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Using Decision Science in Investing: Masters in Business with Omar Aguilar · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio, news.
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  Speaker 2: I'm Barry Ritholtz. You're listening to Masters in Business on
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  Speaker 2: Bloomberg Radio. My extra special guest this week is Omar Aguilar.
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  Speaker 2: He is president, CEO, and chief investment officer of Schwab
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  Speaker 2: Asset Management. They run over a trillion dollars across 100
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  Speaker 2: different ETFs, mutual funds, and separately managed account strategies. He
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  Speaker 2: also runs the Schwab Center for Financial Research, sits on
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  Speaker 2: the firm's executive council. He joined Schwab in 2011, specializing
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  Speaker 2: in equities and multi-asset strategy. Schwab's total assets are over
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  Speaker 2: $ 13 trillion, and its asset-weighted expense ratio of eight basis
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  Speaker 2: points is amongst the lowest in the fund industry. I
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  Speaker 2: thought this conversation was fascinating, and I think you will
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  Speaker 2: also With no further ado, Schwab's Omar Aguilar. Omar Aguilar,
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  Speaker 2: welcome to Bloomberg.
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  Speaker 1: It's a pleasure to be here with you, Barry.
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  Speaker 2: It's a pleasure to have you. So I want to
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  Speaker 2: get into your career and some of your conversations about
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  Speaker 2: what's going on in the market today and what's happening
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  Speaker 2: at Schwab. But you have such a fascinating background. I
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  Speaker 2: have to start there. Bachelor's in actuarial science, then a
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  Speaker 2: master's in applied statistics from the Institute of Technology in
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  Speaker 2: Mexico City. Then you come to the U.S. and at Duke,
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  Speaker 2: you're a Fulbright scholar where you get both a master's
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  Speaker 2: in statistics and a Ph.D. in decision sciences. Am I
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  Speaker 2: getting that right? It sounds like you were planning for
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  Speaker 2: a career in academia.
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  Speaker 1: It is true.
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  Speaker 3: And actually, I did in my last year and my Ph.D. program,
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  Speaker 3: I did apply for a couple of academic jobs before
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  Speaker 3: I was lucky enough to basically get back to Wall
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  Speaker 3: Street as an analyst.
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  Speaker 2: Yes. So you your first gig is your your was
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  Speaker 2: it at Merrill Lynch was Bankers Trust, Bankers Trust and
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  Speaker 2: then Merrill Lynch. You have this deep quant research background.
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  Speaker 2: What did you do when you were first starting at
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  Speaker 2: Bankers Trust? And then Merrill Lynch.
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  Speaker 3: Well, you know, if you recall from what the degree
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  Speaker 3: that you mentioned, you know, my dissertation and the work
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  Speaker 3: that I did was in how to use statistical models.
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  Speaker 3: Now they're called data science. Back then it was statistics.
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  Speaker 3: In terms of how you use those models for making decisions.
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  Speaker 3: The whole process of decision on their uncertainty was.
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  Speaker 1: The whole, you know, research that I did.
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  Speaker 3: And we apply that, you know, in particular to areas
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  Speaker 3: like currencies, you know, equity, asset allocation. And I was
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  Speaker 3: hired at Bankers Trust to develop those models. So, you know,
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  Speaker 3: I call that the, you know, before any AI or
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  Speaker 3: anything else, they were just quantitative models that were able
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  Speaker 3: to help people being faster to understand how people make decisions.
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  Speaker 2: And I don't remember if it was the PhD paper
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  Speaker 2: or the 2001 paper. that it's still one of the
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  Speaker 2: most cited papers in quantitative research. How did you jump
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  Speaker 2: from Bankers Trust to Merrill Lynch? When did that transition happen?
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  Speaker 3: Well, if you follow the path of my background, a
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  Speaker 3: lot of that is related to the activities on Wall
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  Speaker 3: Street because there were a series of mergers and events
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  Speaker 3: that happened that took me to where I am today.
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  Speaker 3: you know, Bankerstross was bought by Deutsche Bank. And at
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  Speaker 3: that point, the group that I was part of was
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  Speaker 3: lifted out to join Merrill Lynch. Merrill Lynch Investment Management
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  Speaker 3: was starting to just build their institutional business.
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  Speaker 1: And that's where we became really nice fit.
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  Speaker 3: Unfortunately, September 11 happened 25 years ago.
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  Speaker 1: And then, you know, that.
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  Speaker 3: Basically took us to create the private bank asset management
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  Speaker 3: services for Lehman Brothers that wanted to branch out into
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  Speaker 3: the asset management business for their wealthy clients. And then
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  Speaker 3: from there, it started to just get a little bit
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  Speaker 3: sensitive in terms of the Lehman business. So I had
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  Speaker 3: the opportunity to work with a former colleague of Bankers
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  Speaker 3: Trust at ING to basically rebuild their quantitative and systematic
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  Speaker 3: investment processes. So that was all related to activities that
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  Speaker 3: happened through the Wall Street acquisitions, events, and so forth.
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  Speaker 2: And ING, now better known as VOIA, that was $ 20
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  Speaker 2: billion across 15 strategies, including active index, enhanced index, pensions,
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  Speaker 2: variable annuities, and mutual funds. Once you stand that up
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  Speaker 2: and get that to a reasonable side, was Lehman before
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  Speaker 2: that or after that?
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  Speaker 1: That was before. That was before.
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  Speaker 3: You know, we were able to build a lot of
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  Speaker 3: these things at Lehman Brothers. It goes back a lot
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  Speaker 3: of what my philosophy is, is you have to be
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  Speaker 3: in a place where you can marry distribution with manufacturing.
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  Speaker 3: That's what we believe asset management success relies on. ING
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  Speaker 3: had a very good distribution, and our idea was to
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  Speaker 3: build these more institutional-type, scalable businesses using quantitative tools and
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  Speaker 3: technology to be able to deliver that to different folks.
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  Speaker 3: And again, unfortunately, we were in the middle of a
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  Speaker 3: global financial crisis in 2008 that basically put a stop
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  Speaker 3: to every activity across New York and Wall Street and
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  Speaker 3: everything else. And that gave me the opportunity to go
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  Speaker 3: back to my academic roots and start working at Financial
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  Speaker 3: Engines with a lot of Stanford academics, you know, headed
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  Speaker 3: by Bill Sharp.
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  Speaker 2: To say nothing, right, of the Nobel laureate at Bill Sharp.
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  Speaker 2: I just want to clarify one thing. Lehman Brothers, the
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  Speaker 2: quant research you were doing, was that for alternative investment
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  Speaker 2: management or for public equities?
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  Speaker 3: It was dedicated to both the building asset allocation models
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  Speaker 3: for the private bank. And it was the first time
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  Speaker 3: that we were able to build a set of strategies
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  Speaker 3: that included alternative investments. So we had private equity, private
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  Speaker 3: real estate, you know, fund of hedge funds. And that was,
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  Speaker 3: you know, the whole concept of what we wanted to
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  Speaker 3: do for wealthy clients back then.
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  Speaker 2: And then at Financial Engines, it's $ 40 billion in defined
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  Speaker 2: contribution plan sponsors. I'm fascinated by Bill Sharp's work. I
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  Speaker 2: was fortunate enough to interview him about 10 years ago.
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  Speaker 2: How did his thinking influence your approach to portfolio management
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  Speaker 2: and retirement planning?
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  Speaker 3: Well, going back to this concept of behavioral economics, Bill
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  Speaker 3: and the economics of Stanford have been at the forefront
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  Speaker 3: of merging this concept of how do we create markets
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  Speaker 3: and invest in markets that are not necessarily efficient in
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  Speaker 3: the short run, but in the long run, they are.
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  Speaker 3: Bill has always been in this idea of capital efficiency
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  Speaker 3: in the long run. It's better to do the buy
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  Speaker 3: and hold and stay put at a low cost, as
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  Speaker 3: opposed to try to go in a market. The whole
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  Speaker 3: concept of market timing and avoid market timing was sort
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  Speaker 3: of the premise of everything. And that fits very good
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  Speaker 3: for 401k, for retirement assets, for pensions, where strategic asset
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  Speaker 3: allocation is what really drives your long-term results. So that
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  Speaker 3: was at the core of what we did at Financial Engines,
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  Speaker 3: and it's still at the core of the philosophy that
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  Speaker 3: we have at Schwab.
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  Speaker 2: So I recall one of the most fascinating things of
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  Speaker 2: many really interesting things Sharp had said was the question
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  Speaker 2: of the annual 4% drawdown in retirement as the thorniest
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  Speaker 2: problem in all of finance. I've read that you've said 4%
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  Speaker 2: for many people doesn't make any sense. Do you want
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  Speaker 2: to address that?
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  Speaker 1: Yeah.
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  Speaker 3: Well, we've done and we did a lot of research. And,
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  Speaker 3: you know, the needs for income is not a static number.
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  Speaker 3: And it's not necessarily something where you can rely specifically
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  Speaker 3: about one thing. And what we have become is, you know,
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  Speaker 3: the 4% rule became just like a number that somebody
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  Speaker 3: picked out of the hat and said 4% works as
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  Speaker 3: long as you can generate those. And a lot of
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  Speaker 3: that had to do because if you think about it,
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  Speaker 3: depending on the level of interest rates, you know, you
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  Speaker 3: can actually, you know, 4% may be, it is right now,
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  Speaker 3: probably less than the risk-free rate. So there is no
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  Speaker 3: reason why you have to stay with 4%. So it
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  Speaker 3: is really a dynamic process that depends on the needs
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  Speaker 3: of the moment, inflation numbers, real growth, and the level
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  Speaker 3: of rates that may affect what is the drawdown that
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  Speaker 3: you need to survive.
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  Speaker 2: To say nothing of when 4% was picked, the longevity
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  Speaker 2: projections were so much less than they are today. If
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  Speaker 2: you're 68 and relatively healthy, you got a good shot
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  Speaker 2: at another 15, 20, 25 years of living on that
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  Speaker 2: pile of capital. That wasn't true 30 plus years ago.
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  Speaker 1: Absolutely, Barry.
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  Speaker 3: And a lot of the challenges that we face, and
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  Speaker 3: this is something that we work on financial engines, is
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  Speaker 3: getting into the habit of early saving. Because, you know,
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  Speaker 3: in the generation for Gen X and any of these generations,
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  Speaker 3: there is no pensions that were like back in the day.
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  Speaker 3: So people rely on 401k. So the ability for people
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  Speaker 3: to use that savings and the matching of the companies
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  Speaker 3: It's critical for them to get to a point where
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  Speaker 3: they can retire. Unfortunately, you know, during all the research,
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  Speaker 3: we realized that the majority of Americans don't have enough
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  Speaker 3: to retire for this.
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  Speaker 1: Precisely what you said.
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  Speaker 3: It's more than 25 years of, liabilities that they will
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  Speaker 3: have ahead. And with 4% drawdowns, they will run out
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  Speaker 3: of money very quickly before they can actually get there,
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  Speaker 3: especially when you have inflation impacting.
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  Speaker 2: So what's really so fascinating about your background, you're not
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  Speaker 2: only a quant, but somewhat unusually, you're a big follower
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  Speaker 2: of behavioral finance and thinking about decision-making and You lead
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  Speaker 2: Schwab's BFI program for advisors, including diagnostic coaching tools, and
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  Speaker 2: you run the BFI barometer study. How does someone who's
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  Speaker 2: that mathy and a longstanding statistics, probability, and quant student
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  Speaker 2: fall into behavioral finance?
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  Speaker 1: Well, it is.
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  Speaker 3: A great story because The area of statistics that were
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  Speaker 3: part of my dissertation, it's an area of statistics that's
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  Speaker 3: called Bayesian statistics. And Bayesian statistics is based on a
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  Speaker 3: theorem called by Reverend Thomas Bayes way back when. What
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  Speaker 3: it does, it basically combines information that you have today
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  Speaker 3: that is called a prior, that could be your experience,
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  Speaker 3: and then uses all available data to update your experience,
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  Speaker 3: which is really our life. If you actually just think
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  Speaker 3: about it without necessarily creating a model, Just think about it.
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  Speaker 3: You have an experience. You know what you need to do.
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  Speaker 3: I always give the example of, you know, trying to
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  Speaker 3: get to the airport. So you have your prior knowledge
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  Speaker 3: about how you and your own utility function, how early
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  Speaker 3: you want to get to the airport, how difficult that
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  Speaker 3: may be, the potential problems, the probability you'll miss the plane,
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  Speaker 3: and everybody has a different way to approach it. You know,
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  Speaker 3: two people with the same background and everything else, one
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  Speaker 3: may actually want to get there three hours ahead. The
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  Speaker 3: other person may want to get there, like, just five
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  Speaker 3: minutes before they start planning.
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  Speaker 1: They both take different types of risks.
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  Speaker 3: Updating that information over time, that's basically how decision process is,
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  Speaker 3: and that's probability and its core. And that's pretty much
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  Speaker 3: what Bayes' theory does.
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  Speaker 2: I wonder if Bayes... how he would have thought about
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  Speaker 2: this if he was married to my wife, who she
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  Speaker 2: doesn't want to miss a plane, will get to the
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  Speaker 2: airport two hours later, bring a book. That's just how
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  Speaker 2: it is. But it's interesting that, you know, people have
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  Speaker 2: very different approaches to that. How much time do they
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  Speaker 2: want to waste versus the headache of missing a plane?
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  Speaker 2: So I'm curious, how does your education and decision science
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  Speaker 2: shape the way you think about the big issues like markets, risk,
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  Speaker 2: and investor behavior. Yeah.
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  Speaker 3: Well, you know, I have always been passionate about, you know,
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  Speaker 3: providing tools and services to investors to help them enhance
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  Speaker 3: their financial lives. That's at the core of Schwab Values.
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  Speaker 3: That's at the core of what we do in asset management.
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  Speaker 3: And a big part of that, Barry, includes the fact that,
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  Speaker 3: you know, we want to provide information to clients so
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  Speaker 3: that they can make better decisions on their process. So again,
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  Speaker 3: the whole idea of try not to time the market,
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  Speaker 3: try to look at your long-term investments, try to stay
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  Speaker 3: calm when things are. All that goes back to the
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  Speaker 3: core of their behavior because we're all humans. All of
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  Speaker 3: us have evolved over time with two parts of our brains. One,
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  Speaker 3: that is the amygdala, which is the more private, primitive
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  Speaker 3: version of us that allows us to react and go
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  Speaker 3: fly to safety whenever we see a problem and allows
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  Speaker 3: us to just be emotional about things. And then the
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  Speaker 3: other part, which is the part of the front of
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  Speaker 3: the brain that allows us to be rational and allows
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  Speaker 3: us to use data to make decisions. That combination, which
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  Speaker 3: sounds very familiar to the base TRM, one that is
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  Speaker 3: more gut feeling, the other one that is more analytical
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  Speaker 3: and more brain-oriented, and they get combined. And every day,
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  Speaker 3: they're battling with each other. So for us, being able
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  Speaker 3: to provide the context for clients that are more emotional
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  Speaker 3: and with the information they need to adapt to their
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  Speaker 3: investment strategies so that they don't panic when the market
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  Speaker 3: goes down or they don't have to give them a
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  Speaker 3: process that is quantitative in nature so that they can
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  Speaker 3: stay the course is very important. On the other hand,
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  Speaker 3: we have other clients that are more analytical in nature.
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  Speaker 3: They think they can outsmart the market. They think they
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  Speaker 3: know the answers. And we give them information and data
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  Speaker 3: so that they can inform and update their own beliefs
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  Speaker 3: so that they can have better decisions. So our main
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  Speaker 3: clients with the tools and products and solutions to make
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  Speaker 3: them and help them make better decisions is the core
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  Speaker 3: of what we do.
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  Speaker 2: A little bit of thinking fast and slow. Bill Bernstein, neurologist,
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  Speaker 2: had said, you mentioned the amygdala, our whole limbic system
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  Speaker 2: is what underlies fight or flight. If we don't get
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  Speaker 2: that under control, we will die poor. And it really
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  Speaker 2: is quite fascinating. In In actual usage, when you're in
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  Speaker 2: the real world, when you're advising clients and investors about
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  Speaker 2: their various behavioral foibles and errors, how do you get
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  Speaker 2: them to stay on the straight and narrow? What tools
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  Speaker 2: does Schwab use to prevent investors from shooting themselves in
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  Speaker 2: the foot?
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  Speaker 3: Well, two things we do is, first, we do a
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  Speaker 3: lot of education through our Center for Financial Research. We
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  Speaker 3: also provide a lot of training to our wealth advisors
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  Speaker 3: and our financial consultants. So it's precisely the tools that
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  Speaker 3: you mentioned at the beginning. We call it, it's a
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  Speaker 3: very cute name, biagnostics, which is supposed to diagnose your
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  Speaker 3: biases in a way. That's, you know, our market team
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  Speaker 3: was smart enough to put it together. So it is
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  Speaker 3: a diagnosis team for your biases. And the reality is
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  Speaker 3: that all of us have biases one way or another.
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  Speaker 3: So the tools that allow financial consultants to get to
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  Speaker 3: know their clients better.
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  Speaker 1: You know, we have data.
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  Speaker 3: That basically says that the more information we get from
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  Speaker 3: the client or their biases allow us to build longer
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  Speaker 3: relationships with them. And at the core of what we do,
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  Speaker 3: we simplify it by saying, well, we have to balance
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  Speaker 3: their needs with what they want. There's a lot of clients,
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  Speaker 3: they tell you what they want. And you, as a
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  Speaker 3: financial professional, you know what they need. And we need
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  Speaker 3: to put them together. If you think about in the
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  Speaker 3: world of AI, You know, the need is basically what
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  Speaker 3: the computer is going to tell you. The computer is
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  Speaker 3: going to tell you this is the right allocation. This
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  Speaker 3: is what you need to do. But the want is
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  Speaker 3: what the client, you know, wants to have. And merging
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  Speaker 3: those two is the critical part to maintain and have
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  Speaker 3: a sustainable long-term investment strategy.
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  Speaker 2: Really, really interesting. Coming up, we continue our conversation with
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  Speaker 2: Omar Aguilar. President, CEO, and CIO of Schwab Asset Management,
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  Speaker 2: talking about how he helped build the asset management group
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  Speaker 2: to over a trillion dollars in client assets. I'm Barry Ritholtz.
• 16:40
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
• 16:45
  Speaker 2: Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
• 16:48
  Speaker 2: My extra special guest today is Omar Aguilar. He is CEO, CIO,
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  Speaker 2: and President of Schwab Asset Management. helping to run over
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  Speaker 2: a trillion dollars of Schwab's 13 trillion in client assets.
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  Speaker 2: So let's talk a little bit about your time at Schwab.
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  Speaker 2: You joined Schwab, gee, it's 15 years already, to run
• 17:10
  Speaker 2: equities and multi-asset strategies. Back in 2011, after the financial crisis,
• 17:16
  Speaker 2: the fund business was a fraction of its current size.
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  Speaker 2: What was the mandate when you first joined? Was it
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  Speaker 2: simply hey, build this up, or was it a little
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  Speaker 2: more comprehensive than that?
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  Speaker 1: It was more comprehensive.
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  Speaker 3: The belief and the reason why I joined Schwab was
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  Speaker 3: that we had a project that was to use technology,
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  Speaker 3: use systematic strategies to create and use scale. And scaling
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  Speaker 3: the business of this was to try to provide with
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  Speaker 3: different set of tools for the clients to be able
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  Speaker 3: to grow their wealth. That was at the time, you know,
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  Speaker 3: right after the financial crisis, there was a significant amount
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  Speaker 3: of apprehension in the market of what was going to
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  Speaker 3: happen because the experience that people had, you know, was bad.
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  Speaker 3: So there was a lot of behavioral, you know, aspects
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  Speaker 3: and biases of risk aversion that happened during that time.
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  Speaker 3: You know, so what we ended up doing philosophically was saying,
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  Speaker 3: all right, we'll start with the foundations of how the
• 18:16
  Speaker 3: asset management is going to grow and run for the future.
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  Speaker 3: It has to be transparent. You know, clients define transparency
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  Speaker 3: as being.
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  Speaker 1: A key part.
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  Speaker 3: A big value of Schwab is making it accessible. So
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  Speaker 3: all the solutions and all the products and services had
• 18:34
  Speaker 3: to be something that was available for the retail clients.
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  Speaker 3: And it has to be also a low cost. Those
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  Speaker 3: three components were key components of what we have. We
• 18:43
  Speaker 3: said we don't want to have a superstore where every
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  Speaker 3: single product is going to be available in our shelves.
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  Speaker 3: What we're going to manufacture is something that we call
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  Speaker 3: it core for every client. So we built a set
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  Speaker 3: of ETFs, a set of beta exposures, and a set
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  Speaker 3: of smart beta exposures that allow clients to define their
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  Speaker 3: core portfolio and say that core of your strategy should
• 19:06
  Speaker 3: have the most transparency, the most liquidity, and the lower
• 19:10
  Speaker 3: possible cost and an accessible route for you. So we
• 19:13
  Speaker 3: built a franchise of Schwab ETFs. And today, we're still there,
• 19:18
  Speaker 3: the fifth largest ETF manufacturer in the world, which is
• 19:22
  Speaker 3: sort of a big part of the trademark of the
• 19:25
  Speaker 3: wave of the asset management that I was part of
• 19:28
  Speaker 3: at the beginning. At the same time, we say, what
• 19:30
  Speaker 3: are the other components that will be important for clients
• 19:33
  Speaker 3: going forward? Income will be a critical part. You know,
• 19:36
  Speaker 3: we know baby boomers are in the process of retiring.
• 19:39
  Speaker 3: Gen X will come right behind them. And in that sense,
• 19:42
  Speaker 3: you know, our clients, particularly the clients that show up,
• 19:44
  Speaker 3: will require income solutions.
• 19:46
  Speaker 1: So we build dividend strategies.
• 19:48
  Speaker 3: We build, you know, liquidity-based money market funds that were targeted.
• 19:54
  Speaker 3: At the time, the interest rates were zero or negative,
• 19:56
  Speaker 3: so there was really nothing there. But we knew at
• 19:59
  Speaker 3: some point, like it is now, the yields were going
• 20:02
  Speaker 3: to go up and income was going to be able
• 20:03
  Speaker 3: to generate. It took us probably 10 years before we
• 20:06
  Speaker 3: were comfortable issuing more bonds, but that was part of
• 20:09
  Speaker 3: the plan. And at the same time, we say, okay, well,
• 20:12
  Speaker 3: we also need to start building technology to offer this,
• 20:15
  Speaker 3: not just in ETFs and mutual funds but also in
• 20:18
  Speaker 3: managed accounts so that then we use technology to start
• 20:21
  Speaker 3: bringing these Customizations as part of that future generation. So
• 20:25
  Speaker 3: that vision is what got us to what it is
• 20:27
  Speaker 3: today now 1.9 trillion dollars in assets 1.9 trillion.
• 20:31
  Speaker 2: I've been saying over a trillion. It's really almost 2
• 20:33
  Speaker 2: trillion That's interesting. So so you're there for a full
• 20:38
  Speaker 2: decade before you take on the CEO job in 2022
• 20:44
  Speaker 2: But unusually, you kept the CIO title. They're such different jobs.
• 20:50
  Speaker 2: How do you split your time? How do you wear
• 20:52
  Speaker 2: both hats? Does that help being able to see it
• 20:56
  Speaker 2: from both an investment perspective and a business perspective?
• 21:00
  Speaker 1: It has been the best job I've ever had, Barry.
• 21:03
  Speaker 3: And a lot of that is because, you know, the
• 21:05
  Speaker 3: experience I have as an investor and as a researcher,
• 21:09
  Speaker 3: which is the core of my, you know, skills and
• 21:12
  Speaker 3: the scores of my experiences on research. allows me to
• 21:15
  Speaker 3: understand the investment, allows me to understand the risk we're
• 21:19
  Speaker 3: taking any time that we create a new product or
• 21:21
  Speaker 3: create a new solution, and at the same time, allows
• 21:24
  Speaker 3: me to learn a lot about our clients and our business.
• 21:27
  Speaker 3: I've been fortunate enough to have good mentors like Rick Wooster,
• 21:30
  Speaker 3: which is our current CEO, which can combine the ability
• 21:35
  Speaker 3: to run investment management companies with a business setting that
• 21:41
  Speaker 3: allows us to just run it efficiently. And that, to me,
• 21:43
  Speaker 3: has been a great learning and has been a great
• 21:46
  Speaker 3: thing for me.
• 21:46
  Speaker 2: So you mentioned the word efficiency, and I discussed earlier
• 21:51
  Speaker 2: you have one of the lowest fee rates for mutual
• 21:57
  Speaker 2: funds and ETFs at eight basis points. How does that
• 22:01
  Speaker 2: efficiency and scale operate? How do you take advantage of
• 22:06
  Speaker 2: the fact that Schwab is $ 13, $ 14 trillion.
• 22:10
  Speaker 1: It's a behemoth.
• 22:11
  Speaker 2: It's one of the biggest asset managers and custodians in
• 22:15
  Speaker 2: the world. How do you take advantage of that economy
• 22:20
  Speaker 2: of scale?
• 22:22
  Speaker 3: Well, I'll tell you the core of this, and then
• 22:26
  Speaker 3: I'll give you one specific anecdote of one of our
• 22:28
  Speaker 3: products we're very proud of. But You know, at the
• 22:32
  Speaker 3: core of what we offer at Schwab has always been
• 22:34
  Speaker 3: that we want clients to have alternatives, to have options
• 22:38
  Speaker 3: to pick. So we never go to any of our
• 22:41
  Speaker 3: clients to try to tell them that they have to
• 22:43
  Speaker 3: buy the proprietary products that is run by my group.
• 22:46
  Speaker 3: We basically give them third-party options and just, you know,
• 22:49
  Speaker 3: not too far in the past, we basically remove all
• 22:53
  Speaker 3: commissions across all products altogether.
• 22:55
  Speaker 2: Yeah, that was less than 10 years ago.
• 22:57
  Speaker 1: That was less than 10 years ago.
• 22:58
  Speaker 3: So clients can actually go and buy and sell products
• 23:03
  Speaker 3: from our competitors in asset management as long as they want.
• 23:06
  Speaker 3: And we have the mandate to basically offer everything that
• 23:09
  Speaker 3: we have. Because our philosophy, Barry, is that if we
• 23:13
  Speaker 3: create high-quality products at a lower cost with high transparency,
• 23:17
  Speaker 3: with accessibility, our clients will stay with us and will
• 23:21
  Speaker 3: build trust because we're offering options for people to take
• 23:24
  Speaker 3: on some other things. And that has given us the
• 23:27
  Speaker 3: opportunity to grow the business and grow the market share
• 23:29
  Speaker 3: in our own platform, but also off platform. Not only
• 23:32
  Speaker 3: we serve good clients of Schwab, but also clients outside
• 23:36
  Speaker 3: of Schwab, we basically get access to our products. Example
• 23:40
  Speaker 3: is our ETFs. You know, we roughly get 35% of
• 23:43
  Speaker 3: net new assets in our ETFs that come from outside
• 23:46
  Speaker 3: of Schwab, which is just the core of the quality
• 23:50
  Speaker 3: of the products that have the accessibility, that has the
• 23:52
  Speaker 3: efficiency and the scale that allow us to create that product.
• 23:55
  Speaker 3: You know, the product that I said as an anecdote
• 23:58
  Speaker 3: is our dividend product. Our dividend product basically started, you know,
• 24:02
  Speaker 3: back in, you know, when I joined in 2011. And
• 24:04
  Speaker 3: 15 years later, it became the largest dividend ETF in
• 24:08
  Speaker 3: the world. And that's over $ 100 billion now. And that's,
• 24:14
  Speaker 3: you know, at the end, it's among the lowest cost,
• 24:18
  Speaker 3: but it's not the lowest cost. And it's also not
• 24:20
  Speaker 3: the one with the highest yield, which is the reason
• 24:23
  Speaker 3: why we created this. you know, set of dividend payers
• 24:28
  Speaker 3: that basically build that structure, a hundred names. And that alone,
• 24:32
  Speaker 3: because of the high quality investments and the results that
• 24:34
  Speaker 3: it has created, the consistency basically attracted more clients to it.
• 24:39
  Speaker 2: Yeah, the very high yields amongst dividends typically means the
• 24:44
  Speaker 2: prices recently come way down, which is why the yield
• 24:48
  Speaker 2: is high. And typically that means that that dividend is
• 24:51
  Speaker 2: about to get cut. uh... i didn't realize that that
• 24:54
  Speaker 2: product was over a hundred billion dollars uh... but it
• 24:57
  Speaker 2: raises a really interesting point you sit at a fairly
• 25:01
  Speaker 2: unique perch you're at the crossroads of three major shifts
• 25:07
  Speaker 2: in in asset management over the past few decades the
• 25:11
  Speaker 2: rise of quantitative investing the the move at least in
• 25:16
  Speaker 2: part from active to indexing and the role of behavioral
• 25:21
  Speaker 2: science to improve investor decision-making and outcomes. And you're right
• 25:26
  Speaker 2: in the middle of all three of those. Tell us
• 25:28
  Speaker 2: a little bit about how those major vectors have changed
• 25:33
  Speaker 2: how all of us invest.
• 25:35
  Speaker 3: Yeah, well, I think a lot of things have continued
• 25:38
  Speaker 3: to evolve in certain way because of just capital markets efficiency.
• 25:44
  Speaker 3: It goes back to Bill Sharpe's world and theories. And
• 25:47
  Speaker 3: then also, you know, the the availability of information that
• 25:52
  Speaker 3: clients have today that didn't have when I started my
• 25:55
  Speaker 3: days at Bankers Trust. You know, the availability of information
• 25:58
  Speaker 3: that you get today is instant, and the response they'll
• 26:01
  Speaker 3: have and the different anomalies that exist. So what we
• 26:04
  Speaker 3: have observed, and a lot of the core pieces of
• 26:06
  Speaker 3: what you mentioned, you know, because of the rise of technology,
• 26:10
  Speaker 3: the use of technology, you can actually create more efficient processes. Now,
• 26:14
  Speaker 3: we're now in the next wave because AI is going
• 26:16
  Speaker 3: to even improve that even further. And what we're doing
• 26:19
  Speaker 3: instead is we have seen the trend that goes from
• 26:23
  Speaker 3: active into passive. We have seen the trend where people
• 26:26
  Speaker 3: prefer lower-cost beta solution. And then we also see the
• 26:30
  Speaker 3: rise of alternative investments, and we also see the rise
• 26:33
  Speaker 3: of AI as part of the process.
• 26:35
  Speaker 1: So one of the initiatives that.
• 26:38
  Speaker 3: We have now is how do we incorporate AI to
• 26:42
  Speaker 3: help clients use that information and those tools to make
• 26:46
  Speaker 3: better decisions?
• 26:47
  Speaker 1: So go back to decision processes.
• 26:49
  Speaker 3: Go back to base TRM, is how do we blend
• 26:52
  Speaker 3: the information that the client is going to put into AI?
• 26:55
  Speaker 1: It's almost like the prompt that you put into all
• 26:57
  Speaker 1: these agents.
• 26:58
  Speaker 3: And then how do you blend that so that then
• 26:59
  Speaker 3: the answer that you get is the mixture of what
• 27:02
  Speaker 3: we believe is the right answer for the client based
• 27:04
  Speaker 3: on our research and what the client is looking for?
• 27:07
  Speaker 2: Really interesting. You mentioned alternatives. I'm curious, and given your
• 27:12
  Speaker 2: background when you were at Lehman Brothers doing the quant
• 27:14
  Speaker 2: work with alts, I'm curious about your view generally of alts. Obviously,
• 27:20
  Speaker 2: there's been a lot of news this past year, especially
• 27:24
  Speaker 2: in private debt, private credit. And then there's been this
• 27:28
  Speaker 2: sort of nascent push to move alternatives into 401 s.
• 27:34
  Speaker 2: Give us your perspective from Schwab about alternatives. Yes.
• 27:38
  Speaker 3: Well, we are we're pretty constructive on alternatives. You know,
• 27:41
  Speaker 3: we just completed the acquisition of Forge Global. just a
• 27:46
  Speaker 3: few months back. Our belief is that for certain clients,
• 27:51
  Speaker 3: mostly mass affluent, wealthy clients, there is this leave that
• 27:56
  Speaker 3: requires that additional level of diversification and potentially opportunities. I
• 28:03
  Speaker 3: think the biggest misconception, even with the work that we
• 28:07
  Speaker 3: have seen and all the headlines we have seen on
• 28:10
  Speaker 3: private credit, is that it has not ever been a
• 28:13
  Speaker 3: credit issue it has been always a misconception of liquidity.
• 28:17
  Speaker 3: And I think that liquidity education is critical, especially as
• 28:21
  Speaker 3: the market goes down towards the mass affluent and potentially
• 28:25
  Speaker 3: even lower to retail.
• 28:26
  Speaker 1: Which is a question mark.
• 28:27
  Speaker 3: But that is the big component of how do you establish,
• 28:32
  Speaker 3: you know, if you think about the high yield market,
• 28:34
  Speaker 3: public market, you can actually see it is transparent.
• 28:36
  Speaker 1: You can see what it is.
• 28:37
  Speaker 3: There is more delinquencies and there is more credit events
• 28:40
  Speaker 3: there than it is in the private market. So in
• 28:43
  Speaker 3: private credit, when you actually look at what the size
• 28:46
  Speaker 3: of that market is and what the size of the
• 28:48
  Speaker 3: potential credit issues is very minimal or lower than in
• 28:53
  Speaker 3: some cases the high-yield market is at the worst possible time.
• 28:57
  Speaker 3: But the problem is that the understanding that when you
• 28:59
  Speaker 3: go into private assets and alternatives, there is a liquidity
• 29:02
  Speaker 3: premium that you're taking advantage. That means that your money
• 29:05
  Speaker 3: is not going to be available the next day. That
• 29:08
  Speaker 3: is what really brings the headlines because a lot of
• 29:10
  Speaker 3: the challenges that you know we have seen in some
• 29:13
  Speaker 3: of the funds that are available is because people are
• 29:15
  Speaker 3: requesting their money and they're not getting the full money back.
• 29:18
  Speaker 2: I'm always fascinated when that i'd watch that happen and
• 29:21
  Speaker 2: i always want to grab people and say which part
• 29:24
  Speaker 2: of the seven-year lockup was confusing you're getting theoretically potentially
• 29:30
  Speaker 2: getting higher returns because you're asking for that look quickly uh...
• 29:37
  Speaker 2: it seems that there's a little bit of an education
• 29:40
  Speaker 2: problem with people thinking that they're going to get the
• 29:43
  Speaker 2: best of both worlds, higher returns, yet still be liquid.
• 29:47
  Speaker 2: How do you read that?
• 29:48
  Speaker 1: Absolutely.
• 29:49
  Speaker 3: And I think the biggest confusion, Barry, is people are
• 29:53
  Speaker 3: trying to compare investing in public securities or public markets
• 29:59
  Speaker 3: and private as if they were exactly the same. And
• 30:02
  Speaker 3: even when you have quants like my team trying to
• 30:05
  Speaker 3: look at back tests or trying to compare them, trying
• 30:07
  Speaker 3: to put efficient frontiers, they're not comparable because of precisely
• 30:11
  Speaker 3: the liquidity component that is into it. If you look at, say,
• 30:14
  Speaker 3: private equity returns or private credit returns, they tend to
• 30:17
  Speaker 3: be smoother over time and they tend to have a lag.
• 30:20
  Speaker 3: When the markets go down, usually the marks on private equity,
• 30:24
  Speaker 3: they take two or three quarters before they go down.
• 30:27
  Speaker 3: And a lot of that mistiming is precisely liquidity, is
• 30:30
  Speaker 3: precisely how these things operate on valuation. So that component
• 30:34
  Speaker 3: is something that needs to be clearly explained so that
• 30:37
  Speaker 3: people understand this. Now, the big part of what we're
• 30:39
  Speaker 3: doing at Schwab, and I go back to part of
• 30:41
  Speaker 3: your question, is we also believe that, especially now, there
• 30:46
  Speaker 3: is an opportunity for people to have access to those
• 30:50
  Speaker 3: markets that didn't have access before. And the example of
• 30:53
  Speaker 3: the reason why we have forged marketplaces is There is
• 30:56
  Speaker 3: a lot of companies that are pre-IPO, that are being
• 31:00
  Speaker 3: in the process. They're probably going to stay private for longer,
• 31:05
  Speaker 3: but whose liquidity needs of those employees or founders is
• 31:10
  Speaker 3: high because they may be in a great company that
• 31:12
  Speaker 3: will at some point be IPO, but right now they're
• 31:15
  Speaker 3: sitting on shares that they cannot use. On the other hand,
• 31:19
  Speaker 3: there's clients that will have access to that, will love
• 31:21
  Speaker 3: to have access to that, but they don't have access
• 31:24
  Speaker 3: because in the past they were never available. So forged
• 31:26
  Speaker 3: marketplace allows to just create that supply demand so that
• 31:30
  Speaker 3: employees and founders can actually tender their shares in a
• 31:33
  Speaker 3: vehicle so that then all the clients can get access
• 31:36
  Speaker 3: to those. So then you give access to private investments
• 31:40
  Speaker 3: and at the same time you provide liquidity for those
• 31:42
  Speaker 3: that want to desire it.
• 31:43
  Speaker 2: So not public and not liquid, but semi-private and semi-liquid.
• 31:47
  Speaker 1: Is that a good way to describe it? That is
• 31:48
  Speaker 1: a good way to describe it.
• 31:49
  Speaker 3: But it's sort of an interesting because if you think
• 31:51
  Speaker 3: the amount of wealth that has been created on these
• 31:55
  Speaker 3: private markets over the last decade, it has been fairly
• 31:58
  Speaker 3: concentrated in maybe 1% of the population or less. On
• 32:02
  Speaker 3: the other hand, you actually see the amount of money
• 32:04
  Speaker 3: that is in public equities that could access that. Just
• 32:07
  Speaker 3: the view of Schwab over time is, can we give access?
• 32:10
  Speaker 3: Can we provide that gap for the right client? It's
• 32:13
  Speaker 3: not for everybody. So that actually they can have that
• 32:15
  Speaker 3: a little bit better.
• 32:16
  Speaker 2: Will these end up in a 401k eventually? Because as
• 32:21
  Speaker 2: much as some people have complained, they've run out of
• 32:25
  Speaker 2: institutions to sell it to, let's fob it off on retail.
• 32:29
  Speaker 2: It seems that people who have a 10, 20, 30-year
• 32:32
  Speaker 2: investment horizon, that is a fairly rational place for an
• 32:37
  Speaker 2: illiquid investment. What are your thoughts?
• 32:40
  Speaker 3: Yeah, our view is for retirement assets, and this is new,
• 32:45
  Speaker 3: most 401k platforms, they will have access to what is
• 32:48
  Speaker 3: called a broker window. And in that broker window, there
• 32:51
  Speaker 3: is a significant amount of options that you can use,
• 32:55
  Speaker 3: including some of these semi-liquid vehicles that people can use
• 32:58
  Speaker 3: in their 401k. The biggest challenge in here is for
• 33:02
  Speaker 3: those clients that understand the liquidity that goes with it,
• 33:06
  Speaker 3: the duration that goes into that, it is clearly a
• 33:09
  Speaker 3: good fit. For the majority of clients with 401k, they
• 33:12
  Speaker 3: only want to grow And if you actually think the
• 33:16
  Speaker 3: biggest challenge with alternative investments still today is that the
• 33:19
  Speaker 3: cost is much higher.
• 33:21
  Speaker 1: So, and as we said, you know, part of our
• 33:23
  Speaker 1: philosophy at Schwab, if you.
• 33:24
  Speaker 3: Add those fees over 20 years, you're already behind the
• 33:28
  Speaker 3: market just by paying those fixed fees.
• 33:30
  Speaker 1: And those are for, you got to pay them.
• 33:32
  Speaker 3: So, you know, in our view, if you stay in
• 33:35
  Speaker 3: these public markets, when you grow your portfolio, if you,
• 33:38
  Speaker 3: there is this opportunity for using the broker window for
• 33:40
  Speaker 3: the right, you that actually fits better. But overall, just
• 33:45
  Speaker 3: because of the cost of entry in 401k over that
• 33:48
  Speaker 3: long duration seems to be still not the right fit
• 33:51
  Speaker 3: for the average 401k.
• 33:53
  Speaker 2: I couldn't agree more. Coming up, we continue our conversation
• 33:57
  Speaker 2: with Omar Aguilar, CEO and CIO of Schwab Asset Management,
• 34:02
  Speaker 2: talking about the current state of markets today. I'm Barry Ritholtz.
• 34:06
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
• 34:11
  Speaker 2: Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
• 34:15
  Speaker 2: My extra special guest today is Omar Aguilar. He's CEO
• 34:19
  Speaker 2: and CIO at Schwab Asset Management, running nearly $ 2 trillion
• 34:24
  Speaker 2: of Schwab's over $ 13 trillion in client assets. So let's
• 34:29
  Speaker 2: talk a little bit about the state of the world
• 34:33
  Speaker 2: and what's going on in the markets. So let's jump
• 34:36
  Speaker 2: right into artificial intelligence. From Schwab's perspective, how do you
• 34:41
  Speaker 2: see AI changing things within the wealth management business, be
• 34:47
  Speaker 2: it portfolio construction, financial planning, communication, education, even the economics
• 34:55
  Speaker 2: of individualized advice?
• 34:57
  Speaker 1: Well, it's making its way very quickly.
• 35:00
  Speaker 3: And the adoption is something where we all in this
• 35:04
  Speaker 3: business started to just get on it. The way that
• 35:07
  Speaker 3: we describe it is, this is like the third wave
• 35:11
  Speaker 3: of AI in our society.
• 35:13
  Speaker 1: It started with the hyperscalers.
• 35:15
  Speaker 3: It started with that piece of big investments, give capital
• 35:18
  Speaker 3: expenditures going into hyperscalers. It moved to infrastructures with data
• 35:23
  Speaker 3: centers and semiconductors in there. And now we're going to
• 35:26
  Speaker 3: that adoption phase that includes, you know, a lot of sectors,
• 35:29
  Speaker 3: including financials, including healthcare. In our case for Schwab, you know,
• 35:34
  Speaker 3: we're doing this in many ways. On one is efficiency,
• 35:38
  Speaker 3: making AI tools efficient for all our employees so that
• 35:42
  Speaker 3: they can actually make their time to do something else.
• 35:45
  Speaker 3: For client service, we continue to support our clients. We
• 35:49
  Speaker 3: have been over time at Schwab always committed to pick
• 35:52
  Speaker 3: up the phone as fast as we can and give
• 35:54
  Speaker 3: them the service that they provide. And many of these
• 35:56
  Speaker 3: things will basically get the benefit of an AI. We
• 35:59
  Speaker 3: continue to work on analytics, AI analytics that will allow
• 36:04
  Speaker 3: our clients to be able to access their accounts and
• 36:06
  Speaker 3: look at the reports and look at the impact of
• 36:08
  Speaker 3: the markets into their accounts.
• 36:10
  Speaker 1: Using, you know, some of their tools.
• 36:12
  Speaker 3: And for research, you know, we are now in the
• 36:14
  Speaker 3: process where we, all the research that comes to our
• 36:17
  Speaker 3: Center for Financial Research is now being packaged so we
• 36:19
  Speaker 3: have what we call the research assistant that allows clients
• 36:23
  Speaker 3: and financial consultants to get access to, okay, what happened
• 36:26
  Speaker 3: in 2022?
• 36:27
  Speaker 1: What happened in 2023?
• 36:28
  Speaker 3: What we thought, you know, when the Fed make decisions,
• 36:31
  Speaker 3: what was the situation we had? And then being able
• 36:33
  Speaker 3: to have that information available very quickly to understand what
• 36:37
  Speaker 3: it is. So AI in the adoption phase is clearly
• 36:40
  Speaker 3: something that we're embracing and we're investing.
• 36:43
  Speaker 1: And I know, you know, all our peers are doing
• 36:45
  Speaker 1: that too.
• 36:46
  Speaker 2: So when, in the, about a decade ago, maybe a
• 36:48
  Speaker 2: little longer, when the robo-advisors, the digital platforms, first rose up,
• 36:54
  Speaker 2: there was a sort of concern, uh-oh, this is going
• 36:58
  Speaker 2: to replace individual advisors. That turned out not to happen. People,
• 37:05
  Speaker 2: especially wealthy people, want to be able to pick up
• 37:07
  Speaker 2: the phone and talk to another human being. And yet
• 37:10
  Speaker 2: we've seen the same sort of thing play out with
• 37:12
  Speaker 2: AI again. hey, what is this going to replace? Is
• 37:15
  Speaker 2: this going to replace analysts and strategists? Is this going
• 37:19
  Speaker 2: to replace portfolio managers? And what about advisors? Do you
• 37:22
  Speaker 2: see a similar thing playing out where middle class and
• 37:28
  Speaker 2: high net worth investors want a person on the other
• 37:31
  Speaker 2: end of the phone? Or if it could be faster, cheaper, better,
• 37:37
  Speaker 2: will people embrace AI for advice?
• 37:41
  Speaker 3: Well, it varies by generation, and it varies by many,
• 37:49
  Speaker 3: many parts of the segments of the market. Our philosophy is,
• 37:53
  Speaker 3: and it's still today, that the world of personalized relationships
• 37:59
  Speaker 3: will be the key to the success in the future,
• 38:02
  Speaker 3: and that cannot be replaced by AI.
• 38:04
  Speaker 1: When you get to see somebody, when you get to
• 38:06
  Speaker 1: talk to somebody.
• 38:07
  Speaker 3: No matter what it is, that component of establishing the
• 38:10
  Speaker 3: relationships because we're humans, we'll never be able to replace AI.
• 38:14
  Speaker 3: What AI will do is basically create more efficiencies on
• 38:18
  Speaker 3: tasks and things that normally financial advisors are using their
• 38:22
  Speaker 3: time today to build better relationships. So if they were
• 38:26
  Speaker 3: using time for creating reports, for doing analytics, to doing
• 38:30
  Speaker 3: other things, and that took 50% of the time, and
• 38:33
  Speaker 3: you can reduce that to, say, 10%, then now you
• 38:34
  Speaker 3: save 40% of them for building more relationships, establishing and
• 38:40
  Speaker 3: getting to know the client better, getting to understand their
• 38:43
  Speaker 3: biases to see how they can help them better. So
• 38:45
  Speaker 3: that is what we see the trend will going forward
• 38:48
  Speaker 3: where the combination of AI tools, and I'll mention specifically
• 38:52
  Speaker 3: AI tools, with the human expertise and relationship building is
• 38:58
  Speaker 3: basically the formula for the future. And to your point, yes,
• 39:00
  Speaker 3: people thought the robo-advisor was going to take over And
• 39:03
  Speaker 3: it did work very well for many clients, but it
• 39:06
  Speaker 3: didn't replace the relationship building for financial consultants.
• 39:10
  Speaker 2: Yeah, some of those AI tools, just something as simple
• 39:13
  Speaker 2: as note-taking during a Zoom call. I used to watch
• 39:19
  Speaker 2: people not be able to pay attention because they're jotting
• 39:21
  Speaker 2: stuff down, or there's a third person on the call,
• 39:24
  Speaker 2: a whole nother human taking notes and it just has
• 39:28
  Speaker 2: made things so much easier and more efficient but again
• 39:32
  Speaker 2: not replacing replacing individuals let's turn our attention to the
• 39:36
  Speaker 2: markets your mid-year outlook said that earnings are driving the
• 39:41
  Speaker 2: bull market but the leadership is a little narrow it's
• 39:44
  Speaker 2: mostly been AI and energy and First, is that still
• 39:48
  Speaker 2: the case today? And second, when does that concentration become
• 39:53
  Speaker 2: a risk factor?
• 39:54
  Speaker 3: Well, you know, the concentration of the Mach 7 has
• 39:57
  Speaker 3: been an issue for the last, you know, two years.
• 40:00
  Speaker 3: We're starting to see rotation out of the large-cap, mega-cap
• 40:03
  Speaker 3: names in tech. You know, at the end of last year,
• 40:07
  Speaker 3: going into this year, and it comes and goes, we
• 40:10
  Speaker 3: still believe they're still heavily concentrated. There's still significant concentration,
• 40:14
  Speaker 3: particularly in technology. But we started to see that rotation
• 40:18
  Speaker 3: going into other parts of the market, which is very healthy.
• 40:21
  Speaker 3: And we've seen even in days where the Nasdaq is down,
• 40:26
  Speaker 3: the S & P maintains its stay in the right place.
• 40:28
  Speaker 3: A lot of that has to do because some other
• 40:30
  Speaker 3: sectors are starting to just carry the weight in some
• 40:33
  Speaker 3: other parts, things that were a little better valued than tech.
• 40:37
  Speaker 3: And I think that's starting to just get. So the
• 40:38
  Speaker 3: breadth became better in the first part of the year.
• 40:42
  Speaker 3: I'm a little more worried that when I've seen, you know,
• 40:45
  Speaker 3: after that is that, you know, the breadth is starting
• 40:47
  Speaker 3: to get narrow again. And we're starting to see that
• 40:50
  Speaker 3: momentum trade, you know, taking a little bit of a
• 40:53
  Speaker 3: second life.
• 40:55
  Speaker 2: It stumbles a bit in the middle of the year,
• 40:56
  Speaker 2: the momentum trade.
• 40:57
  Speaker 1: It stumbled a little bit.
• 40:58
  Speaker 3: And that was, you know, in our mind was there
• 41:01
  Speaker 3: because we've been working with clients to try to diversify
• 41:03
  Speaker 3: their concentrations, try to just move, you know, assets to
• 41:06
  Speaker 3: other parts of the market. And then, you know, it
• 41:09
  Speaker 3: happened that momentum actually took a little bit of a hit.
• 41:12
  Speaker 3: And then when you look at the last, you know,
• 41:14
  Speaker 3: few weeks, you actually see that that is starting to
• 41:16
  Speaker 3: just recover, which a lot of that is clearly because
• 41:20
  Speaker 3: these companies have done really well earnings-wise. They're generating significant
• 41:25
  Speaker 3: amount of business, and they're spending more on capital on AI. So, but,
• 41:29
  Speaker 3: you know, we believe that it's healthy for people to
• 41:31
  Speaker 3: continue to do the rotation and have opportunities to go
• 41:34
  Speaker 3: outside of those.
• 41:35
  Speaker 2: I'm glad you mentioned the technology. capex cycle from AI.
• 41:40
  Speaker 2: That's been a really significant engine of growth for the past,
• 41:44
  Speaker 2: I don't know, five years. How much risk is embedded
• 41:47
  Speaker 2: in that and how can investors position around something if
• 41:52
  Speaker 2: you've underweighted the technology sector or the AI capex cycle
• 42:00
  Speaker 2: you've underperformed? How should investors think about this?
• 42:03
  Speaker 3: Well, we have seen that continuous and we still believe
• 42:06
  Speaker 3: that we're not completely done We believe that the capex
• 42:10
  Speaker 3: cycle has extended. But what is good is it has
• 42:13
  Speaker 3: extended beyond technology. When you look at the capital expenditures
• 42:17
  Speaker 3: now going in other parts of the market, it's starting
• 42:19
  Speaker 3: to grow. Maybe not as big as what we had
• 42:21
  Speaker 3: with the tech, but it's clearly been over there.
• 42:24
  Speaker 2: What other sectors are you seeing?
• 42:26
  Speaker 1: We've seen healthcare. We've seen financials.
• 42:28
  Speaker 3: We've seen some of the industrials doing well on this
• 42:32
  Speaker 3: and spending money on capex, which makes sense, right? They
• 42:34
  Speaker 3: can make their products more efficient. They can make, you know,
• 42:36
  Speaker 3: other things faster. And I think in a certain way,
• 42:38
  Speaker 3: that adoption has increased that capital expenditure setting. I think
• 42:43
  Speaker 3: the question you have is, what is going to be
• 42:45
  Speaker 3: interesting going into next year is that investors are going
• 42:49
  Speaker 3: to start trying to evaluate how much of that capital
• 42:52
  Speaker 3: expenditures and that investment ended up being profitable. And I
• 42:57
  Speaker 3: think profitability going into next year will be a key
• 43:00
  Speaker 3: metric to watch because that's going to be where people
• 43:03
  Speaker 3: will see, well, you're spending all that money, you borrow
• 43:06
  Speaker 3: money to increase your capex for AI, but yet your
• 43:09
  Speaker 3: return on investment is not working. So that is going
• 43:11
  Speaker 3: to be a really good test going into next year.
• 43:14
  Speaker 2: So in 2024, there was a quote of yours, investors
• 43:19
  Speaker 2: can expect 15 to 20% asset growth annually for seven years.
• 43:25
  Speaker 2: That turned out to be true in 24. We were
• 43:28
  Speaker 2: about 25 percent and 25 were about 25 percent. It's
• 43:33
  Speaker 2: early September and we're not that far away from 15 percent.
• 43:38
  Speaker 2: So it looks like, barring any problems this year, you're
• 43:41
  Speaker 2: going to go three for seven. What was that number
• 43:44
  Speaker 2: based on? That's a pretty healthy return above what we've
• 43:49
  Speaker 2: seen over the past 15 years, which has been a
• 43:51
  Speaker 2: great bull market. What do you base this on?
• 43:55
  Speaker 3: Well, you know, our research goes into starts always with
• 43:59
  Speaker 3: the macro picture on where we see the economic cycle.
• 44:02
  Speaker 3: And at the time, you know, we knew that we
• 44:04
  Speaker 3: were in that sort of early to mid cycle that
• 44:08
  Speaker 3: usually goes into an expansion. We were surprised, obviously, that
• 44:12
  Speaker 3: the expansion continued. I think we never expected that it
• 44:15
  Speaker 3: was going to continue as far as it has been
• 44:17
  Speaker 3: so far. And a lot of that is and I
• 44:19
  Speaker 3: would probably say I was the first one. You know,
• 44:21
  Speaker 3: if you look at any report that we produce and
• 44:24
  Speaker 3: most people produce back in 23, nobody mentioned AI. That came,
• 44:29
  Speaker 3: you know, afterwards and it was very quick and it
• 44:31
  Speaker 3: moved there. You know, had we known that, then that
• 44:33
  Speaker 3: would have said instead of seven years, it would have
• 44:35
  Speaker 3: said 10 years.
• 44:36
  Speaker 1: But that's a big part of this.
• 44:38
  Speaker 3: But if you look at the macro picture, even going
• 44:40
  Speaker 3: that in that expansion where you have, you know, healthy
• 44:43
  Speaker 3: economy growing, you know, the nominal growth expectations for this
• 44:46
  Speaker 3: year is still, you know, close to 6%, which is impressive.
• 44:50
  Speaker 3: When you look at labor market that is stable, when
• 44:53
  Speaker 3: you look at the monetary policy and the fiscal stimulus
• 44:58
  Speaker 3: that go into the economy, that allows us to extend that.
• 45:01
  Speaker 3: And business investments, the credit market is healthy. Everything part
• 45:05
  Speaker 3: of that that allows you to create that tailwind, it
• 45:09
  Speaker 3: was working in the right place, especially because relative. to
• 45:13
  Speaker 3: the rest of the world, the U.S. looked incredibly attractive.
• 45:16
  Speaker 3: And it was leading the charge and it was clearly
• 45:18
  Speaker 3: moving in the right direction because we didn't have the
• 45:21
  Speaker 3: same issues that some other regions in the world had. Obviously,
• 45:25
  Speaker 3: now we're in that past where we're basically getting close
• 45:28
  Speaker 3: to the peak of the cycle.
• 45:29
  Speaker 1: And, you know, from here, it's.
• 45:31
  Speaker 3: Difficult to sustain, especially because you know, the risk premium
• 45:35
  Speaker 3: associated with higher rates is starting to just take, you know,
• 45:37
  Speaker 3: a little bit of the oxygen away of those risky assets. So,
• 45:40
  Speaker 3: you know, our expectations is that we're probably, you know,
• 45:43
  Speaker 3: in that, you know, end of that seven-year run, and
• 45:46
  Speaker 3: we think that at some point in the next year
• 45:48
  Speaker 3: we'll start to balance it out with other asset classes.
• 45:51
  Speaker 2: So you mentioned trade policy tends to hit the economy
• 45:55
  Speaker 2: on a 12- to 18-month lag. The full impact won't
• 45:59
  Speaker 2: show up until sometime in 2026. 18 months ago was
• 46:04
  Speaker 2: Liberation Day, so we're right in the heart of that.
• 46:09
  Speaker 2: What are we seeing from trade policy? How is it
• 46:11
  Speaker 2: impacting the economy and inflation?
• 46:15
  Speaker 3: It has had probably less impact than we all thought.
• 46:18
  Speaker 3: It has an impact, and it has had an impact.
• 46:21
  Speaker 2: A lot of exceptions and exemptions.
• 46:24
  Speaker 3: A lot of exceptions, a lot of negotiations, a lot
• 46:27
  Speaker 3: of exemptions, and a lot of practical implementations. Because it's
• 46:31
  Speaker 3: one thing to set up a tariff. It's one thing
• 46:33
  Speaker 3: to set up certain components. But for that to fully
• 46:36
  Speaker 3: be implemented and checked is more difficult to do. Like
• 46:40
  Speaker 3: the compliance associated to figure out how the tariffs get
• 46:43
  Speaker 3: paid and who does what. And especially because there has
• 46:46
  Speaker 3: been obviously a lot of discussions also even with the
• 46:49
  Speaker 3: Supreme Court and how this gets reversed and how it
• 46:51
  Speaker 3: gets implemented.
• 46:52
  Speaker 1: That obviously lacks the effect.
• 46:53
  Speaker 3: But it's very clear to us that any kind of
• 46:56
  Speaker 3: tariff has an inflationary aspect. The biggest difference of what
• 47:00
  Speaker 3: we have observed, at least so far, is companies have
• 47:03
  Speaker 3: had very clean and very robust balance sheets. So for
• 47:07
  Speaker 3: many companies that were involved in that, even though their
• 47:10
  Speaker 3: prices have increased, their inputs have been more expensive, they
• 47:14
  Speaker 3: have been able to weather the storm without necessarily passing
• 47:17
  Speaker 3: it all through the consumers. That has started to change
• 47:20
  Speaker 3: this year. And if you look at some of the
• 47:23
  Speaker 3: cost of goods, it's starting to just get slowly higher,
• 47:26
  Speaker 3: slowly higher. Even though the inflation rate seems to be stable,
• 47:30
  Speaker 3: the prices have gone up. And I think that's basically
• 47:34
  Speaker 3: part of the inflationary component that actually people feel.
• 47:37
  Speaker 2: Stable at 3.5%. It's not getting worse. It's not going 4%
• 47:40
  Speaker 2: or 5%. But that still means prices are ticking up.
• 47:45
  Speaker 2: Let's talk a little bit about yield, which is directly
• 47:47
  Speaker 2: related to inflation and the Fed rate. Earlier this year,
• 47:53
  Speaker 2: the House view was now was not the moment to
• 47:57
  Speaker 2: reach for duration. Since you mentioned that, we've seen the
• 48:02
  Speaker 2: 10-year move up substantially. At what point do you lock
• 48:08
  Speaker 2: in that longer duration and higher yield? Is it 6%?
• 48:10
  Speaker 2: Is it 7%? Right. When does it become too attractive
• 48:16
  Speaker 2: to not lock it in?
• 48:17
  Speaker 1: Right. Yes, it's true.
• 48:18
  Speaker 3: Well, it turned out that our team that does a
• 48:22
  Speaker 3: lot of the work on fixed income was very clear
• 48:25
  Speaker 3: that there were two things that we didn't want to
• 48:28
  Speaker 3: pursue further, which is credit spreads were too tight. There
• 48:31
  Speaker 3: was no reason for us to try to go too
• 48:33
  Speaker 3: deep into credit. And the second is duration was too
• 48:35
  Speaker 3: volatile and too risky. And that has worked well so
• 48:39
  Speaker 3: far this year. Now, when you started to get to
• 48:41
  Speaker 3: like the 10-year being at 4.8%, close to 5%, that
• 48:45
  Speaker 3: to us has started to just become a little bit
• 48:48
  Speaker 3: more attractive than what it was before. Mostly because then
• 48:51
  Speaker 3: now you see the balancing of upside and downside. And
• 48:53
  Speaker 3: actually you see like, well, where does the yields go
• 48:56
  Speaker 3: from here? When you actually have a good economy, again,
• 48:59
  Speaker 3: go back to the economy. Again, granted that we have
• 49:02
  Speaker 3: this term premium affecting the long part of the curve,
• 49:06
  Speaker 3: and we see the deficits obviously affecting that component. inflation expectations,
• 49:10
  Speaker 3: and the market itself will probably still keep the little
• 49:14
  Speaker 3: bit of that on that 10 year so we believe
• 49:17
  Speaker 3: that staying in that sort of Average duration maybe below
• 49:20
  Speaker 3: what typical benchmarks have is still a pretty healthy component
• 49:24
  Speaker 3: and you can enjoy very nice yields With high quality again,
• 49:28
  Speaker 3: we still don't think it's time to get credit risk
• 49:31
  Speaker 3: So that is in a big part of what we
• 49:33
  Speaker 3: look to stay in the middle of the curve intermediate
• 49:35
  Speaker 3: bonds with higher quality is the place for people can
• 49:38
  Speaker 3: lock in very nice deals.
• 49:40
  Speaker 2: Intermediate seven to ten years, is that about right? Yes.
• 49:44
  Speaker 2: So let's talk a little bit about biases, since you
• 49:47
  Speaker 2: spend so much of your career on behavioral finance and
• 49:51
  Speaker 2: better decision-making. Last year, you said there are four dominant
• 49:55
  Speaker 2: biases that seem to really be affecting investors today. I'm paraphrasing.
• 50:02
  Speaker 2: Herding around the Magnificent Seven, home country bias... Recency bias,
• 50:08
  Speaker 2: especially amongst young people, and confirmation bias. Tell us about
• 50:14
  Speaker 2: those four. Why did you name those?
• 50:16
  Speaker 3: Yeah, well, those four, and they'll continue to be into
• 50:19
  Speaker 3: this year. It's been fascinating to see. So herding is
• 50:23
  Speaker 3: very clear. You know, people follow the momentum trade. They
• 50:26
  Speaker 3: love the momentum trade. And a big part of the
• 50:28
  Speaker 3: help that we have is to make clients and investors
• 50:32
  Speaker 3: understand that that is staying too concentrated because the momentum
• 50:36
  Speaker 3: trade works until it doesn't. And then when it doesn't, basically,
• 50:40
  Speaker 3: it could be very painful. So a very natural cognitive
• 50:45
  Speaker 3: bias that people have is they don't know how to
• 50:47
  Speaker 3: sell their winners. It's impossible for them when they see
• 50:51
  Speaker 3: them on a run to think that it's never going
• 50:53
  Speaker 3: to end. And I think that's a big part of
• 50:55
  Speaker 3: our education to try to help them take profits when
• 50:59
  Speaker 3: you can, rebalance when you can. Rebalance is like a
• 51:02
  Speaker 3: word they Hear me say all the time. The second
• 51:05
  Speaker 3: one is recency bias. The recency bias is basically putting
• 51:08
  Speaker 3: more weight into the recent events than what it is
• 51:11
  Speaker 3: the entire history. That's a very typical, you know, emotional
• 51:15
  Speaker 3: bias when, you know, in days when there is lots
• 51:17
  Speaker 3: of volatility, people tend to say, oh, my God, this
• 51:19
  Speaker 3: is the end of the bull market. You know, we
• 51:21
  Speaker 3: got to get out and they forget about their fundamentals.
• 51:23
  Speaker 3: Or days when they see, oh, you know, there's another
• 51:26
  Speaker 3: great earnings report by semiconductors. Well, let's go into that
• 51:29
  Speaker 3: and then put more money into it. That recency bias,
• 51:33
  Speaker 3: when you only look at the most recent information as
• 51:35
  Speaker 3: your basis to do that, is something we try to understand.
• 51:38
  Speaker 3: And that, you know, tends to work when you actually
• 51:40
  Speaker 3: look at longer horizons, when you look at, you know,
• 51:42
  Speaker 3: more information and more data. Confirmation bias is my favorite.
• 51:47
  Speaker 1: And this is the typical example.
• 51:48
  Speaker 3: When you buy a new car and then you start
• 51:51
  Speaker 3: driving your car, And you're starting to see cars like
• 51:53
  Speaker 3: yours everywhere. Because your brain is basically trained to try
• 51:58
  Speaker 3: to look for things that convince you that you're making
• 52:01
  Speaker 3: the right choice. And so confirmation bias basically have, and
• 52:05
  Speaker 3: we have, especially in a bull market, when you have
• 52:07
  Speaker 3: clients that call us and say, hey, I told you
• 52:10
  Speaker 3: that stock was going to go up. It's like, well, yeah,
• 52:12
  Speaker 3: it was going up, but not for the reason you said,
• 52:14
  Speaker 3: but it went for other reasons. And, you know, even
• 52:16
  Speaker 3: though they didn't have any fundamental reasons to it, it's
• 52:18
  Speaker 3: actually going to that. Or I want to go into
• 52:20
  Speaker 3: these particular classes.
• 52:21
  Speaker 1: The typical example is Bitcoin.
• 52:24
  Speaker 3: You know, Bitcoin is one of those that was clearly
• 52:27
  Speaker 3: in confirmation bias when it was down at $ 16, 000 and
• 52:30
  Speaker 3: people had doubts about how Bitcoin was going to work.
• 52:32
  Speaker 3: When it went up to $ 30, 000, people were like, oh, yeah,
• 52:34
  Speaker 3: this is the right thing. And they did the same
• 52:36
  Speaker 3: thing again. And they had no basis other than the
• 52:39
  Speaker 3: confirmation of them. They created their own theories on why
• 52:43
  Speaker 3: that was happening. So that is another part that drives
• 52:46
  Speaker 3: a lot of the market. And the fourth one, I
• 52:48
  Speaker 3: forgot what.
• 52:49
  Speaker 2: Was the one.
• 52:49
  Speaker 1: Home country bias.
• 52:50
  Speaker 3: Home country bias is more like you know, the safety
• 52:52
  Speaker 3: component where you prefer to stay in the U.S. One
• 52:56
  Speaker 3: of the challenges we have as a country is that
• 53:00
  Speaker 3: we don't have enough exposure to international markets. And there's
• 53:03
  Speaker 3: great companies internationally. There's great opportunities to invest and diversify.
• 53:07
  Speaker 3: But most investors tend to feel comfortable, you know, buying
• 53:11
  Speaker 3: their stuff they're good at.
• 53:14
  Speaker 2: They're familiar with.
• 53:15
  Speaker 1: They're familiar with.
• 53:15
  Speaker 3: And, you know, and a lot of that is being,
• 53:18
  Speaker 3: you know, tested a lot in the market. or of
• 53:21
  Speaker 3: saying like, well, you know, if you think about, you know,
• 53:23
  Speaker 3: your brands that you're loyal to, right? You go to
• 53:25
  Speaker 3: a supermarket and you buy the shampoo that you like
• 53:28
  Speaker 3: and you don't want to change, you don't want to
• 53:29
  Speaker 3: do anything else unless you want to actually try something else.
• 53:32
  Speaker 3: So it's this idea of diversification and trying to understand
• 53:36
  Speaker 3: that it's not going to be always the same. It's
• 53:38
  Speaker 3: actually something we try to teach our clients.
• 53:39
  Speaker 2: And up to two or three years ago, the U.S.
• 53:42
  Speaker 2: was outperforming developed ex-U.S. and emerging markets. The past few years,
• 53:47
  Speaker 2: we've seen international really come on strong.
• 53:50
  Speaker 1: Correct.
• 53:50
  Speaker 2: So if you were stuck with, I'm reluctant to say,
• 53:54
  Speaker 2: the recency effect of seeing U.S. outperformance, you might not
• 53:59
  Speaker 2: even think to look overseas.
• 54:00
  Speaker 3: Well, then that was the combination, Barry, because the recency
• 54:03
  Speaker 3: bias that says, well, the U.S. has outperformed the international
• 54:06
  Speaker 3: markets combined with the home bias basically will prevent any
• 54:10
  Speaker 3: client to diversify away from the U.S.
• 54:13
  Speaker 2: So I want to stay with the biases and If
• 54:16
  Speaker 2: you could convince clients of Schwab, if you could persuade
• 54:21
  Speaker 2: investors to think about adopting one rule to thwart their
• 54:25
  Speaker 2: own biases before whenever the next bear market comes along,
• 54:31
  Speaker 2: what might that rule be?
• 54:32
  Speaker 1: Well, we don't have one rule. We have three rules.
• 54:35
  Speaker 1: We have three components.
• 54:37
  Speaker 3: So we call it, you know, and a lot of
• 54:40
  Speaker 3: that has come from me, but it's clearly a big
• 54:42
  Speaker 3: part of what our philosophical is for clients. to mitigate
• 54:45
  Speaker 3: those biases, and it works for all kinds of clients.
• 54:48
  Speaker 3: Stay invested. That's number one. You know, it's very important
• 54:52
  Speaker 3: for people to try not to time the market. Stay
• 54:55
  Speaker 3: invested is the first component, and we have lots of
• 54:58
  Speaker 3: data over long periods, long cycles, that shows that stay
• 55:01
  Speaker 3: invested is much better than not being or trying to
• 55:04
  Speaker 3: get in and out of the market at different times.
• 55:07
  Speaker 1: Stay diversified.
• 55:08
  Speaker 3: That's number two. Diversification, even though it's like the old trick,
• 55:12
  Speaker 3: it still works. And as I said before, The challenge
• 55:14
  Speaker 3: with clients today and the challenge for investors today is
• 55:17
  Speaker 3: they don't realize their level of concentration until it's too late.
• 55:21
  Speaker 3: So having to rebalance, having a strategic asset allocation, trying
• 55:25
  Speaker 3: to just make sure that they follow that path is
• 55:28
  Speaker 3: very important. If you think about it, if you put
• 55:30
  Speaker 3: your portfolio three years ago and you invest there and
• 55:33
  Speaker 3: you keep it there and you don't touch it for
• 55:34
  Speaker 3: three years, today you will be highly exposed to technology
• 55:38
  Speaker 3: just for the way the market dynamics is. So it
• 55:40
  Speaker 3: is important to take a look and have an approach
• 55:44
  Speaker 3: to rebalancing that allows you to just get that diversification
• 55:47
  Speaker 3: that you have.
• 55:47
  Speaker 1: And the third one is to stay disciplined.
• 55:50
  Speaker 3: The discipline basically creates a mechanism to have a systematic
• 55:55
  Speaker 3: approach for those people. So things that we discuss with
• 55:57
  Speaker 3: our clients, especially with those that tend to be more
• 56:00
  Speaker 3: biased emotionally, is to say, let's set up the rules now.
• 56:04
  Speaker 3: before we get into the action on the market. So
• 56:08
  Speaker 3: if you see the market is down 5% one day,
• 56:10
  Speaker 3: we already have the playbook. We already know what we
• 56:13
  Speaker 3: need to do. We don't have to panic. We don't
• 56:16
  Speaker 3: have to do a lot of things at that moment.
• 56:17
  Speaker 3: We already know what exactly we have to do and
• 56:20
  Speaker 3: follow that discipline, whether it's rebalancing portfolio, whether it's taking profits,
• 56:25
  Speaker 3: whether it's buying some of the companies that may not
• 56:28
  Speaker 3: be natural, and this is very typical, You know, the
• 56:31
  Speaker 3: example that I always provide is, you know, if you
• 56:33
  Speaker 3: had an equal weighted, you know, strategy, well, if things
• 56:36
  Speaker 3: started to get out of whack, you want to get
• 56:38
  Speaker 3: them back to equal weighted. And that's sort of a
• 56:40
  Speaker 3: natural thing to have. People like it because it's like, yeah,
• 56:43
  Speaker 3: I know, you know, that company went down, so I
• 56:45
  Speaker 3: need to buy more. And that's a little better approach.
• 56:48
  Speaker 3: So stay invested, stay diversified, and stay, you know, disciplined.
• 56:52
  Speaker 2: Last question before we get to our speed round, our
• 56:56
  Speaker 2: favorite questions. What do you think investors are not thinking
• 56:59
  Speaker 2: about or talking about today, but perhaps they should be?
• 57:04
  Speaker 2: What topics could be assets, geography, policy, data? What's getting
• 57:09
  Speaker 2: overlooked but really shouldn't?
• 57:12
  Speaker 3: I think the main area where clients get distracted the
• 57:19
  Speaker 3: most is they get concerned about geopolitical risks. They get
• 57:24
  Speaker 3: concerned about inflationary pictures, and they have the right to
• 57:27
  Speaker 3: do that. But a lot of the benefit of long-term investing,
• 57:31
  Speaker 3: it's something that gets overlooked all the time. And again,
• 57:34
  Speaker 3: a lot of that is because of the recency bias
• 57:36
  Speaker 3: that exists today and the availability of information. So this
• 57:40
  Speaker 3: concept of setting up your goals, setting up your investment strategy,
• 57:45
  Speaker 3: setting up your strategic asset allocation, and follow that path,
• 57:50
  Speaker 3: is something that, believe it or not, gets overlooked all
• 57:53
  Speaker 3: the time. And it works no matter what part of
• 57:56
  Speaker 3: the cycle is, as long as you feel comfortable understanding risk.
• 58:00
  Speaker 3: At the same time, the risk budget, and we always
• 58:03
  Speaker 3: talk about this, is so critical for people to understand
• 58:07
  Speaker 3: how to allocate risk. Not to allocate assets, but how
• 58:10
  Speaker 3: to allocate risk. And I think that component gets overlooked
• 58:14
  Speaker 3: all the time. And the way I think about it
• 58:16
  Speaker 3: is that when you go to a dinner, you basically
• 58:19
  Speaker 3: have your main entrance. You also have your salad. You
• 58:22
  Speaker 3: also have your side. And you don't necessarily have the
• 58:25
  Speaker 3: same level of weight to each one of those. That's
• 58:28
  Speaker 3: a risk budget allocation. So you need to understand how
• 58:31
  Speaker 3: much is going to be in your core portfolio. It's
• 58:33
  Speaker 3: going to be long term. And how much is going
• 58:35
  Speaker 3: to be in other parts of the market. Specifically nowadays,
• 58:40
  Speaker 3: which there is a temptation to go into these predictive markets.
• 58:44
  Speaker 3: And I think we try to avoid markets that way
• 58:48
  Speaker 3: because the difference between gambling and investing is huge.
• 58:51
  Speaker 2: Right, that's just pure speculation.
• 58:53
  Speaker 3: And it's, you know, the way that our team has
• 58:56
  Speaker 3: explained it is, you know, when you're investing, you become
• 58:59
  Speaker 3: an owner. When you're gambling, you don't have anything. You're
• 59:03
  Speaker 3: just basically, you know, putting money in the box. The
• 59:06
  Speaker 3: odds are against you, and you don't have any ownership.
• 59:08
  Speaker 2: The house usually wins.
• 59:10
  Speaker 1: Correct.
• 59:11
  Speaker 2: All right, so let's jump to our favorite questions that
• 59:13
  Speaker 2: we ask all our guests. Starting with, tell us about
• 59:16
  Speaker 2: your mentors. You mentioned one earlier. Who helped shape your career?
• 59:22
  Speaker 3: Well, you know, the person that, you know, brought me
• 59:26
  Speaker 3: to Bank of Strauss was, you know, really an innovator
• 59:29
  Speaker 3: that actually took a lot of faith. And he was
• 59:33
  Speaker 3: able to see, you know, in a PhD student, that
• 59:36
  Speaker 3: was doing Bayesian statistics and modeling, you know, the ability
• 59:39
  Speaker 3: for that, and I.
• 59:40
  Speaker 1: Learned a lot from him.
• 59:41
  Speaker 2: And that was from who?
• 59:42
  Speaker 3: That was a bankers' trust, and his name is Phil Green.
• 59:45
  Speaker 2: Phil Green.
• 59:46
  Speaker 3: And Phil basically, you know, put together this vision where
• 59:50
  Speaker 3: he wanted to create this, you know, concept. He bought
• 59:53
  Speaker 3: into the idea of vision, and that helps me in
• 59:56
  Speaker 3: just understanding, you know, how this evolves over time. I
• 1:00:01
  Speaker 3: have also, you know, my advisor from, you know, Duke.
• 1:00:04
  Speaker 3: You know, his name is Mike West. You know, he,
• 1:00:06
  Speaker 3: you know, has, you know, obviously deep academic background, clearly
• 1:00:10
  Speaker 3: a lot of technical, but he's also a business owner.
• 1:00:13
  Speaker 3: He also understands the practical application of all these techniques,
• 1:00:16
  Speaker 3: which I believe vary that, you know, combination of deep
• 1:00:20
  Speaker 3: quantitative tools, you know, with reality and making that merge
• 1:00:24
  Speaker 3: is something that we need more.
• 1:00:25
  Speaker 1: There's a lot of great technicians.
• 1:00:27
  Speaker 3: There's a lot of great people, a lot of really
• 1:00:29
  Speaker 3: smart people, but having that idea to be able to solve,
• 1:00:32
  Speaker 3: it's actually critical. And I would probably say, You know,
• 1:00:36
  Speaker 3: the model that we get from Chuck on the values
• 1:00:38
  Speaker 3: that he has put together.
• 1:00:40
  Speaker 2: Chuck Schwab.
• 1:00:40
  Speaker 1: Chuck Schwab.
• 1:00:42
  Speaker 3: At Schwab of getting access to clients, provide clients with
• 1:00:46
  Speaker 3: the right solutions, being transparent, being accessed, and thinking through
• 1:00:49
  Speaker 3: client eyes. That has been a big mantra for my life.
• 1:00:53
  Speaker 3: You know, Schwab has been the longest job I ever had.
• 1:00:55
  Speaker 3: And it's been great.
• 1:00:57
  Speaker 2: Let's talk about books. What are you reading currently? What
• 1:01:00
  Speaker 2: are some of your favorites?
• 1:01:01
  Speaker 3: Well, I love the books of, you know, Sapiens was
• 1:01:05
  Speaker 3: one of my favorites. Just to re-read it again. You know,
• 1:01:09
  Speaker 3: I think Phantasm Slow was another great of my favorites.
• 1:01:13
  Speaker 3: I like to read a lot about, you know, these components.
• 1:01:16
  Speaker 3: I read the Hail Mary.
• 1:01:18
  Speaker 1: Book that was actually pretty fun. Project Hail Mary. So
• 1:01:21
  Speaker 1: those are great.
• 1:01:22
  Speaker 3: And those are great, you know, components that I like
• 1:01:25
  Speaker 3: to always think about the concept of how you apply
• 1:01:28
  Speaker 3: those to things that I can do for my work.
• 1:01:32
  Speaker 2: What about streaming? Were you watching or listening to anything
• 1:01:34
  Speaker 2: interesting these days?
• 1:01:36
  Speaker 3: I started watching this show called Silo.
• 1:01:40
  Speaker 1: On Apple TV? On Apple TV. You're a sci-fi fan.
• 1:01:45
  Speaker 3: Well, it has a lot of pieces that I think
• 1:01:48
  Speaker 3: it was great.
• 1:01:49
  Speaker 1: I did watch.
• 1:01:52
  Speaker 3: Ted Lasso for a while, and that was also good,
• 1:01:55
  Speaker 3: especially the first season was particularly good.
• 1:01:57
  Speaker 2: Fabulous, yeah.
• 1:01:58
  Speaker 1: You know, it's quite a.
• 1:02:00
  Speaker 3: And then there was this other show called The 100,
• 1:02:03
  Speaker 3: which actually was very good because.
• 1:02:06
  Speaker 1: Again, it was sci-fi.
• 1:02:07
  Speaker 2: Yes.
• 1:02:08
  Speaker 3: And it had many, many episodes and seasons. But what
• 1:02:14
  Speaker 3: it was great because it was, again, a sci-fi, very
• 1:02:17
  Speaker 3: similar to Silo, but the whole plot was about the
• 1:02:21
  Speaker 3: humankind was, you know, in this nuclear war. And therefore,
• 1:02:25
  Speaker 3: they selected 100 people to just put them on space.
• 1:02:29
  Speaker 3: And they had to survive, you know, there until the
• 1:02:32
  Speaker 3: Earth was, you know, safe again to just come back.
• 1:02:35
  Speaker 3: Once that happens, then, you know, there was a lot
• 1:02:38
  Speaker 3: of changes. There was a lot of things for survival.
• 1:02:40
  Speaker 3: There's a lot of leadership lessons on how to, you know,
• 1:02:43
  Speaker 3: deal with that and how to deal with adversity that
• 1:02:45
  Speaker 3: I thought was fascinating.
• 1:02:47
  Speaker 2: I know you mentioned reading Project Hail Mary. Have you
• 1:02:51
  Speaker 2: seen the movie yet?
• 1:02:52
  Speaker 1: Yes, we did.
• 1:02:53
  Speaker 2: Yes. Really, it's really quite amazing. Our final two questions,
• 1:02:58
  Speaker 2: what sort of advice would you give to a recent
• 1:03:00
  Speaker 2: college grad interested in a career in either quantitative analytics
• 1:03:06
  Speaker 2: or wealth management?
• 1:03:08
  Speaker 1: Yeah, number one is the.
• 1:03:11
  Speaker 3: Yes, getting your exercise and trying to get up to
• 1:03:15
  Speaker 3: speed on all the methods that we can use. And
• 1:03:18
  Speaker 3: in this day and age, understanding, getting a CFA, getting
• 1:03:22
  Speaker 3: some project where basic theory about investing comes into play. Second,
• 1:03:29
  Speaker 3: which is very important, soft skills. That's something you don't
• 1:03:33
  Speaker 3: get taught in school. But the ability to have the
• 1:03:36
  Speaker 3: soft skills to be able to talk and explain They'll
• 1:03:39
  Speaker 3: be able to say, all right, this is the things
• 1:03:41
  Speaker 3: that you can do, and this is how you can
• 1:03:44
  Speaker 3: structure it. That, to me, becomes like a big part
• 1:03:47
  Speaker 3: of the assets. That combination of being able to be
• 1:03:50
  Speaker 3: good technically, but being able to explain things becomes incredibly valuable.
• 1:03:55
  Speaker 2: And our final question, what do you know about the
• 1:03:58
  Speaker 2: world of investing and behavioral decision-making and quantitative research today
• 1:04:05
  Speaker 2: might have been useful 30 or so years ago when
• 1:04:07
  Speaker 2: you were first getting started?
• 1:04:10
  Speaker 1: What do I think today?
• 1:04:11
  Speaker 2: What do you know today would have been useful 30
• 1:04:14
  Speaker 2: years ago?
• 1:04:15
  Speaker 3: I would probably say that, you know, underestimating the effect
• 1:04:21
  Speaker 3: of how fast, you know, the market was going to
• 1:04:25
  Speaker 3: move was there. I mean, I think there was a
• 1:04:29
  Speaker 3: wrong idea that you can be faster than the market
• 1:04:33
  Speaker 3: and that people can really get ahead of many things
• 1:04:36
  Speaker 3: by just trying to capture information faster. I think that
• 1:04:40
  Speaker 3: information advantage that people claim to have, you know, when
• 1:04:44
  Speaker 3: after all these years in the investment, you know, it's
• 1:04:46
  Speaker 3: very hard to actually capitalize.
• 1:04:49
  Speaker 2: Really, really fascinating. Omar, thank you for being so generous
• 1:04:52
  Speaker 2: with your time. We have been speaking with Omar Aguilar.
• 1:04:56
  Speaker 2: He's CEO and CIO at Schwab Asset Management. If you
• 1:05:00
  Speaker 2: enjoy this conversation, well, check out any of the 662
• 1:05:03
  Speaker 2: we've done over the past 14 years, 14 years, 12 years.
• 1:05:09
  Speaker 2: You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever
• 1:05:13
  Speaker 2: you get your favorite podcasts. I would be remiss if
• 1:05:16
  Speaker 2: I didn't thank the crack team that helps put these
• 1:05:19
  Speaker 2: conversations together each week. Anna Luca and Elizabeth Sedrin are
• 1:05:23
  Speaker 2: my producers. Sam Danziger is my video producer. Sean Russo
• 1:05:29
  Speaker 2: is my researcher. I'm Barry Ritholtz. You've been listening to
• 1:05:32
  Speaker 2: Masters in Business on Bloomberg Radio.