned down by Jamie Diamond, what was the

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Speaker 1: transition from the Marines to finance, Like, how did you

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Speaker 1: work your way to Wall Street? Well, my undergraduate degree

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Speaker 1: was in business administration and then in night. As you know,

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Speaker 1: we were in a pretty bad recession at the time,

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Speaker 1: and there was no jobs available. The unemployment rate was

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Speaker 1: double digits, interest rates were sky high. Uh. I decided

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Speaker 1: at that time I was going to serve the country,

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Speaker 1: and I went into the Marine Corps. Uh. And when

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Speaker 1: I took the test to go into the Marine Corps,

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Speaker 1: they asked me if I wanted to take the test

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Speaker 1: to become a pilot and go to flight school. Had

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Speaker 1: you ever shown previous interest in flying or was this

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Speaker 1: just out a left field. I saw a picture in

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Speaker 1: the brochure. I said, that looks pretty cool. It certainly does.

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Speaker 1: So I said, okay, I'll take the test, and I did,

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Speaker 1: and I did fine. And they gave me the physical

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Speaker 1: and check my eyesight and my height and all kinds

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Speaker 1: of things probe me in all kinds of different ways.

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Speaker 1: And then they gave me the opportunity after I finished

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Speaker 1: my Officers Candidate School and then Infantry Officers school called

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Speaker 1: Basic School, they allowed me to go down to Pennscola,

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Speaker 1: Florida and try my hand at flight school, which I

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Speaker 1: did and UH finished that, ended up down in Kingsville, Texas.

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Speaker 1: Married somebody down there, which is why I lived down

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Speaker 1: there now. And UH was in the Marine Corps for

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Speaker 1: eight years, did two tours overseas and then left and

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Speaker 1: went into the reserves. And when I did leave the

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Speaker 1: Marine Corps active duty, I was looking for a finance

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Speaker 1: job and I was picked up by Kitter Peabody, and

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Speaker 1: that's how my career began in this industry. What were

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Speaker 1: you flying before you while you were in the Marines,

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Speaker 1: I flew A six Intruders and I flew A four Skyhawks.

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Speaker 1: So ward Hogs and the wall Hogs are air force plane.

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Speaker 1: Isn't this similar? Isn't that a six a similar? Or

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Speaker 1: is this a totally different? Places it's a it's a

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Speaker 1: different platform than than the A ten, but a ten.

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Speaker 1: That's what I was thinking, that that's the wall got it?

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Speaker 1: And so you did a couple of tours overseas and

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Speaker 1: then peat body. What was it like starting out there. Well,

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Speaker 1: I was under the impression, like a lot of people were,

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Speaker 1: that stockbrokers were investment analysts and that we went out

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Speaker 1: and found the best investments for our clients, which made

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Speaker 1: money for them, which in turn made money for the company,

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Speaker 1: which in turn made money for me. And I thought

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Speaker 1: that stockbrokers did. So their training program quickly disabused you

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Speaker 1: of that. I went through the boot camp, if you will,

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Speaker 1: UH and learned how to make a thousand cold calls

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Speaker 1: a day and try to sell a thousand shares of

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Speaker 1: the latest stock. And I began to realize at the

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Speaker 1: beginning that maybe this wasn't what I thought it was.

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Speaker 1: But I did stay in it for ten years in total. Wow,

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Speaker 1: that's amazing, and so Kiter Peabody then transitions over to

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Speaker 1: Smith Barney and UH that was a an eye opening

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Speaker 1: experience as well. Well. What happened was, UM, I began

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Speaker 1: to do uh a lot of analysis on the money

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Speaker 1: manager as we were hiring at Peabody to manage money

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Speaker 1: for our clients. And I wrote a program, quite long

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Speaker 1: program and quatro pro. Do you remember that it was

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Speaker 1: a programmable spreadsheet program, so I pre excel pre excel

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Speaker 1: and UH. But it was programmable, so I could take

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Speaker 1: the data from active money managers and I could compare

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Speaker 1: them to appropriate benchmarks. First, I could use it to

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Speaker 1: determine what the appropriate benchmarks were, and then I could

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Speaker 1: do an analysis to see how they were doing relative

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Speaker 1: to the appropriate benchmarks. Now, a lot of this technology

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Speaker 1: is off the shelf now, but back then, and you

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Speaker 1: push a single button everybody's relative performance. But back in

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Speaker 1: late nineteen eighties or early you know, you had to

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Speaker 1: create it yourself. So I created the software, and of

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Speaker 1: course when you get into that detail of it, you

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Speaker 1: really see a lot of things that other people weren't

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Speaker 1: seeing at the time. And what I was seeing was

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Speaker 1: that the active managers were not beating their benchmark. In fact,

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Speaker 1: that really weren't coming close to the benchmark. And that's

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Speaker 1: before you get to higher fees that active managers have

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Speaker 1: a tendency to to charge. That has to have a

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Speaker 1: big impact on on the bottom line of clients. I'm

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Speaker 1: Barry Rehults. You're listening a Masters in Business on Bloomberg Radio.

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Speaker 1: My special guest this week is Rick Ferry. He is

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Speaker 1: the founder and CEO of Portfolio Solutions, an asset manager

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Speaker 1: that runs one point four billion dollars before the break.

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Speaker 1: We were discussing the advantages of or the disadvantages of

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Speaker 1: active management, and how so few people actually beat their benchmark.

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Speaker 1: Tell us how you discovered indexing and while you gravitated

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Speaker 1: that way. So as I was doing this quantitative analysis

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Speaker 1: or attribution analysis on the active managers and realizing they

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Speaker 1: weren't beating their benchmarks. In fact, they weren't coming close

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Speaker 1: to their benchmarks. Most of them were not UH, I

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Speaker 1: began paying more attention to what Vanguard was doing and

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Speaker 1: indexing UH. And in I read John Bogel's first book,

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Speaker 1: Bogel on Mutual Funds, and I was very, very frustrated

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Speaker 1: at the time of what was going on in my industry.

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Speaker 1: And again I was at Smith Barney at the time,

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Speaker 1: and I read this book and it was an epiphany.

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Speaker 1: It was I called it my AHA moment. I can

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Speaker 1: recall exactly where where this happened. I was at a

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Speaker 1: House of Horrors. My children, we were teenagers, and they

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Speaker 1: were going through the House of Horrors before Halloween, and

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Speaker 1: I was sitting in the parking lot waiting for him,

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Speaker 1: and they were screaming and yelling and chains I was

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Speaker 1: going on and I'm reading John Vogel's book and I'm

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Speaker 1: screaming and yelling in my car, saying, I can't believe

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Speaker 1: how stupid I've been. This is so obvious what John

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Speaker 1: Vogel is saying here. I am seeing this daily in

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Speaker 1: my business. I mean, he's right. And I had what

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Speaker 1: I like to call a chemical reaction at that point,

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Speaker 1: and I was a change of religion. It was an epiphany.

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Speaker 1: So so that was was truly when you're you pivoted?

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Speaker 1: Is the new tech jar? Okay, so your business pivoted

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Speaker 1: and you said, no more stock picking, no more mutual

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Speaker 1: fund picking. I'm just gonna do a broad asset allocation

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Speaker 1: and not worry about worry about the selection process. Well

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Speaker 1: not really, because I remember that was so I not

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Speaker 1: a lot of ETFs, not a lot of of Today

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Speaker 1: there's a thousand locals CTSS. Back then you had a

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Speaker 1: handful you can work off of. So I investigated this.

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Speaker 1: I'm getting this is October. So then in is when

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Speaker 1: I went to Jamie and I asked him if I

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Speaker 1: could create a program at Smith Parney that used Vanguard

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Speaker 1: index funds and packages them together into an asset allocation

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Speaker 1: for our clients. And then we would charge a reasonable

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Speaker 1: fifty basis point management fee. And that's when Jamie told

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Speaker 1: me that wouldn't be possible, and sort of not that

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Speaker 1: many words, he just said, wouldn't be possible, too many,

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Speaker 1: too many words. He just said no, and that was

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Speaker 1: the end of it. He said a little more than that.

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Speaker 1: But that's correct. Um, that's that's fascinating. So, by the way,

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Speaker 1: I mean, James a great guy. I mean, I he

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Speaker 1: was always very approachable and I don't want to I mean,

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Speaker 1: he had a job to do. Like so let me

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Speaker 1: digress a little bit. So, so who are your early

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Speaker 1: mentors who bog Vogel obviously, how do you gym pact?

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Speaker 1: Who else had an influence? Well, you had a lot

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Speaker 1: of them on your show, Vogel, Charlie Ellis, I mean

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Speaker 1: the Ellis Ellis was what a phenomenal conversation. And these

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Speaker 1: people were the icons back then. They were the ones

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Speaker 1: who recognized the problems. And there was there was others,

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Speaker 1: more academics. As you read Samuelson and so forth, As

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Speaker 1: you read you realize that there was a whole group

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Speaker 1: of very smart people out there who had already realized

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Speaker 1: this and so and it was hidden though. I mean

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Speaker 1: it really was pushed back as far as you could

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Speaker 1: push it back. And but the academics spoke for themselves.

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Speaker 1: The data was there, and so if you believe the data,

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Speaker 1: you're going to go this way. And that's what I did.

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Speaker 1: So let's talk a bit about index and so why

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Speaker 1: do you think it is? And and Charlie Ellis gave

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Speaker 1: his explanation, why is it that active managers can cannot

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Speaker 1: consistently beat the market? Well, it's a zero sum game

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Speaker 1: where the total market return is a finite dollar amount.

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Speaker 1: Every year market's worth twenty trillion dollars. You get a

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Speaker 1: certain rate of return from dividends, you get a certain

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Speaker 1: rate of return from capital game. It's a finite amount

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Speaker 1: of money. So if you have one group of people

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Speaker 1: who's trying to get more than that, it has to

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Speaker 1: come from another group of people who get less than

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Speaker 1: that minus fees, or you can just capture your fair share.

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Speaker 1: So in the long run, it's a fee game. Period

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Speaker 1: you have money that goes from one set of managers

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Speaker 1: to another and then back again. And skill is very

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Speaker 1: difficult to even determine, let alone actually identify in advance.

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Speaker 1: So the best thing for most people to do is

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Speaker 1: to just buy a very low cost portfolio of index

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Speaker 1: funds and sit on it. And that's the answer. So

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Speaker 1: so that raises a really interesting question about the practice

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Speaker 1: management of of running money. And weich about this in

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Speaker 1: our office all the time. How much of what you

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Speaker 1: do is behavioral consulting and how much of it is

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Speaker 1: you know, really trying to prevent people from being their

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Speaker 1: own worst enemies when it comes to investing. Well, I

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Speaker 1: think it's the same thing behavioral consulting and being your

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Speaker 1: worst enemy. Um, how much of the practice are those factors?

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Speaker 1: What what do you time wise are you how much?

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Speaker 1: How often does this come up? Yeah, so nine of

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Speaker 1: my practice is behavioral control. Wow, that's amazing. Well, because

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Speaker 1: the portfolios don't change. I haven't changed the portfolio in

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Speaker 1: five years. Now. You might have a different allocation than

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Speaker 1: the next person between stocks and bonds, but you know

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Speaker 1: that's the driving factor after that, and we put the

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Speaker 1: portfolio together as stocks and index funds and bond index funds.

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Speaker 1: It shouldn't change. I mean, the process then is just

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Speaker 1: staying the course. It's it's driving down the middle of

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Speaker 1: the road and being safe and not going to the

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Speaker 1: after going to the right and that and that's what

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Speaker 1: we try to do. Are My whole idea is to

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Speaker 1: keep the clients going down the middle of the road,

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Speaker 1: be disciplined, and if they can do that, then they'll

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Speaker 1: get the benefits of the markets. If they veer one

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Speaker 1: way or the other, it gets you know, Harry. So

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Speaker 1: now let's talk about how you handle clients in the

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Speaker 1: event of some turmoil. What was it like in two

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Speaker 1: thousand when you know the dot com has collapsed or

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Speaker 1: even worse. I've heard stories from guys who were running assets.

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Speaker 1: I was a market strategist then, and the hard thing

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Speaker 1: was you're running a moderate portfolio. It's doing fairly well,

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Speaker 1: but other people are making sixty eight in the junkiest

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Speaker 1: of the dot com stocks, and how do you compete

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Speaker 1: with that? Even though we all know how that ends.

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Speaker 1: You'll find the right clients. Really it gets down to

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Speaker 1: realized that not this isn't for everyone, and I need

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Speaker 1: to find clients who also have the religion and they're

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Speaker 1: just looking for somebody to help them put the portfolio

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Speaker 1: together and execute. I can't go out and try to

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Speaker 1: convert people. That just doesn't work. You just want to

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Speaker 1: attract clients who buy into your philosophy, and you're there

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Speaker 1: to prevent them from from hurting themselves. And it's not

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Speaker 1: my philosophy, but buying into the philosophy correct that I've

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Speaker 1: already bought in. And then they're looking for a way

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Speaker 1: to execute and and get it done, and that's where

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Speaker 1: we can come in. I'm Barry Ridholts. You're listening to

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Speaker 1: Masters in Business on Bloomberg Radio. My guest today is

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Speaker 1: Rick Ferry. He is the founder and c i O

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Speaker 1: of Portfolio Solutions, And before the break, we were discussing, UH,

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Speaker 1: some of the impact of technology on the business of

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Speaker 1: asset management. So let's start out with UM, the robo advisors.

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Speaker 1: What you what do you think about that line of

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Speaker 1: of asset management. I think it's important. I think it's

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Speaker 1: UM a very good methodology for younger people that didn't

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Speaker 1: exist before. Now it's used for everyone, but for younger

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Speaker 1: people in particular because it gets them into this philosophy

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Speaker 1: of investing a whole lot faster than they would have

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Speaker 1: and making regular monthly contract the whole process of saving

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Speaker 1: for retirement as well as investing properly. So uh, the

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Speaker 1: saving for retirement, a regular regular amount going in is

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Speaker 1: is it's very important, um. But the real interest for

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Speaker 1: me and the robo advisors is that it gets young

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Speaker 1: people interested in index funds and asset allocation doing it

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Speaker 1: the proper way right from the start. So I think

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Speaker 1: that's really important. You know, a quick digression. I've discovered

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Speaker 1: that a lot of people have to wander in the

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Speaker 1: desert a little bit before they come to the promised lands.

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Speaker 1: And not to get too biblical, but it seems that

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Speaker 1: the people who really buy into the concept of indexing

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Speaker 1: and low cost asset allocation have to have played the

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Speaker 1: stock picking game they had or the market timing game,

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Speaker 1: and they had to come to the same realization you

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Speaker 1: you did that Hey, this is feudal. Let me try

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Speaker 1: something that that seems to make more sense. And they

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Speaker 1: tend not to find that in the twenties and thirties.

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Speaker 1: It tends to be something they discover later in life.

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Speaker 1: I completely agree with that, because they've been through the gauntlet,

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Speaker 1: so to speak, and now they've had their pivot epiphany,

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Speaker 1: aha moment, whatever you wanna call it. But the robos, now,

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Speaker 1: if you're young in your twenties and thirties and you're

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Speaker 1: using this technology. You're getting it right away, even though

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Speaker 1: maybe you don't understand it at first, and that's good

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Speaker 1: because it saves you a lot of money and it

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Speaker 1: educates you on on the power of this strategy. So

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Speaker 1: let me ask the question differently, what does a human

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Speaker 1: offer at a robo or an let's call them what

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Speaker 1: they are really it's software algorithmically driven allocation models. What

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Speaker 1: kind of human offer that that these models can't? Well?

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Speaker 1: A human offers advice. Now, people who are in their

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Speaker 1: twenties and thirties may not need a lot more advice

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Speaker 1: than just put money away, pick an asset allocation that

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Speaker 1: you're going to be able to live with through all

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Speaker 1: market conditions, and just shovel it away. Because my theory

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Speaker 1: is that younger people are fairly homogeneous group. You're getting

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Speaker 1: out of college, you don't have a lot of money,

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Speaker 1: may be paying off debt, just getting married, starting a family,

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Speaker 1: and so it's a fairly homogeneous group. But as you

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Speaker 1: get into your forties and fifties, the differences between us

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Speaker 1: financially and socially just changed dramatically, and as as you're

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Speaker 1: approaching retirement, you really need much more than what a

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Speaker 1: computer can give you. As far as answers, and you

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Speaker 1: are seeking much more holistic at vice on everything have

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Speaker 1: to do with your finances. And this is where advisors

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Speaker 1: will sort of take the money from the robos just

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Speaker 1: when the robos are becoming profitable on a client. And

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Speaker 1: so the that's what I see occurring. And uh so,

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Speaker 1: so let's talk about that advice. And I jotted a

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Speaker 1: few notes down. Tax issues, inter generational wealth transfer. Are

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Speaker 1: these issues that are million dollar or five million dollar

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Speaker 1: accounts or are there things that people who are in

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Speaker 1: the one thousand to a million dollar range really are

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Speaker 1: gonna need. Yeah, the the big issue is income distribution

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Speaker 1: after retirement and is my money going to last? That

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Speaker 1: is the question, the big question out there. We by

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Speaker 1: the way, in our office, this is the um you're

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Speaker 1: preaching to the choir. We hear this all the time.

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Speaker 1: I'm concerned that I'm going to outlive my money. And

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Speaker 1: we hear that from people with tens of millions of

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Speaker 1: dollars that they're concerned that it's not gonna last. Absolutely,

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Speaker 1: it's universal. I heard the same thing, and I hear

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Speaker 1: it quite often. And you sit back and you say,

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Speaker 1: you only need a hundred and fifty tho dollars from

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Speaker 1: your ten million dollar portfolio and you're worried about running

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Speaker 1: out of money. And I don't know what the mental

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Speaker 1: block is there. Maybe some PhD student can do a

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Speaker 1: thesis or something on it, but there's an incredible mental

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Speaker 1: block when they need to be told, or I'm really told,

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Speaker 1: you're not going to run on the money. If you

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Speaker 1: do this sensible strategy and you don't go out and

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Speaker 1: buy a bunch of Ferrari's, you're not going to run

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Speaker 1: out of money. Just one, limited to one. That's all

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Speaker 1: anybody needs. You don't need a few. So that's the

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Speaker 1: universal big question. And you can get on a website

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Speaker 1: and fill out a bunch of questionnaires and do some

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Speaker 1: Monty Callo simulations or whatever, it just doesn't replace the

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Speaker 1: human advisor who's sitting there looking at you and saying

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Speaker 1: you don't have anything to worry about, and your spouse

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Speaker 1: has nothing to worry about. You've got plenty of money,

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Speaker 1: and that's that's not going to go away. That the

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Speaker 1: there's no computer that's going to take that away. I'm

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Speaker 1: Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio.

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Speaker 1: My guest today is Rick Ferry. He is the founder

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Speaker 1: and chief investment officer of Portfolio Solutions, a one point

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Speaker 1: four billion dollar asset management firm. We were talking earlier

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Speaker 1: about the impact of of what the venture cap was

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Speaker 1: called fintech, so some of its robo advisors, but there's

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Speaker 1: a lot of other technological advances. I have to assume

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Speaker 1: you're doing things today that you couldn't have dreamt about

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Speaker 1: twenty years ago. What's the technology like in running a firm? Well, sure,

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Speaker 1: there's been a lot of productivity gains and across the

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Speaker 1: board UM actual portfolio management software, trading software, UH, client

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Speaker 1: contact software, UH phone systems. It allows you to manage

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Speaker 1: more relationships than you had in the past, so you

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Speaker 1: become more productive of in this business, just like in

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Speaker 1: all other industries. Same same with UM performance reporting. It's

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Speaker 1: it's pretty much the entire business has been made faster, better, smarter,

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Speaker 1: smaller than it was previously. That that footprint, I assume

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Speaker 1: you're seeing the same same thing. Yeah, and the technology

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Speaker 1: has become much less expensive and there's much more of

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Speaker 1: it and there's a lot of competition, so prices have

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Speaker 1: come down. So what we sell in our industry as

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Speaker 1: intellectual property. That's my value added. Uh, and be the

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Speaker 1: ability in many ways to be able to explain to

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Speaker 1: people sometimes relatively complicated concepts in a very simplified way

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Speaker 1: so that they can understand it. Uh. And that that's

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Speaker 1: the value added. I can't add any value. I'll performing

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Speaker 1: the market and UH. You know I'm not going to

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Speaker 1: give them higher dividend yields from the SMP five hundred.

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Speaker 1: But UM, I have to be able to deliver this

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Speaker 1: intellectual property in an efficient manner so that I remain

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Speaker 1: competitive in the marketplace, keep your keep your costs low. Um.

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Speaker 1: You are very forward looking in the mid nineties when

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Speaker 1: you first proposed this idea of a low cost asset

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Speaker 1: management firm too to Jamie Diamond at at Smith Barney

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Speaker 1: back then. So let me bring us up to speed

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Speaker 1: and ask you this question. What do you see looking

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Speaker 1: out ten years in the future for the advisory business. Well,

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Speaker 1: advisors are going to have to offer different levels of service. Uh.

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Speaker 1: Like your firm, We're going to be offering a robo advisor,

429
00:25:39,720 --> 00:25:41,639
Speaker 1: which is one level, and it's going to be one price.

430
00:25:41,640 --> 00:25:44,280
Speaker 1: It's going to be a very low fee. Then there's

431
00:25:44,320 --> 00:25:49,080
Speaker 1: the next level of some guidance, uh, and a touch

432
00:25:49,200 --> 00:25:52,080
Speaker 1: perhaps once a year um, and then a lot of

433
00:25:52,480 --> 00:25:54,760
Speaker 1: technology touches if you will, with the client and that

434
00:25:54,760 --> 00:25:56,840
Speaker 1: will be just a slightly higher fee than what the

435
00:25:56,920 --> 00:26:00,359
Speaker 1: robo fee would be. And then there's a comprehend of

436
00:26:00,640 --> 00:26:03,639
Speaker 1: financial planning, but not face to face. Are you seeing

437
00:26:03,680 --> 00:26:07,560
Speaker 1: this as potentially happening across the entire industry? I think

438
00:26:07,600 --> 00:26:09,240
Speaker 1: people are going to specialize or is it going to

439
00:26:09,320 --> 00:26:11,720
Speaker 1: be or is that just going to be a mix

440
00:26:11,760 --> 00:26:13,960
Speaker 1: of different companies doing different things. I think that the

441
00:26:14,080 --> 00:26:18,280
Speaker 1: robot advisors will have to get into face a personal advice.

442
00:26:18,280 --> 00:26:20,080
Speaker 1: They'll have to have human advice or they're gonna lose

443
00:26:20,080 --> 00:26:22,360
Speaker 1: their clients, and that they're really they're going to realize

444
00:26:22,359 --> 00:26:25,480
Speaker 1: this as the clients grow up and get more money

445
00:26:25,520 --> 00:26:30,400
Speaker 1: and get more complicated lives, they're gonna need actual personal advice,

446
00:26:30,920 --> 00:26:36,400
Speaker 1: and uh, they're going to have to merge or create

447
00:26:36,760 --> 00:26:39,920
Speaker 1: that personal advice. And then there are times when people

448
00:26:39,960 --> 00:26:43,720
Speaker 1: become not price sensitive anymore because of that a point

449
00:26:43,760 --> 00:26:48,439
Speaker 1: in their life where they really need advice and the

450
00:26:48,480 --> 00:26:50,760
Speaker 1: cost of that advice. At this point in their lives,

451
00:26:50,760 --> 00:26:54,600
Speaker 1: when they're nearing retirement, they're no longer price sensitive. They

452
00:26:54,640 --> 00:26:57,480
Speaker 1: just want good quality advice, and you have to be

453
00:26:57,480 --> 00:27:00,280
Speaker 1: able to offer that as well at a higher level hold.

454
00:27:00,520 --> 00:27:03,000
Speaker 1: And then when they're ready beyond that into retirement for

455
00:27:03,000 --> 00:27:05,160
Speaker 1: a while, they want to step back to the lower

456
00:27:05,200 --> 00:27:07,760
Speaker 1: advice model, they could do that at a lower price point.

457
00:27:07,800 --> 00:27:12,399
Speaker 1: So I call this the vertical advisor idea. And you

458
00:27:12,400 --> 00:27:14,360
Speaker 1: think that's going to be more widely adopted. I don't

459
00:27:14,359 --> 00:27:15,760
Speaker 1: know if it's going to be widely adopted or not.

460
00:27:15,840 --> 00:27:18,399
Speaker 1: I know that likes you said back in the nine nineties,

461
00:27:18,400 --> 00:27:22,040
Speaker 1: and when I started the low cost Indexing solution UM,

462
00:27:22,080 --> 00:27:23,960
Speaker 1: it was ahead of its time, and I think this

463
00:27:24,040 --> 00:27:29,040
Speaker 1: is where people will go eventually. So now let's talk

464
00:27:29,080 --> 00:27:32,160
Speaker 1: a little bit about running an advisory business and interacting

465
00:27:32,200 --> 00:27:36,320
Speaker 1: with clients. What's the biggest mistake you see that the

466
00:27:36,400 --> 00:27:41,760
Speaker 1: average investor makes. The average investor, the biggest mistake they

467
00:27:41,800 --> 00:27:45,360
Speaker 1: make is not staying disciplined to a strategy. But let's

468
00:27:45,440 --> 00:27:47,960
Speaker 1: keep them go back from that. The average investor doesn't

469
00:27:47,960 --> 00:27:51,639
Speaker 1: have a philosophy, and philosophy is different than strategy. You

470
00:27:51,720 --> 00:27:53,879
Speaker 1: and I have the same philosophy about investing. You at

471
00:27:53,920 --> 00:27:55,800
Speaker 1: Charlie Ellis here, John Bogel, I mean we have the

472
00:27:55,800 --> 00:27:58,280
Speaker 1: same yet, but you haven't. We'd love to get them,

473
00:27:58,320 --> 00:28:02,960
Speaker 1: be sure and pass along the Okay, Um, so we

474
00:28:03,000 --> 00:28:05,879
Speaker 1: have the same philosophy, but I don't know what your

475
00:28:06,000 --> 00:28:09,000
Speaker 1: portfolio looks like as far as what funds you have

476
00:28:09,119 --> 00:28:11,520
Speaker 1: for your clients, and you don't really know what my

477
00:28:11,600 --> 00:28:14,399
Speaker 1: portfolio looks like what funds I have from my clients.

478
00:28:14,960 --> 00:28:20,879
Speaker 1: That's called strategy. Uh, philosophy is universal. Strategy becomes personal

479
00:28:21,160 --> 00:28:25,679
Speaker 1: and personal to the individual client. So, first off, I

480
00:28:25,760 --> 00:28:28,280
Speaker 1: think that's important and in a book I'm actually writing

481
00:28:28,359 --> 00:28:31,560
Speaker 1: right now, that people get the philosophy first, they have

482
00:28:31,760 --> 00:28:37,480
Speaker 1: the the moment, the pivot, the the epiphany of what

483
00:28:37,600 --> 00:28:39,760
Speaker 1: it's all about. That you get the philosophy first, and

484
00:28:39,800 --> 00:28:42,960
Speaker 1: then once you get the philosophy, then you can develop

485
00:28:43,000 --> 00:28:47,600
Speaker 1: a strategy. And then once you develop a strategy, you

486
00:28:47,680 --> 00:28:49,760
Speaker 1: implement that strategy some way, and then you have to

487
00:28:49,800 --> 00:28:51,600
Speaker 1: have the discipline to stay with it. So it's really

488
00:28:51,640 --> 00:28:54,440
Speaker 1: three different things. You need the philosophy, you need to

489
00:28:54,480 --> 00:28:57,600
Speaker 1: implement create a good strategy for yourself, and then you

490
00:28:57,640 --> 00:29:00,120
Speaker 1: need a way of implementing it and staying disciplined with it.

491
00:29:00,600 --> 00:29:03,479
Speaker 1: And so all three of those things are missing. So

492
00:29:03,480 --> 00:29:09,760
Speaker 1: there's really three issues. People confuse them all. By the way, philosophy, strategy,

493
00:29:10,000 --> 00:29:12,880
Speaker 1: discipline really becomes the key. How much how much of

494
00:29:12,920 --> 00:29:17,080
Speaker 1: this is disrupted just by normal emotional ups and downs

495
00:29:17,160 --> 00:29:21,520
Speaker 1: of the average human creature. Well, again, if you had

496
00:29:21,560 --> 00:29:26,040
Speaker 1: the philosophy, it's much less probability, much lower probability that

497
00:29:26,080 --> 00:29:29,560
Speaker 1: it's going to be disrupted. If you've got the vision,

498
00:29:30,400 --> 00:29:32,560
Speaker 1: then you're a strategy. You'll be able to maintain it

499
00:29:32,760 --> 00:29:35,840
Speaker 1: during all market conditions pretty much, it's high probability. But

500
00:29:35,880 --> 00:29:37,840
Speaker 1: if you don't have the vision, if you don't have

501
00:29:37,880 --> 00:29:40,440
Speaker 1: the philosophy and you have some strategy that you heard

502
00:29:40,640 --> 00:29:45,680
Speaker 1: on the radio last week, or your your adviser or

503
00:29:45,720 --> 00:29:50,040
Speaker 1: somebody got you into last year and it's not working, Uh,

504
00:29:50,160 --> 00:29:52,240
Speaker 1: you're gonna change it. You're gonna have a higher turnover,

505
00:29:52,760 --> 00:29:55,560
Speaker 1: and you're not gonna stay disciplined. So that's why I

506
00:29:55,560 --> 00:29:57,440
Speaker 1: I say that the biggest mistake people have is they

507
00:29:57,440 --> 00:29:59,400
Speaker 1: don't have the philosophy. First, You've got to get that

508
00:29:59,440 --> 00:30:01,880
Speaker 1: down first. Then you develop a strategy, and then you're

509
00:30:01,920 --> 00:30:04,600
Speaker 1: more likely to stay disciplined. We're speaking with Rick Ferry

510
00:30:04,640 --> 00:30:09,040
Speaker 1: of Portfolio Solutions discussing some of the classic errors that

511
00:30:09,200 --> 00:30:13,560
Speaker 1: investors make. And we were just talking about why philosophy

512
00:30:13,800 --> 00:30:16,320
Speaker 1: is the most important thing. So you remind me a

513
00:30:16,360 --> 00:30:18,240
Speaker 1: little bit of some of the things that Larry Sweddrow

514
00:30:18,360 --> 00:30:20,480
Speaker 1: has said, and I'll ask you the same question I

515
00:30:20,520 --> 00:30:23,760
Speaker 1: asked him. So what is it that investors should do

516
00:30:23,960 --> 00:30:27,000
Speaker 1: when we start to see volatility in the market, or

517
00:30:27,080 --> 00:30:31,400
Speaker 1: earnings start coming out poorly, or the economic data takes

518
00:30:31,400 --> 00:30:34,160
Speaker 1: a turn to the south? What what should people do when?

519
00:30:34,760 --> 00:30:37,000
Speaker 1: How do you deal with the pushback you get? Because

520
00:30:37,000 --> 00:30:39,840
Speaker 1: I know what your answer is gonna be from from clients.

521
00:30:41,040 --> 00:30:45,720
Speaker 1: So I lived through both the tech crash and two

522
00:30:45,720 --> 00:30:48,160
Speaker 1: thousand two thousand and one. Remember I started my company

523
00:30:50,240 --> 00:30:54,280
Speaker 1: and then lived through the financial crisis, so two pretty

524
00:30:54,360 --> 00:31:01,760
Speaker 1: tough times. But the only thing that we did for

525
00:31:01,880 --> 00:31:05,800
Speaker 1: clients during that period of time, besides due regular rebalancing,

526
00:31:06,640 --> 00:31:11,200
Speaker 1: was keep them focused on the long term. And then

527
00:31:11,240 --> 00:31:16,440
Speaker 1: those clients who really had an issue, and I know

528
00:31:16,680 --> 00:31:19,240
Speaker 1: that they had an issue when they use this phrase

529
00:31:20,080 --> 00:31:23,640
Speaker 1: classic phrase for all advisors, remember it, I can't sleep

530
00:31:23,680 --> 00:31:28,760
Speaker 1: at night. Classic phrase, which means the next step is capitulation.

531
00:31:29,040 --> 00:31:32,440
Speaker 1: They're going to sell everything. When a client says I

532
00:31:32,520 --> 00:31:34,840
Speaker 1: can't sleep at night, you have to do something as

533
00:31:34,880 --> 00:31:38,280
Speaker 1: an advisor, and what you have to do is you

534
00:31:38,320 --> 00:31:42,000
Speaker 1: have to lower their risk permanently because we the advisor

535
00:31:42,080 --> 00:31:46,400
Speaker 1: has probably made a mistake and allowed them or assess

536
00:31:46,480 --> 00:31:49,120
Speaker 1: their risk tolerance at too higher a level than what

537
00:31:49,200 --> 00:31:51,840
Speaker 1: it really was. Well, let me let me interrupt you there,

538
00:31:53,440 --> 00:31:56,880
Speaker 1: because again I'm we're very familiar with the same process.

539
00:31:56,920 --> 00:31:59,920
Speaker 1: But one can't help but notice that what people say

540
00:32:00,040 --> 00:32:03,560
Speaker 1: a during a bull market is very often not what

541
00:32:03,720 --> 00:32:08,200
Speaker 1: they feel during a bear market. That's correct, And so

542
00:32:08,480 --> 00:32:11,400
Speaker 1: we find out what people's real tolerance for risk is

543
00:32:11,800 --> 00:32:16,880
Speaker 1: after they've lost because right now, so we launched after

544
00:32:16,960 --> 00:32:20,800
Speaker 1: the bear market in in o eight oh nine, a

545
00:32:20,800 --> 00:32:24,000
Speaker 1: few years after that, and we're seeing the exact opposite

546
00:32:24,000 --> 00:32:26,800
Speaker 1: of that. It's not suddenly that people's risk tolerance is

547
00:32:26,800 --> 00:32:30,640
Speaker 1: getting worse. It's that people who said they were conservative,

548
00:32:31,240 --> 00:32:35,160
Speaker 1: Suddenly you're seeing markets go up every year, especially sm

549
00:32:35,200 --> 00:32:37,720
Speaker 1: P up thirty pcent. Hey, why don't we have more

550
00:32:37,800 --> 00:32:40,680
Speaker 1: U S docks? We aren't we? Well that was last year.

551
00:32:41,960 --> 00:32:44,960
Speaker 1: European and emerging market stocks are doing terrible. That's where

552
00:32:44,960 --> 00:32:47,760
Speaker 1: you want to be, not chasing what just ran up.

553
00:32:47,800 --> 00:32:51,280
Speaker 1: And that's what rebalancing is. About But what do you

554
00:32:51,400 --> 00:32:54,480
Speaker 1: do when you're gonna get it both ways? You're gonna

555
00:32:54,480 --> 00:32:57,360
Speaker 1: get it to the upside and the downside. Even if

556
00:32:57,400 --> 00:33:00,400
Speaker 1: someone says I'm conservative and suddenly in a bull market

557
00:33:01,040 --> 00:33:03,760
Speaker 1: that assessment was wrong, how much of that is just

558
00:33:03,960 --> 00:33:06,400
Speaker 1: human nature, that whatever is going on at the moment

559
00:33:07,040 --> 00:33:11,040
Speaker 1: is changing what they think they're there risk tolerance is right.

560
00:33:11,080 --> 00:33:14,520
Speaker 1: So you asked me what percentage of my business is

561
00:33:15,440 --> 00:33:19,560
Speaker 1: psychology and you know, trying to control human behavior, and

562
00:33:19,600 --> 00:33:25,520
Speaker 1: what part is actual portfolio management? Uh, changing the client's portfolios.

563
00:33:25,560 --> 00:33:28,719
Speaker 1: And the answer is as humans. So I don't want

564
00:33:28,760 --> 00:33:31,440
Speaker 1: to do anything. I mean, my my goal is to

565
00:33:31,520 --> 00:33:33,880
Speaker 1: not do anything. You actually had a blog post that

566
00:33:33,960 --> 00:33:38,720
Speaker 1: said portfolio changes at a glacial pace. Glacial pace. Yeah.

567
00:33:39,200 --> 00:33:41,160
Speaker 1: So the idea though, is to not do anything. So

568
00:33:41,200 --> 00:33:43,560
Speaker 1: when I hear it both ways, like right now, you're right,

569
00:33:43,600 --> 00:33:46,440
Speaker 1: we're getting the calls about well, you know, we could

570
00:33:46,440 --> 00:33:49,840
Speaker 1: be a little more because starts out with bonds. Bonds

571
00:33:49,840 --> 00:33:51,920
Speaker 1: are yielding zero, So why don't I want to be

572
00:33:51,920 --> 00:33:53,480
Speaker 1: in bonds? You know the real return of zero, I

573
00:33:53,480 --> 00:33:55,800
Speaker 1: should be in stocks. I have the conversation about how

574
00:33:55,840 --> 00:33:58,280
Speaker 1: am I going to live in retirement when my when

575
00:33:58,280 --> 00:34:02,600
Speaker 1: interest rates are so low and therefore I should be

576
00:34:02,640 --> 00:34:07,200
Speaker 1: more in stocks. And all I'm saying is people right

577
00:34:07,200 --> 00:34:10,000
Speaker 1: now with justifying reasons, are coming up with reasons why

578
00:34:10,040 --> 00:34:12,440
Speaker 1: they should be more aggressive, and I have to do

579
00:34:12,480 --> 00:34:15,520
Speaker 1: the exact opposite of what I did in two thousand

580
00:34:15,520 --> 00:34:19,160
Speaker 1: and one and two thousand and eight, which is tame

581
00:34:19,280 --> 00:34:25,040
Speaker 1: the expectations uh down, as opposed to reverse of where

582
00:34:25,080 --> 00:34:26,759
Speaker 1: what I had to do in the past, which is

583
00:34:26,800 --> 00:34:29,680
Speaker 1: to you know, bring the expectations up. We've been speaking

584
00:34:29,680 --> 00:34:33,799
Speaker 1: with Rick Ferry of Portfolio Solutions. If you enjoy this conversation,

585
00:34:33,880 --> 00:34:36,839
Speaker 1: be sure and check out our full podcast extras where

586
00:34:36,880 --> 00:34:40,360
Speaker 1: we let the tape run and continue the conversation. Be

587
00:34:40,440 --> 00:34:43,399
Speaker 1: sure and check out my daily column on Bloomberg View

588
00:34:43,440 --> 00:34:47,319
Speaker 1: dot com. Follow me on Twitter at rid Halts. I'm

589
00:34:47,360 --> 00:34:50,080
Speaker 1: Barry rid Halts. You're listening to Masters in Business on

590
00:34:50,200 --> 00:34:54,680
Speaker 1: Bloomberg Radio. Welcome to the podcast portion of our show.

591
00:34:55,000 --> 00:34:58,759
Speaker 1: My special guest this week is Rick Ferry. Um let

592
00:34:58,840 --> 00:35:03,880
Speaker 1: me give people a little background about Rick. So I

593
00:35:04,080 --> 00:35:10,960
Speaker 1: read and follow a lot of people, and you know, intellectually,

594
00:35:11,000 --> 00:35:14,200
Speaker 1: there are certain quants I follow because I like their

595
00:35:14,239 --> 00:35:19,040
Speaker 1: mathematical analysis of investing and asset allocation, and to people

596
00:35:19,040 --> 00:35:22,600
Speaker 1: like Jim O'Shaughnessy and Cliff Fastness and there's a there's

597
00:35:22,600 --> 00:35:26,400
Speaker 1: a whole run of guys like that Um West Um

598
00:35:26,760 --> 00:35:29,600
Speaker 1: Alpha Architect. I love that that blog. He does some

599
00:35:29,680 --> 00:35:35,400
Speaker 1: really interesting momentum value analyzes. But when we were leaving

600
00:35:35,960 --> 00:35:39,600
Speaker 1: to launch a new firm, we started looking around and saying, hey,

601
00:35:39,719 --> 00:35:43,080
Speaker 1: who did this right? Who had the right idea, the

602
00:35:43,160 --> 00:35:46,440
Speaker 1: right concept, the right execution. And we kept coming up

603
00:35:46,920 --> 00:35:51,080
Speaker 1: to you. We kept finding, Hey, Portfolio Solutions seems to

604
00:35:51,239 --> 00:35:53,960
Speaker 1: really have set this up. Look, there are tens of

605
00:35:54,000 --> 00:35:58,399
Speaker 1: thousands of advisors there, and there are thousands, I want

606
00:35:58,400 --> 00:36:03,120
Speaker 1: to say hundreds, if not thousands, of advisors running nine figures,

607
00:36:03,239 --> 00:36:05,720
Speaker 1: and a whole lot of people running eight figures, and

608
00:36:05,719 --> 00:36:11,319
Speaker 1: and but there's there's only a in our opinion, only

609
00:36:11,360 --> 00:36:15,520
Speaker 1: a small handful of people that from the business perspective of, Hey,

610
00:36:15,560 --> 00:36:17,480
Speaker 1: what's the right way to set this up? What's the

611
00:36:17,560 --> 00:36:21,200
Speaker 1: right way to execute? You kept on coming up in

612
00:36:21,200 --> 00:36:24,760
Speaker 1: in our you know, same situation. Although it wasn't three years,

613
00:36:25,160 --> 00:36:28,440
Speaker 1: but it was really the last year of thinking about

614
00:36:28,560 --> 00:36:31,400
Speaker 1: it and doing these things that we said, let's model this,

615
00:36:31,520 --> 00:36:35,239
Speaker 1: let's let's war game this and figure out whose approach

616
00:36:35,280 --> 00:36:38,279
Speaker 1: has made a lot of sense. This podcast tends to

617
00:36:38,320 --> 00:36:41,239
Speaker 1: be listened to by a lot of advisors, some of

618
00:36:41,239 --> 00:36:43,560
Speaker 1: whom were at big firms thinking about launching on their own,

619
00:36:43,880 --> 00:36:45,880
Speaker 1: some of whom have already launched on their own and

620
00:36:45,920 --> 00:36:49,520
Speaker 1: have had, you know, a little bit of challenges. So

621
00:36:49,680 --> 00:36:51,640
Speaker 1: I thought you would really be a perfect person to

622
00:36:51,719 --> 00:36:56,360
Speaker 1: speak to about that because because you were so helpful, Um,

623
00:36:56,440 --> 00:36:59,000
Speaker 1: your example was so helpful when when we were launching.

624
00:36:59,080 --> 00:37:03,720
Speaker 1: So let let's go back to our earlier conversation about

625
00:37:03,760 --> 00:37:06,879
Speaker 1: when you were launching your firm. So you spent did

626
00:37:06,920 --> 00:37:10,120
Speaker 1: you say three years teeing this up? Is that about right?

627
00:37:10,560 --> 00:37:14,279
Speaker 1: Three years um thinking about it writing the book? I

628
00:37:14,320 --> 00:37:16,080
Speaker 1: mean how much time you could go home at night,

629
00:37:16,440 --> 00:37:19,839
Speaker 1: sitting your home office on the computer and map out

630
00:37:19,880 --> 00:37:22,759
Speaker 1: business strategy. Basically, that's correct. That's that's what I did,

631
00:37:23,560 --> 00:37:26,759
Speaker 1: um for three years. Well, the beginning of that was

632
00:37:26,960 --> 00:37:30,279
Speaker 1: coming up with the strategies how I was going to

633
00:37:30,320 --> 00:37:33,799
Speaker 1: manage money. The next couple of years we're coming up

634
00:37:33,840 --> 00:37:36,800
Speaker 1: with how I was going to set up an investment advisor,

635
00:37:36,800 --> 00:37:39,400
Speaker 1: you know, all of the compliance things, and then the

636
00:37:39,440 --> 00:37:42,680
Speaker 1: last corporate set up the compliance, the pay roll, the

637
00:37:42,719 --> 00:37:46,720
Speaker 1: back end of running an smen business. It's like running

638
00:37:46,840 --> 00:37:50,399
Speaker 1: a fairly complicated business with an overlay of a lot

639
00:37:50,440 --> 00:37:52,840
Speaker 1: of regulator a lot of compliance. Yes, so you had

640
00:37:52,840 --> 00:37:55,640
Speaker 1: to figure out the compliance puzzle. And then the very

641
00:37:55,719 --> 00:38:00,000
Speaker 1: last year I spent, you know, I had to register

642
00:38:00,000 --> 00:38:02,399
Speaker 1: to the company. I had to do everything under the radar.

643
00:38:02,480 --> 00:38:04,880
Speaker 1: By the way, because I was still at Smith Barney.

644
00:38:05,480 --> 00:38:08,040
Speaker 1: Is that what you use Portfolio Solutions instead of Rick

645
00:38:08,120 --> 00:38:11,960
Speaker 1: Ferry asset management? No, actually, Barry, I used portfolio Solutions

646
00:38:12,000 --> 00:38:18,960
Speaker 1: to make it more Um, uh have the longevity of

647
00:38:18,960 --> 00:38:21,560
Speaker 1: the company. I mean, I believed in the philosophy and

648
00:38:21,600 --> 00:38:24,840
Speaker 1: I could train other people to work with me to

649
00:38:24,840 --> 00:38:27,040
Speaker 1: to do this, and if something happened to me, I

650
00:38:27,040 --> 00:38:30,120
Speaker 1: could hit by a bus or whatever, the company would survive.

651
00:38:30,360 --> 00:38:32,400
Speaker 1: And so I didn't want to have my name in it.

652
00:38:32,719 --> 00:38:37,000
Speaker 1: Lehman Brothers was around a hundred sixty and uh, you

653
00:38:37,040 --> 00:38:41,320
Speaker 1: know it, long after Lehman passed away, Dick Fold helped

654
00:38:41,480 --> 00:38:46,000
Speaker 1: drive the company. That that's true, but I just felt like, um,

655
00:38:46,160 --> 00:38:47,839
Speaker 1: you're not the only one that makes a lot of sense.

656
00:38:47,960 --> 00:38:52,080
Speaker 1: Portfolio Solutions was a name that I just sort of

657
00:38:52,160 --> 00:38:54,560
Speaker 1: tells people what we do. We come up with a

658
00:38:54,600 --> 00:38:59,640
Speaker 1: solution for your portfolio using this philosophy. So the last

659
00:38:59,800 --> 00:39:03,600
Speaker 1: year going into launch, I had finished writing the book

660
00:39:04,200 --> 00:39:07,200
Speaker 1: and was looking for distribution of the book, and you

661
00:39:07,200 --> 00:39:10,239
Speaker 1: know the marketing and getting the website ready and all

662
00:39:10,280 --> 00:39:15,080
Speaker 1: that stuff that goes behind launching. And so in July

663
00:39:15,360 --> 00:39:21,880
Speaker 1: of after I UM was off contract now with Smith Barney,

664
00:39:21,920 --> 00:39:24,760
Speaker 1: I had fulfilled my five year contract and I vested

665
00:39:24,760 --> 00:39:26,520
Speaker 1: in a pension plan by the way, and all of

666
00:39:26,520 --> 00:39:30,320
Speaker 1: my City Group stock options vested, which was nice because

667
00:39:30,320 --> 00:39:31,640
Speaker 1: I was able to catch them made at a nice

668
00:39:31,719 --> 00:39:35,800
Speaker 1: high price and get that money to buy the software,

669
00:39:35,840 --> 00:39:40,120
Speaker 1: technology and whatnot that I needed. So that's what I

670
00:39:40,160 --> 00:39:42,680
Speaker 1: did it it it does take quite quite a while

671
00:39:42,840 --> 00:39:45,080
Speaker 1: to really do it right, I think. So when you

672
00:39:45,160 --> 00:39:47,759
Speaker 1: left Smith Barney, would you leave in terms of how

673
00:39:47,800 --> 00:39:51,040
Speaker 1: many assets did you bring with you? I brought the

674
00:39:51,080 --> 00:39:54,520
Speaker 1: thirty five clients and sixty million dollars of assets. That

675
00:39:54,600 --> 00:39:58,799
Speaker 1: was my beginning in correct, And I was charging one

676
00:39:58,840 --> 00:40:03,000
Speaker 1: quarter of a percent manage fae ascid management fake, so

677
00:40:03,120 --> 00:40:05,360
Speaker 1: you're really not throwing off a whole lot of revenues.

678
00:40:05,400 --> 00:40:07,799
Speaker 1: At that time, I was working on in my living room.

679
00:40:08,000 --> 00:40:10,359
Speaker 1: I had an old desk that I picked up out

680
00:40:10,360 --> 00:40:12,239
Speaker 1: of the junk pile when I was in the Marine Corps.

681
00:40:12,280 --> 00:40:14,400
Speaker 1: One day somebody threw a wooden desk out and it

682
00:40:14,440 --> 00:40:16,880
Speaker 1: was an old Korean War desk. I grabbed it and

683
00:40:16,920 --> 00:40:18,840
Speaker 1: threw it in the back of my truck. So I

684
00:40:18,880 --> 00:40:20,480
Speaker 1: had that in my living room. I set up a

685
00:40:20,480 --> 00:40:24,280
Speaker 1: costco table where my wife filled out paperwork for clients

686
00:40:24,920 --> 00:40:26,799
Speaker 1: in another corner of the living room. And this was

687
00:40:26,840 --> 00:40:31,439
Speaker 1: portfolio solutions. That's amazing, and so now let's let's talk

688
00:40:31,480 --> 00:40:34,839
Speaker 1: about how Hey, now, let's talk about hey, how that

689
00:40:35,080 --> 00:40:40,759
Speaker 1: developed from sixty million to one point for billion. So

690
00:40:40,920 --> 00:40:47,200
Speaker 1: who's the typical portfolio solution client. Typical portfolio solution client

691
00:40:47,560 --> 00:40:53,359
Speaker 1: is um approximately sixty years old, has a total net

692
00:40:53,360 --> 00:40:57,080
Speaker 1: worth of about three million dollars, liquid net worth of

693
00:40:57,080 --> 00:41:02,920
Speaker 1: about two million dollars. And so that is, uh, you know,

694
00:41:03,160 --> 00:41:08,160
Speaker 1: typical client who is either approaching retirement or rolling over

695
00:41:08,200 --> 00:41:13,120
Speaker 1: into retirement. And that's our typical client today. We talked

696
00:41:13,160 --> 00:41:17,440
Speaker 1: about this briefly during the broadcast portion. How significant is

697
00:41:17,640 --> 00:41:22,880
Speaker 1: planning for that distribution post retirement, how how important is

698
00:41:22,920 --> 00:41:27,799
Speaker 1: that to clients and how important is that to your practice. Well,

699
00:41:27,840 --> 00:41:31,000
Speaker 1: it's becoming much more important because the baby boomers are

700
00:41:32,160 --> 00:41:35,560
Speaker 1: getting more into retirements. Sixty per day I think is

701
00:41:35,960 --> 00:41:39,480
Speaker 1: so sixty people per day have the big question in

702
00:41:39,520 --> 00:41:45,640
Speaker 1: their mind, am I going to make it? Um? So Originally,

703
00:41:45,680 --> 00:41:49,479
Speaker 1: when I launched fifteen years ago, there weren't as many

704
00:41:49,560 --> 00:41:53,760
Speaker 1: people asking the question, But now that the baby boomers

705
00:41:53,760 --> 00:41:59,279
Speaker 1: are approaching that we have had to um come up

706
00:41:59,280 --> 00:42:02,880
Speaker 1: with different serve is that help them answer this question?

707
00:42:03,880 --> 00:42:07,080
Speaker 1: And that's why we're doing this vertical advisor idea, which

708
00:42:07,080 --> 00:42:09,560
Speaker 1: we had talked about in a previous program. So you

709
00:42:09,680 --> 00:42:14,000
Speaker 1: talked earlier also about finding clients who buy into the

710
00:42:14,040 --> 00:42:18,279
Speaker 1: philosophy that that you and I both espoused. Let me

711
00:42:18,360 --> 00:42:22,040
Speaker 1: ask the opposite question. How often do you come across

712
00:42:22,120 --> 00:42:26,279
Speaker 1: clients that early in the prospect process you recognize, hey,

713
00:42:26,320 --> 00:42:30,160
Speaker 1: this guy is not a good fit. Quite often recognized

714
00:42:30,200 --> 00:42:31,400
Speaker 1: there not a good fit. And I'll tell you what

715
00:42:31,440 --> 00:42:35,480
Speaker 1: the tell tale phrases. Well, don't we get the so

716
00:42:35,560 --> 00:42:38,560
Speaker 1: what's your sharp ratio? Sort the question that that's an

717
00:42:38,560 --> 00:42:41,920
Speaker 1: automatical Well, exactly the same thing. You're talking about performance?

718
00:42:42,280 --> 00:42:45,799
Speaker 1: So if I get the question from a prospect, what's

719
00:42:45,800 --> 00:42:48,319
Speaker 1: your performance spent? Over the last five years. It is

720
00:42:48,360 --> 00:42:54,120
Speaker 1: just a red flag because if you really understood what

721
00:42:54,160 --> 00:42:57,719
Speaker 1: we did and you and you had the philosophy you're

722
00:42:57,760 --> 00:42:59,920
Speaker 1: in the church, you wouldn't ask that question. Here's what

723
00:43:00,000 --> 00:43:03,800
Speaker 1: the market did, here's what emerging markets and and developed

724
00:43:03,800 --> 00:43:07,799
Speaker 1: that US did, here's what fixed income did, here's your mix. Basically,

725
00:43:08,560 --> 00:43:12,279
Speaker 1: this is what you did, and so there's no ambiguity

726
00:43:12,320 --> 00:43:18,440
Speaker 1: about it. Um So when people are asking questions about performance,

727
00:43:19,960 --> 00:43:22,880
Speaker 1: they don't have the vision and they're not going to

728
00:43:22,920 --> 00:43:26,080
Speaker 1: be a good client. So that's the number one key

729
00:43:26,200 --> 00:43:29,319
Speaker 1: right there there, tip off that this isn't gonna work.

730
00:43:30,280 --> 00:43:32,560
Speaker 1: You have a fun yourself having to fire a client.

731
00:43:32,760 --> 00:43:35,760
Speaker 1: I know that's an expression people outside of Wall Street

732
00:43:35,800 --> 00:43:39,080
Speaker 1: may not be all that familiar with, but that's the phrase, Hey,

733
00:43:39,120 --> 00:43:42,200
Speaker 1: sometimes you gotta fire a client. How often does that happen?

734
00:43:44,160 --> 00:43:46,640
Speaker 1: If you've done a good job screening them in the beginning,

735
00:43:46,680 --> 00:43:48,960
Speaker 1: it shouldn't happen. But every now and then. I know

736
00:43:49,000 --> 00:43:55,160
Speaker 1: I have fired clients in the past because they they

737
00:43:55,200 --> 00:43:59,080
Speaker 1: called too much, they take up too much time, and

738
00:43:59,440 --> 00:44:00,799
Speaker 1: at that point and we have to say, you know,

739
00:44:00,880 --> 00:44:03,200
Speaker 1: we're not the right advisor. We're not going to have

740
00:44:03,760 --> 00:44:06,240
Speaker 1: we can't. We can't have a discussion with you about

741
00:44:06,600 --> 00:44:09,759
Speaker 1: what happened in the stock market today and then have

742
00:44:09,760 --> 00:44:12,680
Speaker 1: another discussion with you tomorrow, and then have another discussion

743
00:44:12,760 --> 00:44:15,640
Speaker 1: the next day. That's emblematic of a deeper issue beneath.

744
00:44:15,719 --> 00:44:18,480
Speaker 1: It's not the stock market. They're essentially saying, I'm not

745
00:44:18,520 --> 00:44:21,320
Speaker 1: buying into the philosophy, right, they don't have the philosophy,

746
00:44:21,360 --> 00:44:23,120
Speaker 1: because if they had the philosophy, then they wouldn't be

747
00:44:23,120 --> 00:44:25,840
Speaker 1: asking those questions. So it's not a good fit. So

748
00:44:25,880 --> 00:44:29,000
Speaker 1: the way I fire a client and say, you know this,

749
00:44:30,000 --> 00:44:32,680
Speaker 1: I don't think we're really the right company for you.

750
00:44:32,760 --> 00:44:36,960
Speaker 1: I think you need another type of advisor than what

751
00:44:37,040 --> 00:44:40,640
Speaker 1: we can offer. And that's how I fire the client,

752
00:44:40,760 --> 00:44:43,879
Speaker 1: if you gently. But it's true though, it's true. It's

753
00:44:43,920 --> 00:44:46,719
Speaker 1: it's it's a fact that they need more. I mean

754
00:44:46,760 --> 00:44:50,000
Speaker 1: they should be at you know, the wire houses, because

755
00:44:50,000 --> 00:44:53,040
Speaker 1: that's what the wire houses do well, that amongst other

756
00:44:53,160 --> 00:44:56,640
Speaker 1: other sort of things. Um, and we talked about technology

757
00:44:56,680 --> 00:45:00,320
Speaker 1: the other day, you mentioned the wire houses, So tip bically,

758
00:45:00,480 --> 00:45:03,000
Speaker 1: what what for those people who may not be familiar

759
00:45:03,040 --> 00:45:06,640
Speaker 1: with the phrase that typically refers to the big brokerage

760
00:45:06,640 --> 00:45:11,759
Speaker 1: firms think Morgan, Stanley, Merrill Lynch. In the old days

761
00:45:11,800 --> 00:45:15,239
Speaker 1: it was Bear Stearns and Lehman Brothers. But I guess

762
00:45:15,280 --> 00:45:20,759
Speaker 1: you could put JP Morrigan and well Will's. Fargo is

763
00:45:20,800 --> 00:45:23,360
Speaker 1: also has A used to have a brokerage division. I

764
00:45:23,360 --> 00:45:26,799
Speaker 1: think they still do. So what's going on on the

765
00:45:26,840 --> 00:45:31,239
Speaker 1: old school side of the business these days? Um, they

766
00:45:31,280 --> 00:45:33,760
Speaker 1: seem to con still. But even though we read about

767
00:45:33,800 --> 00:45:38,320
Speaker 1: these big teams leaving, these billion dollar teams an off elsewhere,

768
00:45:38,960 --> 00:45:44,480
Speaker 1: their assets under management continue to grow. They are not. Um,

769
00:45:44,560 --> 00:45:48,359
Speaker 1: they are not hurting these days for business. What what's

770
00:45:48,360 --> 00:45:51,919
Speaker 1: happening on that side of the street. Well, I really

771
00:45:51,920 --> 00:45:55,080
Speaker 1: don't know what I couldn't I couldn't answer. Let me

772
00:45:55,160 --> 00:45:57,759
Speaker 1: let me phrase it differently. How often have you seen

773
00:45:57,880 --> 00:46:01,879
Speaker 1: clients come to you from big wire houses, from from

774
00:46:01,880 --> 00:46:07,120
Speaker 1: places like Maryland? Morgan? Probably fifty of our new clients

775
00:46:07,120 --> 00:46:10,920
Speaker 1: that come in come from the big wire houses. But realize,

776
00:46:10,920 --> 00:46:14,880
Speaker 1: what's happened since Bernie made off is that clients have

777
00:46:14,960 --> 00:46:18,880
Speaker 1: diversified into several different advisors. So it's not whereas it

778
00:46:19,000 --> 00:46:21,480
Speaker 1: used to all come from one place. Now when we

779
00:46:21,480 --> 00:46:23,560
Speaker 1: get a new client and they'll be transferring in assets

780
00:46:23,560 --> 00:46:27,520
Speaker 1: from two or three different places. People have diversified more

781
00:46:27,960 --> 00:46:32,839
Speaker 1: and in fact, even with advisors, UM, we still get

782
00:46:32,840 --> 00:46:34,879
Speaker 1: our fair share of people who have us manage all

783
00:46:34,880 --> 00:46:37,440
Speaker 1: of their money. But I think that in the in

784
00:46:37,480 --> 00:46:41,480
Speaker 1: the world of post Bernie made Off, that people are

785
00:46:41,520 --> 00:46:44,640
Speaker 1: comfortable splitting their money between a couple of advisors as well,

786
00:46:44,640 --> 00:46:46,759
Speaker 1: and we've see more more of that in the last

787
00:46:46,800 --> 00:46:50,959
Speaker 1: few years. That's really interesting. You would think the lesson is, hey,

788
00:46:51,120 --> 00:46:53,480
Speaker 1: don't put your money with somebody who doesn't use a

789
00:46:53,560 --> 00:46:57,279
Speaker 1: third party trusted custodian UH and pretends to run the

790
00:46:57,320 --> 00:47:02,280
Speaker 1: money themselves. But that's that's a UH. That's a different

791
00:47:03,040 --> 00:47:06,200
Speaker 1: UM analysis is hey, it's not us, it's t D

792
00:47:06,480 --> 00:47:09,720
Speaker 1: or Fidelity or Schwab or whoever. People are are holding

793
00:47:09,719 --> 00:47:12,160
Speaker 1: their money, so we don't have the right the ability

794
00:47:12,200 --> 00:47:15,120
Speaker 1: to go in and and steal your money. Bernie Madoff

795
00:47:15,200 --> 00:47:17,560
Speaker 1: had the money going right into his checking and can't understand.

796
00:47:18,000 --> 00:47:21,719
Speaker 1: I understand what happened, but Phil. But emotionally people are

797
00:47:21,760 --> 00:47:25,960
Speaker 1: basically saying, well, I'm just in case somebody is dishonest,

798
00:47:26,040 --> 00:47:28,719
Speaker 1: I'm gonna split my money in three places so I

799
00:47:28,800 --> 00:47:32,960
Speaker 1: can't lose it all with We've seen more of that

800
00:47:33,040 --> 00:47:35,880
Speaker 1: post financial crisis than we did before the financial crisis.

801
00:47:35,920 --> 00:47:37,879
Speaker 1: That's correct. So now let's talk a little bit about

802
00:47:37,880 --> 00:47:40,840
Speaker 1: the financial crisis. You mentioned what it was like living

803
00:47:40,840 --> 00:47:45,160
Speaker 1: through two thousand, two thousand one. How disruptive was oh

804
00:47:45,280 --> 00:47:48,080
Speaker 1: eight o nine to your practice. How much did clients

805
00:47:48,120 --> 00:47:51,880
Speaker 1: freak out or were people you know, all right, this

806
00:47:51,960 --> 00:47:54,719
Speaker 1: is gonna suck, but we'll come out fine and everything

807
00:47:54,760 --> 00:47:57,400
Speaker 1: will be okay on the other side, even though just

808
00:47:57,800 --> 00:48:00,520
Speaker 1: at the time it very much felt like, hey, this

809
00:48:00,600 --> 00:48:02,440
Speaker 1: is a one off, this is a unique end of

810
00:48:02,480 --> 00:48:05,560
Speaker 1: world sort of thing, or at least that's how a

811
00:48:05,560 --> 00:48:09,080
Speaker 1: lot of places were describing it. Sure, so of course

812
00:48:09,120 --> 00:48:11,440
Speaker 1: we've got a lot of phone calls, just like everyone else.

813
00:48:11,560 --> 00:48:17,440
Speaker 1: And of those people, after talking with them, didn't do anything,

814
00:48:17,880 --> 00:48:20,080
Speaker 1: which was good. We didn't we didn't have to do

815
00:48:20,120 --> 00:48:25,120
Speaker 1: anything with their portfolios. The other ten percent, a portion

816
00:48:25,160 --> 00:48:29,239
Speaker 1: of them terminated, they capitulated before we even had a

817
00:48:29,320 --> 00:48:34,279
Speaker 1: chance to talk with them about three Okay, that's not

818
00:48:34,600 --> 00:48:38,359
Speaker 1: you know, we hear our stories about people just you know,

819
00:48:38,440 --> 00:48:40,920
Speaker 1: losing their mind, and and people have a third of

820
00:48:40,920 --> 00:48:44,000
Speaker 1: people's business going away because they freaked out about a

821
00:48:44,040 --> 00:48:48,439
Speaker 1: particular you know, one particular not not from We were

822
00:48:48,600 --> 00:48:50,600
Speaker 1: at a different firm at the time. But you know,

823
00:48:50,800 --> 00:48:53,600
Speaker 1: you hear stories going on, you read about people blowing

824
00:48:53,719 --> 00:48:57,400
Speaker 1: up and imploding, and you know, it's really a challenge

825
00:48:57,440 --> 00:49:01,080
Speaker 1: to to deal with that sort of influx of of

826
00:49:01,200 --> 00:49:04,960
Speaker 1: panicked client phone calls. But not not in the not

827
00:49:05,080 --> 00:49:08,280
Speaker 1: in our business. I mean the philosophy we have again

828
00:49:08,320 --> 00:49:14,600
Speaker 1: and yeah, the low cost to try to create the

829
00:49:14,640 --> 00:49:18,440
Speaker 1: correct allocation for you in the long term, educating the

830
00:49:18,480 --> 00:49:23,440
Speaker 1: clients and reminding them, Um, a vast majority of our

831
00:49:23,760 --> 00:49:29,280
Speaker 1: clients didn't do anything, Um panic phone call, no nervous emails,

832
00:49:29,360 --> 00:49:35,320
Speaker 1: past majority. Really that's fantastic. Just you know, you continue

833
00:49:35,360 --> 00:49:37,120
Speaker 1: to do what you do. And it's because they had

834
00:49:38,200 --> 00:49:40,719
Speaker 1: they were in the church, they understood it that they

835
00:49:40,719 --> 00:49:43,200
Speaker 1: were part of the philosophy. They got it. Hey, this

836
00:49:43,280 --> 00:49:45,279
Speaker 1: is gonna write tough, but we'll write it out and

837
00:49:45,280 --> 00:49:49,120
Speaker 1: we'll be fine on the other side. Right, Because you

838
00:49:49,120 --> 00:49:52,439
Speaker 1: you have to select clients who have the same philosophy

839
00:49:52,480 --> 00:49:55,759
Speaker 1: as you. You can't try to convert people. I mean,

840
00:49:55,760 --> 00:49:57,759
Speaker 1: we can try to convert people on radio shows and such,

841
00:49:58,440 --> 00:50:00,319
Speaker 1: but by the time we're speaking with them one on

842
00:50:00,360 --> 00:50:02,480
Speaker 1: one as an advisor, they have to already we have

843
00:50:02,520 --> 00:50:05,480
Speaker 1: to already see eye to eye because if not, I

844
00:50:05,520 --> 00:50:09,920
Speaker 1: can't convert you. So I was gonna That leads me

845
00:50:09,960 --> 00:50:12,359
Speaker 1: to a question. I've been thinking about how much time

846
00:50:12,400 --> 00:50:17,360
Speaker 1: do you spend educating clients, because there's a fine line

847
00:50:17,400 --> 00:50:20,560
Speaker 1: between proselytizing and saying, hey, let me give you a

848
00:50:20,640 --> 00:50:23,440
Speaker 1: deeper dive into why we have this philosophy and and

849
00:50:23,440 --> 00:50:25,879
Speaker 1: and where does that cross the lawn? Sure, so most

850
00:50:25,880 --> 00:50:29,719
Speaker 1: of my education has done through the books and my

851
00:50:29,760 --> 00:50:36,480
Speaker 1: blog and articles as opposed to one on one conversation. Again,

852
00:50:36,880 --> 00:50:40,960
Speaker 1: because I structured this company to be a low fee,

853
00:50:41,040 --> 00:50:46,720
Speaker 1: including our fee. Uh, I can't go out and try

854
00:50:46,760 --> 00:50:50,399
Speaker 1: to convert people, um, you know, person one on one.

855
00:50:50,400 --> 00:50:52,080
Speaker 1: I don't have the time for it. I don't have

856
00:50:52,120 --> 00:50:54,480
Speaker 1: the resources for it. You know. I can't do that.

857
00:50:54,880 --> 00:50:58,200
Speaker 1: So but I can do it in mass by writing books.

858
00:50:58,200 --> 00:51:01,560
Speaker 1: And then they come to me because they read the book,

859
00:51:01,680 --> 00:51:03,080
Speaker 1: they read a blog, or they read a lot of

860
00:51:03,120 --> 00:51:05,280
Speaker 1: stuff and they ended up coming to me and saying,

861
00:51:05,320 --> 00:51:08,520
Speaker 1: I get it. Now, I'm interested in having you manage

862
00:51:08,520 --> 00:51:12,560
Speaker 1: my assets. Well that's a good conversation. So the farm itself,

863
00:51:12,600 --> 00:51:14,960
Speaker 1: you mentioned you're you're running lean. How many employees do

864
00:51:15,000 --> 00:51:18,200
Speaker 1: you have, Well, we actually now have about sixteen total employees.

865
00:51:18,719 --> 00:51:21,759
Speaker 1: We have one point four billion dollars. That's not a

866
00:51:21,920 --> 00:51:26,560
Speaker 1: huge ratio. So there. My my formula has always been

867
00:51:26,680 --> 00:51:29,680
Speaker 1: one new employee for every hundred million of assets and

868
00:51:30,080 --> 00:51:31,759
Speaker 1: try to keep to that as much as I can.

869
00:51:31,840 --> 00:51:34,000
Speaker 1: But as you get larger over a billion dollars, you

870
00:51:34,040 --> 00:51:37,040
Speaker 1: need to add different levels, like I had to add

871
00:51:37,040 --> 00:51:41,240
Speaker 1: a compliance manager full time. Um, you have to add

872
00:51:41,280 --> 00:51:44,360
Speaker 1: an operations manager full time. That was over a billion dollars.

873
00:51:44,360 --> 00:51:47,840
Speaker 1: That's when it becomes hey, I can't just outsource this.

874
00:51:47,920 --> 00:51:50,080
Speaker 1: There are things known as r A in a box

875
00:51:50,200 --> 00:51:55,880
Speaker 1: or outside compliance companies. You can now outsource chief compliance officers.

876
00:51:55,920 --> 00:51:59,160
Speaker 1: There's third parties that will actually be registered on on

877
00:51:59,280 --> 00:52:02,920
Speaker 1: the UH form adv with the SEC and they're not

878
00:52:02,960 --> 00:52:06,480
Speaker 1: an employee, their third party consultants, but they're on your

879
00:52:06,960 --> 00:52:10,120
Speaker 1: your SEC documents. A billion dollars is the one in

880
00:52:10,120 --> 00:52:12,600
Speaker 1: the same way you start, I think. So, I mean

881
00:52:12,600 --> 00:52:15,000
Speaker 1: there are different levels as you grow your advisory firm

882
00:52:15,040 --> 00:52:19,960
Speaker 1: where you realize you have to uh do creative reconstruction

883
00:52:19,960 --> 00:52:23,560
Speaker 1: of what's the word destruction? Right, I'm sorry, So you're

884
00:52:24,840 --> 00:52:27,880
Speaker 1: you realize that what you've put together can take you

885
00:52:27,960 --> 00:52:32,120
Speaker 1: to certain point, and then you've got to recreate it

886
00:52:32,280 --> 00:52:34,319
Speaker 1: and that will take you to another point. So it's

887
00:52:34,320 --> 00:52:36,600
Speaker 1: scales and then a certain point you notice, hey there

888
00:52:36,600 --> 00:52:38,680
Speaker 1: are a lot of stress points here. I need to

889
00:52:38,719 --> 00:52:42,440
Speaker 1: throw some some intelligence and a body of that, maybe

890
00:52:42,440 --> 00:52:46,160
Speaker 1: a little technology and that. And again technology does drive

891
00:52:46,200 --> 00:52:48,400
Speaker 1: a lot of this. So as technology gets better, we

892
00:52:48,400 --> 00:52:51,040
Speaker 1: are able to do scale it more so it can

893
00:52:51,080 --> 00:52:55,759
Speaker 1: go further. But as you continue to grow, you have

894
00:52:55,920 --> 00:53:00,400
Speaker 1: to change things to scale up. For EXAMP, there was

895
00:53:00,480 --> 00:53:03,520
Speaker 1: came a point when I personally couldn't speak with all

896
00:53:03,520 --> 00:53:06,760
Speaker 1: the clients anymore. So we began to hire UH Certified

897
00:53:06,800 --> 00:53:09,319
Speaker 1: Financial planners who came in and now we have three

898
00:53:09,400 --> 00:53:12,960
Speaker 1: full time certified financial planners. They're speaking with the clients

899
00:53:13,000 --> 00:53:17,120
Speaker 1: on a day to day basis and I'm just they're saying, hey,

900
00:53:17,160 --> 00:53:19,120
Speaker 1: thank you for being with us, and you know, if

901
00:53:19,120 --> 00:53:21,439
Speaker 1: you have any questions for me, just give me a call.

902
00:53:22,320 --> 00:53:25,280
Speaker 1: But it's the cfps who are speaking with the clients

903
00:53:25,719 --> 00:53:27,920
Speaker 1: one on one now on a daily basis. We do

904
00:53:28,000 --> 00:53:31,400
Speaker 1: something very similar, although we haven't you know, we're eighteen

905
00:53:31,400 --> 00:53:33,520
Speaker 1: months old. We haven't scaled up the way the way

906
00:53:33,560 --> 00:53:37,799
Speaker 1: you have what's fascinating in the process of developing this

907
00:53:37,920 --> 00:53:42,080
Speaker 1: is so we use certain reporting and performance software like

908
00:53:42,200 --> 00:53:46,759
Speaker 1: O'Ryan and years ago to crank out what you push

909
00:53:46,800 --> 00:53:50,000
Speaker 1: a button and Orion generates. It would take two accountants

910
00:53:50,000 --> 00:53:53,879
Speaker 1: working for a week to get the quarterly statements out

911
00:53:53,920 --> 00:53:58,000
Speaker 1: to the clients. I remember those days. Today all the

912
00:53:58,040 --> 00:54:00,000
Speaker 1: clients have full access to it. They push your button,

913
00:54:00,120 --> 00:54:03,480
Speaker 1: they get We tell them, hey, it's seven access, but

914
00:54:03,600 --> 00:54:07,320
Speaker 1: please try not to check. You know, look at your monthly,

915
00:54:07,400 --> 00:54:10,000
Speaker 1: quarterly year to date. You're fine, but don't obsess over

916
00:54:10,040 --> 00:54:11,759
Speaker 1: and it's going to go up and down. That's what

917
00:54:11,840 --> 00:54:15,120
Speaker 1: markets do. And we have actually now outsourced a lot

918
00:54:15,160 --> 00:54:22,359
Speaker 1: of our portfolio management function to Black Diamond and so

919
00:54:22,480 --> 00:54:24,640
Speaker 1: this just just occurred and were so we're coming off

920
00:54:24,719 --> 00:54:28,440
Speaker 1: of um A p X, which is advents in in

921
00:54:28,560 --> 00:54:31,880
Speaker 1: house you know, on server software, and we've going to

922
00:54:31,960 --> 00:54:35,200
Speaker 1: the cloud black Diamond, and we are uh and and

923
00:54:35,239 --> 00:54:39,080
Speaker 1: they are actually doing a lot of our reconciliation and

924
00:54:39,719 --> 00:54:42,840
Speaker 1: uh it's the back end. It's the administrative an accounting

925
00:54:42,920 --> 00:54:46,600
Speaker 1: and and reporting function, reporting functions and portal and all

926
00:54:46,600 --> 00:54:51,319
Speaker 1: of that for the clients. So uh, although it's expensive

927
00:54:51,840 --> 00:54:54,880
Speaker 1: for us, we're paying about a hundred thousand dollars a

928
00:54:54,920 --> 00:54:58,600
Speaker 1: year for this, but a per household basis, it's really

929
00:54:58,640 --> 00:55:00,640
Speaker 1: not terrible. Well, it's also now I don't have to

930
00:55:00,719 --> 00:55:03,359
Speaker 1: hire two people in portfolio management. So it's those two

931
00:55:03,480 --> 00:55:05,080
Speaker 1: two c pas that you were saying in the back,

932
00:55:05,120 --> 00:55:08,000
Speaker 1: crunching the numbers. Okay, So though those people I don't

933
00:55:08,040 --> 00:55:11,279
Speaker 1: have to hire because I've been able to use technology

934
00:55:11,400 --> 00:55:13,080
Speaker 1: and put it up in the cloud and outsource it

935
00:55:13,640 --> 00:55:18,680
Speaker 1: to UM Black Diamond, and then also do a subadvisor

936
00:55:18,800 --> 00:55:21,799
Speaker 1: role or a camp role using that same technology, which

937
00:55:21,800 --> 00:55:25,120
Speaker 1: allows me now to expand my intellectual property. Which again

938
00:55:25,120 --> 00:55:28,600
Speaker 1: that's what I'm selling to other advisors who don't want

939
00:55:28,640 --> 00:55:31,799
Speaker 1: to manage money, and they can put their clients with

940
00:55:31,880 --> 00:55:34,040
Speaker 1: us and we can manage their clients money in a

941
00:55:34,120 --> 00:55:37,440
Speaker 1: customized fashion at a very low fee, using the same technology.

942
00:55:37,440 --> 00:55:40,239
Speaker 1: It's funny because it's it's a business line that we've

943
00:55:40,239 --> 00:55:43,839
Speaker 1: been exploring because we get inquiries all the time from

944
00:55:43,840 --> 00:55:47,520
Speaker 1: other advisors. UM you do the same thing I do.

945
00:55:47,560 --> 00:55:49,000
Speaker 1: You go around the country, you speak at a lot

946
00:55:49,000 --> 00:55:51,719
Speaker 1: of conferences. One of the questions I ask if I'm

947
00:55:51,719 --> 00:55:55,720
Speaker 1: speaking to a room full of cfps or financial planners

948
00:55:55,719 --> 00:55:57,920
Speaker 1: of some sort. Hey, how many of you run your

949
00:55:57,920 --> 00:56:01,239
Speaker 1: own assets? Less than half of hands, that's correct? And

950
00:56:01,239 --> 00:56:03,600
Speaker 1: then how many of you are happy with your outside management?

951
00:56:04,120 --> 00:56:07,399
Speaker 1: And less than half of those are good questions. It's

952
00:56:07,440 --> 00:56:11,680
Speaker 1: really a fascinating So on that business line of you're

953
00:56:11,760 --> 00:56:17,000
Speaker 1: the institutional advisor to other advisors, advisor subadvisor, what do

954
00:56:17,040 --> 00:56:19,080
Speaker 1: you what do you charge them in terms of UM

955
00:56:19,200 --> 00:56:23,800
Speaker 1: asset fees? So the portfolio management fee to their clients

956
00:56:23,880 --> 00:56:26,200
Speaker 1: is twenty five basis points. But then if we do

957
00:56:26,280 --> 00:56:29,319
Speaker 1: some administrative work for the advisor themselves, like collect their

958
00:56:29,360 --> 00:56:31,200
Speaker 1: fees for them, it's a little bit more than that.

959
00:56:31,760 --> 00:56:35,799
Speaker 1: And so here's the debate that we've had internally. How

960
00:56:35,880 --> 00:56:41,920
Speaker 1: much does that make what you offer as portfolio solutions

961
00:56:41,960 --> 00:56:47,000
Speaker 1: to potential clients UM less valuable as opposed, or let

962
00:56:47,040 --> 00:56:50,920
Speaker 1: me rephrase that less unique. So right now, if someone

963
00:56:50,920 --> 00:56:53,359
Speaker 1: wants Rick Ferry, they have to come to Rick Ferry.

964
00:56:53,400 --> 00:56:57,719
Speaker 1: But if this advisory to advisor's business expands, are you

965
00:56:57,800 --> 00:56:59,920
Speaker 1: running the risk that people are getting Rick Ferry with

966
00:57:00,040 --> 00:57:04,080
Speaker 1: out having to pay Rick Ferry directly? No, because the

967
00:57:04,080 --> 00:57:06,920
Speaker 1: way I looked at at the pricing of this is

968
00:57:06,960 --> 00:57:10,320
Speaker 1: that we get paid twenty five basis points for portfolio management,

969
00:57:10,480 --> 00:57:13,680
Speaker 1: whether it's through the robo advisor which we're creating, whether

970
00:57:13,719 --> 00:57:17,600
Speaker 1: it's through our own channel, or whether it's through a subadvising.

971
00:57:17,600 --> 00:57:20,040
Speaker 1: We're getting paid twenty five basis points for the intellectual

972
00:57:20,080 --> 00:57:22,880
Speaker 1: property of and the running of the portfolio and creating

973
00:57:22,920 --> 00:57:26,920
Speaker 1: the portfolio. The extra fees are for advice. Either you're

974
00:57:26,920 --> 00:57:32,320
Speaker 1: going to get the advice from my CFPS or advice exactly. Listen.

975
00:57:32,760 --> 00:57:35,920
Speaker 1: I'm a big believer in that we had Larry Sweddrow

976
00:57:36,080 --> 00:57:38,840
Speaker 1: here before. I'm a big fan of Carl Richards sure

977
00:57:38,920 --> 00:57:43,160
Speaker 1: who who does the sharpie sketches and rites in the Times.

978
00:57:43,240 --> 00:57:48,000
Speaker 1: And I think Buckingham runs about five billion dollars. I'm

979
00:57:48,040 --> 00:57:50,160
Speaker 1: doing this off the top of my head, so double

980
00:57:50,240 --> 00:57:52,880
Speaker 1: check this when you hear this. But I think they

981
00:57:52,920 --> 00:57:58,120
Speaker 1: advise on another two billions. That's bam, bam, that's right Buckingham. Yeah, exactly,

982
00:57:58,120 --> 00:58:00,720
Speaker 1: And what happened there and I can speak for for

983
00:58:00,760 --> 00:58:03,080
Speaker 1: bucking Ham, but what they did was they created an

984
00:58:03,120 --> 00:58:08,240
Speaker 1: asset management company called Buckingham Asset Management, and they realize

985
00:58:08,280 --> 00:58:10,520
Speaker 1: that they can run money, not just for their own

986
00:58:10,520 --> 00:58:13,520
Speaker 1: clients and advise their own clients but since they had

987
00:58:13,520 --> 00:58:15,560
Speaker 1: built out the back office, they can run money for

988
00:58:15,640 --> 00:58:18,200
Speaker 1: other advisors using their strategies as well. But it's the

989
00:58:18,200 --> 00:58:21,360
Speaker 1: other advisor who gets paid the advisory fee. They get

990
00:58:21,360 --> 00:58:23,400
Speaker 1: paid the portfolio management fate. And it's the same thing

991
00:58:23,400 --> 00:58:25,840
Speaker 1: with the portfolio solutions. You're breaking the you're breaking the

992
00:58:25,920 --> 00:58:29,959
Speaker 1: total cost to the client into discrete pieces. You're paying

993
00:58:30,000 --> 00:58:32,040
Speaker 1: this much for the asset management business, You're paying this

994
00:58:32,160 --> 00:58:35,400
Speaker 1: much for the advisory side for this that that's correct,

995
00:58:35,480 --> 00:58:38,000
Speaker 1: and but but of course all the advisors who go

996
00:58:38,080 --> 00:58:40,840
Speaker 1: with us have to have the same philosophy, so it's

997
00:58:40,880 --> 00:58:44,560
Speaker 1: not like we're going to do tactical asset allocation because

998
00:58:44,600 --> 00:58:48,040
Speaker 1: of advisor believes in that. So just like a d

999
00:58:48,160 --> 00:58:51,520
Speaker 1: f A and just like a BAM client, you you

1000
00:58:51,520 --> 00:58:54,760
Speaker 1: you have the philosophy and then you're coming to us

1001
00:58:54,880 --> 00:58:59,960
Speaker 1: for UM implementation and advice perhaps if you're an advice

1002
00:59:00,040 --> 00:59:02,760
Speaker 1: there on how to structure the portfolio. I mean, do

1003
00:59:02,800 --> 00:59:05,040
Speaker 1: you really want to have the SMP five hundred or

1004
00:59:05,040 --> 00:59:07,760
Speaker 1: should you have a total market Uh, you know, do

1005
00:59:07,840 --> 00:59:10,400
Speaker 1: you need a q q Q you know NASA dec

1006
00:59:10,480 --> 00:59:14,840
Speaker 1: I mean, really, what is that? Um? You're you're jingling

1007
00:59:15,080 --> 00:59:19,160
Speaker 1: a hundred thoughts in my head. One on on fun families,

1008
00:59:19,160 --> 00:59:22,280
Speaker 1: one on why the SMP is not your favorite asset

1009
00:59:22,320 --> 00:59:24,800
Speaker 1: management one on smart beta. Let me let me throw

1010
00:59:24,840 --> 00:59:28,400
Speaker 1: some of these out out of you. So our portfolios

1011
00:59:28,480 --> 00:59:33,720
Speaker 1: are Vanguard, Dimensional funds, some Black Rocks, some UM Double Line,

1012
00:59:33,800 --> 00:59:36,919
Speaker 1: some Wisdom Tree. What what fun families do you tend

1013
00:59:36,920 --> 00:59:39,560
Speaker 1: to focus on? Well, it's mostly Vanguard in d f A.

1014
00:59:39,640 --> 00:59:43,360
Speaker 1: That's that's a majority of our assets. Um. There might

1015
00:59:43,400 --> 00:59:46,200
Speaker 1: be uh an eye share or two out there. But

1016
00:59:47,360 --> 00:59:51,560
Speaker 1: you know, we're trying to capture the return of a

1017
00:59:51,800 --> 00:59:54,640
Speaker 1: risk in the marketplace. I don't even want to call

1018
00:59:54,680 --> 00:59:58,960
Speaker 1: it an asset class because asset classes may not have returns.

1019
00:59:59,000 --> 01:00:03,200
Speaker 1: And yeah, as we're looking at a risk in the marketplace,

1020
01:00:03,240 --> 01:00:05,800
Speaker 1: called it market beta at US equity beta, if you will.

1021
01:00:05,800 --> 01:00:08,280
Speaker 1: And so we're gonna trying to capture that. Well, now

1022
01:00:08,520 --> 01:00:11,360
Speaker 1: what's the best way to capture that? Well, first you

1023
01:00:11,400 --> 01:00:13,280
Speaker 1: have to look at all the different products that are available.

1024
01:00:13,280 --> 01:00:15,960
Speaker 1: There's different indexes out there. There's a Russell three thousand,

1025
01:00:16,160 --> 01:00:19,560
Speaker 1: there's a Dow Jones Total Market, there's the CRISP Total

1026
01:00:19,760 --> 01:00:23,360
Speaker 1: total Market index, I mean five thousand. Okay, So now

1027
01:00:23,360 --> 01:00:25,160
Speaker 1: you have all the indexes that out there that have

1028
01:00:25,240 --> 01:00:27,440
Speaker 1: been created that capture this, and then you have to

1029
01:00:27,480 --> 01:00:31,120
Speaker 1: go to the marketplace and see what products are tracking

1030
01:00:31,160 --> 01:00:34,200
Speaker 1: these indexes, and you end up running into Vanguard, and

1031
01:00:34,280 --> 01:00:36,680
Speaker 1: you run into I Shares, and you run into State Street,

1032
01:00:36,800 --> 01:00:40,840
Speaker 1: and you also are now running into Schwab and so

1033
01:00:40,880 --> 01:00:45,040
Speaker 1: you have to do an analysis of uh fees and

1034
01:00:45,600 --> 01:00:50,480
Speaker 1: turnover taxes to come up with what is the best

1035
01:00:51,320 --> 01:00:54,919
Speaker 1: product that I can select that best captures the risk

1036
01:00:55,080 --> 01:00:58,000
Speaker 1: that I'm trying to capture and a lot of times

1037
01:00:58,640 --> 01:01:02,600
Speaker 1: and as a BT Vanguard UM they're pretty clearly the

1038
01:01:02,640 --> 01:01:07,240
Speaker 1: lowest course provider almost across the board for beta, for

1039
01:01:07,400 --> 01:01:10,360
Speaker 1: beta correct for for just marking for people who just

1040
01:01:10,440 --> 01:01:12,800
Speaker 1: want to get what the market is returned stock market

1041
01:01:12,800 --> 01:01:14,680
Speaker 1: and bond market. That's correct. Now, if you're talking about

1042
01:01:14,760 --> 01:01:19,840
Speaker 1: smart beta, if you will, or factor investing UM, strategic beta,

1043
01:01:19,880 --> 01:01:22,640
Speaker 1: alternative beta, additional beta, exotic beta, whatever you want to

1044
01:01:22,680 --> 01:01:24,000
Speaker 1: call it. I mean, the fact is you're you're not

1045
01:01:24,040 --> 01:01:28,680
Speaker 1: actually going after the market. You're going after a strategy

1046
01:01:28,720 --> 01:01:33,040
Speaker 1: that's used in the market. Then you have to try

1047
01:01:33,040 --> 01:01:34,840
Speaker 1: to figure out how can in what risks by the

1048
01:01:34,840 --> 01:01:39,080
Speaker 1: way of that strategy giving you and therefore, what risk

1049
01:01:39,160 --> 01:01:42,240
Speaker 1: premiums you might be able to draw from it. Now

1050
01:01:42,320 --> 01:01:44,560
Speaker 1: you have to look at what is my best bang

1051
01:01:44,600 --> 01:01:48,240
Speaker 1: for the buck, I mean what funds produce. It gives

1052
01:01:48,240 --> 01:01:52,040
Speaker 1: me the highest exposures to those risks, therefore potentially highest

1053
01:01:52,040 --> 01:01:54,840
Speaker 1: exposures to those risk premiums for the amount of fee

1054
01:01:54,840 --> 01:01:58,200
Speaker 1: that I'm paying. And here is where you end up

1055
01:01:58,240 --> 01:02:01,080
Speaker 1: with somebody like d f A, because even though they're

1056
01:02:01,080 --> 01:02:05,120
Speaker 1: not inexpensive relative to Vanguard, I mean they are more expensive.

1057
01:02:05,200 --> 01:02:07,280
Speaker 1: You're getting more bang for the buck. You're getting more

1058
01:02:07,400 --> 01:02:10,880
Speaker 1: risk exposure to the risks that you want. So uh,

1059
01:02:11,360 --> 01:02:13,800
Speaker 1: you would look at them. You would look at research affiliates.

1060
01:02:14,160 --> 01:02:17,000
Speaker 1: Uh raffy, you would look at other types of products

1061
01:02:17,040 --> 01:02:19,920
Speaker 1: that are in that space. So we we had um

1062
01:02:20,000 --> 01:02:23,520
Speaker 1: on in terms of both Vanguard and resource affiliates. The

1063
01:02:23,520 --> 01:02:26,720
Speaker 1: conversation we had with Jack Brennan was quite fascinating and

1064
01:02:26,760 --> 01:02:28,560
Speaker 1: I asked him, Hey, how come you guys aren't doing

1065
01:02:28,600 --> 01:02:32,160
Speaker 1: smart Beta and uh, he's chairman now he's no longer CEO,

1066
01:02:32,800 --> 01:02:35,720
Speaker 1: and I think that it's something that they've been wrestling

1067
01:02:35,720 --> 01:02:39,400
Speaker 1: with internally. We're we have coming up in a few months.

1068
01:02:39,440 --> 01:02:41,640
Speaker 1: We're gonna have David Booth, we're gonna have that conversation

1069
01:02:41,680 --> 01:02:45,840
Speaker 1: about UM their particular form of I don't know if

1070
01:02:45,840 --> 01:02:47,920
Speaker 1: I would call it smart beta so much as I

1071
01:02:47,920 --> 01:02:51,960
Speaker 1: would call it a a tilt towards small cap and value.

1072
01:02:52,040 --> 01:02:54,640
Speaker 1: That's really how they built their brand. I think they're

1073
01:02:54,680 --> 01:02:58,560
Speaker 1: running about three hundred plus billion dollars. Well, first of all,

1074
01:02:58,600 --> 01:03:00,600
Speaker 1: smart beta is just a marketing term. I mean, there's

1075
01:03:00,600 --> 01:03:05,520
Speaker 1: nothing smart about there's nothing smart inherently smart about taking

1076
01:03:05,560 --> 01:03:07,640
Speaker 1: more risk. I mean, if you decide to take more

1077
01:03:07,720 --> 01:03:10,680
Speaker 1: risk to get a higher return, fine, and you decide

1078
01:03:10,680 --> 01:03:12,360
Speaker 1: that the risk isn't going to be beta, but it's

1079
01:03:12,400 --> 01:03:14,960
Speaker 1: going to be small cap risk, or it's going to

1080
01:03:15,040 --> 01:03:19,320
Speaker 1: be UH value risk or momentum risk, or it's going

1081
01:03:19,360 --> 01:03:21,480
Speaker 1: to be quality risk or something. I mean, if you

1082
01:03:21,480 --> 01:03:26,800
Speaker 1: believe in Fama French methodology, you're gonna say these are risks.

1083
01:03:26,840 --> 01:03:30,720
Speaker 1: Eugene Fama recent winner of the Nobel Prize for his

1084
01:03:30,800 --> 01:03:35,000
Speaker 1: work on UM efficient markets and and how challenging it

1085
01:03:35,120 --> 01:03:38,640
Speaker 1: is to beat the market. And French is also ah.

1086
01:03:38,760 --> 01:03:41,120
Speaker 1: Is he a former Chicago or Pennsylvania? You gotta try

1087
01:03:41,160 --> 01:03:44,560
Speaker 1: to remember where he went, where he teaches. But he's

1088
01:03:44,600 --> 01:03:47,840
Speaker 1: a consultant to UH Dimensional Funds and is one of

1089
01:03:47,840 --> 01:03:54,920
Speaker 1: the key architects of Hey, here's a factor that FAMA,

1090
01:03:55,040 --> 01:03:59,560
Speaker 1: the FAMA French three factor model, which UM codified if

1091
01:03:59,560 --> 01:04:08,080
Speaker 1: you will, the the idea that portfolios have three distinct

1092
01:04:08,240 --> 01:04:11,240
Speaker 1: risks and you can measure the risk, and the risks

1093
01:04:11,240 --> 01:04:14,919
Speaker 1: are the return, the sensitivity to the market, the sensitivity

1094
01:04:14,960 --> 01:04:17,240
Speaker 1: of small caps to large gaps, and the sensitivity of

1095
01:04:17,240 --> 01:04:21,880
Speaker 1: basically value stocks to growth stocks. And that covers the

1096
01:04:22,000 --> 01:04:27,760
Speaker 1: variability of a diversified portfolio stocks, so kind of captures

1097
01:04:27,880 --> 01:04:30,120
Speaker 1: most of it. There's a there's a few others in there,

1098
01:04:30,120 --> 01:04:32,880
Speaker 1: like momentum and quality. Now, so it's really a five

1099
01:04:32,920 --> 01:04:37,520
Speaker 1: factor model that captures a great portion of the variability

1100
01:04:37,560 --> 01:04:40,600
Speaker 1: of of a diverse, fied stock portfolio. So you can

1101
01:04:40,680 --> 01:04:47,000
Speaker 1: now design your equity portfolios to have tilts are overweightings

1102
01:04:47,040 --> 01:04:50,120
Speaker 1: to these various risks with the hope of getting a

1103
01:04:50,280 --> 01:04:54,000
Speaker 1: higher return than the market. Although you know, in the

1104
01:04:54,040 --> 01:04:57,200
Speaker 1: farmer French world, it's only because you're taking more risk, right.

1105
01:04:57,280 --> 01:05:01,840
Speaker 1: The translation is small caps are less covered, they have

1106
01:05:01,920 --> 01:05:04,440
Speaker 1: less Wall Street coverage, they're less understood, there are thousands

1107
01:05:04,520 --> 01:05:08,640
Speaker 1: of them, they have a tendency less liquidity. They tend

1108
01:05:08,680 --> 01:05:11,240
Speaker 1: to wink in and out of existence, and hence you're

1109
01:05:11,240 --> 01:05:15,240
Speaker 1: getting compensated a little more um for the additional risk.

1110
01:05:15,280 --> 01:05:18,480
Speaker 1: There's also less efficiency in that space, and that's why

1111
01:05:18,480 --> 01:05:20,920
Speaker 1: there's some I hate to use a dirty word, alpha

1112
01:05:21,360 --> 01:05:25,200
Speaker 1: to be captured. When we had our conversation with Rob

1113
01:05:25,240 --> 01:05:29,000
Speaker 1: are not of research affiliates, I really liked his definition

1114
01:05:29,040 --> 01:05:33,440
Speaker 1: of smart data, which was, hey, a market cap weighted

1115
01:05:33,480 --> 01:05:35,920
Speaker 1: index is the worst way to assemble one index. And

1116
01:05:35,920 --> 01:05:38,560
Speaker 1: you run into all these problems, especially at the end

1117
01:05:38,600 --> 01:05:41,040
Speaker 1: of the cycle when it's you know, think back to

1118
01:05:41,920 --> 01:05:46,080
Speaker 1: thousand and when it was the Cisco's and Yahoo's and

1119
01:05:46,080 --> 01:05:49,120
Speaker 1: and I can't even remember the other companies that were

1120
01:05:49,160 --> 01:05:53,040
Speaker 1: the prime drivers back then. And if instead of doing

1121
01:05:53,040 --> 01:05:55,880
Speaker 1: it market cap based, hey, you do it by revenue

1122
01:05:55,880 --> 01:06:00,040
Speaker 1: of profits or dividends or some other reasonable factor. That

1123
01:06:00,040 --> 01:06:04,680
Speaker 1: that's his explanation. You're you're you confused. He's well, I know,

1124
01:06:04,760 --> 01:06:06,880
Speaker 1: I know Rob very well. I speak with Rob all

1125
01:06:06,880 --> 01:06:09,160
Speaker 1: the time, and uh, I'm a big proponent of what

1126
01:06:09,240 --> 01:06:11,680
Speaker 1: he's doing. I follow all his research and uh, and

1127
01:06:11,760 --> 01:06:16,680
Speaker 1: they do a great job. That said, but however, I

1128
01:06:16,760 --> 01:06:19,240
Speaker 1: can tell you from the south because that's just a

1129
01:06:19,400 --> 01:06:23,600
Speaker 1: g that we just don't see in New Year anymore.

1130
01:06:23,720 --> 01:06:27,040
Speaker 1: That's a lost era. However, this idea that it is

1131
01:06:27,120 --> 01:06:31,280
Speaker 1: something wrong about a cap weighted index is just wrong.

1132
01:06:32,160 --> 01:06:36,600
Speaker 1: Cap Weighted index are a measurement of the value of

1133
01:06:36,720 --> 01:06:38,960
Speaker 1: the equity market, and that's what they were designed to do,

1134
01:06:39,840 --> 01:06:46,560
Speaker 1: and only only out of sheer poor performance by the

1135
01:06:46,640 --> 01:06:51,560
Speaker 1: act of managers have indexing using cap waiting become so

1136
01:06:51,800 --> 01:06:56,280
Speaker 1: popular in otherwids. You're trying, you're trying to say that

1137
01:06:56,400 --> 01:06:59,000
Speaker 1: this isn't a good way to invest, yet it outperforms

1138
01:06:59,200 --> 01:07:01,520
Speaker 1: most everything out It's like our form of government, right,

1139
01:07:01,920 --> 01:07:04,720
Speaker 1: but a terrible government. Democracy is terrible, except is the

1140
01:07:04,760 --> 01:07:09,440
Speaker 1: worst form of government except for all others. So that's

1141
01:07:09,480 --> 01:07:13,080
Speaker 1: really interesting. So you are on the same page as

1142
01:07:13,160 --> 01:07:16,960
Speaker 1: John Bogel when it comes to smart beta, but I

1143
01:07:17,120 --> 01:07:20,880
Speaker 1: think in two very specific ways. He's not a fan

1144
01:07:21,120 --> 01:07:24,560
Speaker 1: of smart beta, and I'm saying dimensional isn't a smart

1145
01:07:24,640 --> 01:07:27,280
Speaker 1: beta so much as a These are the factors that

1146
01:07:27,520 --> 01:07:29,120
Speaker 1: but it's all the same thing. Again. Smart better is

1147
01:07:29,160 --> 01:07:30,720
Speaker 1: just a marketing term, and Rob picked up on it,

1148
01:07:30,800 --> 01:07:32,040
Speaker 1: Rob or not. I mean, he picked up on the

1149
01:07:32,080 --> 01:07:34,040
Speaker 1: word smart, but he loved it because all of a sudden,

1150
01:07:34,120 --> 01:07:37,960
Speaker 1: it was a very easy way to talk about fundamental indexing,

1151
01:07:38,880 --> 01:07:41,880
Speaker 1: and it made it sound so chic. Fundamental indexing is

1152
01:07:41,920 --> 01:07:44,680
Speaker 1: a much better description the absolutely. In fact, I had

1153
01:07:44,720 --> 01:07:47,840
Speaker 1: this conversation with Rob or Not I said, fundamental indexing

1154
01:07:47,880 --> 01:07:51,360
Speaker 1: has legs because it actually describes what you're doing smart

1155
01:07:51,520 --> 01:07:53,760
Speaker 1: and it seems to work for people who want to

1156
01:07:54,560 --> 01:07:57,480
Speaker 1: have those have those uh you know tilts if you

1157
01:07:57,520 --> 01:08:01,920
Speaker 1: will towards value stocks Uh siffically, Um sure, I mean

1158
01:08:02,080 --> 01:08:04,360
Speaker 1: it's it's a methodology or a strategy that you can

1159
01:08:04,720 --> 01:08:06,480
Speaker 1: use to get those tilts of d f A S

1160
01:08:06,520 --> 01:08:08,840
Speaker 1: and other strategy you can use to get those tilts.

1161
01:08:08,880 --> 01:08:11,400
Speaker 1: So there's a lot of different strategies out there that

1162
01:08:11,520 --> 01:08:13,840
Speaker 1: you can use to get these various tilts. And it's

1163
01:08:13,880 --> 01:08:17,519
Speaker 1: a question of cost per unit of risk, you know,

1164
01:08:18,000 --> 01:08:20,439
Speaker 1: from our perspective as an advisor looking at all these

1165
01:08:20,479 --> 01:08:24,439
Speaker 1: different products out there, determining how much tilt is there,

1166
01:08:24,600 --> 01:08:28,839
Speaker 1: how much load is there to these various factors risk factors,

1167
01:08:29,080 --> 01:08:32,360
Speaker 1: and how much am I paying over beta to get

1168
01:08:32,520 --> 01:08:37,000
Speaker 1: those loads? And it's a cost per unit of risk

1169
01:08:37,360 --> 01:08:40,040
Speaker 1: to come up with what funds you should invest in

1170
01:08:40,120 --> 01:08:42,000
Speaker 1: if you decide to even do this Now it's a

1171
01:08:42,040 --> 01:08:44,240
Speaker 1: big question whether you should even do it. You have

1172
01:08:44,360 --> 01:08:47,000
Speaker 1: to really understand it to do it, because if you

1173
01:08:47,080 --> 01:08:49,719
Speaker 1: don't understand it, then the next time these things don't work.

1174
01:08:50,360 --> 01:08:53,080
Speaker 1: Like in the nine nineties when large cap growth was

1175
01:08:53,439 --> 01:08:56,479
Speaker 1: doing very well, value was just you know, getting plumber.

1176
01:08:56,640 --> 01:08:58,840
Speaker 1: You were cool hearing people say in the nineteen nine

1177
01:08:58,840 --> 01:09:01,479
Speaker 1: So I've been in the business lat warm Buffett is

1178
01:09:01,520 --> 01:09:04,800
Speaker 1: washed up. He's old school. He just hasn't adapted to

1179
01:09:04,880 --> 01:09:07,360
Speaker 1: the new paradigm. The new paradigm. You remember that exactly

1180
01:09:07,400 --> 01:09:09,040
Speaker 1: that that was the word, the new paradigm. And and

1181
01:09:09,120 --> 01:09:13,600
Speaker 1: here's the thing. If our clients or advisors don't understand

1182
01:09:14,520 --> 01:09:17,600
Speaker 1: what they're really doing with this smart beta stuff and

1183
01:09:17,640 --> 01:09:22,519
Speaker 1: doesn't really understand where the potential returns are supposed to

1184
01:09:22,560 --> 01:09:25,360
Speaker 1: be coming from, then how long are they going to

1185
01:09:25,479 --> 01:09:29,160
Speaker 1: stick with this strategy when it doesn't work for ten years?

1186
01:09:29,280 --> 01:09:31,000
Speaker 1: And there have been ten year periods of time where

1187
01:09:31,040 --> 01:09:34,960
Speaker 1: that it didn't work. So, and what's going to happen

1188
01:09:35,000 --> 01:09:37,400
Speaker 1: to your business if you hang your hat on this

1189
01:09:37,560 --> 01:09:40,880
Speaker 1: stuff and it doesn't work. What are your client's going

1190
01:09:40,920 --> 01:09:42,280
Speaker 1: to think of it? And how long are they gonna

1191
01:09:42,320 --> 01:09:44,080
Speaker 1: stick with you? When the guy down the road is

1192
01:09:44,120 --> 01:09:46,920
Speaker 1: just doing what the markets doing and you're not. And

1193
01:09:47,080 --> 01:09:51,320
Speaker 1: so there's a certain business risk to advisors to going

1194
01:09:51,400 --> 01:09:53,840
Speaker 1: down this road. And if you do, how much are

1195
01:09:53,880 --> 01:09:57,400
Speaker 1: you going to expose the portfolio to it? And uh,

1196
01:09:57,479 --> 01:09:59,599
Speaker 1: we we made the decision that no more than twenty

1197
01:09:59,680 --> 01:10:02,920
Speaker 1: five recent of the equity portfolio will be exposed to

1198
01:10:03,000 --> 01:10:05,200
Speaker 1: these various factors and the rest of it's just going

1199
01:10:05,240 --> 01:10:08,760
Speaker 1: to be beta, because, um, I don't know if it's

1200
01:10:08,760 --> 01:10:10,720
Speaker 1: gonna work. I know we worked in the last fifteen years.

1201
01:10:10,760 --> 01:10:14,439
Speaker 1: It was fabulous coming off the tech bubble um. But

1202
01:10:14,520 --> 01:10:17,800
Speaker 1: if you look back ten years prior to that and

1203
01:10:17,880 --> 01:10:21,360
Speaker 1: it's not so rosy. It looks really bad. So, um,

1204
01:10:22,080 --> 01:10:23,519
Speaker 1: I don't know if it's gonna work for ten years

1205
01:10:23,560 --> 01:10:25,880
Speaker 1: going forward. There's a thing called factor crowding. Have you

1206
01:10:25,960 --> 01:10:28,000
Speaker 1: heard that storm before? Okay, So you've got all this

1207
01:10:28,160 --> 01:10:31,519
Speaker 1: money coming into these smart beta strategies, a lot of

1208
01:10:31,600 --> 01:10:34,600
Speaker 1: it potentially for the wrong reason. They're they're chasing performance

1209
01:10:34,640 --> 01:10:37,000
Speaker 1: and chasing the hot dot, if you will. They're chasing

1210
01:10:37,200 --> 01:10:42,519
Speaker 1: smart beta rather than factor investing. That that crowded trade

1211
01:10:42,600 --> 01:10:46,160
Speaker 1: approach is why nothing works always all the time, and

1212
01:10:46,320 --> 01:10:49,160
Speaker 1: you tend to see suddenly valuable full out of favor,

1213
01:10:49,680 --> 01:10:52,880
Speaker 1: just as growth fell out of favor, and the core

1214
01:10:53,000 --> 01:10:55,840
Speaker 1: adherence to that will ride it out because they know

1215
01:10:56,560 --> 01:10:59,560
Speaker 1: eventually again we cross the desert and get to the

1216
01:10:59,600 --> 01:11:03,920
Speaker 1: promise land. But um, that that's just the nature of

1217
01:11:04,320 --> 01:11:07,320
Speaker 1: of human psychology and investing. And I don't know if

1218
01:11:07,360 --> 01:11:09,439
Speaker 1: we are at a point where so much money is

1219
01:11:09,479 --> 01:11:11,439
Speaker 1: going into these strategies that we're gonna have a very

1220
01:11:11,920 --> 01:11:16,639
Speaker 1: poor period of performance for a while or not any

1221
01:11:16,760 --> 01:11:19,200
Speaker 1: chance we're going to see that in indexing. And I

1222
01:11:20,000 --> 01:11:22,720
Speaker 1: have with people is hey, Van God is now three

1223
01:11:22,800 --> 01:11:26,880
Speaker 1: trillion dollars, but there's you know, sixty trillion dollars in

1224
01:11:27,200 --> 01:11:30,799
Speaker 1: in investable assets that are either equity or equity related.

1225
01:11:31,360 --> 01:11:35,760
Speaker 1: It's a tiny percentage of of take. Indexing is still

1226
01:11:35,920 --> 01:11:41,839
Speaker 1: the minority investment versus active management. Tuck with David Blitzer

1227
01:11:42,000 --> 01:11:47,639
Speaker 1: from another guest for you, if you're looking for somebody

1228
01:11:47,680 --> 01:11:49,920
Speaker 1: would be great to have on the show. I think, um,

1229
01:11:50,640 --> 01:11:54,200
Speaker 1: two trillion dollars are directly benchmark to the SMP five.

1230
01:11:55,640 --> 01:12:01,639
Speaker 1: Yet there's still volatility between SPI stocks. In other words,

1231
01:12:01,760 --> 01:12:07,519
Speaker 1: it really hasn't changed the market, you know a little bit, perhaps,

1232
01:12:08,400 --> 01:12:11,600
Speaker 1: But if you're buying a total market as opposed to

1233
01:12:11,640 --> 01:12:14,360
Speaker 1: the SMP. It's a wash there, there's no effect on

1234
01:12:14,479 --> 01:12:19,599
Speaker 1: you at all. So uh, I don't think that how

1235
01:12:21,120 --> 01:12:27,760
Speaker 1: how how much uh indexing is too much indexing of

1236
01:12:27,800 --> 01:12:30,240
Speaker 1: the market being index Maybe that becomes too much. I mean,

1237
01:12:30,720 --> 01:12:32,519
Speaker 1: I don't know what the answer is. And the thesis

1238
01:12:32,720 --> 01:12:37,120
Speaker 1: is that if indexing as indexing grows, it just creates

1239
01:12:37,200 --> 01:12:39,680
Speaker 1: opportunity for people who are not in death and that's

1240
01:12:39,720 --> 01:12:41,080
Speaker 1: that's not true. And if we haven't seen that at

1241
01:12:41,080 --> 01:12:44,120
Speaker 1: all last year large no, I mean when it managed

1242
01:12:44,200 --> 01:12:48,840
Speaker 1: like six some massive size, that then creates a little

1243
01:12:48,840 --> 01:12:51,719
Speaker 1: bit for the alpha chase. That's the theory. Only remember

1244
01:12:51,800 --> 01:12:54,040
Speaker 1: we just said that two trillion dollars is already benchmarked

1245
01:12:54,040 --> 01:12:56,880
Speaker 1: to the SMP fire Yet last year only fiftent of

1246
01:12:56,960 --> 01:13:00,439
Speaker 1: large capus managers i'll perform the SMP five. So where's

1247
01:13:00,479 --> 01:13:05,519
Speaker 1: the data? Not yet? The argument would be, well, as

1248
01:13:05,600 --> 01:13:10,320
Speaker 1: the as alpha is created by people identifying inefficiencies, and

1249
01:13:11,520 --> 01:13:14,600
Speaker 1: as more and more people leave active, that's how you

1250
01:13:14,760 --> 01:13:18,160
Speaker 1: generate uh. You know, the Ellis thesis is there's so

1251
01:13:18,280 --> 01:13:25,360
Speaker 1: many smart, hardworking, intelligent people chasing alpha they kind of

1252
01:13:25,439 --> 01:13:29,400
Speaker 1: cancel each other out. Once that number of alpha chasers drop. Look,

1253
01:13:29,439 --> 01:13:32,280
Speaker 1: we have ten thousand hedge funds. The Jim Chanos had said,

1254
01:13:32,720 --> 01:13:35,320
Speaker 1: you know, alpha is created by two hundred hedge funds

1255
01:13:35,360 --> 01:13:38,679
Speaker 1: out of ten thousand ps. It's the two hundred hedgephones

1256
01:13:38,840 --> 01:13:41,439
Speaker 1: that existed when there were only two hundred hedge funds.

1257
01:13:41,479 --> 01:13:43,840
Speaker 1: It's the same two hundred guys and every all these

1258
01:13:43,880 --> 01:13:47,640
Speaker 1: other alpha chasers are really just fee chasers UM. So

1259
01:13:47,960 --> 01:13:51,360
Speaker 1: maybe you need that same sort of situation to take

1260
01:13:51,400 --> 01:13:57,400
Speaker 1: place before the active funds start to create some value. There's,

1261
01:13:58,280 --> 01:14:02,400
Speaker 1: like Charlie Ella said, there's too many people so that

1262
01:14:02,520 --> 01:14:06,679
Speaker 1: there is almost no inefficiencies left to be mined. There's

1263
01:14:06,720 --> 01:14:09,240
Speaker 1: no alpha left to be gotten because they all cancel

1264
01:14:09,280 --> 01:14:12,120
Speaker 1: each other out, essentially. I'll add something to that too,

1265
01:14:12,560 --> 01:14:14,280
Speaker 1: which is that there not only are there a lot

1266
01:14:14,320 --> 01:14:16,840
Speaker 1: of alpha chasers now, but there's also less stocks on

1267
01:14:16,960 --> 01:14:21,040
Speaker 1: the stock exchange. So the number of stocks on the

1268
01:14:21,880 --> 01:14:25,160
Speaker 1: US exchanges that that trade with any amount of volume

1269
01:14:26,040 --> 01:14:29,760
Speaker 1: UM has been cut in half since so over the

1270
01:14:29,840 --> 01:14:32,360
Speaker 1: last twenty years used to be holding there just be

1271
01:14:32,400 --> 01:14:34,600
Speaker 1: over seven thousand stocks that trade on the U S

1272
01:14:34,640 --> 01:14:37,560
Speaker 1: stock exchanges that had enough volume to be in the

1273
01:14:37,960 --> 01:14:41,439
Speaker 1: CRISP indexes that is now down to something like thirty,

1274
01:14:42,560 --> 01:14:46,200
Speaker 1: So companies are no longer capitalizing themselves using private Equit

1275
01:14:46,360 --> 01:14:48,760
Speaker 1: is less companies trading on the US exchanges. So you've

1276
01:14:48,800 --> 01:14:52,759
Speaker 1: got you've got more advisors and more hedge funds chasing

1277
01:14:53,320 --> 01:14:56,639
Speaker 1: fewer opportunities just because there were just fewer companies too.

1278
01:14:56,880 --> 01:15:00,719
Speaker 1: It should be no surprise that alpha is based going away.

1279
01:15:02,560 --> 01:15:04,880
Speaker 1: For the most part, there's less and less people. At

1280
01:15:04,960 --> 01:15:08,160
Speaker 1: one point in time. It was in any given year,

1281
01:15:08,200 --> 01:15:11,040
Speaker 1: it was never the same people, and that was pre fee.

1282
01:15:11,479 --> 01:15:14,680
Speaker 1: But the numbers we used to hear was people were outperforming,

1283
01:15:14,720 --> 01:15:19,280
Speaker 1: and then it became I watched that sort of drip.

1284
01:15:19,439 --> 01:15:21,960
Speaker 1: Unless you're gonna tell me, I'm gonna tell you otherwise. Um,

1285
01:15:22,600 --> 01:15:25,120
Speaker 1: depending what part of the market you're looking at, there's

1286
01:15:25,200 --> 01:15:27,880
Speaker 1: always that part of the market that outperforms. So if

1287
01:15:28,000 --> 01:15:30,400
Speaker 1: large cap stocks out perform last year, you're going to

1288
01:15:30,520 --> 01:15:34,720
Speaker 1: find that few large cap active managers outperform, and if

1289
01:15:34,960 --> 01:15:39,200
Speaker 1: small cap underperformed, you're gonna find that more small cap

1290
01:15:39,400 --> 01:15:43,640
Speaker 1: active managers outperformed than large cap managers. On why is that?

1291
01:15:43,760 --> 01:15:48,000
Speaker 1: Because the the index is a pure and the managers

1292
01:15:48,040 --> 01:15:53,640
Speaker 1: are messy. So if small cap underperformed, in large cap outperformed,

1293
01:15:53,760 --> 01:15:56,000
Speaker 1: and the managers are messy and they kind of bleed

1294
01:15:56,120 --> 01:15:58,320
Speaker 1: off into mid cap and even some small cap even

1295
01:15:58,360 --> 01:16:01,080
Speaker 1: though they're still in the morning star arge cap box.

1296
01:16:01,520 --> 01:16:04,679
Speaker 1: They're gonna underperform because they're bleeding. And the index itself

1297
01:16:04,800 --> 01:16:09,080
Speaker 1: is pure classic style drift leads to right that that

1298
01:16:09,200 --> 01:16:11,120
Speaker 1: sort of this issue and it's not really style different

1299
01:16:11,200 --> 01:16:13,280
Speaker 1: just this is that they do more of a equal

1300
01:16:13,360 --> 01:16:15,920
Speaker 1: waiting approach rather than the market cap waiting. Okay, now

1301
01:16:15,960 --> 01:16:18,920
Speaker 1: you get the small cap side and small cap underperforms.

1302
01:16:19,040 --> 01:16:21,840
Speaker 1: But since the small cap managers are not old small cap,

1303
01:16:21,920 --> 01:16:24,240
Speaker 1: they're bleed off into some mid cap you know, maybe

1304
01:16:24,280 --> 01:16:27,120
Speaker 1: even a large cap or something, they're gonna pick that up,

1305
01:16:27,320 --> 01:16:30,680
Speaker 1: that that style difference up, and they're going to outperform.

1306
01:16:30,800 --> 01:16:35,000
Speaker 1: So in the asset class or the style that underperforms,

1307
01:16:35,120 --> 01:16:37,560
Speaker 1: you will find more managers that outperform, and in the

1308
01:16:37,600 --> 01:16:40,560
Speaker 1: style that outperformed, you're gonna find more managers that underperform.

1309
01:16:40,880 --> 01:16:44,120
Speaker 1: That makes sense. So it's it's I see exactly where

1310
01:16:44,120 --> 01:16:46,880
Speaker 1: you're you're going with that. Um let me bring this

1311
01:16:46,960 --> 01:16:49,280
Speaker 1: back to John Bogel because I wanted to ask you

1312
01:16:49,439 --> 01:16:51,360
Speaker 1: something I got a lot of push back to a

1313
01:16:51,479 --> 01:16:54,040
Speaker 1: column where I basically said, hey, let me tell you

1314
01:16:54,080 --> 01:16:57,960
Speaker 1: what John Bogel is wrong. And it wasn't that his

1315
01:16:58,080 --> 01:17:01,720
Speaker 1: philosophy of indexing was wrong or his low cost, low

1316
01:17:01,800 --> 01:17:05,160
Speaker 1: turnover approach was wrong. There are certain things that I

1317
01:17:05,360 --> 01:17:10,280
Speaker 1: disagree with him about, and I'm finding that you disagree

1318
01:17:10,360 --> 01:17:13,880
Speaker 1: with him as well. And oh, look at you. I'm gonna,

1319
01:17:13,920 --> 01:17:18,160
Speaker 1: I'm gonna, I'm gonna listen. I am not. I disagree

1320
01:17:18,200 --> 01:17:20,200
Speaker 1: with John on a few things. Okay, So let's let's

1321
01:17:20,240 --> 01:17:22,160
Speaker 1: start with the t f s. Right. He is not

1322
01:17:22,280 --> 01:17:25,840
Speaker 1: a fan of exchange traded funds because he says people

1323
01:17:25,920 --> 01:17:28,679
Speaker 1: tend to use them to overtrade with Sure, he says

1324
01:17:28,720 --> 01:17:32,080
Speaker 1: it's like throwing giving match to matches to an arsonist

1325
01:17:32,160 --> 01:17:38,080
Speaker 1: or something like that. Um something. Yeah. Yet if you

1326
01:17:38,160 --> 01:17:40,080
Speaker 1: get with him privately, he will say that there's a

1327
01:17:40,120 --> 01:17:42,240
Speaker 1: handful of E t F that actually makes sense. So

1328
01:17:42,400 --> 01:17:44,920
Speaker 1: you're outing him as not as anti e t F

1329
01:17:45,080 --> 01:17:49,840
Speaker 1: as he claims. Here's the here's the irony of the situation.

1330
01:17:50,040 --> 01:17:52,519
Speaker 1: E t F s have done more to promote John

1331
01:17:52,600 --> 01:17:56,040
Speaker 1: Bogel's philosophy than anything in the last twenty five years.

1332
01:17:56,880 --> 01:18:00,640
Speaker 1: So all of the robo advice, there's all of the

1333
01:18:00,680 --> 01:18:03,920
Speaker 1: other advisers out there that are doing et F mainly

1334
01:18:04,040 --> 01:18:07,360
Speaker 1: using beta type products to put together an asset allocation

1335
01:18:08,080 --> 01:18:11,200
Speaker 1: that is promoting John bogel strategy. So the irony is,

1336
01:18:11,240 --> 01:18:14,400
Speaker 1: even though John doesn't like exchange traded funds or is

1337
01:18:14,439 --> 01:18:20,000
Speaker 1: said publicly doesn't like them, that product or that structure

1338
01:18:20,120 --> 01:18:25,880
Speaker 1: has done more to promote his philosophy than anything in

1339
01:18:25,960 --> 01:18:29,120
Speaker 1: a very long time. So he should love ets for

1340
01:18:29,240 --> 01:18:33,559
Speaker 1: that reason. Let's talk a little bit about UM overseas investing.

1341
01:18:34,240 --> 01:18:38,639
Speaker 1: I'm assuming your asset allocation has not just US stocks

1342
01:18:38,800 --> 01:18:44,719
Speaker 1: but developed x US, emerging markets, etcetera. Bogel, not a fan,

1343
01:18:45,080 --> 01:18:48,479
Speaker 1: says the currency risk offsets any gains that you'll get

1344
01:18:48,560 --> 01:18:52,960
Speaker 1: from overseas investing. How how would you reconcile that with John's? Uh?

1345
01:18:53,280 --> 01:18:56,840
Speaker 1: Your approach? With John's approach, and by the way, full disclosure,

1346
01:18:56,960 --> 01:18:59,720
Speaker 1: I'm in your camp, I think. And that's before we

1347
01:18:59,760 --> 01:19:03,840
Speaker 1: start talking about currency hedgdtfs like you can buy UM

1348
01:19:03,960 --> 01:19:09,000
Speaker 1: from Wisdom Tree for Japan is pretty pure. Europe kind

1349
01:19:09,040 --> 01:19:11,920
Speaker 1: of misses half of it. But um, how do you

1350
01:19:12,000 --> 01:19:18,040
Speaker 1: reconcile that with Bogel? John's a brilliant guy. Here comes

1351
01:19:18,120 --> 01:19:23,360
Speaker 1: some texts. Guy. What I really mean to say is, however,

1352
01:19:24,880 --> 01:19:29,360
Speaker 1: I've never believed that in his approach to the fact

1353
01:19:29,439 --> 01:19:32,240
Speaker 1: that while US companies are doing at least in the

1354
01:19:32,360 --> 01:19:36,960
Speaker 1: SP their business overseas, therefore you getting overseas exposure. That's true,

1355
01:19:37,400 --> 01:19:39,800
Speaker 1: but overseas companies are doing business with the US as well.

1356
01:19:40,439 --> 01:19:45,000
Speaker 1: So I like the idea of getting more diversification in

1357
01:19:45,040 --> 01:19:47,200
Speaker 1: a portfolio. Remember we talked about the US equity market

1358
01:19:47,240 --> 01:19:49,960
Speaker 1: is shrinking, the number of names of shrinking, and getting

1359
01:19:50,360 --> 01:19:54,960
Speaker 1: more names in the portfolio via international where things are

1360
01:19:55,160 --> 01:19:58,120
Speaker 1: expanding and more names are coming on board, especially in

1361
01:19:58,120 --> 01:20:02,200
Speaker 1: the emerging markets. Is it helps offset the fact that

1362
01:20:02,240 --> 01:20:06,000
Speaker 1: the US equity market number of issuers are shrinking. But

1363
01:20:06,080 --> 01:20:08,080
Speaker 1: in addition to that, I like the idea of getting

1364
01:20:08,120 --> 01:20:11,160
Speaker 1: some currency diversification in my portfolio, even though you're getting

1365
01:20:11,200 --> 01:20:16,919
Speaker 1: it sort of with US equities because they're doing business overseas.

1366
01:20:16,960 --> 01:20:20,520
Speaker 1: Therefore the earnings of US companies are being affected by currencies.

1367
01:20:20,880 --> 01:20:24,599
Speaker 1: This is a direct currency play, and doing rebalancing between

1368
01:20:24,720 --> 01:20:27,160
Speaker 1: US and international gives you a little bit of a

1369
01:20:27,880 --> 01:20:36,320
Speaker 1: rebalancing benefit between the currencies. So mathematically, John's idea, hasn't it.

1370
01:20:36,880 --> 01:20:41,920
Speaker 1: It makes it sounds good. You know it's populist if

1371
01:20:42,200 --> 01:20:45,400
Speaker 1: you will, But you know, from a academic standpoint, you

1372
01:20:45,520 --> 01:20:50,920
Speaker 1: really want to have about international we're on the We're

1373
01:20:50,960 --> 01:20:55,599
Speaker 1: more or less on the same page of your total portfolio.

1374
01:20:57,600 --> 01:21:00,400
Speaker 1: So when we look around the world, I to say

1375
01:21:00,520 --> 01:21:05,280
Speaker 1: Europe is about of the global equity exposure, at least

1376
01:21:05,360 --> 01:21:08,840
Speaker 1: by cap you throw in that that's yours. I'm still

1377
01:21:08,880 --> 01:21:12,720
Speaker 1: working on the cappuccino um. By the way, for those

1378
01:21:12,760 --> 01:21:15,000
Speaker 1: of you who are listening, one of the fun things

1379
01:21:15,040 --> 01:21:17,040
Speaker 1: about every time we come into Bloomberg is you have

1380
01:21:17,160 --> 01:21:22,160
Speaker 1: a variety of unsweetened flavored waters, all more or less

1381
01:21:22,160 --> 01:21:25,439
Speaker 1: tests taste the same. That's cherry, the other one was lemon.

1382
01:21:25,560 --> 01:21:28,360
Speaker 1: It's always That's why I described this place as the

1383
01:21:28,479 --> 01:21:30,560
Speaker 1: East Coast Google, because you walk in and it's just

1384
01:21:31,760 --> 01:21:33,960
Speaker 1: it's kind of madness. People don't realize this, but you

1385
01:21:34,040 --> 01:21:37,040
Speaker 1: see this part of the building. When Mike Bloomberg pushes

1386
01:21:37,040 --> 01:21:42,080
Speaker 1: a button, it turns into a rocket and week. So

1387
01:21:42,320 --> 01:21:45,240
Speaker 1: in the last five minutes we have let I got

1388
01:21:45,280 --> 01:21:48,920
Speaker 1: a couple of questions that I don't wanna skip um

1389
01:21:49,120 --> 01:21:51,960
Speaker 1: and that I try and ask um. I try and

1390
01:21:52,080 --> 01:21:55,519
Speaker 1: ask everybody, UM, let's let's let's go to the two

1391
01:21:56,000 --> 01:21:58,720
Speaker 1: two big ones and you could wax for as long

1392
01:21:58,800 --> 01:22:04,080
Speaker 1: as you like on this. The first is, you've seen

1393
01:22:04,120 --> 01:22:06,800
Speaker 1: a lot of changes in the industry since you began.

1394
01:22:07,640 --> 01:22:10,720
Speaker 1: What do you think is the most significant and is

1395
01:22:10,800 --> 01:22:13,400
Speaker 1: this for the better or worse? Or maybe I can

1396
01:22:13,479 --> 01:22:16,880
Speaker 1: rephrase that, what what changes do you see have impacted

1397
01:22:16,960 --> 01:22:20,280
Speaker 1: the industry for the better? And what is still out

1398
01:22:20,320 --> 01:22:26,439
Speaker 1: there that what changes have impacted it for the worse? Tough.

1399
01:22:26,520 --> 01:22:31,840
Speaker 1: One for the better is certainly the technology. It's made

1400
01:22:31,880 --> 01:22:34,920
Speaker 1: it so much more efficient, and it really has tightened

1401
01:22:35,000 --> 01:22:43,000
Speaker 1: up our ability to analyze UM portfolios, analyzed products. UM.

1402
01:22:43,320 --> 01:22:45,640
Speaker 1: I think that the transparency also is better than it

1403
01:22:45,720 --> 01:22:49,640
Speaker 1: used to be as well. So uh, it's made me,

1404
01:22:50,120 --> 01:22:52,519
Speaker 1: made our clients, made our company, and made the whole

1405
01:22:52,560 --> 01:22:59,240
Speaker 1: industry more productive. So that's that's good. What's bad? Nothing's

1406
01:22:59,280 --> 01:23:02,880
Speaker 1: changed on Wall Street? Really, UM. You take a good

1407
01:23:02,960 --> 01:23:05,280
Speaker 1: product like indexing, and you've got to smear it all

1408
01:23:05,400 --> 01:23:08,920
Speaker 1: up by calling it something else. And you know, active

1409
01:23:09,000 --> 01:23:14,479
Speaker 1: management takes something as pure and beautiful, if you will,

1410
01:23:14,560 --> 01:23:17,320
Speaker 1: as you know, a straight market index fund, and and

1411
01:23:17,520 --> 01:23:21,519
Speaker 1: now everything is an index. Every active management strategy that

1412
01:23:21,600 --> 01:23:24,200
Speaker 1: you can think of is now an index and and

1413
01:23:24,800 --> 01:23:28,680
Speaker 1: you have to add these new indexes to your portfolio

1414
01:23:28,800 --> 01:23:31,200
Speaker 1: to give you diversification. It's kind of complete nonsense. So

1415
01:23:33,360 --> 01:23:35,800
Speaker 1: e T s, while they've been great to promote the

1416
01:23:35,960 --> 01:23:41,640
Speaker 1: idea of John Voglo's philosophy, they have also polluted the

1417
01:23:41,720 --> 01:23:44,600
Speaker 1: pure concept of what indexing is. And that might be

1418
01:23:44,720 --> 01:23:47,120
Speaker 1: why he's not a huge fan of e T s

1419
01:23:47,360 --> 01:23:51,080
Speaker 1: is one of the reasons. So last question before we

1420
01:23:51,160 --> 01:23:53,519
Speaker 1: have to send you on your way, And I asked

1421
01:23:53,560 --> 01:23:58,320
Speaker 1: this everybody you started in night here, it is what

1422
01:23:58,439 --> 01:24:01,040
Speaker 1: do you know today that you wish you knew when

1423
01:24:01,080 --> 01:24:16,840
Speaker 1: you started out? Wow, that's a long, thoughtful pause. Yeah.

1424
01:24:16,880 --> 01:24:18,320
Speaker 1: I always tell the people as I get older, I

1425
01:24:18,400 --> 01:24:22,639
Speaker 1: know less. So it's just a difficult questions. Your head

1426
01:24:22,680 --> 01:24:25,559
Speaker 1: is filled with so much stuff, it's harder to access things.

1427
01:24:25,680 --> 01:24:27,800
Speaker 1: That's what I'm finding. At a certain point your brain

1428
01:24:27,960 --> 01:24:30,400
Speaker 1: is just full and I need a backup drive. That

1429
01:24:30,600 --> 01:24:33,400
Speaker 1: that's what it feels like. But there's certainly has to

1430
01:24:33,479 --> 01:24:38,400
Speaker 1: be things that is part of your daily operations, your philosophy,

1431
01:24:38,439 --> 01:24:42,160
Speaker 1: your thought process that would have been enormously helpful when

1432
01:24:42,240 --> 01:24:44,840
Speaker 1: you began, you know, one of my clients, who is

1433
01:24:44,920 --> 01:24:51,840
Speaker 1: now deceased, said to me when I started my company, Rick,

1434
01:24:51,880 --> 01:24:54,439
Speaker 1: you're going to be enormously successful. I didn't. I didn't

1435
01:24:54,439 --> 01:24:56,280
Speaker 1: think this. I said, well, I'm just working out in

1436
01:24:56,320 --> 01:24:58,880
Speaker 1: my living room out of this old wooden desk I

1437
01:24:58,920 --> 01:25:00,599
Speaker 1: pulled out of the trash can. He goes, you're gonna

1438
01:25:00,600 --> 01:25:03,760
Speaker 1: be enormously successful. You have to make a decision. You're

1439
01:25:03,760 --> 01:25:05,280
Speaker 1: either gonna just going to continue to work out of

1440
01:25:05,320 --> 01:25:07,960
Speaker 1: your living room and have maybe sixty clients and you're

1441
01:25:07,960 --> 01:25:09,960
Speaker 1: gonna earn a good living with you and your wife

1442
01:25:10,000 --> 01:25:12,600
Speaker 1: and maybe one assistant, or you're gonna go out and

1443
01:25:12,640 --> 01:25:15,880
Speaker 1: you're gonna build a big, multibillion dollar money management company

1444
01:25:15,920 --> 01:25:19,000
Speaker 1: and you're gonna hire all kinds of people, and you're

1445
01:25:19,000 --> 01:25:21,400
Speaker 1: gonna have all kinds of hr issues, and you're going

1446
01:25:21,479 --> 01:25:23,559
Speaker 1: to have a business that you're gonna have to run.

1447
01:25:25,120 --> 01:25:28,120
Speaker 1: And he said, you're gonna have to make a decision

1448
01:25:28,400 --> 01:25:30,160
Speaker 1: at some point whether you just want to work out

1449
01:25:30,160 --> 01:25:31,800
Speaker 1: of your living room and just take on the twenty

1450
01:25:31,880 --> 01:25:34,680
Speaker 1: five clients and be happy, or whether you want to

1451
01:25:34,720 --> 01:25:39,960
Speaker 1: build this colossal thing. And I don't know if I guess,

1452
01:25:40,000 --> 01:25:43,320
Speaker 1: I what what? I what? I learned in the last

1453
01:25:43,320 --> 01:25:45,960
Speaker 1: twenty five years. Is he's absolutely right. I mean, there's

1454
01:25:45,960 --> 01:25:49,200
Speaker 1: nothing wrong with just working out of your living room

1455
01:25:49,240 --> 01:25:51,719
Speaker 1: with twenty five clients and helping those twenty five clients,

1456
01:25:52,680 --> 01:25:55,040
Speaker 1: And there's nothing wrong with going on and building a

1457
01:25:55,120 --> 01:25:59,400
Speaker 1: multibillion dollar business. But um, I always thought that it

1458
01:25:59,520 --> 01:26:01,720
Speaker 1: was the right thing to do back when I was

1459
01:26:02,200 --> 01:26:04,200
Speaker 1: forty years old, to go out and build a multibillion

1460
01:26:04,240 --> 01:26:06,759
Speaker 1: dollar business. But in fact, now that I'm fifty seven,

1461
01:26:07,240 --> 01:26:08,960
Speaker 1: I think that working on in my living room with

1462
01:26:09,000 --> 01:26:13,519
Speaker 1: twenty five clients seems it's not a bad idea. A

1463
01:26:13,640 --> 01:26:16,640
Speaker 1: lot less headaches than running a big bus. Well, Rick,

1464
01:26:16,720 --> 01:26:19,000
Speaker 1: thank you so much for being so generous with your time.

1465
01:26:19,600 --> 01:26:23,080
Speaker 1: You've been listening to my conversation with Rick Ferry, founder,

1466
01:26:23,240 --> 01:26:27,400
Speaker 1: chief investment officer of Portfolio Solutions. Be sure and check

1467
01:26:27,479 --> 01:26:30,560
Speaker 1: out our other podcasts. Take a look at this on

1468
01:26:30,720 --> 01:26:33,400
Speaker 1: Apple iTunes. Look an inch up or down you'll see

1469
01:26:33,439 --> 01:26:37,440
Speaker 1: the other forty podcasts. Check out my daily column on Bloomberg,

1470
01:26:37,560 --> 01:26:41,120
Speaker 1: view my regular blog at Dholtz dot com. People want

1471
01:26:41,120 --> 01:26:44,720
Speaker 1: to find you um Portfolio Solutions dot com and what

1472
01:26:44,880 --> 01:26:49,240
Speaker 1: is your handle on Twitter? Uh Rick Underscore Ferry is

1473
01:26:49,280 --> 01:26:51,599
Speaker 1: my quitter handle, and I also have a blog website

1474
01:26:51,640 --> 01:26:54,280
Speaker 1: at Rick Ferry dot com Rick Ferry dot com. You've

1475
01:26:54,280 --> 01:26:57,400
Speaker 1: been listening to Masters in Business on Bloomberg Radio.