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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Have you taken full advantage of automating your investments, You

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Speaker 2: can improve your returns, reduce emotional decision making, and generally

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Speaker 2: end up with better results simply by putting your investing

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Speaker 2: on autopilot. To help us figure out how, let's bring

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Speaker 2: in Jeffrey Pattak. He's managing director at morning Star. Previously

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Speaker 2: he was the chief rating officer there. He's been with

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Speaker 2: morning Star since two thousand and two, and his research

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Speaker 2: has shown features like auto enrollment or contribution increases, default investments,

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Speaker 2: and target date funds enable investors to bypass common pitfalls

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Speaker 2: of market timing and emotional trading. So, Jeffrey, let's define

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Speaker 2: the automation features you're discussing in your research, things like

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Speaker 2: steady paycheck deductions and regularly balancing. How can an investor

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Speaker 2: set that up?

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Speaker 3: Sure, so you know, it's relatively straightforward. If you're working

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Speaker 3: with a brokerage platform to enable those types of features.

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Speaker 3: In some other context, like a retirement plan, it might

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Speaker 3: be standard plan features. In fact, you might be defaulted

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Speaker 3: into them, and so away you go. And so it's

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Speaker 3: well within our reaches investors either to switch these features

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Speaker 3: on at our own election or to be opted into

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Speaker 3: them as we would be in a retirement plan.

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Speaker 2: So explain to me the difference between auto enrollment and

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Speaker 2: auto escalation for sure.

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Speaker 3: Yeah, So auto enrollment the notion is your auto enrolled

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Speaker 3: you become a participant in the retirement plan. Auto escalation

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Speaker 3: is you're in the plan and then your contribution rate

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Speaker 3: is steadily increased at a predetermined level. And so you know,

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Speaker 3: one is about being in participating, the second is about

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Speaker 3: the extent to which you are participating. Both valuable.

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Speaker 2: So your research has found automatic investing reduces bad investor outcomes,

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Speaker 2: reduces behavioral errors, promotes consistency. Sounds a little too good

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Speaker 2: to be true. What sort of data have you found

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Speaker 2: that supports automation leading to improved investor returns?

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Speaker 3: Yeah, real good question. So we it's a bit inferential

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Speaker 3: because we're not a brokerage platform and so we don't

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Speaker 3: have sort of the tick data. Nevertheless, we can look

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Speaker 3: at the types of funds and where they tend to

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Speaker 3: be used and whether automation is common in those settings,

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Speaker 3: you know, and draw some conclusions. And one of the

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Speaker 3: more striking findings from our research this is the mind.

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Speaker 3: The gap study that we conduct is that investors in

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Speaker 3: allocation funds, the most popular version of which are target

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Speaker 3: date funds, they do the best job of capturing their

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Speaker 3: funds total returns. That is, they experience the fewest frictions

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Speaker 3: related to the timing and magnitude of their transactions over time.

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Speaker 3: And what do we know about target date funds. We

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Speaker 3: know that people are commonly defaulted into them, that they

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Speaker 3: regularly invest in them just as part of their regular

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Speaker 3: payroll deduction that takes place, and so they're kind of

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Speaker 3: the signal example of automation. Then take some other examples

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Speaker 3: of fun types that you wouldn't find in a retirement plan,

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Speaker 3: Like maybe the quintessential example would be something like a

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Speaker 3: sector fund or a thematic fund. You're typically not going

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Speaker 3: to find those in a plan lineup. We found those

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Speaker 3: that have some of the widest gaps, and why is

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Speaker 3: that they're not used within that gilded cage of a

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Speaker 3: retirement plan. Furthermore, they might be more subject to discretionary

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Speaker 3: ad hoc off site go trading decisions, where there might

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Speaker 3: be a greater propensity to trade an emotion than would

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Speaker 3: be the case with something like a target date fund.

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Speaker 2: And it sounds like the key advantage of automation is

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Speaker 2: it tends to reduce unnecessary trading and it also reduces

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Speaker 2: the emotional responses to just ordinary market volatility.

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Speaker 3: It does, yeah, it, you know it. Basically, it's the

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Speaker 3: best kind of inertia. I would say, we know that,

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Speaker 3: you know, market bobbles can be unnerving to investors, and

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Speaker 3: left to their own devices, they might make a change

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Speaker 3: of their allocation. They could elect to remove capital from

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Speaker 3: the markets, and we know how harmful that can be

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Speaker 3: to their long term compounding power. Whereas in these settings,

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Speaker 3: because they just continue to mechanically add to their investments,

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Speaker 3: and those investments in turn, you know, take care of

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Speaker 3: some of the mundane tasks like rebalancing and adjusting the

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Speaker 3: asset mix, they just get on with it. And I

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Speaker 3: think that worked to their benefit over the long term,

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Speaker 3: and certainly our research seems to bear that out.

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Speaker 2: So we talked about the investor gap between their actual

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Speaker 2: performance and their funds performance. When we're looking at automated

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Speaker 2: target date funds or automated allocation funds, how measurable is

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Speaker 2: the gap between those and people who kind of self

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Speaker 2: manage that allocation.

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Speaker 3: Yeah, So with allocation funds, the largest subset of which

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Speaker 3: are target date funds, we found almost no gap. It

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Speaker 3: was basically point one percentage points per year. Then when

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Speaker 3: you focus on every other type of fund, we found

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Speaker 3: that the gap was around one point two percentage points

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Speaker 3: per year. Now, yes, among those other types of funds,

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Speaker 3: it is quite possible that some are using them in

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Speaker 3: an automated fashion. Maybe they have some sort of investment

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Speaker 3: plan that they've set up, or they've otherwise mechanized the process.

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Speaker 3: But I think it stands the reason that for a

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Speaker 3: fairly large subset of that capital, it's being invested in

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Speaker 3: a more discretionary fashion. You can see the difference between

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Speaker 3: the two of those. It amounts to around one point

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Speaker 3: one percentage points annually of return that's being foregone effectively.

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Speaker 2: So what are the automation features that have consistently good

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Speaker 2: benefits for investors?

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Speaker 3: So I would say that probably the biggie is auto enrollment.

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Speaker 3: We don't have as much data that we collect, but

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Speaker 3: there are others like Vanger puts out a terrific annual

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Speaker 3: study called How America Saves. In the most recent edition,

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Speaker 3: they reported a sixty one percent of the plans they

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Speaker 3: service as clients at auto enrollment, and two thirds of

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Speaker 3: those plans that offered auto enrollment also offered auto escalation.

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Speaker 3: And then of those that auto and roll, ninety eight

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Speaker 3: percent of them are defaulted into a target date and

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Speaker 3: striking me, the average participant holds only two funds, So

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Speaker 3: it gives a sense of the reach of automation in

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Speaker 3: our retirement system. If I had to choose between the

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Speaker 3: two of those, auto enrollment versus auto escalation, it's a

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Speaker 3: bit of a false binary, but all the same, I

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Speaker 3: would say auto enrollment is far far more important. Why

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Speaker 3: is that. It's because we want people participating so that

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Speaker 3: they can compound their wealth. Even if they were to

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Speaker 3: experience a return gap, we would rather that they get some,

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Speaker 3: if not all, of their fund's returns and auto enrollment

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Speaker 3: and cease to that.

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Speaker 2: Yeah, before the default settings, there were stories were rife

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Speaker 2: about people working at places for years and the money

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Speaker 2: just piled up in cash and did nothing. It's kind

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Speaker 2: of it's kind of crazy. So, but that that leads

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Speaker 2: to an obvious question. How widespread has the adoption of

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Speaker 2: animation been in the various retirement ecosystems that are out there.

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Speaker 3: It's become very widespread, as you know, as I might

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Speaker 3: have mentioned before, you're talking about two thirds of plans

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Speaker 3: that offer auto enrollment and and then also a very

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Speaker 3: significant number auto escalation as well. And you know, I

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Speaker 3: think that one other thing from the Vanguard study that

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Speaker 3: I've mentioned before that I found quite telling. They found

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Speaker 3: that one percent of target date fund investors transacted last

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Speaker 3: year that'd be twenty twenty four, compared to eleven percent

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Speaker 3: of investors and other types of funds. And so it

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Speaker 3: just gives a sense not only the breadth of automation

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Speaker 3: that's taking place here, but also some of the benefits

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Speaker 3: it confers and tamping down transacting that we see within

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Speaker 3: these plans.

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Speaker 2: Any particular demographic groups stand to benefit more or less

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Speaker 2: from automating these strategies.

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Speaker 3: That is a great question. Was it was one of

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Speaker 3: the most eye opening findings from that study. They found

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Speaker 3: that auto enrollment disproportionately benefited younger and lower earning participants.

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Speaker 3: So you were really talking about a quantum among those cohorts,

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Speaker 3: and I think that's critical because we want to get

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Speaker 3: those folks into plans. You know, in some senses, you

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Speaker 3: were talking about socioeconomic demographics that may be more vulnerable

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Speaker 3: that otherwise wouldn't have the opportunity to compound wealth, and

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Speaker 3: the way we'd like to see, auto enrollment has helped

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Speaker 3: to ensure that those gaps get closed. And so I

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Speaker 3: think that that's a really really telling and encouraging finding

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Speaker 3: from their study.

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Speaker 2: What about non qualified plans, portfolios outside of for one

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Speaker 2: ks or eras, what can we do to automate those

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Speaker 2: sort of holdings?

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Speaker 3: Yeah, so I think to the extent, so one, I

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Speaker 3: think that one thing that you can do is you

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Speaker 3: can set up sort of an auto investment plan, very

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Speaker 3: similar to the kind of setup that you would find

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Speaker 3: in a retirement plan. Put that on autopilot, and then

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Speaker 3: I would say to the extent that you can automate

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Speaker 3: your investments. I may have mentioned in other settings that

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Speaker 3: it's important to have a plan first of all, But

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Speaker 3: then once you've got that plan, you know, maybe it's

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Speaker 3: an allocation fund, a target day fund, or a target

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Speaker 3: risk fund where you're fixing the percentage of equity, fixed income,

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Speaker 3: and other asset classes, and that obviates the need for

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Speaker 3: you to go in and make adjustments on your own. Automate, automate, automate.

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Speaker 3: I think those are the key things to ensure that

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Speaker 3: we capture as much of our funds, total returns, and

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Speaker 3: compound as we can.

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Speaker 2: So there are a lot of new digital investing tools

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Speaker 2: and AI is starting to have an impact on various strategies.

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Speaker 2: What do you think is going to have a powerful

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Speaker 2: impact on both automation and future investor outcomes?

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Speaker 3: Yep, And so I think, you know, I'm an avid

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Speaker 3: user of AI. I know how beneficial it's been in

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Speaker 3: my own work, making me more productive. I think that

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Speaker 3: it confer the same sorts of benefits to investors, you know,

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Speaker 3: maybe helping them to formulate a plan, maybe figuring out

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Speaker 3: the optimal way for them to allocate their assets, you know,

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Speaker 3: and otherwise sort of keeping them to you know, sort

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Speaker 3: of the goals that they've set consistent with their risk parameters.

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Speaker 3: You know. The other side of it is it can

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Speaker 3: engender over confidence. You know, maybe we feel like we've

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Speaker 3: got the capacity to make trading decisions that maybe really

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Speaker 3: are outside of our circle of competence, and so we

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Speaker 3: just want to make sure, like so many of these

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Speaker 3: other tools and resources we have available to us, we

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Speaker 3: use it in a way that advances our goals and

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Speaker 3: we don't get carried away in an overconfident way, you know,

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Speaker 3: sort of an impulse that we're you know, maybe all

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Speaker 3: you know, likely to succumb to from time to time.

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Speaker 2: And for either an individual investor or perhaps a financial advisor,

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Speaker 2: if they're seeking to automate investments, what are the most

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Speaker 2: important factors they should be thinking about when they're either

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Speaker 2: selecting a platform or a tool to use to help automate.

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Speaker 3: That's a great question. So, you know, one of the

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Speaker 3: corollaries to automating, at least in a retirement plan context,

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Speaker 3: is it is a little bit of an all in

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Speaker 3: one decision. So typically if the target DAED fund is

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Speaker 3: going to be offered by a single provider, and so

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Speaker 3: what that means is that we want to make sure that,

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Speaker 3: you know, we're feeling very confident about that organization's culture,

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Speaker 3: about its staying power, about its overall investor centricity. Those

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Speaker 3: aren't necessarily easy things to tease out, but I think

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Speaker 3: a little bit of research can tell you whether or

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Speaker 3: not this is a firm that is a certain kind

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Speaker 3: of pedigree, a certain kind of reputation. Look at the

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Speaker 3: fees that at levees. Fees speak volumes about organizational fibers.

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Speaker 2: So to speak.

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Speaker 3: And I think if you can go through and satisfy

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Speaker 3: yourself that this is an organization that has my best

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Speaker 3: interest at heart, that is levying a fair fee, and

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Speaker 3: is likely to be around for the years to come

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Speaker 3: over which I'm looking to compound. Those are all good

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Speaker 3: facts and I think that they portend well for you

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Speaker 3: to succeed in capturing your fund's return and compound some

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Speaker 3: real wealth over time.

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Speaker 2: So to wrap up, there are lots of automated tools

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Speaker 2: that you could use, platforms, specific allocation funds, other things

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Speaker 2: you can do to improve your returns, reduce emotional decision making,

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Speaker 2: and generally end up with better performance simply by putting

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Speaker 2: your investments on autopilot. Barry whittlets, you're listening to Bloombergs

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Speaker 2: at the money.

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Speaker 1: This is a desist.

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Speaker 2: She said, Oh baby, do it man,