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Catherine Keating on Wealth Management (Podcast) · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:07
Speaker 1: This week on the podcast, I have an extra special guest,
0:10
Speaker 1: and once again it was a tour to fourth. Katherine
0:14
Speaker 1: Keating has quite the storied history UH in the financial
0:19
Speaker 1: services world. She's not only the CEO of the B
0:23
Speaker 1: and Y Melon's wealth management group, she is a regular
0:27
Speaker 1: on all of the most Powerful Women in Finance lists.
0:31
Speaker 1: Previously she was CEO UM. Previously she was Chief executive
0:37
Speaker 1: Officer of Common Funds and Head of Investment Management and
0:42
Speaker 1: CEO of the U s US Private Bank at JP Morrigan.
0:46
Speaker 1: She has really a fascinating background. They are one of
0:50
Speaker 1: the larger asset managers, and so what B and Y
0:56
Speaker 1: Melon does when it comes to UM, generational wealth transfer,
1:00
Speaker 1: and philanthropic planning and all these other areas related to
1:05
Speaker 1: the core of of wealth management. They are very much
1:09
Speaker 1: a thought leader in the space and and there actions
1:13
Speaker 1: have ripple effects throughout the industry. I found this to
1:16
Speaker 1: be just an absolutely fascinating conversation. We definitely went deep
1:22
Speaker 1: into the weeds discussing things like certain types of retaining
1:26
Speaker 1: test guarante r trusts, but generally everything was very accessible
1:31
Speaker 1: and quite fascinating. If you're remotely interested in the asset
1:35
Speaker 1: management business or financial planning, will strap yourself in because
1:38
Speaker 1: this is going to be absolutely fascinating. With no further ado,
1:43
Speaker 1: my conversation with Katherine Keating. This is Masters in Business
1:49
Speaker 1: with very Ridholts on Bloomberg Radio. My extra special guest
1:54
Speaker 1: this week is Kathleen Keating. She is the CEO of
1:57
Speaker 1: B and Y Melon's Wealth Management Group, which runs about
2:01
Speaker 1: two hundred and sixty five billion dollars in assets. Uh
2:05
Speaker 1: B and Y Melon manages two trillion dollars and has
2:09
Speaker 1: over thirty eight trillion dollars in assets custodied. The firm
2:14
Speaker 1: was founded in seventeen eighty four by Alexander Hamilton's. Keating
2:19
Speaker 1: previously was CEO at Common Funds and head of Investment
2:24
Speaker 1: management at the US private bank for JP Morgan. Katherine Keating,
2:29
Speaker 1: Welcome to Bloomberg. Thank you very great to be here.
2:33
Speaker 1: So you have a fascinating background and I want to
2:36
Speaker 1: start out delving into it. You were the first woman
2:40
Speaker 1: to be CEO at B and Y Melon Wealth Management,
2:44
Speaker 1: and you were one of the only women running investment
2:48
Speaker 1: management or the private banquet at JP Morgan tell Us
2:51
Speaker 1: about your journey. Well, thank you for asking it. You know,
2:54
Speaker 1: it's never about being the first. It's always about not
2:57
Speaker 1: being the last, right in anything you do. So let
2:59
Speaker 1: me stay with that. Let me start with that. You
3:01
Speaker 1: know here at UM at B and Y Melan. Interestingly enough,
3:05
Speaker 1: you mentioned Alexander Hamilton's You know, we've worked with strong
3:08
Speaker 1: women throughout our history. His widow, Eliza, was actually our
3:11
Speaker 1: first client. People don't know that she was a powerhouse
3:14
Speaker 1: in her own right, sounded the first orphanage here in
3:16
Speaker 1: New York City. Uh So we've worked with strong women
3:19
Speaker 1: throughout our history. You know, as as far as my career,
3:23
Speaker 1: I guess like those people, I've gravitated to UM what
3:27
Speaker 1: interests me? Right, We work hard in this industry. We
3:30
Speaker 1: want to make a difference. I've had a tremendous passion
3:32
Speaker 1: for trying to help clients, whether it's individuals or institutions,
3:36
Speaker 1: have better financial outcomes. And that's really our purpose that
3:40
Speaker 1: this company. We log it every day and we see
3:41
Speaker 1: on our computers. Our our purpose is to power individuals
3:46
Speaker 1: and institutions to succeed in the financial world. And so
3:50
Speaker 1: UM that's a large part of what has motivated me.
3:53
Speaker 1: I also think that I just had experiences in my
3:56
Speaker 1: life that have demonstrated how important found financial advice is. Again,
4:03
Speaker 1: whether you're an institution or an individual. Um, when I
4:06
Speaker 1: was a young youngster, eight years old, my dad died
4:10
Speaker 1: very suddenly, and I watched my mom, I was the
4:12
Speaker 1: oldest of three kids. I watched her have to go
4:15
Speaker 1: back to work and then go back to school. She
4:17
Speaker 1: she was a school teacher, and she decided she wanted
4:19
Speaker 1: to go back to school and become a librarian. Um,
4:23
Speaker 1: that was a career that she loved so much. She
4:25
Speaker 1: just retired a couple of years ago at seventy nine,
4:28
Speaker 1: And so I've kind of watched how important good financial
4:32
Speaker 1: advice is. Obviously, she had to do things like by
4:35
Speaker 1: her own first car. She took us all to the
4:37
Speaker 1: Bolvo dealer. Had done her research Bolbo station wagons with
4:40
Speaker 1: a Sacist cars back in the nineteen seventies. She took
4:44
Speaker 1: us all to the car dealer, and I remember walking
4:46
Speaker 1: in and having the dealer look at her and say, um,
4:49
Speaker 1: where's Mr Kessler, And of course there wasn't a Mr Kesler.
4:52
Speaker 1: So again I've just seen you know how important um,
4:55
Speaker 1: sound financial planning, investment planning and decisions are in people's lives.
5:01
Speaker 1: I've also seen it an institution. You know, I was
5:03
Speaker 1: lucky enough to go to the college that paid for everything.
5:05
Speaker 1: I served on the board for years, including through the
5:09
Speaker 1: financial crisis, and I know how important sound financial management
5:14
Speaker 1: is institutions too. It enables them to make it through
5:17
Speaker 1: cycles and continue to accomplish their missions. So, um, a
5:21
Speaker 1: lot of it is just sort of the basics. What
5:23
Speaker 1: motivates you in the morning and how can you contribute
5:26
Speaker 1: to people's lives through your career. So let's talk about
5:28
Speaker 1: institutions for a moment. You spent a good part of
5:32
Speaker 1: your career as CEO of Common Fund, which was a
5:36
Speaker 1: nonprofit asset manager serving endowments, foundations and other financial institutions.
5:42
Speaker 1: How has that experience colored how you view the world
5:45
Speaker 1: of institutions. So couple of things are important to know
5:49
Speaker 1: about institutional investors versus individuals. The first one is that
5:53
Speaker 1: every institutional investor knows what its goal is. So if
5:56
Speaker 1: you think about a college endowment, the goal of the
5:59
Speaker 1: college endowment is to earn enough on it's portfolio so
6:02
Speaker 1: that it can make distributions to support the mission. You know,
6:05
Speaker 1: typically four four and a half maybe five percent a
6:08
Speaker 1: year and still exceed inflation right, so called that you
6:13
Speaker 1: know it's inflations two percent and you want to distribute
6:15
Speaker 1: four and a half or five you want to have
6:16
Speaker 1: returns of over seven percent. They know what their goal is.
6:20
Speaker 1: The second thing about institutions that might be different than
6:24
Speaker 1: individuals is that they have governance and process right, boards
6:27
Speaker 1: and committees. When you think about individuals, neither of those
6:30
Speaker 1: things is necessarily the case. Nobody tells an individual what
6:33
Speaker 1: their goal has to be. They have to figure that
6:35
Speaker 1: out for themselves, and we spend a lot of time
6:36
Speaker 1: with clients about that, and you don't necessarily have the
6:41
Speaker 1: governance of a board and an investment committee standing in
6:44
Speaker 1: between you and making those decisions. So I think the
6:46
Speaker 1: two things about institutions that are so different is very
6:50
Speaker 1: focused on goals, very well defined, and have governance and
6:54
Speaker 1: process in place to help support it. So let's do
6:57
Speaker 1: a compare and contrast. What when you're working with an institution,
7:02
Speaker 1: you know who's the head of investing there, and you
7:04
Speaker 1: know who's managing a particular committee. What's that like when
7:08
Speaker 1: you are working with the family, where there might be
7:12
Speaker 1: very different group dynamics, there's going to be often a
7:15
Speaker 1: husband and a wife. Sometimes there's an active second generation
7:19
Speaker 1: or even third generation. How different is working with individuals
7:24
Speaker 1: versus institutions, So it's it's very different. And in fact,
7:27
Speaker 1: one of having worked in asset management with institutions and
7:30
Speaker 1: also in wealth management for the individuals, one of the
7:33
Speaker 1: things that I try to do is to bridge that
7:35
Speaker 1: gap and take the best practices that institutions have and
7:40
Speaker 1: try to adapt them to families. And so let me
7:42
Speaker 1: give you two real life examples, right, because two and
7:46
Speaker 1: eight a great example. Um, and I'll give you another one.
7:49
Speaker 1: So what happened in two thousand and eight? We all
7:51
Speaker 1: know the financial crisis, and I was on the board
7:54
Speaker 1: of my college at that time, and just by luck
7:57
Speaker 1: of the calendar, we happen to be having a board
8:00
Speaker 1: meeting and an investment committee meeting on Columbus Day in October,
8:04
Speaker 1: which if you take your mind back to two thousand
8:06
Speaker 1: and eight, you might remember that was the day that
8:08
Speaker 1: all the CEOs from the banks went down to Washington
8:11
Speaker 1: to take the tart money. So there we were having
8:14
Speaker 1: our regular board meeting and our investment committee meeting, and
8:16
Speaker 1: we had had we had done an enormous amount of
8:19
Speaker 1: work on asset allocation and the strategy for our portfolio,
8:23
Speaker 1: and we had done stress testing and all the things
8:25
Speaker 1: that you do as an institution. And so here we
8:28
Speaker 1: were in the depths of the financial crisis, with thanks
8:31
Speaker 1: CEO taking tart money, and we had to decide as
8:34
Speaker 1: a board and an investment committee, what were we going
8:36
Speaker 1: to do. We're we going to do what our policy
8:39
Speaker 1: portfolio told us we ought to do, which is rebalance
8:43
Speaker 1: and continue to buy stocks as the market was going down,
8:47
Speaker 1: because that's what our policy had been tested for. And
8:50
Speaker 1: sure enough, we had to lock arms and um do
8:53
Speaker 1: something that was very hard, which was to buy and
8:55
Speaker 1: rebalance when the market was down. And you tend to
8:58
Speaker 1: see institutions do exactly that because of all of the
9:01
Speaker 1: time that has been spent on the policy portfolio, and
9:04
Speaker 1: because they know time and market is one of their
9:08
Speaker 1: biggest advantages. It's more important than timing the market. On
9:11
Speaker 1: the other hand, when you look at individuals, they don't
9:14
Speaker 1: necessarily have that governance and policy in place, and that's
9:20
Speaker 1: one of the things that we try to do with
9:22
Speaker 1: our clients. We have all of our clients adopt an
9:24
Speaker 1: investment policy statement and wealth management, just as if they
9:27
Speaker 1: were institutions, and then we try to help them stick
9:30
Speaker 1: with it when it's hardest. And you know, we can
9:33
Speaker 1: watch the industry fund flows and we can see whether
9:36
Speaker 1: clients actually do it. And in fact, interestingly enough, what
9:39
Speaker 1: you saw this year as the market was going down
9:42
Speaker 1: and you watch the flows as we do, right, you
9:44
Speaker 1: saw money flowing into cash. We saw record amounts of
9:47
Speaker 1: cash and money market funds. We saw money flowing into
9:50
Speaker 1: bond funds. Um, we really didn't see a lot of
9:53
Speaker 1: money flowing into equity funds when the market was down
9:56
Speaker 1: in March, and so we know how hard it is
10:00
Speaker 1: to stay with your portfolio through the cycle. We told
10:03
Speaker 1: our clients to do that and um, you know, if
10:06
Speaker 1: they did, they participated as the market has has come
10:10
Speaker 1: back to reach all time hives. So let me follow
10:12
Speaker 1: up with a question about exactly what you just described.
10:16
Speaker 1: When your investment committee and institution, which has a perpetual
10:21
Speaker 1: time horizon, is looking at a period like March oh
10:27
Speaker 1: nine or more recently this this past down draft in
10:32
Speaker 1: they're precluded from doing something silly because they have an
10:37
Speaker 1: investment policy statement which prevents them from market timing or
10:42
Speaker 1: there's no upside to a committee to say, sure, what
10:45
Speaker 1: the hell, let's jump in and out and see if
10:47
Speaker 1: we can pick up a couple extra basis points. There's
10:49
Speaker 1: no financial incentive, there's no glory. It violates their own rules,
10:53
Speaker 1: so they sort of are forced to behave. Well, how
10:57
Speaker 1: do you translate that better behavior to an individual when
11:02
Speaker 1: you're working with them and they're nervous in a period
11:05
Speaker 1: like February or March. Yeah, so it's a great question, Barry.
11:10
Speaker 1: And again, what we really try to do here is
11:13
Speaker 1: we really try to court from the institutional asset management
11:17
Speaker 1: industry over into wealth management. The same institutional processes and
11:23
Speaker 1: tools been felt institutions for so long. So, as I said,
11:27
Speaker 1: every one of our wealth management clients, we've spent a
11:29
Speaker 1: lot of time with them to actually develop an investment
11:32
Speaker 1: policy statement, just as an institution would have. And how
11:36
Speaker 1: do we do that. We do that by by first
11:38
Speaker 1: and foremost having to figure out what their goal is, Right,
11:41
Speaker 1: every family is different. There's an adage that we can't
11:43
Speaker 1: see one wealthy family. You've seen one wealthy family, and
11:45
Speaker 1: that's true. Every family is different. Every family has a
11:49
Speaker 1: different near term and long term goal. So the first
11:53
Speaker 1: thing we try to do is really be clear on
11:56
Speaker 1: what that goal is. And most of the time we
11:58
Speaker 1: find that there's two aspects to a US like number
12:00
Speaker 1: one has to do with lifestyle. They want a certain
12:03
Speaker 1: um amount of income to support, you know, a lifestyle,
12:06
Speaker 1: particularly as they move into retirement. And then the second
12:09
Speaker 1: tends to be about legacy. What are the things that
12:11
Speaker 1: you want to preserve in your family and they could
12:13
Speaker 1: be financial or they could be not financial, um to
12:16
Speaker 1: preserve from one generation to the next. Because our clients
12:20
Speaker 1: have wealth set out with them, and so we focused
12:23
Speaker 1: very very hard on what is that goal, and then
12:27
Speaker 1: we use a lot of modeling tools to show all
12:29
Speaker 1: the variables that will impact that goal. Some of them
12:33
Speaker 1: are obvious, right the market and asset allocation right so
12:36
Speaker 1: well will trigger back and forth between different asset allocations
12:40
Speaker 1: to show the impact of them over time. Some of
12:43
Speaker 1: them are uniquely in your control spending rates. Every institutional
12:47
Speaker 1: investor has a policy on spending. Nobody requires an individual
12:52
Speaker 1: to have a policy or even a philosophy on spending,
12:54
Speaker 1: and yet it has an enormous amount of impact on
12:57
Speaker 1: the wealth that you accumulate over time. Increasingly we take
13:01
Speaker 1: into account borrowing, right, our clients don't have to borrow,
13:05
Speaker 1: but just like major companies, that might make sense from
13:08
Speaker 1: a capital allocation perspective. Another thing that we have to
13:11
Speaker 1: take into account is after tax returns. Institutions don't pay taxes.
13:15
Speaker 1: Our clients pay taxes every year and every generation. So
13:18
Speaker 1: you have to keep an eye on after tax returns.
13:21
Speaker 1: And so we've built models that help us to integrate
13:24
Speaker 1: all of these things and allow us to kind of
13:27
Speaker 1: show clients perspectively the impact of choices on asset allocations,
13:33
Speaker 1: on spending, on borrowing, on taxes, to try to help
13:38
Speaker 1: them chart not only the goal, but what are the
13:41
Speaker 1: things that I have to do to get there. Catherine,
13:44
Speaker 1: let's talk a little bit about the clients of of
13:47
Speaker 1: B and Y. Who who is the typical wealth management customer?
13:51
Speaker 1: Tell us about them? Sure, Berry, our typical client is
13:55
Speaker 1: a wealthy family. It might also be entities that you
13:59
Speaker 1: think of is being associated with wealthy families. Foundations, endowment's
14:03
Speaker 1: family offices, family businesses, even retirement plans potentially related to
14:10
Speaker 1: families and family entities. So think about the whole ecosystem
14:13
Speaker 1: surrounding wealthy families, the people, and the entities and that's
14:17
Speaker 1: really our clientation. So you guys have been around for
14:20
Speaker 1: quite a long time. Is a fantastic run. Most of
14:26
Speaker 1: your current clients, are they legacies of of B and
14:31
Speaker 1: Y being around as long as it has been? Are
14:33
Speaker 1: they referrals generational transfers? Where does the typical clients come
14:39
Speaker 1: from within the B and Y melon Um family? So
14:43
Speaker 1: great question, Barry about mostly half of our clients are
14:46
Speaker 1: referred to us from other clients or advisors to UM clients.
14:50
Speaker 1: So think about its half and then the other half
14:52
Speaker 1: comes from all sorts of sources, right just you know,
14:55
Speaker 1: the dynamism of the market wealth is being created around
14:58
Speaker 1: us all the time. UM. We're obviously pursuing those opportunities.
15:02
Speaker 1: And we do have a combination of clients that have
15:05
Speaker 1: been with us many years. UM. We have a couple
15:07
Speaker 1: of families that have been with a six or seven
15:09
Speaker 1: generations now, which is just truly remarkable and something that
15:13
Speaker 1: we appreciate and try to earn every day. And then
15:16
Speaker 1: we have clients that you know, have just taken their
15:18
Speaker 1: companies public and our brand new clients this year. So
15:21
Speaker 1: it's really all the sources that you would expect in
15:23
Speaker 1: a long tenure in institution like ours, and and how
15:28
Speaker 1: have clients expectations changed over the years in terms of
15:33
Speaker 1: what they're looking for from you guys, in terms of communication,
15:37
Speaker 1: what they're expecting in terms of performance. Has that shifted
15:41
Speaker 1: over the past decade or two? So that's yes. The
15:46
Speaker 1: answer to that, barr Is is yes. You know, when
15:49
Speaker 1: I think about when I started my career in this
15:51
Speaker 1: industry back in the nine you know, the typical client
15:55
Speaker 1: might have been a CEO, a CFO with C, a
16:00
Speaker 1: senior corporate executive, and when that client retired, chances are
16:05
Speaker 1: he or she and very often it was the heat
16:08
Speaker 1: retired with a corporate pension plan, right, an annuity for
16:12
Speaker 1: the rest of his life and his spouses life, and
16:16
Speaker 1: also anything else that they've accumulated in their savings. So
16:20
Speaker 1: when I think of the nineties, I think of wealth
16:22
Speaker 1: management is kind of an and you had your you
16:24
Speaker 1: had your pension plan, and you had any savings that
16:27
Speaker 1: you've accumulated on your own. Well, fast forward to this
16:31
Speaker 1: decade that we're in, and what we see is that,
16:34
Speaker 1: you know, there are very few company provided pension plans
16:37
Speaker 1: anymore in corporate America. Corporate America is shifted from company
16:41
Speaker 1: provide attention plans to employee funded savings plans. So today
16:45
Speaker 1: everybody is responsible for their own financial futures. And that's
16:49
Speaker 1: a fundamental shift, and that's another reason very that we
16:53
Speaker 1: try to pour over into wealth management. All of the
16:56
Speaker 1: institutional asset management disciplines that you would have seeing a
17:00
Speaker 1: chief financial officer or a chief investment officer used when
17:05
Speaker 1: they were actually providing for people's long term retirements. That's
17:08
Speaker 1: much less common today. And so our mantra for clients is,
17:11
Speaker 1: you have to be your own CFO, you have to
17:13
Speaker 1: be your own c i O, and we're here to help.
17:17
Speaker 1: H Quite interesting, the past couple of decades have seen
17:21
Speaker 1: a big flow of capital into passive products and indexes.
17:27
Speaker 1: What do you see from your perspective, how is that
17:30
Speaker 1: change in what's going on in the ultra high net
17:34
Speaker 1: worth investment family. So before we look at active or passive,
17:39
Speaker 1: we look at the ecosystem that we're investing in. Right,
17:43
Speaker 1: what's going on in the global economy, because that's really
17:45
Speaker 1: the ecosystem that we invest in. And in fact, at
17:48
Speaker 1: the beginning of this year, I sent a letter to
17:51
Speaker 1: all of our clients, not knowing of course, in the
17:53
Speaker 1: beginning of January what was going to hold for us.
17:56
Speaker 1: But recognizing that we were starting a new decades and
17:59
Speaker 1: as we've started this new decade, we looked at global economy,
18:03
Speaker 1: we looked at capital markets, and we we had forecap
18:07
Speaker 1: for our clients, you know, what do we think market
18:09
Speaker 1: returns are going to be in the next decade? And
18:12
Speaker 1: I actually quoted Bill Gates in that letter. He says,
18:15
Speaker 1: we always overestimate what's going to happen in the next
18:18
Speaker 1: two years and underestimate what's going to happen in the
18:20
Speaker 1: next ten. And one of the things that we said
18:23
Speaker 1: to our clients about the next ten years is that
18:26
Speaker 1: we thought that market returns we're going to be lower,
18:29
Speaker 1: incrementally lower, not significantly lower, but incrementally lower going forward.
18:34
Speaker 1: And there was one major reason for that, and that
18:38
Speaker 1: is that all of the largest economies in the world
18:41
Speaker 1: are aging at the same time, China, Europe, and the
18:47
Speaker 1: United States. And we know what happens when economy's age.
18:52
Speaker 1: Inflation tends to go down, interest rates tend to go down,
18:56
Speaker 1: yield curves tend to flatten, GDP growth tends to go down,
19:00
Speaker 1: and eventually market returns tend to go down. And we
19:03
Speaker 1: pointed out to our clients, but actually we've been seeing
19:07
Speaker 1: that through this whole new century we're in, I think
19:12
Speaker 1: about it right. Inflation has been coming down, interest rates
19:14
Speaker 1: have been coming down, GDP growth has been coming down,
19:18
Speaker 1: and market returns have come down incrementally. So what we
19:21
Speaker 1: said to our clients is that's the ecosystem that we
19:24
Speaker 1: think we're going to be in over this next decade.
19:28
Speaker 1: We still do. We've had some really unexpected and very
19:33
Speaker 1: important eventstasy are obviously with the global pandemic and the
19:37
Speaker 1: influence of Congress, the Cisco stimulus, and the Federal Reserve
19:42
Speaker 1: with monetary stimulus, and we actually think that that monetary
19:45
Speaker 1: stimulus and the low interest rates for longer are very
19:49
Speaker 1: very important to the outlets going forward. Interesting, We're gonna
19:53
Speaker 1: talk more about interest rates in a little bit, but
19:57
Speaker 1: I want to ask you um something that I found
20:00
Speaker 1: fascinating in my research, which was your description of five
20:06
Speaker 1: active wealth practices invests, spend, manage, borrow, protect. Tell us
20:12
Speaker 1: a little bit about what that group of five is
20:16
Speaker 1: and how does it manifest itself in a client's portfolio
20:21
Speaker 1: and their relationship with their advisor at B and Y. Melon.
20:25
Speaker 1: Thanks for asking Barry, and we have a lot of
20:27
Speaker 1: passion around this because again, as I said, Um, we
20:31
Speaker 1: believe that part of our job, being you know, one
20:33
Speaker 1: of the largest institutional firms out there, is to help
20:36
Speaker 1: our clients benefit from the best institutional practices around those
20:41
Speaker 1: five things we took. You know, we have the great
20:43
Speaker 1: fortune of having a lot of experience working with wealthy
20:46
Speaker 1: families at this firm, all the way back to the
20:49
Speaker 1: Hamilton's family, as I said, and so you know, our
20:52
Speaker 1: brain trust of people have put their heads together and said,
20:56
Speaker 1: what have we learned over the years, what are the
20:58
Speaker 1: five things? And we didn't know if it was gonna
21:00
Speaker 1: be five. It could have been three, it could have
21:01
Speaker 1: been far. It turns out it's five that we see
21:05
Speaker 1: allow families to sustain their success every time. First and
21:09
Speaker 1: foremost investing your financial assets, your portfolio, having the right
21:13
Speaker 1: ASSEID allocation, and most importantly, sticking to it when it's hard.
21:18
Speaker 1: Number two, UM, spending. As I said, every institutional investor
21:22
Speaker 1: has a spending rate of spending policy. Understanding the impact
21:25
Speaker 1: of spending on long term returns is very very important.
21:30
Speaker 1: Number Three borrowing. Our clients don't typically have to borrow,
21:33
Speaker 1: but they can. And one of the things that we
21:35
Speaker 1: joke about is that we you can date yourself, um
21:39
Speaker 1: by saying what the interest rate was on the first
21:42
Speaker 1: mortgage you took out on a house. If it was
21:45
Speaker 1: in the double digits, cancers are, it was in the
21:47
Speaker 1: late eighties, early nineties. If it was in the mid
21:50
Speaker 1: single digits, it was in the nineties. If it, you know,
21:52
Speaker 1: drops even lower, it was sometime in this new um
21:56
Speaker 1: century we're in. And if it's below three percent, you
21:58
Speaker 1: took it out this year. So you know, our clients
22:01
Speaker 1: don't have to borrow, but they make capital allocation decisions
22:04
Speaker 1: just like any major company does, and so thinking about
22:07
Speaker 1: their balance sheets and thinking about when it might make
22:10
Speaker 1: sense to borrow, particularly when rates are low, for estate
22:14
Speaker 1: planning purposes, for liquidity purposes, for purchases, that's become a
22:18
Speaker 1: more important discipline. And that that's the third one for investing, sending, borrowing,
22:25
Speaker 1: managing for after tax returns because our clients do pay taxes,
22:28
Speaker 1: and part of that is related to your question about
22:30
Speaker 1: active and passive right passive vehicles um lower costs but
22:34
Speaker 1: also very tax efficient. And what we say to our
22:37
Speaker 1: clients is again with our investment outlook, you've got to
22:40
Speaker 1: eke out excess returns wherever you can, and there are
22:43
Speaker 1: certain classes where that may be less likely. You know,
22:47
Speaker 1: the US large cap market is very very efficient. Um,
22:50
Speaker 1: we would say, um, you can actually add tax alpha
22:54
Speaker 1: in the US large cap markets, perhaps more effectively and
22:57
Speaker 1: consistently than you can add invest an alpha. But then
23:01
Speaker 1: there are other classes as at classes where markets are
23:03
Speaker 1: much less efficient, and we do encourage them to go
23:06
Speaker 1: um for access returns. And then the last discipline protect
23:09
Speaker 1: what you have. And that's everything from good cyber practices
23:14
Speaker 1: to estate planning and trusts and things that protect assets
23:19
Speaker 1: to protecting them unfinancial assets. What are the qualities and
23:22
Speaker 1: disciplines in your family that you want to see survived
23:25
Speaker 1: to the next generation. So it's it's invest, send, borrow, manage, protect,
23:32
Speaker 1: as you said, mhm, quite quite intriguing. Let's talk a
23:37
Speaker 1: little bit about what a year we've been living through
23:43
Speaker 1: of virus induced economic shutdown, a thirty decline in the SMP,
23:50
Speaker 1: tons of volatility. How has this mayhem this year affected clients?
23:57
Speaker 1: Were you guys forced to respond on with new policies
24:01
Speaker 1: and procedures or how did you deal with great question Barry,
24:05
Speaker 1: I mean, how has this pandemic not impacted our business
24:09
Speaker 1: to here in a way? I think it's the question
24:11
Speaker 1: because if you go back to the beginning of March,
24:14
Speaker 1: of the people in my division worked in our offices
24:17
Speaker 1: and we had to transition over a three week period
24:21
Speaker 1: to them working at home. So, you know, first and foremost, um,
24:26
Speaker 1: you know, kudos to the company for all of the
24:29
Speaker 1: work that it has done over the years in resiliency
24:32
Speaker 1: and in technology, because it actually enabled us We didn't
24:35
Speaker 1: expect us to happen, but it actually enabled us to
24:38
Speaker 1: very very rapidly shift our employees and wealth management from
24:42
Speaker 1: working full time in the offices to working at home. So, um,
24:47
Speaker 1: you know, Fortunately, it turns out in hindsight we were
24:49
Speaker 1: more prepared than we thought. But apart from that, it
24:51
Speaker 1: meant we had to change our days and so at
24:54
Speaker 1: b M. Y Melon what that meant in March, in
24:56
Speaker 1: April and May, when we were really in the thick
24:58
Speaker 1: of this, the exact a committee of senior leadership group
25:01
Speaker 1: of the company met early every single morning, and in
25:04
Speaker 1: fact some days we met more than once to kind
25:06
Speaker 1: of take a look across the markets, the landscape. What
25:09
Speaker 1: did we see what's happening. Then. In wealth management, we
25:12
Speaker 1: start our mornings now every single morning together on a
25:15
Speaker 1: market call, kind of guiding our people to what we're
25:18
Speaker 1: seeing in the markets, what changes are we making the portfolios,
25:21
Speaker 1: what advice are we sharing with clients. During the spring
25:26
Speaker 1: when markets were changing so rapidly, every single Monday, at
25:29
Speaker 1: four o'clock after the markets closed, we held a call
25:31
Speaker 1: for our all of our clients, sharing with them what
25:34
Speaker 1: we were observing and what we were doing UH to
25:36
Speaker 1: help them. On Tuesdays at four o'clock, we closed our
25:40
Speaker 1: days together with another meeting internally, just gathering people together
25:44
Speaker 1: and talking about some of the new things that UM
25:46
Speaker 1: we have to learn and absorb the fee or whether
25:48
Speaker 1: it's around low interest rates that we have, whether it's
25:51
Speaker 1: around new planning techniques under the Cares Act or other
25:54
Speaker 1: things UM. And on Fridays for much of this year,
25:58
Speaker 1: we've actually closed our days together and while management four
26:00
Speaker 1: o'clock with a very short call fifteen minutes just reflecting
26:04
Speaker 1: on what the week is meant to all of us
26:06
Speaker 1: personally and professionally. So we've really changed the way we
26:09
Speaker 1: spend our time because we're going through this crisis in
26:13
Speaker 1: such a different way than any other crisis in our history,
26:17
Speaker 1: which is we're going through it together, but we're sitting separately,
26:20
Speaker 1: and so we're really trying to recreate occasions to come together.
26:25
Speaker 1: So so now we've gotten pretty close to FDA approvals
26:30
Speaker 1: on three separate vaccines that all look extremely promising. What
26:37
Speaker 1: do you think this is going to do? Not just
26:39
Speaker 1: to reopening generally, but how has this experience changed what
26:44
Speaker 1: the future of the workplace is going to be. Are
26:46
Speaker 1: we're going to go back to en or has twenty
26:50
Speaker 1: left a lasting impression that will change how financial services
26:55
Speaker 1: firm are going to operate in the future. That's a
26:59
Speaker 1: great question, Barry, and I think the answer is that
27:02
Speaker 1: this has fundamentally changed our working model for the future.
27:07
Speaker 1: And so let me talk about the business model. First
27:09
Speaker 1: of all, how we work with clients. You know, I
27:11
Speaker 1: would have said that for many, many years we had
27:13
Speaker 1: a two legged business model. Part of it was physical,
27:16
Speaker 1: meeting with the client in person, and part of it
27:18
Speaker 1: was digital, the client interacting with us digital at using
27:21
Speaker 1: our tools. I would say that this year we have
27:24
Speaker 1: permanently added a third leg to that business model, which
27:27
Speaker 1: is virtual. So they'll be physical, they'll be digital, but
27:31
Speaker 1: they'll also be virtual because what we found is it's
27:34
Speaker 1: a very efficient way to meet with people. It's an
27:38
Speaker 1: efficient way to get a family together that may not
27:40
Speaker 1: be living together, they might be living in different states. Um,
27:43
Speaker 1: it's a very very efficient way to get large groups
27:46
Speaker 1: of people together, right just for an hour meeting time. Um,
27:49
Speaker 1: we've we've actually done some virtual events for our clients,
27:52
Speaker 1: given you virtual tours of the Metropolitan Museum of Art
27:55
Speaker 1: that people from all over the country are taking part in,
27:58
Speaker 1: even without trying to in to New York. Same thing
28:01
Speaker 1: for for the moment as our museums here in the
28:03
Speaker 1: city of Rios m So, I think we have added
28:06
Speaker 1: virtual as the third leg of the business model permanently,
28:10
Speaker 1: and I think that's a really good thing. Huh. Quite
28:13
Speaker 1: quite interesting. So it seemed was an election year and
28:18
Speaker 1: all clients wanted to ask about was what our thoughts
28:22
Speaker 1: were on the outcome of the election and what it
28:25
Speaker 1: might mean. What was your experience pre election, how are
28:29
Speaker 1: you looking at possible changes, and how um curious and
28:34
Speaker 1: concerned was your client base. So I would say that
28:41
Speaker 1: certain an election year, I would say it's even bigger
28:43
Speaker 1: than that. Twenty twenty a year for the history books
28:45
Speaker 1: when you think about what we've gone through, right, historic
28:49
Speaker 1: actions in the markets, historic actions by central banks, historic
28:52
Speaker 1: global pandemic, historic election. It's just been a year for
28:56
Speaker 1: the history books, and we're all going to look back
28:58
Speaker 1: on this um and remember what it was like to
29:01
Speaker 1: go through it together. I think specifically with respect to
29:04
Speaker 1: the election, our clients have had questions really about two things, um,
29:09
Speaker 1: leading into the election and after. The first is, you know,
29:12
Speaker 1: elections are really about policies, right, what do we think
29:15
Speaker 1: the policies of the new administration the new Congress might adopt.
29:20
Speaker 1: And so our clients are business people, they were concerned
29:22
Speaker 1: about policies related to different industry segments, and also about
29:27
Speaker 1: taxes because, of course, as I said before, our clients
29:29
Speaker 1: pay taxes every year and every generation. So those were
29:32
Speaker 1: really the two areas that we were spending time on
29:36
Speaker 1: with clients. And with respect the taxes, our clients have
29:39
Speaker 1: you know, an understanding that really tax rates in this
29:42
Speaker 1: country have been declining, you know since the nineteen seventy
29:46
Speaker 1: right when we look at federal tax rates, income tax rates,
29:49
Speaker 1: couple of themes, tax rates, corporate tax rates, you know,
29:53
Speaker 1: they have been coming down. So our clients have been
29:55
Speaker 1: awareness that we are at you know, sort of multi
29:59
Speaker 1: decade low on tax rights, and they also have an
30:02
Speaker 1: awareness that we've got you know, deficit spending and pressures
30:05
Speaker 1: on on the budget, so they focus very very keenly
30:09
Speaker 1: on tax rates. And I think, um, you know, we
30:13
Speaker 1: we wait to see what the outcome of the Georgia
30:16
Speaker 1: elections will be. Um to clee, you know, what's the
30:20
Speaker 1: more likely outcome on passing some of the policies and
30:24
Speaker 1: related to taxes and other things in the Biden Harris administration.
30:29
Speaker 1: We will see, we will see. So so that raises
30:33
Speaker 1: questions we've we've already seen the certification and the transition
30:37
Speaker 1: um phase begin. That was sort of up in the
30:41
Speaker 1: air for a while. But as you referred, we don't
30:44
Speaker 1: know what's going to happen in the runoff election and
30:47
Speaker 1: whether or not there'll be a change in control in
30:50
Speaker 1: the Senate. But given that, what sort of things should
30:54
Speaker 1: investors be doing in to prepare for potential changes or
31:02
Speaker 1: should they not are there even if the Senate flips?
31:07
Speaker 1: Does it matter what's done now? Can it wait till?
31:11
Speaker 1: How are you advising clients? So what we would tell
31:15
Speaker 1: our clients is to take the step that makes sense
31:21
Speaker 1: for your long term plans. If it makes sense to diversify.
31:26
Speaker 1: Many of our clients their wealth is created in concentration,
31:29
Speaker 1: right they found the company. They have a concentration and
31:32
Speaker 1: a single stock. That's how wealth is created in this country.
31:34
Speaker 1: We can think of the wealthiest people in the country
31:36
Speaker 1: and we know how Jeff Bezos and everybody else created
31:39
Speaker 1: their wealth. So we tell them, if it makes sense
31:41
Speaker 1: for your long term plan to be making some changeup
31:44
Speaker 1: to your investment portfolio, perhaps to diversifying, perhaps to taking
31:49
Speaker 1: some capital gains, that you should do that. If it
31:52
Speaker 1: makes sense for the long term, you should stick with
31:55
Speaker 1: that long term plan. You know, in the meantime, markets
31:58
Speaker 1: tend to like divide. It is government. Markets have done
32:01
Speaker 1: very well with divided government. And we've had divided government
32:04
Speaker 1: actually for much of the last twenty years. So um
32:08
Speaker 1: and and that's what the market is tending to expect
32:11
Speaker 1: right now, is divided government. You've had, you have lower
32:14
Speaker 1: you will have lower democratic majorities in the House. The
32:18
Speaker 1: Senate will be very close. So the market is expecting
32:22
Speaker 1: a relatively balanced outcome. And what we say to our
32:25
Speaker 1: clients is, you know, stick with that long term plan,
32:28
Speaker 1: and if there are decisions that you make that you
32:30
Speaker 1: would make for the long term, you should make them.
32:33
Speaker 1: There are things that are highly tactical right now. Right
32:35
Speaker 1: interest rates to the lowest that we've seen in our lifetimes,
32:39
Speaker 1: and that includes for the state planning right, inter family gifts,
32:43
Speaker 1: lit interests, trust, interfamily loans, lowest interest rates ever. So
32:48
Speaker 1: there's a very tactical aspect of that. And the other
32:52
Speaker 1: thing that's tactical is that the estate tax exemption is scheduled,
32:56
Speaker 1: which is currently roughly twenty three million approximately. I lost
33:00
Speaker 1: a husband and a wife that is tended to reduce
33:05
Speaker 1: in the so, you know, using things that are going
33:08
Speaker 1: to go away makes a lot of sense. Let's talk
33:12
Speaker 1: a little bit about alternatives. UH. They play a huge
33:16
Speaker 1: role in the institutional world, especially UH in the endowment space.
33:21
Speaker 1: We're seeing more and more interest in that space, especially
33:25
Speaker 1: private equity UH these days. How is this going to
33:29
Speaker 1: play out? What sort of interest are you seeing from
33:34
Speaker 1: your client group, and what do you think the future
33:38
Speaker 1: of alternatives are going to be in the investment management space?
33:41
Speaker 1: Good question. You know, our clients are business people and
33:45
Speaker 1: so as a as a baseline, they're very comfortable with
33:48
Speaker 1: private businesses and private markets because that tends to be
33:51
Speaker 1: how many of them have become successful. So they understand
33:54
Speaker 1: that as as business people. You know, when we think
33:57
Speaker 1: about portfolios and again, trying to have individ digital investors
34:00
Speaker 1: achieved the kinds of long term returns and institution paths
34:04
Speaker 1: alternatives is very much a part of that. And capital
34:08
Speaker 1: market structure has changed a lot over the last twenty years.
34:11
Speaker 1: If we think about capital markets and what's happened, you know,
34:14
Speaker 1: you've seen a steady decline in the number of public
34:17
Speaker 1: companies in this country. We now have fewer than five
34:20
Speaker 1: thousand public companies. At one time that was as many
34:22
Speaker 1: as eight thousands. And at the same time, you've seen
34:25
Speaker 1: a very large increase in the number of private companies
34:29
Speaker 1: that are backed by private equity and venture capital funds,
34:33
Speaker 1: to the point where you now have more of those
34:35
Speaker 1: private companies that are backed by private equity funds and
34:38
Speaker 1: venture capital funds then you have public companies, So you
34:42
Speaker 1: have a much bigger investment universe in the private equity space.
34:47
Speaker 1: And you we also see that companies tend to be
34:50
Speaker 1: staying public longer, particularly to venture backed companies and so
34:55
Speaker 1: there's a very large alternative universe out there where lot
35:00
Speaker 1: of value is being created, and we think it's very
35:02
Speaker 1: important for our clients to have exposure to that for
35:05
Speaker 1: the long term, because what you've seen over time is
35:09
Speaker 1: that when you give up the daily liquidity of a
35:12
Speaker 1: public markets, you tend to earn a liquidity premium and
35:16
Speaker 1: private markets, and that liquidity premium could be as much
35:19
Speaker 1: as three four five percent a year. And so if
35:22
Speaker 1: I go back to you know, kind of our outlook
35:24
Speaker 1: for markets for the next decade, and the fact that
35:26
Speaker 1: we think public market returns are probably going to be
35:29
Speaker 1: incrementally lower, speaking out, those excess returns that you can
35:33
Speaker 1: get in private markets are going to be even more
35:36
Speaker 1: important for wealthy clients. Let's talk a little bit about
35:40
Speaker 1: the traditional sixty forty portfolio stocks, bonds. You have called
35:47
Speaker 1: it a quote relic of the past. Tell us why so?
35:51
Speaker 1: The sixty forty portfolio for many, many decades gave clients
35:57
Speaker 1: a combination of um good returns and equity markets you know,
36:02
Speaker 1: call it high single digit returns and equity markets, and
36:06
Speaker 1: good returns and fixed income markets call it mid single
36:09
Speaker 1: digit returns. In the fixed income markets, you know, as
36:13
Speaker 1: we look ahead, for the reasons that we've we've been discussing,
36:17
Speaker 1: we've see modestly lower returns and public equity markets, and now,
36:22
Speaker 1: particularly this year after the actions of the Federal Reserve
36:25
Speaker 1: and reducing interest rates, we see lower returns and fixed
36:28
Speaker 1: income markets as well. And so the question is what
36:32
Speaker 1: is that sixty forty portfolio becomes in it? And the
36:35
Speaker 1: answer is it really depends upon you, your long term objectives,
36:41
Speaker 1: your needs for liquidity. But at a minimum, it probably
36:44
Speaker 1: isn't the sixty forty for almost anybody anymore. Right, It
36:48
Speaker 1: might become a sixty five thirty five. It might be
36:51
Speaker 1: a seventy thirty. It could even be an eight d twenty,
36:55
Speaker 1: depending on your age, your outlook, your needs, your objectives,
37:00
Speaker 1: and those are the that's the modeling that we're going
37:02
Speaker 1: through with every client right now, because we would look
37:05
Speaker 1: at that portfolio that might have fairly reliably delivered call
37:11
Speaker 1: it a seven percent, you know, annualized return over the
37:14
Speaker 1: last couple of decades, and we would say, you know,
37:17
Speaker 1: our outlook right now, it's probably that that's more like
37:20
Speaker 1: five percent. If you leave left to its own devices,
37:24
Speaker 1: is probably more like five percent. It could even be
37:26
Speaker 1: a little lower. How do we help to capture those
37:31
Speaker 1: additional returns? And it will be some of the things
37:33
Speaker 1: that we've talked about, right, It'll be things like um
37:36
Speaker 1: diversifying into private markets. It will also be about diversifying
37:41
Speaker 1: a bit away from the United States. The United States
37:44
Speaker 1: equity markets have led the world since the financial crisis.
37:48
Speaker 1: We actually think that we might see a bit of
37:49
Speaker 1: a rotation they're going forward, So diversifying the way from
37:53
Speaker 1: the United States. In your bond portfolio, it probably means
37:56
Speaker 1: having a smaller allocation to bond because the yield will
38:01
Speaker 1: be lower, but it also means finding some other things
38:05
Speaker 1: that you can sort of reliably sleep at night with.
38:08
Speaker 1: Maybe it's more like absolute return hedge funds, for example
38:14
Speaker 1: um so's. It's a tweaking of that portfolio. It is
38:17
Speaker 1: not a huge rewrite. It's a tweak and it's being
38:21
Speaker 1: tweaked every day, slightly differently for every client. Huh, what
38:26
Speaker 1: do you think in the fixed income space of things
38:29
Speaker 1: like high quality corporates, muni bonds, and we are occasionally
38:34
Speaker 1: getting questions about preferred what are your thoughts there? You know,
38:37
Speaker 1: for us, the fixed income portfolio is the is the
38:41
Speaker 1: balance right to the to the risk that you take
38:44
Speaker 1: in the rest of your portfolio. So we do tend
38:46
Speaker 1: to focus a lot on quality, right, higher quality. UM,
38:51
Speaker 1: we actually focus very much right now on duration because UM,
38:55
Speaker 1: you know, duration has actually extended, meaning that there's more
38:58
Speaker 1: duration risk in portfolio. So, UM, those are the two
39:02
Speaker 1: things that were most focused on in fixed income right now.
39:06
Speaker 1: I have to ask you a couple of questions about
39:09
Speaker 1: philanthropy and your clients. I know you're on the investment
39:12
Speaker 1: committee of the Howard Used Medical Institute and the Helmsley
39:17
Speaker 1: Charitable Trust, and you were on a couple of of
39:21
Speaker 1: your alma materas on the investment committees. Uh, how are
39:26
Speaker 1: clients thinking about philanthropy these days? What what issues seem
39:31
Speaker 1: to be dominated Tving make two points about philanthropy. One
39:34
Speaker 1: is that we are a very very generous country and culture,
39:38
Speaker 1: and we've seen that this year. We've seen that across
39:40
Speaker 1: our client base. We've seen charitable giving going up, and
39:44
Speaker 1: donor advise funds and outright gifts and trust gifts and
39:48
Speaker 1: planned giving. So we are a very very generous country
39:53
Speaker 1: and culture and that's very inspiring. The other thing that
39:56
Speaker 1: I think has been just amazing to watch into a
40:00
Speaker 1: certain extent to be part of this year is to
40:02
Speaker 1: watch how philanthropic resources have gotten together and just attacked
40:09
Speaker 1: where the needs are. Right. So you mentioned Howard Hughes.
40:12
Speaker 1: You mentioned helpfully they both focus on healthcare and they
40:15
Speaker 1: have dived in UM to opportunities and challenges created and
40:19
Speaker 1: healthcare related to the virus. You know, I think about
40:22
Speaker 1: our company. We have been you know, we're headquartered here
40:25
Speaker 1: in New York City, and we've we've sort of dived
40:27
Speaker 1: in through needs that we've seen here in the city.
40:29
Speaker 1: We've provided iPads to a hospital system for patients to
40:34
Speaker 1: be able to communicate with family members when they couldn't visit.
40:37
Speaker 1: We've helped homeless shelters get WiFi for students that might
40:42
Speaker 1: be living in shelters that needs to do remote learning.
40:44
Speaker 1: So I think one of the things about this year
40:47
Speaker 1: has just been seeing UM philanthropists dive in to meet
40:54
Speaker 1: the needs that were created so unexpectedly. You mentioned that
40:58
Speaker 1: some of the UM non traditional gifting techniques are quote
41:04
Speaker 1: unquote on sale, things like charitable lead trusts or grant
41:08
Speaker 1: or retain annuity trusts. Tell us about some of these
41:13
Speaker 1: mechanisms that allow families to very advantageously make donations to
41:19
Speaker 1: their favorite philanthropies. So it really depends very on the
41:23
Speaker 1: type of the gift. If you make an outright gift,
41:25
Speaker 1: you value it on the day of the gift, you know,
41:27
Speaker 1: um what that is, and you've you've made an absolute
41:30
Speaker 1: transfer of it. But sometimes gifts are split interest gifts.
41:34
Speaker 1: You might keep an interest and give away the remainder.
41:38
Speaker 1: You do that um with a charitable lead trust or
41:41
Speaker 1: a charitable remainder trust. You do that with a grant
41:44
Speaker 1: or retain annuity trust. And the interesting thing about split
41:48
Speaker 1: interest gifts is that you have to value what you're keeping,
41:52
Speaker 1: because that's not a gift. You don't make a gift
41:54
Speaker 1: yourself um, And the gift really is the remainder what
41:58
Speaker 1: you're not, what you haven't kept. And the reason that
42:00
Speaker 1: there's such a compelling opportunity right now is that the
42:03
Speaker 1: value of what you've kept is discounted at very very
42:07
Speaker 1: very low interest rates UM, and so that means that
42:11
Speaker 1: potentially there could be a large gift just market succeed
42:14
Speaker 1: you know, low interest rates, there could be a large
42:15
Speaker 1: gift um at the end to the beneficiary, whether that's
42:19
Speaker 1: a charity or a family member. So it's a pretty
42:20
Speaker 1: technical estate planning environment, but lots of opportunities for clients.
42:26
Speaker 1: One of the areas we did not get into was environmental,
42:31
Speaker 1: social and governance E s G investing. Tell us a
42:34
Speaker 1: little bit about that space. What what are your clients thinking?
42:38
Speaker 1: They're so when it comes to environmental, social and governance matters,
42:41
Speaker 1: we view those considerations. It's just basic considerations that you
42:47
Speaker 1: should employ as an investor and as an active manager.
42:50
Speaker 1: So we look at those considerations when we make decisions
42:55
Speaker 1: as investors. I think that in a in the big
42:58
Speaker 1: scheme of things, you know e s G. Environmental social
43:02
Speaker 1: governance considerations. Interestingly enough, there was a time when people
43:08
Speaker 1: were concerned that if you took those into account, you
43:11
Speaker 1: might be limiting your investment universe. Is therefore, you might
43:14
Speaker 1: potentially limit your return because you're investing in a smaller
43:18
Speaker 1: universe of companies. In fact, what we've seen happen over
43:22
Speaker 1: the last ten years or so, if investors had come
43:25
Speaker 1: to realize that these are factors that should be taken
43:28
Speaker 1: into account, and if you don't take them into account,
43:31
Speaker 1: you might actually increase your risk. So, in our view,
43:36
Speaker 1: the whole, the whole rubric of E, S G has
43:40
Speaker 1: now become just a fundamental part of investing. Now, when
43:43
Speaker 1: it comes to any particular family, they might have particular
43:48
Speaker 1: passions or concerns related to E or F or G,
43:53
Speaker 1: and we can take those into account and Taylor that
43:55
Speaker 1: in general as investors, we just look at those factors
43:58
Speaker 1: as things that any um analytical investors should take into account.
44:05
Speaker 1: So so let's stay with the governance side of that.
44:09
Speaker 1: There was a Deloitte study They found that women in
44:14
Speaker 1: leadership roles in the financial services industry was a rather paltry.
44:21
Speaker 1: At your firm, the leadership group or women, that is
44:26
Speaker 1: quite a success story compared to the industry. How was
44:31
Speaker 1: b n y Melon capable of achieving such such success
44:36
Speaker 1: in that space? Well, look at the wealth management industry.
44:42
Speaker 1: We understand how important diversity is. Our clients are diverse,
44:45
Speaker 1: we represent families, so we know how important it is
44:48
Speaker 1: to our business. But apart from that, you know, the
44:51
Speaker 1: data is really clear. Diverse leadership teams have lower cost
44:56
Speaker 1: of capital, Diverse investment teams have better investment returns, Diverse
45:01
Speaker 1: sales teams have better sales performance. The data is really clear.
45:06
Speaker 1: The diversity. It's good for business and it's good for
45:09
Speaker 1: investment businesses. So there's simply no question about that. Who
45:12
Speaker 1: asked about why is it that the industry maybe hasn't
45:16
Speaker 1: been as diverse as um we are and that we
45:18
Speaker 1: wanted to be? And I think there are really two reasons, Verry.
45:21
Speaker 1: The first one is visibility. You know, when I was
45:24
Speaker 1: growing up, I'm from Washington, DC, and when I was
45:26
Speaker 1: growing up, I didn't really see finance or investing or
45:30
Speaker 1: financial services of a career. Back then. This was, you know,
45:33
Speaker 1: in the nineteen and Washington, and I saw lots of
45:36
Speaker 1: great careers public service and medicine and law. My dad
45:40
Speaker 1: as a lawyer, Um, you know, real estate, all sorts
45:43
Speaker 1: of things, media, But I wouldn't necessarily see financial services.
45:47
Speaker 1: It wasn't until I was a professional that I realized, um,
45:51
Speaker 1: that that was a career you know, that I could pursue.
45:54
Speaker 1: And so one thing that's happened since then is that
45:57
Speaker 1: Marcus took democratized that shift from pension plans to furrowing
46:03
Speaker 1: case and personal savings markets have democratized, and so I
46:06
Speaker 1: think the industry is much more visible, and I try
46:09
Speaker 1: to do things to make it as visible as I can.
46:11
Speaker 1: For women, part of what we're doing today because I
46:14
Speaker 1: just think it's really important. It's a wonderful industry and
46:16
Speaker 1: a wonderful career. So visibility is the first, but then
46:20
Speaker 1: the second thing, that's the process. Right. We are in
46:22
Speaker 1: industry that is challenged by markets, the change all day
46:27
Speaker 1: every day. Right, we are in industry that tends to
46:30
Speaker 1: have to absorb information and move very quickly. And sometimes
46:34
Speaker 1: when it comes to diversity, moving too quickly is not
46:38
Speaker 1: the best thing to do. Sometimes you need to slow down.
46:41
Speaker 1: You need to have a good process, and you need
46:43
Speaker 1: to cast your nest widely when you're thinking about recruiting
46:47
Speaker 1: and promoting, and that does take a little longer, but
46:50
Speaker 1: the but the result tends to be much better if
46:54
Speaker 1: you can just slow down a little and have a
46:56
Speaker 1: great process that's very inclusive. M it's quite interesting we're
47:01
Speaker 1: recording this on a day when black Rock bought a
47:06
Speaker 1: direct indexing fund for about a billion dollars. What are
47:10
Speaker 1: your thoughts given what you said about tax advantaged alpha
47:15
Speaker 1: of direct indexing and its ability to um generate better
47:22
Speaker 1: after tax returns versus traditional indexing. So I think when
47:28
Speaker 1: it comes to wealth management, there's a role to play
47:31
Speaker 1: for broad market indexes, but there's also a role to
47:34
Speaker 1: play for customizing the indexes. Right, So you might be
47:37
Speaker 1: customizing them for um particular um tax outcomes. Right, you
47:43
Speaker 1: can tax Harve's losses and customize for the kind of
47:46
Speaker 1: tax outcome you want. You might be customizing them for
47:49
Speaker 1: other reasons, right to form an index that is a
47:53
Speaker 1: little bit different than the market but helps to accomplish
47:56
Speaker 1: a particular passion and goal with your clients. So I
47:59
Speaker 1: think there are there are roles for broad market indexes,
48:02
Speaker 1: but increasingly I think there are roles for customizing those
48:06
Speaker 1: indexes too, after tax returns or other goals that a
48:10
Speaker 1: client has. And we really see that at the future
48:13
Speaker 1: and in a way that we spend a lot of
48:14
Speaker 1: our time. Let me let me throw a curve ball
48:18
Speaker 1: at you. I know B and Y Melon's founder was
48:21
Speaker 1: Alexander Hamilton's. How did the play resonate within B and
48:26
Speaker 1: Y Melon? What? What? What was the response within the firm?
48:32
Speaker 1: So obviously we're very proud of our history of Alexander
48:35
Speaker 1: Hamilton's and Eliza, as I said, and Eliza his widow,
48:39
Speaker 1: who was actually our first client in wealth management. We
48:42
Speaker 1: love the musical. We love the musical We love the
48:44
Speaker 1: way it makes our history come to life. We actually
48:47
Speaker 1: enjoyed watching the streaming versions over the summer. One of
48:50
Speaker 1: the fun things that we did UM as a group
48:53
Speaker 1: in wealth management. But you know, when I think about UM,
48:57
Speaker 1: you know the musical, you know, one of the things
49:00
Speaker 1: was that that has always top of mind. Has happens
49:02
Speaker 1: to be my favorite song in the musical, as the
49:05
Speaker 1: rumor it happens, and that's the one about the compromise
49:09
Speaker 1: between the Northern States and the Southern States to move
49:12
Speaker 1: the capital from New York City to Washington, d C.
49:15
Speaker 1: I obviously live in New York right now, I'm from Washington,
49:17
Speaker 1: d C. But I think that that whole process of
49:21
Speaker 1: compromise and give and take, it's something that we do
49:25
Speaker 1: every single day as we debate UM, you know, investment
49:28
Speaker 1: portfolios and decisions and things like that with clients, and
49:31
Speaker 1: I think increasingly it's something that we're all looking to
49:34
Speaker 1: our government to do right in Washington. So we love
49:38
Speaker 1: the We love the show, We love the history that
49:41
Speaker 1: bliss us all the time. And thank you for asking
49:44
Speaker 1: tell us what you're streaming these days. You mentioned the
49:46
Speaker 1: Disney Plus version of Hamilton's which was spectacular. What else
49:51
Speaker 1: are you watching on either Netflix or Amazon Prime or
49:54
Speaker 1: or whatever. So I'm streaming a couple of things. One
49:58
Speaker 1: is the Crown. I think it's hard to be in
49:59
Speaker 1: a American and not have an affinity for the special
50:02
Speaker 1: relationship we've always had with the UK. I actually even
50:06
Speaker 1: tuned in in the spring when Queen Elizabeth addressed the
50:10
Speaker 1: United Kingdom for only the fifth or sixth time in
50:12
Speaker 1: her whole life about the pandemic, and I found it
50:16
Speaker 1: very inspirational and moving. The only thing that I'm streaming
50:19
Speaker 1: right now. You know, it remains very hard for independent
50:22
Speaker 1: films to get funded in Hollywood, and that can be
50:25
Speaker 1: particularly the case when they are films about women, uh
50:30
Speaker 1: you know, written by women, stories about women. And so
50:32
Speaker 1: a couple of years ago, I actually invested in a
50:35
Speaker 1: wonderful film. It's called The Time to Spy and it
50:38
Speaker 1: is a true story. It is out on Hulu and
50:40
Speaker 1: Amazon right now. It is about three women spies in
50:44
Speaker 1: World War two, true story who trained as spies under
50:49
Speaker 1: the Churchill Foreign Office and went into not the occupied
50:52
Speaker 1: territory as part of the war. And it's a wonderful,
50:55
Speaker 1: wonderful story about real women heroes that's the film A
51:00
Speaker 1: Call to Spy and you could find that on Amazon Prime.
51:04
Speaker 1: Tell us about your early mentors who helped to shape
51:07
Speaker 1: your career. So, one of my early mentors in my career,
51:12
Speaker 1: and it's just an example of the serendipity in this industry,
51:15
Speaker 1: was actually Jack Bogel, who was the founder of the
51:17
Speaker 1: Vangard Group. And I've never worked at the Vanguard Group,
51:20
Speaker 1: and yet um in this industry, I had the chance
51:23
Speaker 1: to meet Jack and work with him and cover him
51:26
Speaker 1: as an industry UM, industry group, industry pere and you know,
51:32
Speaker 1: I watched him really changed the investment industry. I watched,
51:36
Speaker 1: you know, he had lost his dad at a young age,
51:39
Speaker 1: and he was very, very committed to the success of
51:43
Speaker 1: individual investors. And I remember Vanguard when it was still
51:47
Speaker 1: a small company in celebrating billion versus trilliance, and I watched,
51:51
Speaker 1: you know, his passion and his conviction really build a
51:55
Speaker 1: company that changed the industry. And it's I have It
51:58
Speaker 1: has always stayed with me. I was I was fortunate
52:01
Speaker 1: to stay in touch with him for his whole life. UM.
52:04
Speaker 1: So Jack Bogel unexpectedly a big mentor of mine, even
52:07
Speaker 1: though I never worked for him. I just had the
52:09
Speaker 1: great good fortune of working with him. UM. And another
52:12
Speaker 1: one I mentioned earlier my mom, My mom, who became,
52:16
Speaker 1: you know, unexpectedly a widow at thirty two years old,
52:19
Speaker 1: but three little kids that went, um, you know, back
52:22
Speaker 1: to work and back to school and back to work,
52:25
Speaker 1: and learned how to manage her own little you know,
52:27
Speaker 1: pot of life insurance proceeds, and um, you know, stayed
52:31
Speaker 1: with her career until she was seven nine years old
52:33
Speaker 1: because she loved books, since she loved the library, she
52:36
Speaker 1: was a librarian. And you know, she's been an incredible,
52:40
Speaker 1: incredible mentor for me. So Jack Bogel and my mom
52:43
Speaker 1: two of my mentors, quite quite fascinating. Tell us about
52:46
Speaker 1: your favorite books. What are you reading these days? So?
52:50
Speaker 1: I love to read. I love to read. I actually
52:52
Speaker 1: majored in English in college, and this year I've read recently,
52:55
Speaker 1: Eric Larson was blended in The Vial, which again a
52:57
Speaker 1: great story of church Ill in World War Two and
53:01
Speaker 1: the Battle of Britain, really really good and not a story,
53:03
Speaker 1: by the way nonfiction. UM. I enjoyed Michelle Obama's Becoming.
53:07
Speaker 1: I haven't read The Rocks book yet, but I will.
53:10
Speaker 1: I will get to that too, And I enjoyed a
53:13
Speaker 1: fiction book that's called The Vanishing Half, which is about
53:17
Speaker 1: two sisters that ended up living very different lives than
53:21
Speaker 1: very twin sisters, very different lives and very different communities,
53:24
Speaker 1: one in a white community, one in black community. Enjoyed
53:27
Speaker 1: it very much but quite interesting. What sort of advice
53:31
Speaker 1: would you give to a recent college graduate who was
53:34
Speaker 1: interested in a career in investment management? So the first
53:40
Speaker 1: thing I would do is, I would congratulate them for
53:42
Speaker 1: picking a good industry, and the good segments of wealth
53:45
Speaker 1: and investment management industries are dynamic and growing and they
53:47
Speaker 1: will be a good career for for the rest of
53:50
Speaker 1: your career. So congratulations, you pick the great area. And
53:53
Speaker 1: then I would tell them two things. The first one
53:56
Speaker 1: is that we're a knowledge industry, and so what do
53:58
Speaker 1: you realize they or not? Early years in your career
54:01
Speaker 1: you have the luxury of being very selfish, focusing on
54:04
Speaker 1: yourself and trying to learn as much as you can
54:07
Speaker 1: and get as much knowledge as you can. Because as
54:09
Speaker 1: your as your career progresses, you tend to have more responsibilities,
54:13
Speaker 1: responsibilities for more projects at work, more people at work,
54:16
Speaker 1: maybe people at home. So these early years whether you
54:19
Speaker 1: know it or not, are years that you can be
54:21
Speaker 1: really selfish and focused on yourself and try to learn
54:24
Speaker 1: as much as you can. And then the second thing
54:26
Speaker 1: that I would tell them is we're a knowledge industry,
54:30
Speaker 1: but knowledge is them enough. We're also an empathy industry
54:33
Speaker 1: because we really work with people and we have to.
54:37
Speaker 1: The first thing you have to do if you want
54:39
Speaker 1: to be empathetic is adject to listen. And sometimes in
54:43
Speaker 1: our industry the tendency is to tell people everything we know.
54:48
Speaker 1: In fact, what we ought to do first and foremost
54:50
Speaker 1: is the really good listeners, because then we're going to
54:53
Speaker 1: learn about what's important to our clients. And I've just
54:56
Speaker 1: learned over time that you get great success when you
55:00
Speaker 1: combine what you know with what people care about and
55:04
Speaker 1: what you care about. People don't really care about what
55:07
Speaker 1: you know until they know that you care. And so
55:09
Speaker 1: that combination of learning learning, learning early in your career,
55:13
Speaker 1: but also building empathy and listening skills, that's the perfect
55:17
Speaker 1: combination in this industry, and that's what I would encourage
55:20
Speaker 1: them to focus on. And our final question, what do
55:24
Speaker 1: you know about the world of investment management today that
55:27
Speaker 1: you wish you knew back in the es when you
55:30
Speaker 1: were first getting started. So what I know about the
55:34
Speaker 1: world of investment management today that I wish I knew
55:37
Speaker 1: back in the if that success is about a lot
55:42
Speaker 1: more than beating the market. Beating the market is one
55:45
Speaker 1: of those disciplines. And absolutely want to beat the market
55:48
Speaker 1: or at least meet the markets over time. But real
55:52
Speaker 1: success comes from knowing what your goal is, charting of
55:56
Speaker 1: course to get there, staying with it. And it's a
56:00
Speaker 1: lot more than the market. As we talked about, Yes,
56:02
Speaker 1: investing as part of long term success, but so is
56:04
Speaker 1: managing your balance sheet and deciding how much in leather
56:07
Speaker 1: to borrow, So in spending and deciding what's the appropriate
56:11
Speaker 1: send rate to help you achieve your goals. So is
56:13
Speaker 1: managing taxes and managing for after tax returns, and so
56:17
Speaker 1: is protecting what you have. So you know those five
56:19
Speaker 1: disciplines invest, borrow, then managed to protect. When I started
56:24
Speaker 1: my career, I was laser focused on investing, and I
56:27
Speaker 1: would tell everybody to broaden your horizons because success is
56:31
Speaker 1: about a lot more than beating the market. Thank you,
56:33
Speaker 1: Catherine for being so generous with your time. We have
56:36
Speaker 1: been speaking with Katherine Keating. She is the CEO of
56:40
Speaker 1: b n y Melon's wealth management division. If you enjoy
56:44
Speaker 1: this conversation, well, be sure and check out all of
56:47
Speaker 1: our previous interviews. We have about four hundred of them,
56:52
Speaker 1: and you can find them at iTunes, Spotify, Stitcher, wherever
56:56
Speaker 1: you feed your podcast fix. We love your comments, feed
57:00
Speaker 1: back and suggestions. Write to us at m IB podcast
57:03
Speaker 1: at Bloomberg dot net. Give us a review on Apple iTunes.
57:08
Speaker 1: You can check out my weekly column on Bloomberg dot
57:11
Speaker 1: com slash Opinion. Follow me on Twitter at Rid Halts.
57:15
Speaker 1: Sign up for our daily reading list at Rid Halts
57:18
Speaker 1: dot com. I would be remiss if I did not
57:21
Speaker 1: thank the crack staff that helps put these conversations together
57:25
Speaker 1: each week. Maroufle is my audio engineer. Michael Boyle is
57:30
Speaker 1: my producer. Attika val Broun is our project manager. Michael
57:34
Speaker 1: Batnick is my head of research. I'm Barry Riholts. You've
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Speaker 1: been listening to Masters in Business on Bloomberg Radio.