Speaker 1: M hm. This is Mesters in Business with very Results
Speaker 1: on Bluebird Radio this weekend. On the podcast, I have
Speaker 1: a special guest. His name is Steve Fradkin, and he
Speaker 1: runs one of the larger pools of assets that you
Speaker 1: probably had no idea about. He is the president of
Speaker 1: Northern Trust Wealth Management. They run over three hundred fifty
Speaker 1: billion dollars in client assets. They serve some of the
Speaker 1: wealthiest families in America. One in five wealthy families actually
Speaker 1: has assets with Northern Trust. They have something like of
Speaker 1: the Forbes four hundred. Just a very interesting perspective on
Speaker 1: how to manage through periods of uncertainty, changing tax laws,
Speaker 1: rising inflation, all sorts of really interesting perspectives. It's less
Speaker 1: about predicting the future, Steve tells us, than thinking in
Speaker 1: terms of planning and probabilities. And I think that was
Speaker 1: really interesting advice. He he is about as knowledgeable as
Speaker 1: anybody is going to get in the um, both wealth
Speaker 1: management business and ultra high now worth management business. I
Speaker 1: found the conversation really intriguing and I think you will
Speaker 1: also so, with no further ado, my interview of Steve
Speaker 1: Fratkin of Northern Trust, This is Mesters in business with
Speaker 1: very results. On Bloomberg Radio. My special guest this week
Speaker 1: is Steve Fradkin. He is the president of Northern Trust
Speaker 1: Wealth Management, running about three hundred and fifty five billion
Speaker 1: dollars in assets. They serve about one in five of
Speaker 1: the wealthiest families in America. Previously, Steve ran the corporate
Speaker 1: and institutional services. He was head of International business for
Speaker 1: Northern Trust as well as the firm's chief financial officer.
Speaker 1: Steve Fratkin, Welcome to Bloomberg. Thank you very great to
Speaker 1: be here. So you spent your entire career at Northern Trust,
Speaker 1: having joined in in how do you make the leap
Speaker 1: from really CFO to a president, which to me, I
Speaker 1: think of president, I think of someone who's running um
Speaker 1: like a CEO running a division. What were the challenges
Speaker 1: of that transition. Well, it's a great question, and you know,
Speaker 1: careers are mysterious experiences. The bigger mystery, really, Barry, was
Speaker 1: the move to CFO. So I joined Northern Trust as
Speaker 1: a youngster. I didn't know what I wanted to do,
Speaker 1: worked my way through a variety of entry level jobs,
Speaker 1: ultimately uh culminating at that point in running are growing
Speaker 1: international business and UM loving it, traveling the world, clients
Speaker 1: in Asia, Europe, the Middle East, Africa, South America. You know,
Speaker 1: UM really fun and interesting stuff. And was asked at
Speaker 1: that point to service CFO, which was the unnatural job.
Speaker 1: UM was not a controller, was not a treasurer UM,
Speaker 1: and so serving as CFO of a large public company
Speaker 1: was shall we say traumatic when they asked. But UM
Speaker 1: did that for six years, including through the global financial crisis,
Speaker 1: and it was at that point I went back to
Speaker 1: doing what I normally do, which is running businesses. I
Speaker 1: ran our corporate institutional services business and then after that
Speaker 1: wealth management. So so it wasn't so much going from
Speaker 1: CFO to wealth management as it was ending up as CFO,
Speaker 1: if you will, by accidents from my point of view,
Speaker 1: really interesting. So so you guys had a pretty good
Speaker 1: year in How did that carry over to this year?
Speaker 1: Is it just more of the same. What were the
Speaker 1: big success stories relative to all those challenges we saw
Speaker 1: last year? Well, you know, it's it's really an interesting
Speaker 1: phenomenon and it shows you the in some ways the
Speaker 1: unpredictability of what can happen. You know, if you think
Speaker 1: about COVID nineteen and its impact in and if I
Speaker 1: said to you, you know, look, here's what's going to happen.
Speaker 1: We're going to go as a society, not just Northern
Speaker 1: Trust from you know, we all come in and we
Speaker 1: work and so forth and so on, and one day
Speaker 1: on about the same day, worldwide, everyone's going to start
Speaker 1: working from home. Facetiously, what what do you think is
Speaker 1: going to happen to the markets? I think most people
Speaker 1: would have said, well, first of all, it could never
Speaker 1: happen that way. It's not going to be true that
Speaker 1: people in Sydney and London and New York and um
Speaker 1: Sal Paulo are all going to be, you know, as
Speaker 1: much as one can working from home. That's just impossible.
Speaker 1: And second of all, if that were to have up
Speaker 1: in on a sustained basis, well, gee, you know, the
Speaker 1: economy is going to creator because no baseball games, no concerts,
Speaker 1: no you know, less use of restaurants, etcetera, etcetera. I
Speaker 1: don't think people would have said, you know, the markets
Speaker 1: would do as well as they've done. So, um uh, look,
Speaker 1: it's been an incredible journey. Um Northern Trust has navigated
Speaker 1: exceptionally well through it last year and continues to perform
Speaker 1: well today. And there are a variety of factors in that,
Speaker 1: but each and every day has been a navigation because
Speaker 1: we're still not out of the pandemic, and we're still
Speaker 1: operating in a hybrid mode. And UM, you know, balancing
Speaker 1: safety of our partners, are our employees, and the needs
Speaker 1: of our clients is a a daily uh A juggling
Speaker 1: act that we're still working through, and I suspect we'll
Speaker 1: be working through for a while longer. Here we're gonna
Speaker 1: talk a little more about how you guys managed doing
Speaker 1: the pandemic UH in a bit, but I want to
Speaker 1: stay with um the success of Northern Trust. You're one
Speaker 1: of the biggest ultra high net worth investment managers, but
Speaker 1: relative to your size, you guys kind of fly under
Speaker 1: the radar. Why is that, well, you know, it's it's
Speaker 1: an interesting question. Very the uh so in terms of size,
Speaker 1: we're in the top twenty banks in the country as
Speaker 1: measured by our balance sheet, but really the the better
Speaker 1: marker of our size is the assets that we manage
Speaker 1: and the assets that we administer for clients. And we're
Speaker 1: a very uh quiet company. We don't do lots of
Speaker 1: big acquisitions. We do the same thing today that we've
Speaker 1: been doing since eighteen eighty nine, serving the same clientele,
Speaker 1: and so we're a very focused institution. A little over
Speaker 1: half our profits come from the UH provision of services
Speaker 1: to wealthy families in America and around the world, and
Speaker 1: the other half come from essentially providing the same services
Speaker 1: but to large global institutional investors seven wealth funds, pension
Speaker 1: funds and the like, and so um we're a quiet
Speaker 1: company that has been UM extraordinarily successful and consistently so
Speaker 1: for UH many many years. So we're proud of what
Speaker 1: we've got. But we UM we we we fly under
Speaker 1: the radar scream screen intentionally to just keep a low
Speaker 1: profile and stay focused on our clients. And that would
Speaker 1: make sense given the nature of your clients, who are
Speaker 1: less Instagram stars and more quiet wealth. Is that a
Speaker 1: Is that a fair way to describe it? Yeah, Today
Speaker 1: we serve a little overt of the Forbes four hundred
Speaker 1: wealthiest Americans and obviously many other affluent families and interestingly
Speaker 1: very you know, sometimes people think of Northern Trust and
Speaker 1: its wealth management business as UH focusing on or serving multigenerational,
Speaker 1: well healed, you know, families, and that's true. We certainly
Speaker 1: serve many of those, but there are many h entrepreneurs
Speaker 1: uh in Silicon Valley, in New York, in Miami, in Dallas,
Speaker 1: in um all over the country and all over the world.
Speaker 1: And if there's one thing I've learned in being here,
Speaker 1: it's that wealth is created in a lot of mysterious ways.
Speaker 1: And so your your reference to Instagram and so forth.
Speaker 1: I would say our clients are definitely low profile, but
Speaker 1: where they create their wealth emanates from every segment of
Speaker 1: the economy. It's really a fascinating part of the privilege
Speaker 1: of being in this this kind of role. Let's stay
Speaker 1: with that, because I was just involved in a conversation
Speaker 1: recently about the amount of wealth that has been created
Speaker 1: over the past couple of decades. Wherever you look, especially
Speaker 1: in the United States, it seems that people are coming
Speaker 1: up with new ideas, new technologies, new just even business
Speaker 1: processes that if you go back to the nineties, I
Speaker 1: don't think people could have imagined the sort of things
Speaker 1: that are generating the massive amounts of wealth that we've seen.
Speaker 1: And I'm not even talking about n f T s
Speaker 1: or things like that. I mean businesses with clients that
Speaker 1: are just doing tens of millions of dollars of revenue
Speaker 1: a year. M hmm, well, I think the the fascinating
Speaker 1: thing that I think we see is that UM wealth
Speaker 1: can be created in a lot of different ways. And
Speaker 1: I think you're right that as the world has sped up,
Speaker 1: the wealth creation has be up to you know, to
Speaker 1: caricature it. It used to be you would start a
Speaker 1: business in your garage in Louisiana, and over time you would,
Speaker 1: you know, build a vacuum cleaner or whatever it happened
Speaker 1: to be, and you would start selling it from a store,
Speaker 1: and you know it would um. You know, you'd have
Speaker 1: a second store, and and the next thing, you know,
Speaker 1: you have a big business that you never envisioned having,
Speaker 1: and you could sell that company and create a tremendous
Speaker 1: amount of wealth. Today that phenomenon still absolutely happens, but
Speaker 1: it also happens with the power of the Internet that
Speaker 1: the pace at which UM companies in some industries can
Speaker 1: grow and accelerate has has really multiplied. So wealth creation
Speaker 1: in some instances is still a slow, laborious, step by
Speaker 1: step process, but in others, I don't want to say
Speaker 1: it's overnight, but it happens a lot faster. UM with
Speaker 1: digitalization and the pace at which the world moves today.
Speaker 1: So we see both phenomena and that's part of the
Speaker 1: fun and excitement of UM the American economy. And this
Speaker 1: certainly happens elsewhere in the world as well. Quite interesting.
Speaker 1: So let's talk about how you guys had to operate
Speaker 1: during the lockdown. You mentioned this earlier. What were you
Speaker 1: doing when you know it became clear the country was
Speaker 1: shutting down in March. It's a great question. Very well,
Speaker 1: we started, like many other institutions, with the safety of
Speaker 1: our clients and the safety of our employees, and it
Speaker 1: all happened relatively quickly in terms of UH shutting down
Speaker 1: offices to the bare minimum, getting people home and making
Speaker 1: sure that they could function effectively from home. And if
Speaker 1: you go back to and and by the way, we
Speaker 1: have twenty employees worldwide, So we were doing the same
Speaker 1: thing in Manila and the Philippines, as we were doing
Speaker 1: in London, as we were doing in Dublin, as we
Speaker 1: were doing in Houston, as we were doing in Las Vegas. UM.
Speaker 1: And so I want you to think about the operational
Speaker 1: and logistical and infrastructural needs of pretty much all at
Speaker 1: the same time, trying to get people out of the office,
Speaker 1: enable them to function effectively from home, still be able
Speaker 1: to serve our clients, uh and all the family and
Speaker 1: other issues that people were wrestling with. So I would
Speaker 1: say the beginning of the pandemic was um uh stressful.
Speaker 1: You know, we were working seven trying to make sure
Speaker 1: that technology worked and uh people could still get cash
Speaker 1: and all those things. It has gotten to a much
Speaker 1: better you know, I'll call it normalcy in a strange
Speaker 1: sort of way. But the early days of the pandemic
Speaker 1: we're challenging. We navigated through well, but um it's certainly
Speaker 1: not something that anyone had anticipated. Really quite interesting. So
Speaker 1: I'm assuming you guys have your offices more or less reopens.
Speaker 1: What are you gonna do going forward? Is it going
Speaker 1: to be a hybrid model or is everyone back in
Speaker 1: the office or are people working from home? Um Our
Speaker 1: offices are open, uh and and really two different extents
Speaker 1: in different geographies, you know, which makes sense. The the
Speaker 1: UH infection rates, hospitalization rates, all the metrics that we
Speaker 1: track are very different in different cities and countries around
Speaker 1: the globe. Um uh. You know, in terms of where
Speaker 1: it goes in the future, I think Uh, the future
Speaker 1: of work and how people work is forever change. You know,
Speaker 1: we always had a pretty flexible work force and the
Speaker 1: ability to work from home, and you know, people people's
Speaker 1: lives and personal lives and business lives had crossed over
Speaker 1: long ago that as an employer, we had to be flexible. Uh.
Speaker 1: I think that's going to be even more so. Uh
Speaker 1: coming out of the pandemic. People have gotten used to it,
Speaker 1: the technology has gotten better, client expectations are different, and
Speaker 1: so UM, I think we will be in a hybrid
Speaker 1: you know, what we what we think of today as
Speaker 1: a hybrid model will be a normal model tomorrow. And
Speaker 1: that doesn't mean everyone will work from home, but it
Speaker 1: certainly means a lot more flexibility. UM. For employees too
Speaker 1: inevitably juggle the conflicting needs of family and work life,
Speaker 1: and we're well prepared for that. So as investors, COVID
Speaker 1: was pretty much an exogenous shock. It came out of
Speaker 1: left fields. How did the whole COVID crash and recovery
Speaker 1: comparative past crises, whether it's nine eleven or the dot
Speaker 1: com implosion or the Great Financial Crisis? How? How do
Speaker 1: you how do you wrap your head around this one?
Speaker 1: Compared to ones from from recent past. You know, it's
Speaker 1: it's a great question, and I think, Barry my perspective
Speaker 1: would be that we often call events like the COVID
Speaker 1: nineteen pandemic tail events or once in a lifetime events,
Speaker 1: and in some ways they are and in some ways
Speaker 1: they aren't. If if I think about it through the
Speaker 1: prism of my career experience, we had the crash of
Speaker 1: October seven. We've seen the collapses of things like m
Speaker 1: Enron and World come. We've seen September eleventh, We've seen
Speaker 1: Bear Stearns go down, we had the global financial crisis
Speaker 1: of two thousand and eight UM, and of course the pandemic,
Speaker 1: and each time we call it a tale event. But
Speaker 1: at some point we have to admit that there are
Speaker 1: a lot of tales. So I want to take you
Speaker 1: back just to compare and contract um COVID nineteen with
Speaker 1: two thousand and eight. I'll give you this example. I
Speaker 1: want you to imagine it's the end of two thousand
Speaker 1: and seven and you're presenting the two thousand and eight
Speaker 1: plan for Northern Trust to our board, and you go
Speaker 1: to the board and you say, look, we expect our
Speaker 1: revenues to do this, and our expenses to do that,
Speaker 1: and so forth and so on, And one of the
Speaker 1: board members raises his or her hand and he says
Speaker 1: he or she says, um, Berry, that's that's terrific. Sounds
Speaker 1: like a great plan for two thousand and eight. But
Speaker 1: I I just want to get your perspective. What happens
Speaker 1: if bear Stearns collapses Freddie Fanny Washington, Mutual Walk, Covia,
Speaker 1: Meryl Lynch, you know, etcetera, etcetera. Lehman, you know, the
Speaker 1: whole thing collapses in two thousand and eight, how will
Speaker 1: we perform? I think you you know, I think if
Speaker 1: you had been CFO at that time, you would have said, well,
Speaker 1: you know that it's just that's never going to happen.
Speaker 1: But it did. Um and Northern Trust navigated through that
Speaker 1: exceptionally well, not on scarred, but exceptionally well. If you
Speaker 1: take if you fast forward from that paradigm to COVID nineteen,
Speaker 1: it's very similar. You know, if if we had been
Speaker 1: talking to our board uh the year before and put
Speaker 1: forward our plan, I think our board would have said, well, okay,
Speaker 1: you know, that sounds like a great plan. What happens
Speaker 1: if there's a global pandemic, and every office from which
Speaker 1: we operate is going to be shut down or substantially
Speaker 1: shut down. Everyone's got to work from home on the
Speaker 1: same day globally, and by the way, it's going to
Speaker 1: be for a year and a half or more. I'm
Speaker 1: quite confident you or we would have said, well that,
Speaker 1: you know, that's just not you know, I don't know
Speaker 1: what we'll do. That's not going to happen. But it did.
Speaker 1: And so I think the lesson from these crises is
Speaker 1: that while they're different, every time, they happen a lot.
Speaker 1: And so we have to think about our approach to business,
Speaker 1: our approach to resource research, our approach to preparing for
Speaker 1: the unanticipateable and um as I say, each each of
Speaker 1: your examples September eleventh and COVID and two thousand eight
Speaker 1: are different, but they were all. They all featured substantial disruption,
Speaker 1: substantial unanticipatable disruption. And at Northern Trust and every other
Speaker 1: company around the world, you have to be prepared to
Speaker 1: be agile and adapt quickly. And that's what we've been
Speaker 1: able to do pretty consistently over our d and thirty
Speaker 1: plus years of experience. So given that history and the
Speaker 1: fact that a big chunk of your clients are ultra
Speaker 1: high net worth, how do you think about managing assets
Speaker 1: compared to what I don't know, let's use the phrase
Speaker 1: mass affluent. Uh that typical approach? Is this more about
Speaker 1: preserving wealth than it is striking it rich? These folks are,
Speaker 1: after all, already fairly wealthy. How does this specific demographic
Speaker 1: change and challenge the way you manage assets for them? Well?
Speaker 1: I think, um, look where wherever one sits on the
Speaker 1: spectrum of wealth, they generally want to optimize their returns
Speaker 1: over time. And people have different risk preferences as you
Speaker 1: would expect. Uh. So to caricature it, if you come
Speaker 1: from nothing and you've done exceptionally wealth financially, you a
Speaker 1: not always, but you may have a predisposition to have
Speaker 1: a stronger defensive component to your portfolio because you don't
Speaker 1: want to end up back where you were. You know
Speaker 1: what it's like not to have money. You have it, uh,
Speaker 1: and you want to be defensive. Um. On the other hand,
Speaker 1: there are people who, whether they came from nothing or not,
Speaker 1: they've had tremendous success. They've seen the power of capitalism,
Speaker 1: and they want to not only do as well as
Speaker 1: they can, but keep going. So we see things, um
Speaker 1: through the eyes of our clients across a continuum. What
Speaker 1: I would say is people in the ultra neet ultra
Speaker 1: high net worth space, at least from my point of view,
Speaker 1: it's not so much about they're more defensive or more offensive.
Speaker 1: They have more flexibility for choice. Um. They can be
Speaker 1: defensive because they've you know, so to speak, got more
Speaker 1: more than enough, or they can lean in and be
Speaker 1: more aggressive because they have a bigger cushion than the
Speaker 1: rest of us. And our clientele is all ends of
Speaker 1: that spectrum. There's no um the notion that some people
Speaker 1: have that well, once someone's made a certain amount of money,
Speaker 1: they're they're just trying to preserve it. Um. There are
Speaker 1: certainly clients that that exhibit that behavior, but there are
Speaker 1: an equal number who want to optimize it and aren't
Speaker 1: in a completely defensive mindset. So it depends on the personality.
Speaker 1: Very interesting. One of the cliches of the industry is
Speaker 1: three generations from you know, short tales to short tails,
Speaker 1: referring that generational wealth very often gets I don't want
Speaker 1: to say wasted, but frittered away irresponsibly or recklessly. Uh.
Speaker 1: Some people take too much risk. How do you manage
Speaker 1: around that? Do you do? You ever have families coming
Speaker 1: to you and say, hey, we want to leave money
Speaker 1: to the next generation, but we want to make sure
Speaker 1: they get it and that it's not just you know,
Speaker 1: ferraris and weekends in Vegas. Yes, all the time. Again,
Speaker 1: every family is different, every client is different. But you know,
Speaker 1: one thing to one thing that I think is a
Speaker 1: little bit unfair and in not by you, but in
Speaker 1: the characterization that you refer to. Is this notion, well,
Speaker 1: you know by the third generation it is, you know,
Speaker 1: frittered away. I think you you have to remember a
Speaker 1: couple of things first. When when we say it's frittered away,
Speaker 1: the comparison point is often to someone who did the extraordinary.
Speaker 1: So if I started from nothing and created a billion
Speaker 1: dollars billion dollars of wealth, it's a little unfair to say,
Speaker 1: my kids are my grandkids you know they're not as
Speaker 1: smart as I am, because you know they didn't do
Speaker 1: it too. You know, people who have created extraordinary wealth
Speaker 1: have done so. By definition, it's it's extraordinary and it's
Speaker 1: not reasonable. Even if you have bright, talented, you know, um,
Speaker 1: high functioning kids, it's not reasonable to assume that each
Speaker 1: generation is just gonna you know, uh, mom made a billion. Uh,
Speaker 1: mom's kid made two billion, and and mom's grandkids made
Speaker 1: made four billion. You know, it's mathematically that's not a
Speaker 1: reasonable probability. That said, UM, there is definitely an art
Speaker 1: to optimizing wealth through the generations. And of course it
Speaker 1: starts in the home and how you raise kids and
Speaker 1: values and um you know what you demand of them
Speaker 1: or not. Um, But a lot of our clients do
Speaker 1: a great job of trying to steward their wealth, trying
Speaker 1: to educate their kids, trying to make use of family
Speaker 1: governance to to help everyone understand how things work for
Speaker 1: the family. And so each client is different. But UM,
Speaker 1: as with most things, the more you put into it,
Speaker 1: the more you're likely to get out of it. And
Speaker 1: for those who believe it's an important responsibility to steward
Speaker 1: that wealth, pass it to future generations, educate those generations,
Speaker 1: make them um uh, try and help them be important
Speaker 1: members of society. Um. They tend to get better outcomes
Speaker 1: than the rest of us. It's a it's a very um.
Speaker 1: It's you know, raising kids and money are too challenging vectors.
Speaker 1: But um um. We see some great examples of people
Speaker 1: stewarding wealth through multiple generations, not just the founder, so
Speaker 1: to speak. Quite interesting. Let's talk a little bit about
Speaker 1: what you call goals driven wealth management. Start out with
Speaker 1: what what exactly is that sure? Goals driven wealth management
Speaker 1: at Northern Trust is the framework that that we've devised
Speaker 1: to build personalized wealth plans for clients, and it focuses
Speaker 1: on helping them achieve their individual goals with confidence. It
Speaker 1: provides a big picture of their wealth and transparent steps
Speaker 1: on how to manage and optimize wealth over time. So
Speaker 1: very one way to think about it is and I'm
Speaker 1: being a little bit facetian decetious, but just to make
Speaker 1: the point, it used to be in this industry that
Speaker 1: the starting point for how money might be managed was
Speaker 1: a function of your outlook on the markets. You think
Speaker 1: equities are going to go up, etcetera, so you allocate
Speaker 1: more to equities. Um Goals driven wealth management comes at
Speaker 1: investing through a different lens. The starting point is not
Speaker 1: so much our call on the markets, though that will
Speaker 1: be important at some point. Our starting point in goals
Speaker 1: driven is what are you and your family trying to accomplish?
Speaker 1: Once we understand what you're trying to accomplish and the
Speaker 1: assets you need to accomplish it. We can in effect
Speaker 1: back into how to deploy those assets in stocks, bonds,
Speaker 1: other asset classes to give you the best probability of
Speaker 1: achieving your life goals over time. So it's really just
Speaker 1: a different starting point for how to think about creating
Speaker 1: an asset allocation that is most effective for you and
Speaker 1: your family. So let's talk about that framework. And again
Speaker 1: the question comes back, how different is it for the
Speaker 1: ultra high net worth than for the merely wealthy or
Speaker 1: is there a lot of overlapping between the two different
Speaker 1: types of planning. The process is really the same no
Speaker 1: matter where you are on the wealth spectrum. You and
Speaker 1: your family have goals, and whether you have a million dollars,
Speaker 1: a hundred million, a billion, ten billion, or whatever the
Speaker 1: number is, you have something you want to achieve over time.
Speaker 1: You plan to live to age nine hundred, this is
Speaker 1: what you need to live in the style to which
Speaker 1: you want to be accustomed. And we do a variety
Speaker 1: of work to figure out first of all, are you
Speaker 1: asset sufficient? Meaning under reasonable scenarios, do I have enough?
Speaker 1: If I steward it effectively to live my life the
Speaker 1: way I want to live it over time, and that
Speaker 1: happens whether you have you know again, whatever the number
Speaker 1: is five dollars or ten million. The difference Barry comes
Speaker 1: in with the flexibility end options that you have as
Speaker 1: you create more wealth. So the starting point is the same,
Speaker 1: understand your goals, understand your needs, and let's figure out
Speaker 1: an asset allocation to give you the best chance to
Speaker 1: get there. What becomes different for people in the ultra
Speaker 1: high net worth space relative to the rest of us
Speaker 1: is that they can take advantage of more planning techniques.
Speaker 1: They can take advantage of uh more techniques to optimize philanthropy,
Speaker 1: They can take advantage of gifting to future generations and
Speaker 1: so forth, and so the process is the same. But
Speaker 1: as you accumulate more money UM in general, you have
Speaker 1: more flexibility on some other things you can do. The
Speaker 1: ultrah net worth also have more investment optionality. They have
Speaker 1: the ability to invest in asset classes like private equity,
Speaker 1: hedge funds, and so forth, where um they may have
Speaker 1: to trade off some liquidity for a period of time.
Speaker 1: Those of us who are lower on the spectrum may
Speaker 1: not be able to endure that in a down market,
Speaker 1: those who have more wealth can can uh oftentimes whether
Speaker 1: that storm more so, the process is the same, but
Speaker 1: you get more flexibility as your wealth grows. We're going
Speaker 1: to talk more of about alternative investments in a little bit.
Speaker 1: I want to stick with a couple of interesting things
Speaker 1: I read, UH in some Northern Trust research. One of
Speaker 1: the things that I kind of knew but I didn't
Speaker 1: realize it was this intense was the number of clients
Speaker 1: you see relocating to new states. It's been a record volume.
Speaker 1: Some of that's pandemic related, some of it predates the pandemic.
Speaker 1: How does that challenge the planning process? How different is
Speaker 1: it from state to state when it comes to things
Speaker 1: like tax planning. You mentioned trust, you mentioned philanthropic issues.
Speaker 1: What happens when somebody picks up from one state and
Speaker 1: relocates to another state. Yeah, it's an interesting question. Look,
Speaker 1: clients relocating has always been with us. If you look
Speaker 1: at Northern Trust's history. We are headquartered in Chicago, in
Speaker 1: the middle of the United States. It's cold here in
Speaker 1: the winter. Lovely city, but it does get rather cold
Speaker 1: at wintertime, and oftentimes as people age and you know,
Speaker 1: their kids finished school, and so forth. They opt for
Speaker 1: better UH environments in the wintertime, so they may want
Speaker 1: to be in Florida or Arizona, or Texas or California.
Speaker 1: Um So, one phenomenon we've always seen is migration from
Speaker 1: state to state. That phenomenon is also impacted by state
Speaker 1: tax rates, by a state tax UH considerations, and so
Speaker 1: both because of the pandemic and for tax reasons and
Speaker 1: lifestyle reasons, we're continuing to see movement across state lines
Speaker 1: and so, UM. You know, I think that the message
Speaker 1: to UM urban planners is taxes do matter to people.
Speaker 1: It's not necessarily the only factor, but um even affluent
Speaker 1: people will think through where do they want to be,
Speaker 1: where do they want to live, what environment do they
Speaker 1: want to be in, and what's the tax impact for
Speaker 1: their clients. And that phenomenon is alive and well it's
Speaker 1: always been there, UM, but it does seem to be
Speaker 1: important as different states consider different UH policies. If will
Speaker 1: UH people residents make their choices and UM. So it's
Speaker 1: it's it's a phenomenon. It's very much at the front
Speaker 1: of mine for many of our clients. Interesting you mentioned taxes.
Speaker 1: There was a new administration came to town this year,
Speaker 1: and the expectations are there will be some sort of
Speaker 1: change in tax policy, potentially including increases in capital gains
Speaker 1: and increases in estate taxes, and in some cases fairly
Speaker 1: substantial increases. How do you plan around that? And since
Speaker 1: nothing is known for certain in advance what an administration
Speaker 1: is is going to do, how do you make decisions
Speaker 1: in the face of that uncertainty. Yeah, I think our
Speaker 1: starting point on behalf of our clients is to prepare
Speaker 1: rather than predict. So let me give you an example
Speaker 1: that that you referred to. The newly proposed tax law
Speaker 1: change would change the lifetime gift in a state tax
Speaker 1: exemption amount from eleven point seven million dollars down to
Speaker 1: five million dollars. And what this means for people who
Speaker 1: have built up substantial wealth is that, uh, if the
Speaker 1: proposal goes forward as as offered, uh, you have until
Speaker 1: the end of this year if you want to make
Speaker 1: a gift to your heirs of eleven if you can
Speaker 1: afford to, and if you want to make a gift
Speaker 1: of eleven point seven million dollars. And again, I can't
Speaker 1: tell you whether this will happen, but if we just
Speaker 1: think about the financial impact here. If you have enough
Speaker 1: capacity to do that, and you choose to do it,
Speaker 1: you can take eleven point seven million dollars out of
Speaker 1: your estate today, get it to your kids, grant kids whoever.
Speaker 1: It happens to be tax free as opposed to on
Speaker 1: January one, if the law goes forward only as as offered, uh,
Speaker 1: you can only do five million dollars. And what that
Speaker 1: means is the difference between sorry to get you know,
Speaker 1: numbers all over, but the difference between eleven seven and five,
Speaker 1: which is six point seven million dollars will be taxed
Speaker 1: you know when you die um uh at a at
Speaker 1: a high rate. And so we have literally thousands of
Speaker 1: clients all across the country, and each one we're working
Speaker 1: with individually to evaluate, um, what's their financial circumstance, what
Speaker 1: do they want to do? Do they want to make
Speaker 1: the gift? And by the way, this this this tax
Speaker 1: law change may or may not happen um, So people
Speaker 1: have to make a choice without knowing for sure whether
Speaker 1: it's going to happen. I think the bottom law mine though,
Speaker 1: is people are looking at this carefully, they're studying it,
Speaker 1: and they're trying to prepare and make judgments about what
Speaker 1: might happen and what's best for their individual circumstances. But
Speaker 1: tax law changes matter, and we are in the business
Speaker 1: of helping our clients figure out what's the best choice
Speaker 1: for them with the information that we have. Quite quite interesting.
Speaker 1: So we talked a little bit about alternatives earlier. Let's
Speaker 1: address that a bit. There seems to be a growing
Speaker 1: appetite for all manner of alternative investments, given that stocks
Speaker 1: and bonds are all a little bit pricey. Um, let's
Speaker 1: start with private equity. What what sort of demand is
Speaker 1: there from your clients for private equity and how do
Speaker 1: you guys respond to the question of potentially better returns
Speaker 1: and exchange for far less liquidity. Sure, look, investment has
Speaker 1: become much more granular over the decades. And again, just
Speaker 1: to be facetious, you know, large cap stocks versus high
Speaker 1: quality bonds. You know forty years ago. Today clients think
Speaker 1: in terms of small cap, mid cap, large cap, value, international,
Speaker 1: emerging markets, private equity, and thousands of flavors of private equity,
Speaker 1: hedge funds. Same thing. So in the quest for optimizing returns,
Speaker 1: clients and their professional money managers and Northern Trust included
Speaker 1: have um searched for different asset classes to combine together
Speaker 1: to give people the best chance to achieve their objectives.
Speaker 1: Private equity clearly has been in the aggregate. There are
Speaker 1: winners and losers in private equity, but has been a
Speaker 1: asset class that has done well for many There are
Speaker 1: tradeoffs with private equity, particularly in terms of liquidity UM,
Speaker 1: but I would say amongst our clientele, the appetite for
Speaker 1: private equity and private equity is a more normalized asset
Speaker 1: class continues to grow. It's not the right asset class
Speaker 1: for every client, but for clients who have the capacity,
Speaker 1: the risk tolerance, and so forth. Uh, it definitely can
Speaker 1: play an important role in a client's portfolio. And increasingly
Speaker 1: we're seeing more use of private equity today than we did,
Speaker 1: say ten years ago. What about venture capital or hedge
Speaker 1: funds too, totally different entities from both each other and
Speaker 1: private equity. What's the demand like for those products? Demand
Speaker 1: exists for venture capital and four hedge funds as well. Again,
Speaker 1: the devil is in the detail. Not all hedge funds
Speaker 1: are created equally. The theme is that they charge. The
Speaker 1: performance that they've delivered can differ substantially, But there is
Speaker 1: um again, this same notion of I want to diversify
Speaker 1: my portfolio. I want a range of options and so
Speaker 1: called alternative investments, whether you call it private equity, venture capital,
Speaker 1: hedge funds, UH seem to continue to be growing in
Speaker 1: appeal to our clientele. What about crypto and things like
Speaker 1: blockchain and ethereum? There seems to be a lot of
Speaker 1: real interest in the space. Are are you finding your
Speaker 1: client base is crypto curious? Um? I would say the
Speaker 1: demand for crypto is more muted amongst our clientele than
Speaker 1: um some of what you read in the public press.
Speaker 1: And um, that doesn't mean we have example of clients
Speaker 1: who have invested in crypto and done exceptionally well you know,
Speaker 1: right time. But I would say in general, if I
Speaker 1: had to caricature it, I would say that crypto is
Speaker 1: still an evolving asset class that is misunderstood by many,
Speaker 1: and I think most are treating it uh carefully. And
Speaker 1: the ones that are making crypto investments are viewing it
Speaker 1: more as a uh um, more as a roll of
Speaker 1: the dice than a rational uh uh analytical view of
Speaker 1: what crypto is trading it today and what it's going
Speaker 1: to trade it tomorrow. They view it as a bit
Speaker 1: of a roll of the dice. They may jump in
Speaker 1: a little bit, but UM, they understand that what goes
Speaker 1: up can also go down. So I would say amongst
Speaker 1: our clientele overall crypto is still UM not idely in use.
Speaker 1: So we mentioned briefly the market is a certainly priced
Speaker 1: yer than it was five or ten years ago. How
Speaker 1: do you manage around stocks and bonds, neither of which
Speaker 1: are inexpensive. Yeah. Look, I think for many of our
Speaker 1: clients UM, the market does go up, the market does
Speaker 1: go down. And one of the great features of our
Speaker 1: the goals driven methodology that we use for clients is
Speaker 1: that we build a UM portfolio such that, after a
Speaker 1: lot of analytical work to evaluate their goals and so forth,
Speaker 1: UM that enables them to uh endure and not have
Speaker 1: to sell in a down market. We we create something
Speaker 1: that's called a portfolio reserve. I would liken it to
Speaker 1: the moat around your castle. Some people like a wide,
Speaker 1: deep moat, some people eat the narrower UM and less
Speaker 1: deep mode. But think of that as high quality fixed income.
Speaker 1: If the stock market goes down, your your bonds are
Speaker 1: still fine, you can still pay your mortgage. Life is good.
Speaker 1: You can wait until the market goes up or returns
Speaker 1: to normal. So the one thing we know on behalf
Speaker 1: of our clients is markets go up and down, and
Speaker 1: so you have to plan and prepare for that. And
Speaker 1: so it's very difficult to know, um you know. Again,
Speaker 1: using the COVID nineteen example, I think there are a
Speaker 1: lot of people who might have argued the markets are
Speaker 1: going to crash. You know, everyone's working from home and
Speaker 1: we can't get essentials and people don't want to go
Speaker 1: to the grocery store. And yet the market went up dramatically.
Speaker 1: So we try and take a long, stewarded view and
Speaker 1: help our clients plan and prepare themselves so that when
Speaker 1: the market does go down, um, that they can get
Speaker 1: through and um uh not have to take adverse steps
Speaker 1: and sell uh in dire circumstance. And that's been very
Speaker 1: helpful for our clients. So, in terms of forward return expectations,
Speaker 1: does that and historically loban yields high equity prices tend
Speaker 1: to suggest lower returns going forward. Does that work its
Speaker 1: way into the planning process or is that really more
Speaker 1: of an academic theory. No, it absolutely works its way
Speaker 1: into the planning process. Because our starting point is what
Speaker 1: needs does a client have over the near term for
Speaker 1: financial resources. We we've got to make sure they can
Speaker 1: buy their groceries and pay their mortgage, and we have
Speaker 1: to deploy assets against those goals. But once in working
Speaker 1: with a client we figured out the right mix of
Speaker 1: assets to uh to enable them to to afford those
Speaker 1: goals over a reasonable period of time, we then have
Speaker 1: to deploy the rest of the portfolio towards so called
Speaker 1: risk assets equities, private equity, hedge funds, venture cat, whatever
Speaker 1: the asset class, And in so doing we have to
Speaker 1: bring our judgment about risk and return expectations for each
Speaker 1: of those asset classes. So our view of asset classes
Speaker 1: and what they're likely to bring over the relatively short
Speaker 1: term is still an important part of the process. So
Speaker 1: what do you tell investors who say, you know, I'm
Speaker 1: really not happy with my muni bond portfolio. It's barely
Speaker 1: thrown off two or two and a half percent. Investors
Speaker 1: are always seemed to be looking for more yields. How
Speaker 1: do you respond to that group of clients. Yeah, I
Speaker 1: think it's my Our response is, really, you have to
Speaker 1: remember what you're going to do with that muni bond portfolio.
Speaker 1: No one is saying it's a great, high returning asset class,
Speaker 1: but that's not its role. Its role is to making
Speaker 1: this up bury. But generally the role of that muni
Speaker 1: bond portfolio is to provide you with certainty, security, confidence, uh,
Speaker 1: and not have to worry about the other part of
Speaker 1: your portfolio. Let's just call that equities gyrating up and down. So,
Speaker 1: of course people want their muni bonds or their high
Speaker 1: quality fixed income to return as much as it can,
Speaker 1: and it's our job to try and help people achieve that.
Speaker 1: But I think you always have to come back to
Speaker 1: what role is this trying to play? And for most clients,
Speaker 1: it's trying to play a role of stability and reliability
Speaker 1: and consistency, and that's the paramount feature. And in providing
Speaker 1: that consistency and stability and predictability, they give up a
Speaker 1: little bit of return on that asset class, but they're
Speaker 1: trying to get that elsewhere with their equities, private equity
Speaker 1: and so forth. So you had you had discussed previously, Um, hey,
Speaker 1: you know it's up to us to make the most
Speaker 1: of a low rate environment. What does that mean? How
Speaker 1: does one make the most of a low rate environment, Well,
Speaker 1: I think, um, you know, low low rates create low
Speaker 1: interest rates create uh challenges and opportunities, and maybe two
Speaker 1: simple ways to think about it are. One on the
Speaker 1: challenge side, if you're living on a fixed income, as
Speaker 1: assets repriced and you're reliant on bonds, your bonds to
Speaker 1: provide UH income, the lower rates make the yield on
Speaker 1: those bonds lower, and so that's bad from a you know,
Speaker 1: how much cash will I have to fulfill my needs?
Speaker 1: The flip side to that is that when rates are
Speaker 1: very low, UH, if you want to, if it's appropriate,
Speaker 1: if it's thoughtfully done, you can use credit rather than
Speaker 1: liquidating stocks too. You know, if you want to buy
Speaker 1: a new toy, um so to speak, a boat, whatever
Speaker 1: it happens to be. One way to do that is
Speaker 1: to sell stocks in your portfolio and buy the you know,
Speaker 1: whatever it is you want to buy. Another way is
Speaker 1: to let those stocks keep working on your behalf. And
Speaker 1: because rates are so low, UH, take advantage of credit,
Speaker 1: take a loan by that boat and or whatever it
Speaker 1: happens to being paid back over time. So low interest rates,
Speaker 1: you know, can have different UM conflict phenomenon opportunities on
Speaker 1: the credit side and headwinds on the bond investment side.
Speaker 1: So so how do you incorporate all this inflation chatter
Speaker 1: to to your planning. Um, we've started to see rates
Speaker 1: tick up the tenures as we're recording this, just about
Speaker 1: one point five. And I know there's an irony in
Speaker 1: saying that rates are all the way up to one
Speaker 1: point five, which historically is incredibly low. How do you
Speaker 1: figure um inflation into your modeling and thinking about the future.
Speaker 1: Will we use multi scenario modeling? The reality is no
Speaker 1: one knows, and so you have to you know, the
Speaker 1: prognosticators will will have a view. Some some believe inflation
Speaker 1: is here and is going to continue. Others argue it's
Speaker 1: so called transitory. Um, and uh, the truth is, we
Speaker 1: don't know. We'll we'll we'll find that out tomorrow, so
Speaker 1: to speak. And so as we work through planning with
Speaker 1: our clients, we generally are running multiple scenarios low inflation,
Speaker 1: medium inflation, high inflation, and we're trying as well as
Speaker 1: we help clients make decisions, we're trying to make the
Speaker 1: best judgment we can at a given point in time.
Speaker 1: But UM, that's why you you really have to be
Speaker 1: you have to plan for multiple scenarios and bring agility
Speaker 1: to your process because we don't know whether the stock
Speaker 1: markets going up or down. We don't know whether inflation
Speaker 1: will be higher or lower. We have a view, we
Speaker 1: can have probabilities, but as we've seen, whether it was
Speaker 1: with two thousand and eight or uh covid um, we
Speaker 1: everyone can be wrong, and so you have to plan
Speaker 1: and adapt and leave yourself a buffer for when you
Speaker 1: are wrong, and hopefully it's not um uh not catastrophic. Huh.
Speaker 1: So I know I only have you for a little
Speaker 1: bit of time. Let me jump to my favorite questions
Speaker 1: that I ask all of my guests, starting with tell
Speaker 1: us what you're streaming these days? What's keeping you entertained
Speaker 1: at home, either on Netflix or Amazon Prime or wherever. Well,
Speaker 1: I've I've been working hard, so I can't say I've
Speaker 1: made great use of Netflix. But um, what I have
Speaker 1: just started. This will show you, Perry, how far behind
Speaker 1: am is. I've just started ted Lasso, so um, I'm
Speaker 1: behind the rest of the world. But that's what I'm
Speaker 1: on right now. All right, Well, well you'll I can
Speaker 1: tell you this much. You will enjoy it and and
Speaker 1: enjoy catching up with us. What about mentors who helped
Speaker 1: to shape your career. You know, I've had a lot
Speaker 1: of mentors at Northern Trust over the years. Uh, people
Speaker 1: who were senior to me and people who weren't. But
Speaker 1: I learned from everyone. I think when I think about mentors,
Speaker 1: for me, it's less about people with whom I work,
Speaker 1: and maybe it's my interest in history, but um, I
Speaker 1: try and learn from people who have overcome insurmountable ods.
Speaker 1: The Mahatma Gandhi's, the Martin Luther King's, the Winston Churchill's,
Speaker 1: the Thoughts of Hovels, the Abraham Lincoln. And there's so
Speaker 1: much wisdom that I see in people like that, because um,
Speaker 1: they really faced incredible circumstances and worked through them generally
Speaker 1: too good outcomes, and so um they're those great thinkers
Speaker 1: are probably the people I've learned the most from. As
Speaker 1: I wouldn't call them mentors to me, but I've certainly
Speaker 1: read about all of them and learned a lot from
Speaker 1: each of them. Let's talk about books. What are you
Speaker 1: reading right now and what what are some of your favorites?
Speaker 1: You know, I think, in keeping with that theme of
Speaker 1: mentors or poor um periods of time, that interest me. Uh.
Speaker 1: I've really enjoyed The Splendid and the Vial by Eric Larson,
Speaker 1: which is um about Churchill and the blitz of World
Speaker 1: War Two, and again it it helps you here, it
Speaker 1: helps me to see just how dire the circumstances were
Speaker 1: and what he and others had to navigate through. The
Speaker 1: other book that I've dusted off recently I had read
Speaker 1: some time ago, but I think in a few of
Speaker 1: the pandemic it seemed interesting to me was The Hot
Speaker 1: Zone by Richard Preston, which has nothing to do with
Speaker 1: the pandemic, but um uh, there are parallels to what
Speaker 1: we're dealing with than It was sort of a gripping,
Speaker 1: gripping book if you have time for a good read,
Speaker 1: it sounds interesting. What sort of advice would you give
Speaker 1: to a recent college grad who was interested in a
Speaker 1: career in either investment management or finance? Yeah, I think,
Speaker 1: um berry, I'd offer a couple of themes on this,
Speaker 1: and I don't know that I um narrow these themes
Speaker 1: too uh an interest in investments or finance, although I
Speaker 1: think they do overlap. I'd start by saying it probably
Speaker 1: the easiest place to get my view there would be
Speaker 1: to go to YouTube, and I gave a commencement addressed
Speaker 1: at the University of Illinois, Chicago and tried to formulate
Speaker 1: those themes for for young people. But but a few
Speaker 1: that come to mind, at least through my lens are UM.
Speaker 1: Comfort is the enemy of accomplishment. If you want to
Speaker 1: be the best you can be. Uh, you can never
Speaker 1: be satisfied with where you are. You've got to push, push, push,
Speaker 1: and UM make yourself better each and every day and
Speaker 1: everything you touch. UM. I think of a couple of
Speaker 1: the other themes that would come to me would be
Speaker 1: in the same vein UM. We see this at Northern
Speaker 1: Trust all the time. Excellence is not a part time job.
Speaker 1: For people who want to be excellent, who want to
Speaker 1: do the best job for our clients and our shareholders.
Speaker 1: You can't be excellent only when it's convenient, only when
Speaker 1: you want to do it, or only when you feel
Speaker 1: like it. You've you've got to UM. Excellence is an
Speaker 1: all in phenomenon. And then probably the the last theme
Speaker 1: that comes to my mind is persevere beyond your accomplishments.
Speaker 1: It's not what you did yesterday, UH, it's you can
Speaker 1: be proud of what you've accomplished, but again, you want
Speaker 1: to be better going forward, and so be proud of
Speaker 1: who you are. Be proud of your grades and your
Speaker 1: your school and your degrees and all that sort of stuff.
Speaker 1: But those are what you did, you know two years ago,
Speaker 1: five years ago, ten years ago, whatever it happens to be.
Speaker 1: Keep pushing forward to be the best you can be,
Speaker 1: so persevered beyond your accomplishments. And our final question, what
Speaker 1: do you know about the world of investing today? You
Speaker 1: wish you knew thirty five years ago when you were
Speaker 1: first starting with Northern Trust. That is a long list, Arry,
Speaker 1: But um, I think what I would say is you
Speaker 1: don't have to be right on everything, and sometimes being
Speaker 1: right is more about luck and timing than it is
Speaker 1: about specific analytical acumen. Uninspiring choices in a bowl market
Speaker 1: can turn out just fine, and well reasoned ideas in
Speaker 1: a down market can turn out to be not so good.
Speaker 1: Get the direction right more often than not and you'll
Speaker 1: be just fine. Really good advice. Thank you, Steve for
Speaker 1: being so generous with your time. We've been speaking with
Speaker 1: Steve Fradkin. He's the president of Northern Trust Wealth Management.
Speaker 1: If you enjoy this conversation, well, be sure and check
Speaker 1: out any of the other three prior discussions we've had
Speaker 1: over the past seven years. You can find those wherever
Speaker 1: you normally find your favorite podcast iTunes, Spotify, wherever. We
Speaker 1: love your comments, feedback and suggestions right to us at
Speaker 1: m IB podcast at Bloomberg dot net. You can sign
Speaker 1: up from my daily suggested reading list at rid Halts
Speaker 1: dot com. Check out my regular column at Bloomberg dot
Speaker 1: com slash Opinion. Follow me on Twitter at rit Halts.
Speaker 1: I would be remiss if I did not thank the
Speaker 1: crack team that helps put these conversations together each week.
Speaker 1: Paris Wald is my producer. Michael Batnick is my head
Speaker 1: of research. Attika Valbron is our project manager. I'm Barrier. Adults,
Speaker 1: you've been listening to The Master's in Business on Bloomberg Radio.