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Founder and CIO Rick Ferri: Masters in Business (Audio) · Masters in Business

• 0:03
  Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg
• 0:07
  Speaker 1: Radio Today. My special guest is gonna be a little
• 0:10
  Speaker 1: inside baseball. For those of you who either work in
• 0:14
  Speaker 1: the asset management business or our r I as registered
• 0:18
  Speaker 1: investment and buyers or Series seven broker dealers, this is
• 0:22
  Speaker 1: gonna be a fascinating question. Rick Ferry is a really
• 0:27
  Speaker 1: interesting guy. He's going to tell a fascinating story about
• 0:31
  Speaker 1: when he was a retail broker in the nine nineties.
• 0:34
  Speaker 1: Uh the at Smith Barney. The head of his company
• 0:39
  Speaker 1: was Jamie Diamond, and he went to Jamie and said, Hey,
• 0:42
  Speaker 1: this low cost et F thing is going to be huge,
• 0:45
  Speaker 1: we should do something, and uh, Diamond kind of blew
• 0:49
  Speaker 1: him off. Ah, he still had a few years left
• 0:53
  Speaker 1: in his contract, so he thought carefully about it and
• 0:56
  Speaker 1: mapped out what became Portfolios Solutions, which was very much
• 1:03
  Speaker 1: ahead of its time, one of the first low cost
• 1:07
  Speaker 1: asset allocation all et F portfolios or mostly t F portfolios,
• 1:13
  Speaker 1: and launched with a modest amount of money and built
• 1:17
  Speaker 1: it into a billion dollar business. What I found so
• 1:21
  Speaker 1: fascinating about the conversation is that Rick is really one
• 1:26
  Speaker 1: of these people who basically identified a need, a shortcoming,
• 1:33
  Speaker 1: and what Wall Street was offering identified it offered it
• 1:36
  Speaker 1: to his company. They turned him down and said this
• 1:39
  Speaker 1: is too important. I'm going to go do this myself.
• 1:42
  Speaker 1: And UM he's also you know, a quite a gentleman.
• 1:46
  Speaker 1: He's just a delightful person. After the interview, we went
• 1:51
  Speaker 1: out to breakfast. I had some of my office mates
• 1:54
  Speaker 1: join us, and he basically, UM gave us just a
• 2:00
  Speaker 1: fascinating UM Beyond the hour and a half we talked
• 2:04
  Speaker 1: here even more inside baseball details of what it was
• 2:09
  Speaker 1: like leaving setting up. He tells the story in the
• 2:11
  Speaker 1: show about Hey, we I pulled a desk out of
• 2:15
  Speaker 1: the garbage and set this up in my living room.
• 2:18
  Speaker 1: My wife was my first employee. And that's how he
• 2:20
  Speaker 1: did this and built it into a billion dollar business. Uh.
• 2:24
  Speaker 1: They have one point four billion in assets. And it's
• 2:27
  Speaker 1: really fascinating to see how, Um, a person with an
• 2:32
  Speaker 1: idea can say here's how I'm gonna manifest this idea
• 2:36
  Speaker 1: in a business and make this real and it turned
• 2:39
  Speaker 1: out to be really, really substantial. Um, he was way
• 2:42
  Speaker 1: way ahead of his time. He's still ahead of his time.
• 2:44
  Speaker 1: I think he's been very insightful in how he constantly
• 2:49
  Speaker 1: evaluates and constantly analyzes the data that his business produces
• 2:55
  Speaker 1: in order to improve that business. For those of you
• 2:58
  Speaker 1: who work in the industry three or are just curious
• 3:01
  Speaker 1: as to how the business of asset management works, I
• 3:05
  Speaker 1: think you'll find this to be a fascinating conversation. Without
• 3:09
  Speaker 1: further ado, here is the Master's in Business Chat with
• 3:13
  Speaker 1: Rick Ferry. This is Master's in Business with Barry Ridholts
• 3:20
  Speaker 1: on Bloomberg Radio Today. My guest is Rick Ferry. He
• 3:25
  Speaker 1: is the founder and chief investment officer of Portfolio Solutions.
• 3:30
  Speaker 1: A little background about Rick. He is a retired Marine
• 3:34
  Speaker 1: Corps fighter pilot. Is that correct? And and from there
• 3:38
  Speaker 1: he somehow transitioned into finance. We'll find out specifically how
• 3:44
  Speaker 1: that took place. He's the author of is it seven
• 3:46
  Speaker 1: books on investing? Uh? Six books myself and then a
• 3:50
  Speaker 1: co author. Oh and then a seventh with a co author. Great,
• 3:52
  Speaker 1: And here's the your your background as you follow a
• 3:56
  Speaker 1: low cost et f based asset allocation form of listening.
• 4:00
  Speaker 1: But the story is that twenty years ago you were
• 4:03
  Speaker 1: a stockbroker at Smith Barney and you had an idea that, gee,
• 4:07
  Speaker 1: this is way too expensive and too much turnover. So
• 4:11
  Speaker 1: you went to the head of the company, some guy
• 4:13
  Speaker 1: named Jamie Diamond, and said, Hey, I have this great
• 4:17
  Speaker 1: idea for us. Let's offer a low cost asset management plan,
• 4:23
  Speaker 1: really low turnover, very very client friendly. And uh, he
• 4:28
  Speaker 1: basically gave you a flat out no, that's not what
• 4:31
  Speaker 1: we do. You quit and said, I'm gonna take this
• 4:34
  Speaker 1: plan and do it myself. Is that a fair description,
• 4:39
  Speaker 1: That's a very accurate description. Only I didn't quit right away.
• 4:42
  Speaker 1: I had a I took upfront money when I switched
• 4:45
  Speaker 1: from Kidder Peabody over to Smith Barney, so I had
• 4:48
  Speaker 1: a five year contract. And if I left after two years,
• 4:51
  Speaker 1: which is when I had the conversation with Jamie, I
• 4:54
  Speaker 1: would have had to pay back all of this money.
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  Speaker 1: And I had redecorated my house. We bought a pop
• 4:59
  Speaker 1: up Emperor, and so I wasn't able to pay it back.
• 5:03
  Speaker 1: But I took the three years to plan my company,
• 5:07
  Speaker 1: create a business plan, right my first book, so that
• 5:10
  Speaker 1: when I left Smith Barney, I was ready to go.
• 5:13
  Speaker 1: And so you launched Portfolio Solutions. What year that's for
• 5:20
  Speaker 1: two of this timing. Now now you manage one point
• 5:23
  Speaker 1: four billion in assets, is at a ballpark number. That's
• 5:26
  Speaker 1: correct and so so somewhere between being a fighter pilot
• 5:31
  Speaker 1: and getting turned down by Jamie Diamond, what was the
• 5:34
  Speaker 1: transition from the Marines to finance, Like, how did you
• 5:38
  Speaker 1: work your way to Wall Street? Well, my undergraduate degree
• 5:42
  Speaker 1: was in business administration and then in night. As you know,
• 5:46
  Speaker 1: we were in a pretty bad recession at the time,
• 5:48
  Speaker 1: and there was no jobs available. The unemployment rate was
• 5:51
  Speaker 1: double digits, interest rates were sky high. Uh. I decided
• 5:55
  Speaker 1: at that time I was going to serve the country,
• 5:58
  Speaker 1: and I went into the Marine Corps. Uh. And when
• 6:01
  Speaker 1: I took the test to go into the Marine Corps,
• 6:03
  Speaker 1: they asked me if I wanted to take the test
• 6:05
  Speaker 1: to become a pilot and go to flight school. Had
• 6:08
  Speaker 1: you ever shown previous interest in flying or was this
• 6:10
  Speaker 1: just out a left field. I saw a picture in
• 6:12
  Speaker 1: the brochure. I said, that looks pretty cool. It certainly does.
• 6:17
  Speaker 1: So I said, okay, I'll take the test, and I did,
• 6:19
  Speaker 1: and I did fine. And they gave me the physical
• 6:23
  Speaker 1: and check my eyesight and my height and all kinds
• 6:25
  Speaker 1: of things probe me in all kinds of different ways.
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  Speaker 1: And then they gave me the opportunity after I finished
• 6:32
  Speaker 1: my Officers Candidate School and then Infantry Officers school called
• 6:36
  Speaker 1: Basic School, they allowed me to go down to Pennscola,
• 6:41
  Speaker 1: Florida and try my hand at flight school, which I
• 6:44
  Speaker 1: did and UH finished that, ended up down in Kingsville, Texas.
• 6:49
  Speaker 1: Married somebody down there, which is why I lived down
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  Speaker 1: there now. And UH was in the Marine Corps for
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  Speaker 1: eight years, did two tours overseas and then left and
• 6:58
  Speaker 1: went into the reserves. And when I did leave the
• 7:01
  Speaker 1: Marine Corps active duty, I was looking for a finance
• 7:03
  Speaker 1: job and I was picked up by Kitter Peabody, and
• 7:06
  Speaker 1: that's how my career began in this industry. What were
• 7:09
  Speaker 1: you flying before you while you were in the Marines,
• 7:12
  Speaker 1: I flew A six Intruders and I flew A four Skyhawks.
• 7:15
  Speaker 1: So ward Hogs and the wall Hogs are air force plane.
• 7:19
  Speaker 1: Isn't this similar? Isn't that a six a similar? Or
• 7:22
  Speaker 1: is this a totally different? Places it's a it's a
• 7:24
  Speaker 1: different platform than than the A ten, but a ten.
• 7:27
  Speaker 1: That's what I was thinking, that that's the wall got it?
• 7:30
  Speaker 1: And so you did a couple of tours overseas and
• 7:32
  Speaker 1: then peat body. What was it like starting out there. Well,
• 7:37
  Speaker 1: I was under the impression, like a lot of people were,
• 7:40
  Speaker 1: that stockbrokers were investment analysts and that we went out
• 7:47
  Speaker 1: and found the best investments for our clients, which made
• 7:53
  Speaker 1: money for them, which in turn made money for the company,
• 7:57
  Speaker 1: which in turn made money for me. And I thought
• 7:59
  Speaker 1: that stockbrokers did. So their training program quickly disabused you
• 8:04
  Speaker 1: of that. I went through the boot camp, if you will,
• 8:09
  Speaker 1: UH and learned how to make a thousand cold calls
• 8:13
  Speaker 1: a day and try to sell a thousand shares of
• 8:17
  Speaker 1: the latest stock. And I began to realize at the
• 8:23
  Speaker 1: beginning that maybe this wasn't what I thought it was.
• 8:27
  Speaker 1: But I did stay in it for ten years in total. Wow,
• 8:30
  Speaker 1: that's amazing, and so Kiter Peabody then transitions over to
• 8:34
  Speaker 1: Smith Barney and UH that was a an eye opening
• 8:39
  Speaker 1: experience as well. Well. What happened was, UM, I began
• 8:43
  Speaker 1: to do uh a lot of analysis on the money
• 8:47
  Speaker 1: manager as we were hiring at Peabody to manage money
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  Speaker 1: for our clients. And I wrote a program, quite long
• 8:54
  Speaker 1: program and quatro pro. Do you remember that it was
• 8:57
  Speaker 1: a programmable spreadsheet program, so I pre excel pre excel
• 9:02
  Speaker 1: and UH. But it was programmable, so I could take
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  Speaker 1: the data from active money managers and I could compare
• 9:08
  Speaker 1: them to appropriate benchmarks. First, I could use it to
• 9:11
  Speaker 1: determine what the appropriate benchmarks were, and then I could
• 9:14
  Speaker 1: do an analysis to see how they were doing relative
• 9:16
  Speaker 1: to the appropriate benchmarks. Now, a lot of this technology
• 9:19
  Speaker 1: is off the shelf now, but back then, and you
• 9:22
  Speaker 1: push a single button everybody's relative performance. But back in
• 9:27
  Speaker 1: late nineteen eighties or early you know, you had to
• 9:29
  Speaker 1: create it yourself. So I created the software, and of
• 9:32
  Speaker 1: course when you get into that detail of it, you
• 9:36
  Speaker 1: really see a lot of things that other people weren't
• 9:39
  Speaker 1: seeing at the time. And what I was seeing was
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  Speaker 1: that the active managers were not beating their benchmark. In fact,
• 9:46
  Speaker 1: that really weren't coming close to the benchmark. And that's
• 9:50
  Speaker 1: before you get to higher fees that active managers have
• 9:52
  Speaker 1: a tendency to to charge. That has to have a
• 9:56
  Speaker 1: big impact on on the bottom line of clients. I'm
• 9:58
  Speaker 1: Barry Rehults. You're listening a Masters in Business on Bloomberg Radio.
• 10:02
  Speaker 1: My special guest this week is Rick Ferry. He is
• 10:05
  Speaker 1: the founder and CEO of Portfolio Solutions, an asset manager
• 10:09
  Speaker 1: that runs one point four billion dollars before the break.
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  Speaker 1: We were discussing the advantages of or the disadvantages of
• 10:18
  Speaker 1: active management, and how so few people actually beat their benchmark.
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  Speaker 1: Tell us how you discovered indexing and while you gravitated
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  Speaker 1: that way. So as I was doing this quantitative analysis
• 10:32
  Speaker 1: or attribution analysis on the active managers and realizing they
• 10:35
  Speaker 1: weren't beating their benchmarks. In fact, they weren't coming close
• 10:39
  Speaker 1: to their benchmarks. Most of them were not UH, I
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  Speaker 1: began paying more attention to what Vanguard was doing and
• 10:48
  Speaker 1: indexing UH. And in I read John Bogel's first book,
• 10:54
  Speaker 1: Bogel on Mutual Funds, and I was very, very frustrated
• 10:59
  Speaker 1: at the time of what was going on in my industry.
• 11:03
  Speaker 1: And again I was at Smith Barney at the time,
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  Speaker 1: and I read this book and it was an epiphany.
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  Speaker 1: It was I called it my AHA moment. I can
• 11:13
  Speaker 1: recall exactly where where this happened. I was at a
• 11:16
  Speaker 1: House of Horrors. My children, we were teenagers, and they
• 11:19
  Speaker 1: were going through the House of Horrors before Halloween, and
• 11:22
  Speaker 1: I was sitting in the parking lot waiting for him,
• 11:24
  Speaker 1: and they were screaming and yelling and chains I was
• 11:26
  Speaker 1: going on and I'm reading John Vogel's book and I'm
• 11:28
  Speaker 1: screaming and yelling in my car, saying, I can't believe
• 11:30
  Speaker 1: how stupid I've been. This is so obvious what John
• 11:33
  Speaker 1: Vogel is saying here. I am seeing this daily in
• 11:36
  Speaker 1: my business. I mean, he's right. And I had what
• 11:39
  Speaker 1: I like to call a chemical reaction at that point,
• 11:41
  Speaker 1: and I was a change of religion. It was an epiphany.
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  Speaker 1: So so that was was truly when you're you pivoted?
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  Speaker 1: Is the new tech jar? Okay, so your business pivoted
• 11:51
  Speaker 1: and you said, no more stock picking, no more mutual
• 11:54
  Speaker 1: fund picking. I'm just gonna do a broad asset allocation
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  Speaker 1: and not worry about worry about the selection process. Well
• 12:02
  Speaker 1: not really, because I remember that was so I not
• 12:05
  Speaker 1: a lot of ETFs, not a lot of of Today
• 12:08
  Speaker 1: there's a thousand locals CTSS. Back then you had a
• 12:10
  Speaker 1: handful you can work off of. So I investigated this.
• 12:14
  Speaker 1: I'm getting this is October. So then in is when
• 12:17
  Speaker 1: I went to Jamie and I asked him if I
• 12:19
  Speaker 1: could create a program at Smith Parney that used Vanguard
• 12:22
  Speaker 1: index funds and packages them together into an asset allocation
• 12:26
  Speaker 1: for our clients. And then we would charge a reasonable
• 12:29
  Speaker 1: fifty basis point management fee. And that's when Jamie told
• 12:32
  Speaker 1: me that wouldn't be possible, and sort of not that
• 12:35
  Speaker 1: many words, he just said, wouldn't be possible, too many,
• 12:40
  Speaker 1: too many words. He just said no, and that was
• 12:42
  Speaker 1: the end of it. He said a little more than that.
• 12:43
  Speaker 1: But that's correct. Um, that's that's fascinating. So, by the way,
• 12:48
  Speaker 1: I mean, James a great guy. I mean, I he
• 12:49
  Speaker 1: was always very approachable and I don't want to I mean,
• 12:52
  Speaker 1: he had a job to do. Like so let me
• 12:53
  Speaker 1: digress a little bit. So, so who are your early
• 12:56
  Speaker 1: mentors who bog Vogel obviously, how do you gym pact?
• 13:00
  Speaker 1: Who else had an influence? Well, you had a lot
• 13:02
  Speaker 1: of them on your show, Vogel, Charlie Ellis, I mean
• 13:06
  Speaker 1: the Ellis Ellis was what a phenomenal conversation. And these
• 13:10
  Speaker 1: people were the icons back then. They were the ones
• 13:12
  Speaker 1: who recognized the problems. And there was there was others,
• 13:16
  Speaker 1: more academics. As you read Samuelson and so forth, As
• 13:18
  Speaker 1: you read you realize that there was a whole group
• 13:21
  Speaker 1: of very smart people out there who had already realized
• 13:24
  Speaker 1: this and so and it was hidden though. I mean
• 13:29
  Speaker 1: it really was pushed back as far as you could
• 13:31
  Speaker 1: push it back. And but the academics spoke for themselves.
• 13:35
  Speaker 1: The data was there, and so if you believe the data,
• 13:39
  Speaker 1: you're going to go this way. And that's what I did.
• 13:43
  Speaker 1: So let's talk a bit about index and so why
• 13:46
  Speaker 1: do you think it is? And and Charlie Ellis gave
• 13:49
  Speaker 1: his explanation, why is it that active managers can cannot
• 13:54
  Speaker 1: consistently beat the market? Well, it's a zero sum game
• 14:00
  Speaker 1: where the total market return is a finite dollar amount.
• 14:04
  Speaker 1: Every year market's worth twenty trillion dollars. You get a
• 14:09
  Speaker 1: certain rate of return from dividends, you get a certain
• 14:11
  Speaker 1: rate of return from capital game. It's a finite amount
• 14:13
  Speaker 1: of money. So if you have one group of people
• 14:17
  Speaker 1: who's trying to get more than that, it has to
• 14:20
  Speaker 1: come from another group of people who get less than
• 14:22
  Speaker 1: that minus fees, or you can just capture your fair share.
• 14:27
  Speaker 1: So in the long run, it's a fee game. Period
• 14:31
  Speaker 1: you have money that goes from one set of managers
• 14:34
  Speaker 1: to another and then back again. And skill is very
• 14:38
  Speaker 1: difficult to even determine, let alone actually identify in advance.
• 14:42
  Speaker 1: So the best thing for most people to do is
• 14:45
  Speaker 1: to just buy a very low cost portfolio of index
• 14:48
  Speaker 1: funds and sit on it. And that's the answer. So
• 14:52
  Speaker 1: so that raises a really interesting question about the practice
• 14:56
  Speaker 1: management of of running money. And weich about this in
• 15:00
  Speaker 1: our office all the time. How much of what you
• 15:03
  Speaker 1: do is behavioral consulting and how much of it is
• 15:07
  Speaker 1: you know, really trying to prevent people from being their
• 15:10
  Speaker 1: own worst enemies when it comes to investing. Well, I
• 15:13
  Speaker 1: think it's the same thing behavioral consulting and being your
• 15:15
  Speaker 1: worst enemy. Um, how much of the practice are those factors?
• 15:20
  Speaker 1: What what do you time wise are you how much?
• 15:23
  Speaker 1: How often does this come up? Yeah, so nine of
• 15:28
  Speaker 1: my practice is behavioral control. Wow, that's amazing. Well, because
• 15:33
  Speaker 1: the portfolios don't change. I haven't changed the portfolio in
• 15:35
  Speaker 1: five years. Now. You might have a different allocation than
• 15:39
  Speaker 1: the next person between stocks and bonds, but you know
• 15:42
  Speaker 1: that's the driving factor after that, and we put the
• 15:45
  Speaker 1: portfolio together as stocks and index funds and bond index funds.
• 15:49
  Speaker 1: It shouldn't change. I mean, the process then is just
• 15:53
  Speaker 1: staying the course. It's it's driving down the middle of
• 15:56
  Speaker 1: the road and being safe and not going to the
• 16:00
  Speaker 1: after going to the right and that and that's what
• 16:03
  Speaker 1: we try to do. Are My whole idea is to
• 16:05
  Speaker 1: keep the clients going down the middle of the road,
• 16:08
  Speaker 1: be disciplined, and if they can do that, then they'll
• 16:12
  Speaker 1: get the benefits of the markets. If they veer one
• 16:14
  Speaker 1: way or the other, it gets you know, Harry. So
• 16:19
  Speaker 1: now let's talk about how you handle clients in the
• 16:23
  Speaker 1: event of some turmoil. What was it like in two
• 16:26
  Speaker 1: thousand when you know the dot com has collapsed or
• 16:29
  Speaker 1: even worse. I've heard stories from guys who were running assets.
• 16:35
  Speaker 1: I was a market strategist then, and the hard thing
• 16:40
  Speaker 1: was you're running a moderate portfolio. It's doing fairly well,
• 16:45
  Speaker 1: but other people are making sixty eight in the junkiest
• 16:50
  Speaker 1: of the dot com stocks, and how do you compete
• 16:53
  Speaker 1: with that? Even though we all know how that ends.
• 16:55
  Speaker 1: You'll find the right clients. Really it gets down to
• 17:00
  Speaker 1: realized that not this isn't for everyone, and I need
• 17:05
  Speaker 1: to find clients who also have the religion and they're
• 17:08
  Speaker 1: just looking for somebody to help them put the portfolio
• 17:10
  Speaker 1: together and execute. I can't go out and try to
• 17:14
  Speaker 1: convert people. That just doesn't work. You just want to
• 17:17
  Speaker 1: attract clients who buy into your philosophy, and you're there
• 17:23
  Speaker 1: to prevent them from from hurting themselves. And it's not
• 17:26
  Speaker 1: my philosophy, but buying into the philosophy correct that I've
• 17:29
  Speaker 1: already bought in. And then they're looking for a way
• 17:33
  Speaker 1: to execute and and get it done, and that's where
• 17:38
  Speaker 1: we can come in. I'm Barry Ridholts. You're listening to
• 17:40
  Speaker 1: Masters in Business on Bloomberg Radio. My guest today is
• 17:43
  Speaker 1: Rick Ferry. He is the founder and c i O
• 17:47
  Speaker 1: of Portfolio Solutions, And before the break, we were discussing, UH,
• 17:51
  Speaker 1: some of the impact of technology on the business of
• 17:55
  Speaker 1: asset management. So let's start out with UM, the robo advisors.
• 17:59
  Speaker 1: What you what do you think about that line of
• 18:02
  Speaker 1: of asset management. I think it's important. I think it's
• 18:07
  Speaker 1: UM a very good methodology for younger people that didn't
• 18:13
  Speaker 1: exist before. Now it's used for everyone, but for younger
• 18:16
  Speaker 1: people in particular because it gets them into this philosophy
• 18:20
  Speaker 1: of investing a whole lot faster than they would have
• 18:23
  Speaker 1: and making regular monthly contract the whole process of saving
• 18:27
  Speaker 1: for retirement as well as investing properly. So uh, the
• 18:32
  Speaker 1: saving for retirement, a regular regular amount going in is
• 18:35
  Speaker 1: is it's very important, um. But the real interest for
• 18:40
  Speaker 1: me and the robo advisors is that it gets young
• 18:43
  Speaker 1: people interested in index funds and asset allocation doing it
• 18:48
  Speaker 1: the proper way right from the start. So I think
• 18:50
  Speaker 1: that's really important. You know, a quick digression. I've discovered
• 18:55
  Speaker 1: that a lot of people have to wander in the
• 18:58
  Speaker 1: desert a little bit before they come to the promised lands.
• 19:01
  Speaker 1: And not to get too biblical, but it seems that
• 19:05
  Speaker 1: the people who really buy into the concept of indexing
• 19:08
  Speaker 1: and low cost asset allocation have to have played the
• 19:11
  Speaker 1: stock picking game they had or the market timing game,
• 19:14
  Speaker 1: and they had to come to the same realization you
• 19:17
  Speaker 1: you did that Hey, this is feudal. Let me try
• 19:20
  Speaker 1: something that that seems to make more sense. And they
• 19:24
  Speaker 1: tend not to find that in the twenties and thirties.
• 19:26
  Speaker 1: It tends to be something they discover later in life.
• 19:30
  Speaker 1: I completely agree with that, because they've been through the gauntlet,
• 19:32
  Speaker 1: so to speak, and now they've had their pivot epiphany,
• 19:36
  Speaker 1: aha moment, whatever you wanna call it. But the robos, now,
• 19:41
  Speaker 1: if you're young in your twenties and thirties and you're
• 19:43
  Speaker 1: using this technology. You're getting it right away, even though
• 19:47
  Speaker 1: maybe you don't understand it at first, and that's good
• 19:49
  Speaker 1: because it saves you a lot of money and it
• 19:52
  Speaker 1: educates you on on the power of this strategy. So
• 19:56
  Speaker 1: let me ask the question differently, what does a human
• 19:59
  Speaker 1: offer at a robo or an let's call them what
• 20:02
  Speaker 1: they are really it's software algorithmically driven allocation models. What
• 20:08
  Speaker 1: kind of human offer that that these models can't? Well?
• 20:11
  Speaker 1: A human offers advice. Now, people who are in their
• 20:16
  Speaker 1: twenties and thirties may not need a lot more advice
• 20:18
  Speaker 1: than just put money away, pick an asset allocation that
• 20:22
  Speaker 1: you're going to be able to live with through all
• 20:23
  Speaker 1: market conditions, and just shovel it away. Because my theory
• 20:27
  Speaker 1: is that younger people are fairly homogeneous group. You're getting
• 20:31
  Speaker 1: out of college, you don't have a lot of money,
• 20:32
  Speaker 1: may be paying off debt, just getting married, starting a family,
• 20:36
  Speaker 1: and so it's a fairly homogeneous group. But as you
• 20:39
  Speaker 1: get into your forties and fifties, the differences between us
• 20:42
  Speaker 1: financially and socially just changed dramatically, and as as you're
• 20:48
  Speaker 1: approaching retirement, you really need much more than what a
• 20:53
  Speaker 1: computer can give you. As far as answers, and you
• 20:56
  Speaker 1: are seeking much more holistic at vice on everything have
• 21:02
  Speaker 1: to do with your finances. And this is where advisors
• 21:06
  Speaker 1: will sort of take the money from the robos just
• 21:09
  Speaker 1: when the robos are becoming profitable on a client. And
• 21:14
  Speaker 1: so the that's what I see occurring. And uh so,
• 21:18
  Speaker 1: so let's talk about that advice. And I jotted a
• 21:21
  Speaker 1: few notes down. Tax issues, inter generational wealth transfer. Are
• 21:26
  Speaker 1: these issues that are million dollar or five million dollar
• 21:30
  Speaker 1: accounts or are there things that people who are in
• 21:33
  Speaker 1: the one thousand to a million dollar range really are
• 21:36
  Speaker 1: gonna need. Yeah, the the big issue is income distribution
• 21:41
  Speaker 1: after retirement and is my money going to last? That
• 21:44
  Speaker 1: is the question, the big question out there. We by
• 21:47
  Speaker 1: the way, in our office, this is the um you're
• 21:51
  Speaker 1: preaching to the choir. We hear this all the time.
• 21:53
  Speaker 1: I'm concerned that I'm going to outlive my money. And
• 21:57
  Speaker 1: we hear that from people with tens of millions of
• 22:00
  Speaker 1: dollars that they're concerned that it's not gonna last. Absolutely,
• 22:03
  Speaker 1: it's universal. I heard the same thing, and I hear
• 22:06
  Speaker 1: it quite often. And you sit back and you say,
• 22:08
  Speaker 1: you only need a hundred and fifty tho dollars from
• 22:10
  Speaker 1: your ten million dollar portfolio and you're worried about running
• 22:13
  Speaker 1: out of money. And I don't know what the mental
• 22:14
  Speaker 1: block is there. Maybe some PhD student can do a
• 22:17
  Speaker 1: thesis or something on it, but there's an incredible mental
• 22:20
  Speaker 1: block when they need to be told, or I'm really told,
• 22:24
  Speaker 1: you're not going to run on the money. If you
• 22:26
  Speaker 1: do this sensible strategy and you don't go out and
• 22:28
  Speaker 1: buy a bunch of Ferrari's, you're not going to run
• 22:29
  Speaker 1: out of money. Just one, limited to one. That's all
• 22:32
  Speaker 1: anybody needs. You don't need a few. So that's the
• 22:36
  Speaker 1: universal big question. And you can get on a website
• 22:40
  Speaker 1: and fill out a bunch of questionnaires and do some
• 22:42
  Speaker 1: Monty Callo simulations or whatever, it just doesn't replace the
• 22:47
  Speaker 1: human advisor who's sitting there looking at you and saying
• 22:51
  Speaker 1: you don't have anything to worry about, and your spouse
• 22:54
  Speaker 1: has nothing to worry about. You've got plenty of money,
• 22:57
  Speaker 1: and that's that's not going to go away. That the
• 23:00
  Speaker 1: there's no computer that's going to take that away. I'm
• 23:02
  Speaker 1: Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio.
• 23:06
  Speaker 1: My guest today is Rick Ferry. He is the founder
• 23:09
  Speaker 1: and chief investment officer of Portfolio Solutions, a one point
• 23:13
  Speaker 1: four billion dollar asset management firm. We were talking earlier
• 23:17
  Speaker 1: about the impact of of what the venture cap was
• 23:20
  Speaker 1: called fintech, so some of its robo advisors, but there's
• 23:25
  Speaker 1: a lot of other technological advances. I have to assume
• 23:30
  Speaker 1: you're doing things today that you couldn't have dreamt about
• 23:33
  Speaker 1: twenty years ago. What's the technology like in running a firm? Well, sure,
• 23:39
  Speaker 1: there's been a lot of productivity gains and across the
• 23:42
  Speaker 1: board UM actual portfolio management software, trading software, UH, client
• 23:48
  Speaker 1: contact software, UH phone systems. It allows you to manage
• 23:54
  Speaker 1: more relationships than you had in the past, so you
• 23:59
  Speaker 1: become more productive of in this business, just like in
• 24:02
  Speaker 1: all other industries. Same same with UM performance reporting. It's
• 24:07
  Speaker 1: it's pretty much the entire business has been made faster, better, smarter,
• 24:12
  Speaker 1: smaller than it was previously. That that footprint, I assume
• 24:16
  Speaker 1: you're seeing the same same thing. Yeah, and the technology
• 24:20
  Speaker 1: has become much less expensive and there's much more of
• 24:23
  Speaker 1: it and there's a lot of competition, so prices have
• 24:26
  Speaker 1: come down. So what we sell in our industry as
• 24:30
  Speaker 1: intellectual property. That's my value added. Uh, and be the
• 24:36
  Speaker 1: ability in many ways to be able to explain to
• 24:39
  Speaker 1: people sometimes relatively complicated concepts in a very simplified way
• 24:44
  Speaker 1: so that they can understand it. Uh. And that that's
• 24:48
  Speaker 1: the value added. I can't add any value. I'll performing
• 24:52
  Speaker 1: the market and UH. You know I'm not going to
• 24:55
  Speaker 1: give them higher dividend yields from the SMP five hundred.
• 24:58
  Speaker 1: But UM, I have to be able to deliver this
• 25:02
  Speaker 1: intellectual property in an efficient manner so that I remain
• 25:06
  Speaker 1: competitive in the marketplace, keep your keep your costs low. Um.
• 25:09
  Speaker 1: You are very forward looking in the mid nineties when
• 25:13
  Speaker 1: you first proposed this idea of a low cost asset
• 25:17
  Speaker 1: management firm too to Jamie Diamond at at Smith Barney
• 25:20
  Speaker 1: back then. So let me bring us up to speed
• 25:23
  Speaker 1: and ask you this question. What do you see looking
• 25:26
  Speaker 1: out ten years in the future for the advisory business. Well,
• 25:30
  Speaker 1: advisors are going to have to offer different levels of service. Uh.
• 25:36
  Speaker 1: Like your firm, We're going to be offering a robo advisor,
• 25:39
  Speaker 1: which is one level, and it's going to be one price.
• 25:41
  Speaker 1: It's going to be a very low fee. Then there's
• 25:44
  Speaker 1: the next level of some guidance, uh, and a touch
• 25:49
  Speaker 1: perhaps once a year um, and then a lot of
• 25:52
  Speaker 1: technology touches if you will, with the client and that
• 25:54
  Speaker 1: will be just a slightly higher fee than what the
• 25:56
  Speaker 1: robo fee would be. And then there's a comprehend of
• 26:00
  Speaker 1: financial planning, but not face to face. Are you seeing
• 26:03
  Speaker 1: this as potentially happening across the entire industry? I think
• 26:07
  Speaker 1: people are going to specialize or is it going to
• 26:09
  Speaker 1: be or is that just going to be a mix
• 26:11
  Speaker 1: of different companies doing different things. I think that the
• 26:14
  Speaker 1: robot advisors will have to get into face a personal advice.
• 26:18
  Speaker 1: They'll have to have human advice or they're gonna lose
• 26:20
  Speaker 1: their clients, and that they're really they're going to realize
• 26:22
  Speaker 1: this as the clients grow up and get more money
• 26:25
  Speaker 1: and get more complicated lives, they're gonna need actual personal advice,
• 26:30
  Speaker 1: and uh, they're going to have to merge or create
• 26:36
  Speaker 1: that personal advice. And then there are times when people
• 26:39
  Speaker 1: become not price sensitive anymore because of that a point
• 26:43
  Speaker 1: in their life where they really need advice and the
• 26:48
  Speaker 1: cost of that advice. At this point in their lives,
• 26:50
  Speaker 1: when they're nearing retirement, they're no longer price sensitive. They
• 26:54
  Speaker 1: just want good quality advice, and you have to be
• 26:57
  Speaker 1: able to offer that as well at a higher level hold.
• 27:00
  Speaker 1: And then when they're ready beyond that into retirement for
• 27:03
  Speaker 1: a while, they want to step back to the lower
• 27:05
  Speaker 1: advice model, they could do that at a lower price point.
• 27:07
  Speaker 1: So I call this the vertical advisor idea. And you
• 27:12
  Speaker 1: think that's going to be more widely adopted. I don't
• 27:14
  Speaker 1: know if it's going to be widely adopted or not.
• 27:15
  Speaker 1: I know that likes you said back in the nine nineties,
• 27:18
  Speaker 1: and when I started the low cost Indexing solution UM,
• 27:22
  Speaker 1: it was ahead of its time, and I think this
• 27:24
  Speaker 1: is where people will go eventually. So now let's talk
• 27:29
  Speaker 1: a little bit about running an advisory business and interacting
• 27:32
  Speaker 1: with clients. What's the biggest mistake you see that the
• 27:36
  Speaker 1: average investor makes. The average investor, the biggest mistake they
• 27:41
  Speaker 1: make is not staying disciplined to a strategy. But let's
• 27:45
  Speaker 1: keep them go back from that. The average investor doesn't
• 27:47
  Speaker 1: have a philosophy, and philosophy is different than strategy. You
• 27:51
  Speaker 1: and I have the same philosophy about investing. You at
• 27:53
  Speaker 1: Charlie Ellis here, John Bogel, I mean we have the
• 27:55
  Speaker 1: same yet, but you haven't. We'd love to get them,
• 27:58
  Speaker 1: be sure and pass along the Okay, Um, so we
• 28:03
  Speaker 1: have the same philosophy, but I don't know what your
• 28:06
  Speaker 1: portfolio looks like as far as what funds you have
• 28:09
  Speaker 1: for your clients, and you don't really know what my
• 28:11
  Speaker 1: portfolio looks like what funds I have from my clients.
• 28:14
  Speaker 1: That's called strategy. Uh, philosophy is universal. Strategy becomes personal
• 28:21
  Speaker 1: and personal to the individual client. So, first off, I
• 28:25
  Speaker 1: think that's important and in a book I'm actually writing
• 28:28
  Speaker 1: right now, that people get the philosophy first, they have
• 28:31
  Speaker 1: the the moment, the pivot, the the epiphany of what
• 28:37
  Speaker 1: it's all about. That you get the philosophy first, and
• 28:39
  Speaker 1: then once you get the philosophy, then you can develop
• 28:43
  Speaker 1: a strategy. And then once you develop a strategy, you
• 28:47
  Speaker 1: implement that strategy some way, and then you have to
• 28:49
  Speaker 1: have the discipline to stay with it. So it's really
• 28:51
  Speaker 1: three different things. You need the philosophy, you need to
• 28:54
  Speaker 1: implement create a good strategy for yourself, and then you
• 28:57
  Speaker 1: need a way of implementing it and staying disciplined with it.
• 29:00
  Speaker 1: And so all three of those things are missing. So
• 29:03
  Speaker 1: there's really three issues. People confuse them all. By the way, philosophy, strategy,
• 29:10
  Speaker 1: discipline really becomes the key. How much how much of
• 29:12
  Speaker 1: this is disrupted just by normal emotional ups and downs
• 29:17
  Speaker 1: of the average human creature. Well, again, if you had
• 29:21
  Speaker 1: the philosophy, it's much less probability, much lower probability that
• 29:26
  Speaker 1: it's going to be disrupted. If you've got the vision,
• 29:30
  Speaker 1: then you're a strategy. You'll be able to maintain it
• 29:32
  Speaker 1: during all market conditions pretty much, it's high probability. But
• 29:35
  Speaker 1: if you don't have the vision, if you don't have
• 29:37
  Speaker 1: the philosophy and you have some strategy that you heard
• 29:40
  Speaker 1: on the radio last week, or your your adviser or
• 29:45
  Speaker 1: somebody got you into last year and it's not working, Uh,
• 29:50
  Speaker 1: you're gonna change it. You're gonna have a higher turnover,
• 29:52
  Speaker 1: and you're not gonna stay disciplined. So that's why I
• 29:55
  Speaker 1: I say that the biggest mistake people have is they
• 29:57
  Speaker 1: don't have the philosophy. First, You've got to get that
• 29:59
  Speaker 1: down first. Then you develop a strategy, and then you're
• 30:01
  Speaker 1: more likely to stay disciplined. We're speaking with Rick Ferry
• 30:04
  Speaker 1: of Portfolio Solutions discussing some of the classic errors that
• 30:09
  Speaker 1: investors make. And we were just talking about why philosophy
• 30:13
  Speaker 1: is the most important thing. So you remind me a
• 30:16
  Speaker 1: little bit of some of the things that Larry Sweddrow
• 30:18
  Speaker 1: has said, and I'll ask you the same question I
• 30:20
  Speaker 1: asked him. So what is it that investors should do
• 30:23
  Speaker 1: when we start to see volatility in the market, or
• 30:27
  Speaker 1: earnings start coming out poorly, or the economic data takes
• 30:31
  Speaker 1: a turn to the south? What what should people do when?
• 30:34
  Speaker 1: How do you deal with the pushback you get? Because
• 30:37
  Speaker 1: I know what your answer is gonna be from from clients.
• 30:41
  Speaker 1: So I lived through both the tech crash and two
• 30:45
  Speaker 1: thousand two thousand and one. Remember I started my company
• 30:50
  Speaker 1: and then lived through the financial crisis, so two pretty
• 30:54
  Speaker 1: tough times. But the only thing that we did for
• 31:01
  Speaker 1: clients during that period of time, besides due regular rebalancing,
• 31:06
  Speaker 1: was keep them focused on the long term. And then
• 31:11
  Speaker 1: those clients who really had an issue, and I know
• 31:16
  Speaker 1: that they had an issue when they use this phrase
• 31:20
  Speaker 1: classic phrase for all advisors, remember it, I can't sleep
• 31:23
  Speaker 1: at night. Classic phrase, which means the next step is capitulation.
• 31:29
  Speaker 1: They're going to sell everything. When a client says I
• 31:32
  Speaker 1: can't sleep at night, you have to do something as
• 31:34
  Speaker 1: an advisor, and what you have to do is you
• 31:38
  Speaker 1: have to lower their risk permanently because we the advisor
• 31:42
  Speaker 1: has probably made a mistake and allowed them or assess
• 31:46
  Speaker 1: their risk tolerance at too higher a level than what
• 31:49
  Speaker 1: it really was. Well, let me let me interrupt you there,
• 31:53
  Speaker 1: because again I'm we're very familiar with the same process.
• 31:56
  Speaker 1: But one can't help but notice that what people say
• 32:00
  Speaker 1: a during a bull market is very often not what
• 32:03
  Speaker 1: they feel during a bear market. That's correct, And so
• 32:08
  Speaker 1: we find out what people's real tolerance for risk is
• 32:11
  Speaker 1: after they've lost because right now, so we launched after
• 32:16
  Speaker 1: the bear market in in o eight oh nine, a
• 32:20
  Speaker 1: few years after that, and we're seeing the exact opposite
• 32:24
  Speaker 1: of that. It's not suddenly that people's risk tolerance is
• 32:26
  Speaker 1: getting worse. It's that people who said they were conservative,
• 32:31
  Speaker 1: Suddenly you're seeing markets go up every year, especially sm
• 32:35
  Speaker 1: P up thirty pcent. Hey, why don't we have more
• 32:37
  Speaker 1: U S docks? We aren't we? Well that was last year.
• 32:41
  Speaker 1: European and emerging market stocks are doing terrible. That's where
• 32:44
  Speaker 1: you want to be, not chasing what just ran up.
• 32:47
  Speaker 1: And that's what rebalancing is. About But what do you
• 32:51
  Speaker 1: do when you're gonna get it both ways? You're gonna
• 32:54
  Speaker 1: get it to the upside and the downside. Even if
• 32:57
  Speaker 1: someone says I'm conservative and suddenly in a bull market
• 33:01
  Speaker 1: that assessment was wrong, how much of that is just
• 33:03
  Speaker 1: human nature, that whatever is going on at the moment
• 33:07
  Speaker 1: is changing what they think they're there risk tolerance is right.
• 33:11
  Speaker 1: So you asked me what percentage of my business is
• 33:15
  Speaker 1: psychology and you know, trying to control human behavior, and
• 33:19
  Speaker 1: what part is actual portfolio management? Uh, changing the client's portfolios.
• 33:25
  Speaker 1: And the answer is as humans. So I don't want
• 33:28
  Speaker 1: to do anything. I mean, my my goal is to
• 33:31
  Speaker 1: not do anything. You actually had a blog post that
• 33:33
  Speaker 1: said portfolio changes at a glacial pace. Glacial pace. Yeah.
• 33:39
  Speaker 1: So the idea though, is to not do anything. So
• 33:41
  Speaker 1: when I hear it both ways, like right now, you're right,
• 33:43
  Speaker 1: we're getting the calls about well, you know, we could
• 33:46
  Speaker 1: be a little more because starts out with bonds. Bonds
• 33:49
  Speaker 1: are yielding zero, So why don't I want to be
• 33:51
  Speaker 1: in bonds? You know the real return of zero, I
• 33:53
  Speaker 1: should be in stocks. I have the conversation about how
• 33:55
  Speaker 1: am I going to live in retirement when my when
• 33:58
  Speaker 1: interest rates are so low and therefore I should be
• 34:02
  Speaker 1: more in stocks. And all I'm saying is people right
• 34:07
  Speaker 1: now with justifying reasons, are coming up with reasons why
• 34:10
  Speaker 1: they should be more aggressive, and I have to do
• 34:12
  Speaker 1: the exact opposite of what I did in two thousand
• 34:15
  Speaker 1: and one and two thousand and eight, which is tame
• 34:19
  Speaker 1: the expectations uh down, as opposed to reverse of where
• 34:25
  Speaker 1: what I had to do in the past, which is
• 34:26
  Speaker 1: to you know, bring the expectations up. We've been speaking
• 34:29
  Speaker 1: with Rick Ferry of Portfolio Solutions. If you enjoy this conversation,
• 34:33
  Speaker 1: be sure and check out our full podcast extras where
• 34:36
  Speaker 1: we let the tape run and continue the conversation. Be
• 34:40
  Speaker 1: sure and check out my daily column on Bloomberg View
• 34:43
  Speaker 1: dot com. Follow me on Twitter at rid Halts. I'm
• 34:47
  Speaker 1: Barry rid Halts. You're listening to Masters in Business on
• 34:50
  Speaker 1: Bloomberg Radio. Welcome to the podcast portion of our show.
• 34:55
  Speaker 1: My special guest this week is Rick Ferry. Um let
• 34:58
  Speaker 1: me give people a little background about Rick. So I
• 35:04
  Speaker 1: read and follow a lot of people, and you know, intellectually,
• 35:11
  Speaker 1: there are certain quants I follow because I like their
• 35:14
  Speaker 1: mathematical analysis of investing and asset allocation, and to people
• 35:19
  Speaker 1: like Jim O'Shaughnessy and Cliff Fastness and there's a there's
• 35:22
  Speaker 1: a whole run of guys like that Um West Um
• 35:26
  Speaker 1: Alpha Architect. I love that that blog. He does some
• 35:29
  Speaker 1: really interesting momentum value analyzes. But when we were leaving
• 35:35
  Speaker 1: to launch a new firm, we started looking around and saying, hey,
• 35:39
  Speaker 1: who did this right? Who had the right idea, the
• 35:43
  Speaker 1: right concept, the right execution. And we kept coming up
• 35:46
  Speaker 1: to you. We kept finding, Hey, Portfolio Solutions seems to
• 35:51
  Speaker 1: really have set this up. Look, there are tens of
• 35:54
  Speaker 1: thousands of advisors there, and there are thousands, I want
• 35:58
  Speaker 1: to say hundreds, if not thousands, of advisors running nine figures,
• 36:03
  Speaker 1: and a whole lot of people running eight figures, and
• 36:05
  Speaker 1: and but there's there's only a in our opinion, only
• 36:11
  Speaker 1: a small handful of people that from the business perspective of, Hey,
• 36:15
  Speaker 1: what's the right way to set this up? What's the
• 36:17
  Speaker 1: right way to execute? You kept on coming up in
• 36:21
  Speaker 1: in our you know, same situation. Although it wasn't three years,
• 36:25
  Speaker 1: but it was really the last year of thinking about
• 36:28
  Speaker 1: it and doing these things that we said, let's model this,
• 36:31
  Speaker 1: let's let's war game this and figure out whose approach
• 36:35
  Speaker 1: has made a lot of sense. This podcast tends to
• 36:38
  Speaker 1: be listened to by a lot of advisors, some of
• 36:41
  Speaker 1: whom were at big firms thinking about launching on their own,
• 36:43
  Speaker 1: some of whom have already launched on their own and
• 36:45
  Speaker 1: have had, you know, a little bit of challenges. So
• 36:49
  Speaker 1: I thought you would really be a perfect person to
• 36:51
  Speaker 1: speak to about that because because you were so helpful, Um,
• 36:56
  Speaker 1: your example was so helpful when when we were launching.
• 36:59
  Speaker 1: So let let's go back to our earlier conversation about
• 37:03
  Speaker 1: when you were launching your firm. So you spent did
• 37:06
  Speaker 1: you say three years teeing this up? Is that about right?
• 37:10
  Speaker 1: Three years um thinking about it writing the book? I
• 37:14
  Speaker 1: mean how much time you could go home at night,
• 37:16
  Speaker 1: sitting your home office on the computer and map out
• 37:19
  Speaker 1: business strategy. Basically, that's correct. That's that's what I did,
• 37:23
  Speaker 1: um for three years. Well, the beginning of that was
• 37:26
  Speaker 1: coming up with the strategies how I was going to
• 37:30
  Speaker 1: manage money. The next couple of years we're coming up
• 37:33
  Speaker 1: with how I was going to set up an investment advisor,
• 37:36
  Speaker 1: you know, all of the compliance things, and then the
• 37:39
  Speaker 1: last corporate set up the compliance, the pay roll, the
• 37:42
  Speaker 1: back end of running an smen business. It's like running
• 37:46
  Speaker 1: a fairly complicated business with an overlay of a lot
• 37:50
  Speaker 1: of regulator a lot of compliance. Yes, so you had
• 37:52
  Speaker 1: to figure out the compliance puzzle. And then the very
• 37:55
  Speaker 1: last year I spent, you know, I had to register
• 38:00
  Speaker 1: to the company. I had to do everything under the radar.
• 38:02
  Speaker 1: By the way, because I was still at Smith Barney.
• 38:05
  Speaker 1: Is that what you use Portfolio Solutions instead of Rick
• 38:08
  Speaker 1: Ferry asset management? No, actually, Barry, I used portfolio Solutions
• 38:12
  Speaker 1: to make it more Um, uh have the longevity of
• 38:18
  Speaker 1: the company. I mean, I believed in the philosophy and
• 38:21
  Speaker 1: I could train other people to work with me to
• 38:24
  Speaker 1: to do this, and if something happened to me, I
• 38:27
  Speaker 1: could hit by a bus or whatever, the company would survive.
• 38:30
  Speaker 1: And so I didn't want to have my name in it.
• 38:32
  Speaker 1: Lehman Brothers was around a hundred sixty and uh, you
• 38:37
  Speaker 1: know it, long after Lehman passed away, Dick Fold helped
• 38:41
  Speaker 1: drive the company. That that's true, but I just felt like, um,
• 38:46
  Speaker 1: you're not the only one that makes a lot of sense.
• 38:47
  Speaker 1: Portfolio Solutions was a name that I just sort of
• 38:52
  Speaker 1: tells people what we do. We come up with a
• 38:54
  Speaker 1: solution for your portfolio using this philosophy. So the last
• 38:59
  Speaker 1: year going into launch, I had finished writing the book
• 39:04
  Speaker 1: and was looking for distribution of the book, and you
• 39:07
  Speaker 1: know the marketing and getting the website ready and all
• 39:10
  Speaker 1: that stuff that goes behind launching. And so in July
• 39:15
  Speaker 1: of after I UM was off contract now with Smith Barney,
• 39:21
  Speaker 1: I had fulfilled my five year contract and I vested
• 39:24
  Speaker 1: in a pension plan by the way, and all of
• 39:26
  Speaker 1: my City Group stock options vested, which was nice because
• 39:30
  Speaker 1: I was able to catch them made at a nice
• 39:31
  Speaker 1: high price and get that money to buy the software,
• 39:35
  Speaker 1: technology and whatnot that I needed. So that's what I
• 39:40
  Speaker 1: did it it it does take quite quite a while
• 39:42
  Speaker 1: to really do it right, I think. So when you
• 39:45
  Speaker 1: left Smith Barney, would you leave in terms of how
• 39:47
  Speaker 1: many assets did you bring with you? I brought the
• 39:51
  Speaker 1: thirty five clients and sixty million dollars of assets. That
• 39:54
  Speaker 1: was my beginning in correct, And I was charging one
• 39:58
  Speaker 1: quarter of a percent manage fae ascid management fake, so
• 40:03
  Speaker 1: you're really not throwing off a whole lot of revenues.
• 40:05
  Speaker 1: At that time, I was working on in my living room.
• 40:08
  Speaker 1: I had an old desk that I picked up out
• 40:10
  Speaker 1: of the junk pile when I was in the Marine Corps.
• 40:12
  Speaker 1: One day somebody threw a wooden desk out and it
• 40:14
  Speaker 1: was an old Korean War desk. I grabbed it and
• 40:16
  Speaker 1: threw it in the back of my truck. So I
• 40:18
  Speaker 1: had that in my living room. I set up a
• 40:20
  Speaker 1: costco table where my wife filled out paperwork for clients
• 40:24
  Speaker 1: in another corner of the living room. And this was
• 40:26
  Speaker 1: portfolio solutions. That's amazing, and so now let's let's talk
• 40:31
  Speaker 1: about how Hey, now, let's talk about hey, how that
• 40:35
  Speaker 1: developed from sixty million to one point for billion. So
• 40:40
  Speaker 1: who's the typical portfolio solution client. Typical portfolio solution client
• 40:47
  Speaker 1: is um approximately sixty years old, has a total net
• 40:53
  Speaker 1: worth of about three million dollars, liquid net worth of
• 40:57
  Speaker 1: about two million dollars. And so that is, uh, you know,
• 41:03
  Speaker 1: typical client who is either approaching retirement or rolling over
• 41:08
  Speaker 1: into retirement. And that's our typical client today. We talked
• 41:13
  Speaker 1: about this briefly during the broadcast portion. How significant is
• 41:17
  Speaker 1: planning for that distribution post retirement, how how important is
• 41:22
  Speaker 1: that to clients and how important is that to your practice. Well,
• 41:27
  Speaker 1: it's becoming much more important because the baby boomers are
• 41:32
  Speaker 1: getting more into retirements. Sixty per day I think is
• 41:35
  Speaker 1: so sixty people per day have the big question in
• 41:39
  Speaker 1: their mind, am I going to make it? Um? So Originally,
• 41:45
  Speaker 1: when I launched fifteen years ago, there weren't as many
• 41:49
  Speaker 1: people asking the question, But now that the baby boomers
• 41:53
  Speaker 1: are approaching that we have had to um come up
• 41:59
  Speaker 1: with different serve is that help them answer this question?
• 42:03
  Speaker 1: And that's why we're doing this vertical advisor idea, which
• 42:07
  Speaker 1: we had talked about in a previous program. So you
• 42:09
  Speaker 1: talked earlier also about finding clients who buy into the
• 42:14
  Speaker 1: philosophy that that you and I both espoused. Let me
• 42:18
  Speaker 1: ask the opposite question. How often do you come across
• 42:22
  Speaker 1: clients that early in the prospect process you recognize, hey,
• 42:26
  Speaker 1: this guy is not a good fit. Quite often recognized
• 42:30
  Speaker 1: there not a good fit. And I'll tell you what
• 42:31
  Speaker 1: the tell tale phrases. Well, don't we get the so
• 42:35
  Speaker 1: what's your sharp ratio? Sort the question that that's an
• 42:38
  Speaker 1: automatical Well, exactly the same thing. You're talking about performance?
• 42:42
  Speaker 1: So if I get the question from a prospect, what's
• 42:45
  Speaker 1: your performance spent? Over the last five years. It is
• 42:48
  Speaker 1: just a red flag because if you really understood what
• 42:54
  Speaker 1: we did and you and you had the philosophy you're
• 42:57
  Speaker 1: in the church, you wouldn't ask that question. Here's what
• 43:00
  Speaker 1: the market did, here's what emerging markets and and developed
• 43:03
  Speaker 1: that US did, here's what fixed income did, here's your mix. Basically,
• 43:08
  Speaker 1: this is what you did, and so there's no ambiguity
• 43:12
  Speaker 1: about it. Um So when people are asking questions about performance,
• 43:19
  Speaker 1: they don't have the vision and they're not going to
• 43:22
  Speaker 1: be a good client. So that's the number one key
• 43:26
  Speaker 1: right there there, tip off that this isn't gonna work.
• 43:30
  Speaker 1: You have a fun yourself having to fire a client.
• 43:32
  Speaker 1: I know that's an expression people outside of Wall Street
• 43:35
  Speaker 1: may not be all that familiar with, but that's the phrase, Hey,
• 43:39
  Speaker 1: sometimes you gotta fire a client. How often does that happen?
• 43:44
  Speaker 1: If you've done a good job screening them in the beginning,
• 43:46
  Speaker 1: it shouldn't happen. But every now and then. I know
• 43:49
  Speaker 1: I have fired clients in the past because they they
• 43:55
  Speaker 1: called too much, they take up too much time, and
• 43:59
  Speaker 1: at that point and we have to say, you know,
• 44:00
  Speaker 1: we're not the right advisor. We're not going to have
• 44:03
  Speaker 1: we can't. We can't have a discussion with you about
• 44:06
  Speaker 1: what happened in the stock market today and then have
• 44:09
  Speaker 1: another discussion with you tomorrow, and then have another discussion
• 44:12
  Speaker 1: the next day. That's emblematic of a deeper issue beneath.
• 44:15
  Speaker 1: It's not the stock market. They're essentially saying, I'm not
• 44:18
  Speaker 1: buying into the philosophy, right, they don't have the philosophy,
• 44:21
  Speaker 1: because if they had the philosophy, then they wouldn't be
• 44:23
  Speaker 1: asking those questions. So it's not a good fit. So
• 44:25
  Speaker 1: the way I fire a client and say, you know this,
• 44:30
  Speaker 1: I don't think we're really the right company for you.
• 44:32
  Speaker 1: I think you need another type of advisor than what
• 44:37
  Speaker 1: we can offer. And that's how I fire the client,
• 44:40
  Speaker 1: if you gently. But it's true though, it's true. It's
• 44:43
  Speaker 1: it's it's a fact that they need more. I mean
• 44:46
  Speaker 1: they should be at you know, the wire houses, because
• 44:50
  Speaker 1: that's what the wire houses do well, that amongst other
• 44:53
  Speaker 1: other sort of things. Um, and we talked about technology
• 44:56
  Speaker 1: the other day, you mentioned the wire houses, So tip bically,
• 45:00
  Speaker 1: what what for those people who may not be familiar
• 45:03
  Speaker 1: with the phrase that typically refers to the big brokerage
• 45:06
  Speaker 1: firms think Morgan, Stanley, Merrill Lynch. In the old days
• 45:11
  Speaker 1: it was Bear Stearns and Lehman Brothers. But I guess
• 45:15
  Speaker 1: you could put JP Morrigan and well Will's. Fargo is
• 45:20
  Speaker 1: also has A used to have a brokerage division. I
• 45:23
  Speaker 1: think they still do. So what's going on on the
• 45:26
  Speaker 1: old school side of the business these days? Um, they
• 45:31
  Speaker 1: seem to con still. But even though we read about
• 45:33
  Speaker 1: these big teams leaving, these billion dollar teams an off elsewhere,
• 45:38
  Speaker 1: their assets under management continue to grow. They are not. Um,
• 45:44
  Speaker 1: they are not hurting these days for business. What what's
• 45:48
  Speaker 1: happening on that side of the street. Well, I really
• 45:51
  Speaker 1: don't know what I couldn't I couldn't answer. Let me
• 45:55
  Speaker 1: let me phrase it differently. How often have you seen
• 45:57
  Speaker 1: clients come to you from big wire houses, from from
• 46:01
  Speaker 1: places like Maryland? Morgan? Probably fifty of our new clients
• 46:07
  Speaker 1: that come in come from the big wire houses. But realize,
• 46:10
  Speaker 1: what's happened since Bernie made off is that clients have
• 46:14
  Speaker 1: diversified into several different advisors. So it's not whereas it
• 46:19
  Speaker 1: used to all come from one place. Now when we
• 46:21
  Speaker 1: get a new client and they'll be transferring in assets
• 46:23
  Speaker 1: from two or three different places. People have diversified more
• 46:27
  Speaker 1: and in fact, even with advisors, UM, we still get
• 46:32
  Speaker 1: our fair share of people who have us manage all
• 46:34
  Speaker 1: of their money. But I think that in the in
• 46:37
  Speaker 1: the world of post Bernie made Off, that people are
• 46:41
  Speaker 1: comfortable splitting their money between a couple of advisors as well,
• 46:44
  Speaker 1: and we've see more more of that in the last
• 46:46
  Speaker 1: few years. That's really interesting. You would think the lesson is, hey,
• 46:51
  Speaker 1: don't put your money with somebody who doesn't use a
• 46:53
  Speaker 1: third party trusted custodian UH and pretends to run the
• 46:57
  Speaker 1: money themselves. But that's that's a UH. That's a different
• 47:03
  Speaker 1: UM analysis is hey, it's not us, it's t D
• 47:06
  Speaker 1: or Fidelity or Schwab or whoever. People are are holding
• 47:09
  Speaker 1: their money, so we don't have the right the ability
• 47:12
  Speaker 1: to go in and and steal your money. Bernie Madoff
• 47:15
  Speaker 1: had the money going right into his checking and can't understand.
• 47:18
  Speaker 1: I understand what happened, but Phil. But emotionally people are
• 47:21
  Speaker 1: basically saying, well, I'm just in case somebody is dishonest,
• 47:26
  Speaker 1: I'm gonna split my money in three places so I
• 47:28
  Speaker 1: can't lose it all with We've seen more of that
• 47:33
  Speaker 1: post financial crisis than we did before the financial crisis.
• 47:35
  Speaker 1: That's correct. So now let's talk a little bit about
• 47:37
  Speaker 1: the financial crisis. You mentioned what it was like living
• 47:40
  Speaker 1: through two thousand, two thousand one. How disruptive was oh
• 47:45
  Speaker 1: eight o nine to your practice. How much did clients
• 47:48
  Speaker 1: freak out or were people you know, all right, this
• 47:51
  Speaker 1: is gonna suck, but we'll come out fine and everything
• 47:54
  Speaker 1: will be okay on the other side, even though just
• 47:57
  Speaker 1: at the time it very much felt like, hey, this
• 48:00
  Speaker 1: is a one off, this is a unique end of
• 48:02
  Speaker 1: world sort of thing, or at least that's how a
• 48:05
  Speaker 1: lot of places were describing it. Sure, so of course
• 48:09
  Speaker 1: we've got a lot of phone calls, just like everyone else.
• 48:11
  Speaker 1: And of those people, after talking with them, didn't do anything,
• 48:17
  Speaker 1: which was good. We didn't we didn't have to do
• 48:20
  Speaker 1: anything with their portfolios. The other ten percent, a portion
• 48:25
  Speaker 1: of them terminated, they capitulated before we even had a
• 48:29
  Speaker 1: chance to talk with them about three Okay, that's not
• 48:34
  Speaker 1: you know, we hear our stories about people just you know,
• 48:38
  Speaker 1: losing their mind, and and people have a third of
• 48:40
  Speaker 1: people's business going away because they freaked out about a
• 48:44
  Speaker 1: particular you know, one particular not not from We were
• 48:48
  Speaker 1: at a different firm at the time. But you know,
• 48:50
  Speaker 1: you hear stories going on, you read about people blowing
• 48:53
  Speaker 1: up and imploding, and you know, it's really a challenge
• 48:57
  Speaker 1: to to deal with that sort of influx of of
• 49:01
  Speaker 1: panicked client phone calls. But not not in the not
• 49:05
  Speaker 1: in our business. I mean the philosophy we have again
• 49:08
  Speaker 1: and yeah, the low cost to try to create the
• 49:14
  Speaker 1: correct allocation for you in the long term, educating the
• 49:18
  Speaker 1: clients and reminding them, Um, a vast majority of our
• 49:23
  Speaker 1: clients didn't do anything, Um panic phone call, no nervous emails,
• 49:29
  Speaker 1: past majority. Really that's fantastic. Just you know, you continue
• 49:35
  Speaker 1: to do what you do. And it's because they had
• 49:38
  Speaker 1: they were in the church, they understood it that they
• 49:40
  Speaker 1: were part of the philosophy. They got it. Hey, this
• 49:43
  Speaker 1: is gonna write tough, but we'll write it out and
• 49:45
  Speaker 1: we'll be fine on the other side. Right, Because you
• 49:49
  Speaker 1: you have to select clients who have the same philosophy
• 49:52
  Speaker 1: as you. You can't try to convert people. I mean,
• 49:55
  Speaker 1: we can try to convert people on radio shows and such,
• 49:58
  Speaker 1: but by the time we're speaking with them one on
• 50:00
  Speaker 1: one as an advisor, they have to already we have
• 50:02
  Speaker 1: to already see eye to eye because if not, I
• 50:05
  Speaker 1: can't convert you. So I was gonna That leads me
• 50:09
  Speaker 1: to a question. I've been thinking about how much time
• 50:12
  Speaker 1: do you spend educating clients, because there's a fine line
• 50:17
  Speaker 1: between proselytizing and saying, hey, let me give you a
• 50:20
  Speaker 1: deeper dive into why we have this philosophy and and
• 50:23
  Speaker 1: and where does that cross the lawn? Sure, so most
• 50:25
  Speaker 1: of my education has done through the books and my
• 50:29
  Speaker 1: blog and articles as opposed to one on one conversation. Again,
• 50:36
  Speaker 1: because I structured this company to be a low fee,
• 50:41
  Speaker 1: including our fee. Uh, I can't go out and try
• 50:46
  Speaker 1: to convert people, um, you know, person one on one.
• 50:50
  Speaker 1: I don't have the time for it. I don't have
• 50:52
  Speaker 1: the resources for it. You know. I can't do that.
• 50:54
  Speaker 1: So but I can do it in mass by writing books.
• 50:58
  Speaker 1: And then they come to me because they read the book,
• 51:01
  Speaker 1: they read a blog, or they read a lot of
• 51:03
  Speaker 1: stuff and they ended up coming to me and saying,
• 51:05
  Speaker 1: I get it. Now, I'm interested in having you manage
• 51:08
  Speaker 1: my assets. Well that's a good conversation. So the farm itself,
• 51:12
  Speaker 1: you mentioned you're you're running lean. How many employees do
• 51:15
  Speaker 1: you have, Well, we actually now have about sixteen total employees.
• 51:18
  Speaker 1: We have one point four billion dollars. That's not a
• 51:21
  Speaker 1: huge ratio. So there. My my formula has always been
• 51:26
  Speaker 1: one new employee for every hundred million of assets and
• 51:30
  Speaker 1: try to keep to that as much as I can.
• 51:31
  Speaker 1: But as you get larger over a billion dollars, you
• 51:34
  Speaker 1: need to add different levels, like I had to add
• 51:37
  Speaker 1: a compliance manager full time. Um, you have to add
• 51:41
  Speaker 1: an operations manager full time. That was over a billion dollars.
• 51:44
  Speaker 1: That's when it becomes hey, I can't just outsource this.
• 51:47
  Speaker 1: There are things known as r A in a box
• 51:50
  Speaker 1: or outside compliance companies. You can now outsource chief compliance officers.
• 51:55
  Speaker 1: There's third parties that will actually be registered on on
• 51:59
  Speaker 1: the UH form adv with the SEC and they're not
• 52:02
  Speaker 1: an employee, their third party consultants, but they're on your
• 52:06
  Speaker 1: your SEC documents. A billion dollars is the one in
• 52:10
  Speaker 1: the same way you start, I think. So, I mean
• 52:12
  Speaker 1: there are different levels as you grow your advisory firm
• 52:15
  Speaker 1: where you realize you have to uh do creative reconstruction
• 52:19
  Speaker 1: of what's the word destruction? Right, I'm sorry, So you're
• 52:24
  Speaker 1: you realize that what you've put together can take you
• 52:27
  Speaker 1: to certain point, and then you've got to recreate it
• 52:32
  Speaker 1: and that will take you to another point. So it's
• 52:34
  Speaker 1: scales and then a certain point you notice, hey there
• 52:36
  Speaker 1: are a lot of stress points here. I need to
• 52:38
  Speaker 1: throw some some intelligence and a body of that, maybe
• 52:42
  Speaker 1: a little technology and that. And again technology does drive
• 52:46
  Speaker 1: a lot of this. So as technology gets better, we
• 52:48
  Speaker 1: are able to do scale it more so it can
• 52:51
  Speaker 1: go further. But as you continue to grow, you have
• 52:55
  Speaker 1: to change things to scale up. For EXAMP, there was
• 53:00
  Speaker 1: came a point when I personally couldn't speak with all
• 53:03
  Speaker 1: the clients anymore. So we began to hire UH Certified
• 53:06
  Speaker 1: Financial planners who came in and now we have three
• 53:09
  Speaker 1: full time certified financial planners. They're speaking with the clients
• 53:13
  Speaker 1: on a day to day basis and I'm just they're saying, hey,
• 53:17
  Speaker 1: thank you for being with us, and you know, if
• 53:19
  Speaker 1: you have any questions for me, just give me a call.
• 53:22
  Speaker 1: But it's the cfps who are speaking with the clients
• 53:25
  Speaker 1: one on one now on a daily basis. We do
• 53:28
  Speaker 1: something very similar, although we haven't you know, we're eighteen
• 53:31
  Speaker 1: months old. We haven't scaled up the way the way
• 53:33
  Speaker 1: you have what's fascinating in the process of developing this
• 53:37
  Speaker 1: is so we use certain reporting and performance software like
• 53:42
  Speaker 1: O'Ryan and years ago to crank out what you push
• 53:46
  Speaker 1: a button and Orion generates. It would take two accountants
• 53:50
  Speaker 1: working for a week to get the quarterly statements out
• 53:53
  Speaker 1: to the clients. I remember those days. Today all the
• 53:58
  Speaker 1: clients have full access to it. They push your button,
• 54:00
  Speaker 1: they get We tell them, hey, it's seven access, but
• 54:03
  Speaker 1: please try not to check. You know, look at your monthly,
• 54:07
  Speaker 1: quarterly year to date. You're fine, but don't obsess over
• 54:10
  Speaker 1: and it's going to go up and down. That's what
• 54:11
  Speaker 1: markets do. And we have actually now outsourced a lot
• 54:15
  Speaker 1: of our portfolio management function to Black Diamond and so
• 54:22
  Speaker 1: this just just occurred and were so we're coming off
• 54:24
  Speaker 1: of um A p X, which is advents in in
• 54:28
  Speaker 1: house you know, on server software, and we've going to
• 54:31
  Speaker 1: the cloud black Diamond, and we are uh and and
• 54:35
  Speaker 1: they are actually doing a lot of our reconciliation and
• 54:39
  Speaker 1: uh it's the back end. It's the administrative an accounting
• 54:42
  Speaker 1: and and reporting function, reporting functions and portal and all
• 54:46
  Speaker 1: of that for the clients. So uh, although it's expensive
• 54:51
  Speaker 1: for us, we're paying about a hundred thousand dollars a
• 54:54
  Speaker 1: year for this, but a per household basis, it's really
• 54:58
  Speaker 1: not terrible. Well, it's also now I don't have to
• 55:00
  Speaker 1: hire two people in portfolio management. So it's those two
• 55:03
  Speaker 1: two c pas that you were saying in the back,
• 55:05
  Speaker 1: crunching the numbers. Okay, So though those people I don't
• 55:08
  Speaker 1: have to hire because I've been able to use technology
• 55:11
  Speaker 1: and put it up in the cloud and outsource it
• 55:13
  Speaker 1: to UM Black Diamond, and then also do a subadvisor
• 55:18
  Speaker 1: role or a camp role using that same technology, which
• 55:21
  Speaker 1: allows me now to expand my intellectual property. Which again
• 55:25
  Speaker 1: that's what I'm selling to other advisors who don't want
• 55:28
  Speaker 1: to manage money, and they can put their clients with
• 55:31
  Speaker 1: us and we can manage their clients money in a
• 55:34
  Speaker 1: customized fashion at a very low fee, using the same technology.
• 55:37
  Speaker 1: It's funny because it's it's a business line that we've
• 55:40
  Speaker 1: been exploring because we get inquiries all the time from
• 55:43
  Speaker 1: other advisors. UM you do the same thing I do.
• 55:47
  Speaker 1: You go around the country, you speak at a lot
• 55:49
  Speaker 1: of conferences. One of the questions I ask if I'm
• 55:51
  Speaker 1: speaking to a room full of cfps or financial planners
• 55:55
  Speaker 1: of some sort. Hey, how many of you run your
• 55:57
  Speaker 1: own assets? Less than half of hands, that's correct? And
• 56:01
  Speaker 1: then how many of you are happy with your outside management?
• 56:04
  Speaker 1: And less than half of those are good questions. It's
• 56:07
  Speaker 1: really a fascinating So on that business line of you're
• 56:11
  Speaker 1: the institutional advisor to other advisors, advisor subadvisor, what do
• 56:17
  Speaker 1: you what do you charge them in terms of UM
• 56:19
  Speaker 1: asset fees? So the portfolio management fee to their clients
• 56:23
  Speaker 1: is twenty five basis points. But then if we do
• 56:26
  Speaker 1: some administrative work for the advisor themselves, like collect their
• 56:29
  Speaker 1: fees for them, it's a little bit more than that.
• 56:31
  Speaker 1: And so here's the debate that we've had internally. How
• 56:35
  Speaker 1: much does that make what you offer as portfolio solutions
• 56:41
  Speaker 1: to potential clients UM less valuable as opposed, or let
• 56:47
  Speaker 1: me rephrase that less unique. So right now, if someone
• 56:50
  Speaker 1: wants Rick Ferry, they have to come to Rick Ferry.
• 56:53
  Speaker 1: But if this advisory to advisor's business expands, are you
• 56:57
  Speaker 1: running the risk that people are getting Rick Ferry with
• 57:00
  Speaker 1: out having to pay Rick Ferry directly? No, because the
• 57:04
  Speaker 1: way I looked at at the pricing of this is
• 57:06
  Speaker 1: that we get paid twenty five basis points for portfolio management,
• 57:10
  Speaker 1: whether it's through the robo advisor which we're creating, whether
• 57:13
  Speaker 1: it's through our own channel, or whether it's through a subadvising.
• 57:17
  Speaker 1: We're getting paid twenty five basis points for the intellectual
• 57:20
  Speaker 1: property of and the running of the portfolio and creating
• 57:22
  Speaker 1: the portfolio. The extra fees are for advice. Either you're
• 57:26
  Speaker 1: going to get the advice from my CFPS or advice exactly. Listen.
• 57:32
  Speaker 1: I'm a big believer in that we had Larry Sweddrow
• 57:36
  Speaker 1: here before. I'm a big fan of Carl Richards sure
• 57:38
  Speaker 1: who who does the sharpie sketches and rites in the Times.
• 57:43
  Speaker 1: And I think Buckingham runs about five billion dollars. I'm
• 57:48
  Speaker 1: doing this off the top of my head, so double
• 57:50
  Speaker 1: check this when you hear this. But I think they
• 57:52
  Speaker 1: advise on another two billions. That's bam, bam, that's right Buckingham. Yeah, exactly,
• 57:58
  Speaker 1: And what happened there and I can speak for for
• 58:00
  Speaker 1: bucking Ham, but what they did was they created an
• 58:03
  Speaker 1: asset management company called Buckingham Asset Management, and they realize
• 58:08
  Speaker 1: that they can run money, not just for their own
• 58:10
  Speaker 1: clients and advise their own clients but since they had
• 58:13
  Speaker 1: built out the back office, they can run money for
• 58:15
  Speaker 1: other advisors using their strategies as well. But it's the
• 58:18
  Speaker 1: other advisor who gets paid the advisory fee. They get
• 58:21
  Speaker 1: paid the portfolio management fate. And it's the same thing
• 58:23
  Speaker 1: with the portfolio solutions. You're breaking the you're breaking the
• 58:25
  Speaker 1: total cost to the client into discrete pieces. You're paying
• 58:30
  Speaker 1: this much for the asset management business, You're paying this
• 58:32
  Speaker 1: much for the advisory side for this that that's correct,
• 58:35
  Speaker 1: and but but of course all the advisors who go
• 58:38
  Speaker 1: with us have to have the same philosophy, so it's
• 58:40
  Speaker 1: not like we're going to do tactical asset allocation because
• 58:44
  Speaker 1: of advisor believes in that. So just like a d
• 58:48
  Speaker 1: f A and just like a BAM client, you you
• 58:51
  Speaker 1: you have the philosophy and then you're coming to us
• 58:54
  Speaker 1: for UM implementation and advice perhaps if you're an advice
• 59:00
  Speaker 1: there on how to structure the portfolio. I mean, do
• 59:02
  Speaker 1: you really want to have the SMP five hundred or
• 59:05
  Speaker 1: should you have a total market Uh, you know, do
• 59:07
  Speaker 1: you need a q q Q you know NASA dec
• 59:10
  Speaker 1: I mean, really, what is that? Um? You're you're jingling
• 59:15
  Speaker 1: a hundred thoughts in my head. One on on fun families,
• 59:19
  Speaker 1: one on why the SMP is not your favorite asset
• 59:22
  Speaker 1: management one on smart beta. Let me let me throw
• 59:24
  Speaker 1: some of these out out of you. So our portfolios
• 59:28
  Speaker 1: are Vanguard, Dimensional funds, some Black Rocks, some UM Double Line,
• 59:33
  Speaker 1: some Wisdom Tree. What what fun families do you tend
• 59:36
  Speaker 1: to focus on? Well, it's mostly Vanguard in d f A.
• 59:39
  Speaker 1: That's that's a majority of our assets. Um. There might
• 59:43
  Speaker 1: be uh an eye share or two out there. But
• 59:47
  Speaker 1: you know, we're trying to capture the return of a
• 59:51
  Speaker 1: risk in the marketplace. I don't even want to call
• 59:54
  Speaker 1: it an asset class because asset classes may not have returns.
• 59:59
  Speaker 1: And yeah, as we're looking at a risk in the marketplace,
• 1:00:03
  Speaker 1: called it market beta at US equity beta, if you will.
• 1:00:05
  Speaker 1: And so we're gonna trying to capture that. Well, now
• 1:00:08
  Speaker 1: what's the best way to capture that? Well, first you
• 1:00:11
  Speaker 1: have to look at all the different products that are available.
• 1:00:13
  Speaker 1: There's different indexes out there. There's a Russell three thousand,
• 1:00:16
  Speaker 1: there's a Dow Jones Total Market, there's the CRISP Total
• 1:00:19
  Speaker 1: total Market index, I mean five thousand. Okay, So now
• 1:00:23
  Speaker 1: you have all the indexes that out there that have
• 1:00:25
  Speaker 1: been created that capture this, and then you have to
• 1:00:27
  Speaker 1: go to the marketplace and see what products are tracking
• 1:00:31
  Speaker 1: these indexes, and you end up running into Vanguard, and
• 1:00:34
  Speaker 1: you run into I Shares, and you run into State Street,
• 1:00:36
  Speaker 1: and you also are now running into Schwab and so
• 1:00:40
  Speaker 1: you have to do an analysis of uh fees and
• 1:00:45
  Speaker 1: turnover taxes to come up with what is the best
• 1:00:51
  Speaker 1: product that I can select that best captures the risk
• 1:00:55
  Speaker 1: that I'm trying to capture and a lot of times
• 1:00:58
  Speaker 1: and as a BT Vanguard UM they're pretty clearly the
• 1:01:02
  Speaker 1: lowest course provider almost across the board for beta, for
• 1:01:07
  Speaker 1: beta correct for for just marking for people who just
• 1:01:10
  Speaker 1: want to get what the market is returned stock market
• 1:01:12
  Speaker 1: and bond market. That's correct. Now, if you're talking about
• 1:01:14
  Speaker 1: smart beta, if you will, or factor investing UM, strategic beta,
• 1:01:19
  Speaker 1: alternative beta, additional beta, exotic beta, whatever you want to
• 1:01:22
  Speaker 1: call it. I mean, the fact is you're you're not
• 1:01:24
  Speaker 1: actually going after the market. You're going after a strategy
• 1:01:28
  Speaker 1: that's used in the market. Then you have to try
• 1:01:33
  Speaker 1: to figure out how can in what risks by the
• 1:01:34
  Speaker 1: way of that strategy giving you and therefore, what risk
• 1:01:39
  Speaker 1: premiums you might be able to draw from it. Now
• 1:01:42
  Speaker 1: you have to look at what is my best bang
• 1:01:44
  Speaker 1: for the buck, I mean what funds produce. It gives
• 1:01:48
  Speaker 1: me the highest exposures to those risks, therefore potentially highest
• 1:01:52
  Speaker 1: exposures to those risk premiums for the amount of fee
• 1:01:54
  Speaker 1: that I'm paying. And here is where you end up
• 1:01:58
  Speaker 1: with somebody like d f A, because even though they're
• 1:02:01
  Speaker 1: not inexpensive relative to Vanguard, I mean they are more expensive.
• 1:02:05
  Speaker 1: You're getting more bang for the buck. You're getting more
• 1:02:07
  Speaker 1: risk exposure to the risks that you want. So uh,
• 1:02:11
  Speaker 1: you would look at them. You would look at research affiliates.
• 1:02:14
  Speaker 1: Uh raffy, you would look at other types of products
• 1:02:17
  Speaker 1: that are in that space. So we we had um
• 1:02:20
  Speaker 1: on in terms of both Vanguard and resource affiliates. The
• 1:02:23
  Speaker 1: conversation we had with Jack Brennan was quite fascinating and
• 1:02:26
  Speaker 1: I asked him, Hey, how come you guys aren't doing
• 1:02:28
  Speaker 1: smart Beta and uh, he's chairman now he's no longer CEO,
• 1:02:32
  Speaker 1: and I think that it's something that they've been wrestling
• 1:02:35
  Speaker 1: with internally. We're we have coming up in a few months.
• 1:02:39
  Speaker 1: We're gonna have David Booth, we're gonna have that conversation
• 1:02:41
  Speaker 1: about UM their particular form of I don't know if
• 1:02:45
  Speaker 1: I would call it smart beta so much as I
• 1:02:47
  Speaker 1: would call it a a tilt towards small cap and value.
• 1:02:52
  Speaker 1: That's really how they built their brand. I think they're
• 1:02:54
  Speaker 1: running about three hundred plus billion dollars. Well, first of all,
• 1:02:58
  Speaker 1: smart beta is just a marketing term. I mean, there's
• 1:03:00
  Speaker 1: nothing smart about there's nothing smart inherently smart about taking
• 1:03:05
  Speaker 1: more risk. I mean, if you decide to take more
• 1:03:07
  Speaker 1: risk to get a higher return, fine, and you decide
• 1:03:10
  Speaker 1: that the risk isn't going to be beta, but it's
• 1:03:12
  Speaker 1: going to be small cap risk, or it's going to
• 1:03:15
  Speaker 1: be UH value risk or momentum risk, or it's going
• 1:03:19
  Speaker 1: to be quality risk or something. I mean, if you
• 1:03:21
  Speaker 1: believe in Fama French methodology, you're gonna say these are risks.
• 1:03:26
  Speaker 1: Eugene Fama recent winner of the Nobel Prize for his
• 1:03:30
  Speaker 1: work on UM efficient markets and and how challenging it
• 1:03:35
  Speaker 1: is to beat the market. And French is also ah.
• 1:03:38
  Speaker 1: Is he a former Chicago or Pennsylvania? You gotta try
• 1:03:41
  Speaker 1: to remember where he went, where he teaches. But he's
• 1:03:44
  Speaker 1: a consultant to UH Dimensional Funds and is one of
• 1:03:47
  Speaker 1: the key architects of Hey, here's a factor that FAMA,
• 1:03:55
  Speaker 1: the FAMA French three factor model, which UM codified if
• 1:03:59
  Speaker 1: you will, the the idea that portfolios have three distinct
• 1:04:08
  Speaker 1: risks and you can measure the risk, and the risks
• 1:04:11
  Speaker 1: are the return, the sensitivity to the market, the sensitivity
• 1:04:14
  Speaker 1: of small caps to large gaps, and the sensitivity of
• 1:04:17
  Speaker 1: basically value stocks to growth stocks. And that covers the
• 1:04:22
  Speaker 1: variability of a diversified portfolio stocks, so kind of captures
• 1:04:27
  Speaker 1: most of it. There's a there's a few others in there,
• 1:04:30
  Speaker 1: like momentum and quality. Now, so it's really a five
• 1:04:32
  Speaker 1: factor model that captures a great portion of the variability
• 1:04:37
  Speaker 1: of of a diverse, fied stock portfolio. So you can
• 1:04:40
  Speaker 1: now design your equity portfolios to have tilts are overweightings
• 1:04:47
  Speaker 1: to these various risks with the hope of getting a
• 1:04:50
  Speaker 1: higher return than the market. Although you know, in the
• 1:04:54
  Speaker 1: farmer French world, it's only because you're taking more risk, right.
• 1:04:57
  Speaker 1: The translation is small caps are less covered, they have
• 1:05:01
  Speaker 1: less Wall Street coverage, they're less understood, there are thousands
• 1:05:04
  Speaker 1: of them, they have a tendency less liquidity. They tend
• 1:05:08
  Speaker 1: to wink in and out of existence, and hence you're
• 1:05:11
  Speaker 1: getting compensated a little more um for the additional risk.
• 1:05:15
  Speaker 1: There's also less efficiency in that space, and that's why
• 1:05:18
  Speaker 1: there's some I hate to use a dirty word, alpha
• 1:05:21
  Speaker 1: to be captured. When we had our conversation with Rob
• 1:05:25
  Speaker 1: are not of research affiliates, I really liked his definition
• 1:05:29
  Speaker 1: of smart data, which was, hey, a market cap weighted
• 1:05:33
  Speaker 1: index is the worst way to assemble one index. And
• 1:05:35
  Speaker 1: you run into all these problems, especially at the end
• 1:05:38
  Speaker 1: of the cycle when it's you know, think back to
• 1:05:41
  Speaker 1: thousand and when it was the Cisco's and Yahoo's and
• 1:05:46
  Speaker 1: and I can't even remember the other companies that were
• 1:05:49
  Speaker 1: the prime drivers back then. And if instead of doing
• 1:05:53
  Speaker 1: it market cap based, hey, you do it by revenue
• 1:05:55
  Speaker 1: of profits or dividends or some other reasonable factor. That
• 1:06:00
  Speaker 1: that's his explanation. You're you're you confused. He's well, I know,
• 1:06:04
  Speaker 1: I know Rob very well. I speak with Rob all
• 1:06:06
  Speaker 1: the time, and uh, I'm a big proponent of what
• 1:06:09
  Speaker 1: he's doing. I follow all his research and uh, and
• 1:06:11
  Speaker 1: they do a great job. That said, but however, I
• 1:06:16
  Speaker 1: can tell you from the south because that's just a
• 1:06:19
  Speaker 1: g that we just don't see in New Year anymore.
• 1:06:23
  Speaker 1: That's a lost era. However, this idea that it is
• 1:06:27
  Speaker 1: something wrong about a cap weighted index is just wrong.
• 1:06:32
  Speaker 1: Cap Weighted index are a measurement of the value of
• 1:06:36
  Speaker 1: the equity market, and that's what they were designed to do,
• 1:06:39
  Speaker 1: and only only out of sheer poor performance by the
• 1:06:46
  Speaker 1: act of managers have indexing using cap waiting become so
• 1:06:51
  Speaker 1: popular in otherwids. You're trying, you're trying to say that
• 1:06:56
  Speaker 1: this isn't a good way to invest, yet it outperforms
• 1:06:59
  Speaker 1: most everything out It's like our form of government, right,
• 1:07:01
  Speaker 1: but a terrible government. Democracy is terrible, except is the
• 1:07:04
  Speaker 1: worst form of government except for all others. So that's
• 1:07:09
  Speaker 1: really interesting. So you are on the same page as
• 1:07:13
  Speaker 1: John Bogel when it comes to smart beta, but I
• 1:07:17
  Speaker 1: think in two very specific ways. He's not a fan
• 1:07:21
  Speaker 1: of smart beta, and I'm saying dimensional isn't a smart
• 1:07:24
  Speaker 1: beta so much as a These are the factors that
• 1:07:27
  Speaker 1: but it's all the same thing. Again. Smart better is
• 1:07:29
  Speaker 1: just a marketing term, and Rob picked up on it,
• 1:07:30
  Speaker 1: Rob or not. I mean, he picked up on the
• 1:07:32
  Speaker 1: word smart, but he loved it because all of a sudden,
• 1:07:34
  Speaker 1: it was a very easy way to talk about fundamental indexing,
• 1:07:38
  Speaker 1: and it made it sound so chic. Fundamental indexing is
• 1:07:41
  Speaker 1: a much better description the absolutely. In fact, I had
• 1:07:44
  Speaker 1: this conversation with Rob or Not I said, fundamental indexing
• 1:07:47
  Speaker 1: has legs because it actually describes what you're doing smart
• 1:07:51
  Speaker 1: and it seems to work for people who want to
• 1:07:54
  Speaker 1: have those have those uh you know tilts if you
• 1:07:57
  Speaker 1: will towards value stocks Uh siffically, Um sure, I mean
• 1:08:02
  Speaker 1: it's it's a methodology or a strategy that you can
• 1:08:04
  Speaker 1: use to get those tilts of d f A S
• 1:08:06
  Speaker 1: and other strategy you can use to get those tilts.
• 1:08:08
  Speaker 1: So there's a lot of different strategies out there that
• 1:08:11
  Speaker 1: you can use to get these various tilts. And it's
• 1:08:13
  Speaker 1: a question of cost per unit of risk, you know,
• 1:08:18
  Speaker 1: from our perspective as an advisor looking at all these
• 1:08:20
  Speaker 1: different products out there, determining how much tilt is there,
• 1:08:24
  Speaker 1: how much load is there to these various factors risk factors,
• 1:08:29
  Speaker 1: and how much am I paying over beta to get
• 1:08:32
  Speaker 1: those loads? And it's a cost per unit of risk
• 1:08:37
  Speaker 1: to come up with what funds you should invest in
• 1:08:40
  Speaker 1: if you decide to even do this Now it's a
• 1:08:42
  Speaker 1: big question whether you should even do it. You have
• 1:08:44
  Speaker 1: to really understand it to do it, because if you
• 1:08:47
  Speaker 1: don't understand it, then the next time these things don't work.
• 1:08:50
  Speaker 1: Like in the nine nineties when large cap growth was
• 1:08:53
  Speaker 1: doing very well, value was just you know, getting plumber.
• 1:08:56
  Speaker 1: You were cool hearing people say in the nineteen nine
• 1:08:58
  Speaker 1: So I've been in the business lat warm Buffett is
• 1:09:01
  Speaker 1: washed up. He's old school. He just hasn't adapted to
• 1:09:04
  Speaker 1: the new paradigm. The new paradigm. You remember that exactly
• 1:09:07
  Speaker 1: that that was the word, the new paradigm. And and
• 1:09:09
  Speaker 1: here's the thing. If our clients or advisors don't understand
• 1:09:14
  Speaker 1: what they're really doing with this smart beta stuff and
• 1:09:17
  Speaker 1: doesn't really understand where the potential returns are supposed to
• 1:09:22
  Speaker 1: be coming from, then how long are they going to
• 1:09:25
  Speaker 1: stick with this strategy when it doesn't work for ten years?
• 1:09:29
  Speaker 1: And there have been ten year periods of time where
• 1:09:31
  Speaker 1: that it didn't work. So, and what's going to happen
• 1:09:35
  Speaker 1: to your business if you hang your hat on this
• 1:09:37
  Speaker 1: stuff and it doesn't work. What are your client's going
• 1:09:40
  Speaker 1: to think of it? And how long are they gonna
• 1:09:42
  Speaker 1: stick with you? When the guy down the road is
• 1:09:44
  Speaker 1: just doing what the markets doing and you're not. And
• 1:09:47
  Speaker 1: so there's a certain business risk to advisors to going
• 1:09:51
  Speaker 1: down this road. And if you do, how much are
• 1:09:53
  Speaker 1: you going to expose the portfolio to it? And uh,
• 1:09:57
  Speaker 1: we we made the decision that no more than twenty
• 1:09:59
  Speaker 1: five recent of the equity portfolio will be exposed to
• 1:10:03
  Speaker 1: these various factors and the rest of it's just going
• 1:10:05
  Speaker 1: to be beta, because, um, I don't know if it's
• 1:10:08
  Speaker 1: gonna work. I know we worked in the last fifteen years.
• 1:10:10
  Speaker 1: It was fabulous coming off the tech bubble um. But
• 1:10:14
  Speaker 1: if you look back ten years prior to that and
• 1:10:17
  Speaker 1: it's not so rosy. It looks really bad. So, um,
• 1:10:22
  Speaker 1: I don't know if it's gonna work for ten years
• 1:10:23
  Speaker 1: going forward. There's a thing called factor crowding. Have you
• 1:10:25
  Speaker 1: heard that storm before? Okay, So you've got all this
• 1:10:28
  Speaker 1: money coming into these smart beta strategies, a lot of
• 1:10:31
  Speaker 1: it potentially for the wrong reason. They're they're chasing performance
• 1:10:34
  Speaker 1: and chasing the hot dot, if you will. They're chasing
• 1:10:37
  Speaker 1: smart beta rather than factor investing. That that crowded trade
• 1:10:42
  Speaker 1: approach is why nothing works always all the time, and
• 1:10:46
  Speaker 1: you tend to see suddenly valuable full out of favor,
• 1:10:49
  Speaker 1: just as growth fell out of favor, and the core
• 1:10:53
  Speaker 1: adherence to that will ride it out because they know
• 1:10:56
  Speaker 1: eventually again we cross the desert and get to the
• 1:10:59
  Speaker 1: promise land. But um, that that's just the nature of
• 1:11:04
  Speaker 1: of human psychology and investing. And I don't know if
• 1:11:07
  Speaker 1: we are at a point where so much money is
• 1:11:09
  Speaker 1: going into these strategies that we're gonna have a very
• 1:11:11
  Speaker 1: poor period of performance for a while or not any
• 1:11:16
  Speaker 1: chance we're going to see that in indexing. And I
• 1:11:20
  Speaker 1: have with people is hey, Van God is now three
• 1:11:22
  Speaker 1: trillion dollars, but there's you know, sixty trillion dollars in
• 1:11:27
  Speaker 1: in investable assets that are either equity or equity related.
• 1:11:31
  Speaker 1: It's a tiny percentage of of take. Indexing is still
• 1:11:35
  Speaker 1: the minority investment versus active management. Tuck with David Blitzer
• 1:11:42
  Speaker 1: from another guest for you, if you're looking for somebody
• 1:11:47
  Speaker 1: would be great to have on the show. I think, um,
• 1:11:50
  Speaker 1: two trillion dollars are directly benchmark to the SMP five.
• 1:11:55
  Speaker 1: Yet there's still volatility between SPI stocks. In other words,
• 1:12:01
  Speaker 1: it really hasn't changed the market, you know a little bit, perhaps,
• 1:12:08
  Speaker 1: But if you're buying a total market as opposed to
• 1:12:11
  Speaker 1: the SMP. It's a wash there, there's no effect on
• 1:12:14
  Speaker 1: you at all. So uh, I don't think that how
• 1:12:21
  Speaker 1: how how much uh indexing is too much indexing of
• 1:12:27
  Speaker 1: the market being index Maybe that becomes too much. I mean,
• 1:12:30
  Speaker 1: I don't know what the answer is. And the thesis
• 1:12:32
  Speaker 1: is that if indexing as indexing grows, it just creates
• 1:12:37
  Speaker 1: opportunity for people who are not in death and that's
• 1:12:39
  Speaker 1: that's not true. And if we haven't seen that at
• 1:12:41
  Speaker 1: all last year large no, I mean when it managed
• 1:12:44
  Speaker 1: like six some massive size, that then creates a little
• 1:12:48
  Speaker 1: bit for the alpha chase. That's the theory. Only remember
• 1:12:51
  Speaker 1: we just said that two trillion dollars is already benchmarked
• 1:12:54
  Speaker 1: to the SMP fire Yet last year only fiftent of
• 1:12:56
  Speaker 1: large capus managers i'll perform the SMP five. So where's
• 1:13:00
  Speaker 1: the data? Not yet? The argument would be, well, as
• 1:13:05
  Speaker 1: the as alpha is created by people identifying inefficiencies, and
• 1:13:11
  Speaker 1: as more and more people leave active, that's how you
• 1:13:14
  Speaker 1: generate uh. You know, the Ellis thesis is there's so
• 1:13:18
  Speaker 1: many smart, hardworking, intelligent people chasing alpha they kind of
• 1:13:25
  Speaker 1: cancel each other out. Once that number of alpha chasers drop. Look,
• 1:13:29
  Speaker 1: we have ten thousand hedge funds. The Jim Chanos had said,
• 1:13:32
  Speaker 1: you know, alpha is created by two hundred hedge funds
• 1:13:35
  Speaker 1: out of ten thousand ps. It's the two hundred hedgephones
• 1:13:38
  Speaker 1: that existed when there were only two hundred hedge funds.
• 1:13:41
  Speaker 1: It's the same two hundred guys and every all these
• 1:13:43
  Speaker 1: other alpha chasers are really just fee chasers UM. So
• 1:13:47
  Speaker 1: maybe you need that same sort of situation to take
• 1:13:51
  Speaker 1: place before the active funds start to create some value. There's,
• 1:13:58
  Speaker 1: like Charlie Ella said, there's too many people so that
• 1:14:02
  Speaker 1: there is almost no inefficiencies left to be mined. There's
• 1:14:06
  Speaker 1: no alpha left to be gotten because they all cancel
• 1:14:09
  Speaker 1: each other out, essentially. I'll add something to that too,
• 1:14:12
  Speaker 1: which is that there not only are there a lot
• 1:14:14
  Speaker 1: of alpha chasers now, but there's also less stocks on
• 1:14:16
  Speaker 1: the stock exchange. So the number of stocks on the
• 1:14:21
  Speaker 1: US exchanges that that trade with any amount of volume
• 1:14:26
  Speaker 1: UM has been cut in half since so over the
• 1:14:29
  Speaker 1: last twenty years used to be holding there just be
• 1:14:32
  Speaker 1: over seven thousand stocks that trade on the U S
• 1:14:34
  Speaker 1: stock exchanges that had enough volume to be in the
• 1:14:37
  Speaker 1: CRISP indexes that is now down to something like thirty,
• 1:14:42
  Speaker 1: So companies are no longer capitalizing themselves using private Equit
• 1:14:46
  Speaker 1: is less companies trading on the US exchanges. So you've
• 1:14:48
  Speaker 1: got you've got more advisors and more hedge funds chasing
• 1:14:53
  Speaker 1: fewer opportunities just because there were just fewer companies too.
• 1:14:56
  Speaker 1: It should be no surprise that alpha is based going away.
• 1:15:02
  Speaker 1: For the most part, there's less and less people. At
• 1:15:04
  Speaker 1: one point in time. It was in any given year,
• 1:15:08
  Speaker 1: it was never the same people, and that was pre fee.
• 1:15:11
  Speaker 1: But the numbers we used to hear was people were outperforming,
• 1:15:14
  Speaker 1: and then it became I watched that sort of drip.
• 1:15:19
  Speaker 1: Unless you're gonna tell me, I'm gonna tell you otherwise. Um,
• 1:15:22
  Speaker 1: depending what part of the market you're looking at, there's
• 1:15:25
  Speaker 1: always that part of the market that outperforms. So if
• 1:15:28
  Speaker 1: large cap stocks out perform last year, you're going to
• 1:15:30
  Speaker 1: find that few large cap active managers outperform, and if
• 1:15:34
  Speaker 1: small cap underperformed, you're gonna find that more small cap
• 1:15:39
  Speaker 1: active managers outperformed than large cap managers. On why is that?
• 1:15:43
  Speaker 1: Because the the index is a pure and the managers
• 1:15:48
  Speaker 1: are messy. So if small cap underperformed, in large cap outperformed,
• 1:15:53
  Speaker 1: and the managers are messy and they kind of bleed
• 1:15:56
  Speaker 1: off into mid cap and even some small cap even
• 1:15:58
  Speaker 1: though they're still in the morning star arge cap box.
• 1:16:01
  Speaker 1: They're gonna underperform because they're bleeding. And the index itself
• 1:16:04
  Speaker 1: is pure classic style drift leads to right that that
• 1:16:09
  Speaker 1: sort of this issue and it's not really style different
• 1:16:11
  Speaker 1: just this is that they do more of a equal
• 1:16:13
  Speaker 1: waiting approach rather than the market cap waiting. Okay, now
• 1:16:15
  Speaker 1: you get the small cap side and small cap underperforms.
• 1:16:19
  Speaker 1: But since the small cap managers are not old small cap,
• 1:16:21
  Speaker 1: they're bleed off into some mid cap you know, maybe
• 1:16:24
  Speaker 1: even a large cap or something, they're gonna pick that up,
• 1:16:27
  Speaker 1: that that style difference up, and they're going to outperform.
• 1:16:30
  Speaker 1: So in the asset class or the style that underperforms,
• 1:16:35
  Speaker 1: you will find more managers that outperform, and in the
• 1:16:37
  Speaker 1: style that outperformed, you're gonna find more managers that underperform.
• 1:16:40
  Speaker 1: That makes sense. So it's it's I see exactly where
• 1:16:44
  Speaker 1: you're you're going with that. Um let me bring this
• 1:16:46
  Speaker 1: back to John Bogel because I wanted to ask you
• 1:16:49
  Speaker 1: something I got a lot of push back to a
• 1:16:51
  Speaker 1: column where I basically said, hey, let me tell you
• 1:16:54
  Speaker 1: what John Bogel is wrong. And it wasn't that his
• 1:16:58
  Speaker 1: philosophy of indexing was wrong or his low cost, low
• 1:17:01
  Speaker 1: turnover approach was wrong. There are certain things that I
• 1:17:05
  Speaker 1: disagree with him about, and I'm finding that you disagree
• 1:17:10
  Speaker 1: with him as well. And oh, look at you. I'm gonna,
• 1:17:13
  Speaker 1: I'm gonna, I'm gonna listen. I am not. I disagree
• 1:17:18
  Speaker 1: with John on a few things. Okay, So let's let's
• 1:17:20
  Speaker 1: start with the t f s. Right. He is not
• 1:17:22
  Speaker 1: a fan of exchange traded funds because he says people
• 1:17:25
  Speaker 1: tend to use them to overtrade with Sure, he says
• 1:17:28
  Speaker 1: it's like throwing giving match to matches to an arsonist
• 1:17:32
  Speaker 1: or something like that. Um something. Yeah. Yet if you
• 1:17:38
  Speaker 1: get with him privately, he will say that there's a
• 1:17:40
  Speaker 1: handful of E t F that actually makes sense. So
• 1:17:42
  Speaker 1: you're outing him as not as anti e t F
• 1:17:45
  Speaker 1: as he claims. Here's the here's the irony of the situation.
• 1:17:50
  Speaker 1: E t F s have done more to promote John
• 1:17:52
  Speaker 1: Bogel's philosophy than anything in the last twenty five years.
• 1:17:56
  Speaker 1: So all of the robo advice, there's all of the
• 1:18:00
  Speaker 1: other advisers out there that are doing et F mainly
• 1:18:04
  Speaker 1: using beta type products to put together an asset allocation
• 1:18:08
  Speaker 1: that is promoting John bogel strategy. So the irony is,
• 1:18:11
  Speaker 1: even though John doesn't like exchange traded funds or is
• 1:18:14
  Speaker 1: said publicly doesn't like them, that product or that structure
• 1:18:20
  Speaker 1: has done more to promote his philosophy than anything in
• 1:18:25
  Speaker 1: a very long time. So he should love ets for
• 1:18:29
  Speaker 1: that reason. Let's talk a little bit about UM overseas investing.
• 1:18:34
  Speaker 1: I'm assuming your asset allocation has not just US stocks
• 1:18:38
  Speaker 1: but developed x US, emerging markets, etcetera. Bogel, not a fan,
• 1:18:45
  Speaker 1: says the currency risk offsets any gains that you'll get
• 1:18:48
  Speaker 1: from overseas investing. How how would you reconcile that with John's? Uh?
• 1:18:53
  Speaker 1: Your approach? With John's approach, and by the way, full disclosure,
• 1:18:56
  Speaker 1: I'm in your camp, I think. And that's before we
• 1:18:59
  Speaker 1: start talking about currency hedgdtfs like you can buy UM
• 1:19:03
  Speaker 1: from Wisdom Tree for Japan is pretty pure. Europe kind
• 1:19:09
  Speaker 1: of misses half of it. But um, how do you
• 1:19:12
  Speaker 1: reconcile that with Bogel? John's a brilliant guy. Here comes
• 1:19:18
  Speaker 1: some texts. Guy. What I really mean to say is, however,
• 1:19:24
  Speaker 1: I've never believed that in his approach to the fact
• 1:19:29
  Speaker 1: that while US companies are doing at least in the
• 1:19:32
  Speaker 1: SP their business overseas, therefore you getting overseas exposure. That's true,
• 1:19:37
  Speaker 1: but overseas companies are doing business with the US as well.
• 1:19:40
  Speaker 1: So I like the idea of getting more diversification in
• 1:19:45
  Speaker 1: a portfolio. Remember we talked about the US equity market
• 1:19:47
  Speaker 1: is shrinking, the number of names of shrinking, and getting
• 1:19:50
  Speaker 1: more names in the portfolio via international where things are
• 1:19:55
  Speaker 1: expanding and more names are coming on board, especially in
• 1:19:58
  Speaker 1: the emerging markets. Is it helps offset the fact that
• 1:20:02
  Speaker 1: the US equity market number of issuers are shrinking. But
• 1:20:06
  Speaker 1: in addition to that, I like the idea of getting
• 1:20:08
  Speaker 1: some currency diversification in my portfolio, even though you're getting
• 1:20:11
  Speaker 1: it sort of with US equities because they're doing business overseas.
• 1:20:16
  Speaker 1: Therefore the earnings of US companies are being affected by currencies.
• 1:20:20
  Speaker 1: This is a direct currency play, and doing rebalancing between
• 1:20:24
  Speaker 1: US and international gives you a little bit of a
• 1:20:27
  Speaker 1: rebalancing benefit between the currencies. So mathematically, John's idea, hasn't it.
• 1:20:36
  Speaker 1: It makes it sounds good. You know it's populist if
• 1:20:42
  Speaker 1: you will, But you know, from a academic standpoint, you
• 1:20:45
  Speaker 1: really want to have about international we're on the We're
• 1:20:50
  Speaker 1: more or less on the same page of your total portfolio.
• 1:20:57
  Speaker 1: So when we look around the world, I to say
• 1:21:00
  Speaker 1: Europe is about of the global equity exposure, at least
• 1:21:05
  Speaker 1: by cap you throw in that that's yours. I'm still
• 1:21:08
  Speaker 1: working on the cappuccino um. By the way, for those
• 1:21:12
  Speaker 1: of you who are listening, one of the fun things
• 1:21:15
  Speaker 1: about every time we come into Bloomberg is you have
• 1:21:17
  Speaker 1: a variety of unsweetened flavored waters, all more or less
• 1:21:22
  Speaker 1: tests taste the same. That's cherry, the other one was lemon.
• 1:21:25
  Speaker 1: It's always That's why I described this place as the
• 1:21:28
  Speaker 1: East Coast Google, because you walk in and it's just
• 1:21:31
  Speaker 1: it's kind of madness. People don't realize this, but you
• 1:21:34
  Speaker 1: see this part of the building. When Mike Bloomberg pushes
• 1:21:37
  Speaker 1: a button, it turns into a rocket and week. So
• 1:21:42
  Speaker 1: in the last five minutes we have let I got
• 1:21:45
  Speaker 1: a couple of questions that I don't wanna skip um
• 1:21:49
  Speaker 1: and that I try and ask um. I try and
• 1:21:52
  Speaker 1: ask everybody, UM, let's let's let's go to the two
• 1:21:56
  Speaker 1: two big ones and you could wax for as long
• 1:21:58
  Speaker 1: as you like on this. The first is, you've seen
• 1:22:04
  Speaker 1: a lot of changes in the industry since you began.
• 1:22:07
  Speaker 1: What do you think is the most significant and is
• 1:22:10
  Speaker 1: this for the better or worse? Or maybe I can
• 1:22:13
  Speaker 1: rephrase that, what what changes do you see have impacted
• 1:22:16
  Speaker 1: the industry for the better? And what is still out
• 1:22:20
  Speaker 1: there that what changes have impacted it for the worse? Tough.
• 1:22:26
  Speaker 1: One for the better is certainly the technology. It's made
• 1:22:31
  Speaker 1: it so much more efficient, and it really has tightened
• 1:22:35
  Speaker 1: up our ability to analyze UM portfolios, analyzed products. UM.
• 1:22:43
  Speaker 1: I think that the transparency also is better than it
• 1:22:45
  Speaker 1: used to be as well. So uh, it's made me,
• 1:22:50
  Speaker 1: made our clients, made our company, and made the whole
• 1:22:52
  Speaker 1: industry more productive. So that's that's good. What's bad? Nothing's
• 1:22:59
  Speaker 1: changed on Wall Street? Really, UM. You take a good
• 1:23:02
  Speaker 1: product like indexing, and you've got to smear it all
• 1:23:05
  Speaker 1: up by calling it something else. And you know, active
• 1:23:09
  Speaker 1: management takes something as pure and beautiful, if you will,
• 1:23:14
  Speaker 1: as you know, a straight market index fund, and and
• 1:23:17
  Speaker 1: now everything is an index. Every active management strategy that
• 1:23:21
  Speaker 1: you can think of is now an index and and
• 1:23:24
  Speaker 1: you have to add these new indexes to your portfolio
• 1:23:28
  Speaker 1: to give you diversification. It's kind of complete nonsense. So
• 1:23:33
  Speaker 1: e T s, while they've been great to promote the
• 1:23:35
  Speaker 1: idea of John Voglo's philosophy, they have also polluted the
• 1:23:41
  Speaker 1: pure concept of what indexing is. And that might be
• 1:23:44
  Speaker 1: why he's not a huge fan of e T s
• 1:23:47
  Speaker 1: is one of the reasons. So last question before we
• 1:23:51
  Speaker 1: have to send you on your way, And I asked
• 1:23:53
  Speaker 1: this everybody you started in night here, it is what
• 1:23:58
  Speaker 1: do you know today that you wish you knew when
• 1:24:01
  Speaker 1: you started out? Wow, that's a long, thoughtful pause. Yeah.
• 1:24:16
  Speaker 1: I always tell the people as I get older, I
• 1:24:18
  Speaker 1: know less. So it's just a difficult questions. Your head
• 1:24:22
  Speaker 1: is filled with so much stuff, it's harder to access things.
• 1:24:25
  Speaker 1: That's what I'm finding. At a certain point your brain
• 1:24:27
  Speaker 1: is just full and I need a backup drive. That
• 1:24:30
  Speaker 1: that's what it feels like. But there's certainly has to
• 1:24:33
  Speaker 1: be things that is part of your daily operations, your philosophy,
• 1:24:38
  Speaker 1: your thought process that would have been enormously helpful when
• 1:24:42
  Speaker 1: you began, you know, one of my clients, who is
• 1:24:44
  Speaker 1: now deceased, said to me when I started my company, Rick,
• 1:24:51
  Speaker 1: you're going to be enormously successful. I didn't. I didn't
• 1:24:54
  Speaker 1: think this. I said, well, I'm just working out in
• 1:24:56
  Speaker 1: my living room out of this old wooden desk I
• 1:24:58
  Speaker 1: pulled out of the trash can. He goes, you're gonna
• 1:25:00
  Speaker 1: be enormously successful. You have to make a decision. You're
• 1:25:03
  Speaker 1: either gonna just going to continue to work out of
• 1:25:05
  Speaker 1: your living room and have maybe sixty clients and you're
• 1:25:07
  Speaker 1: gonna earn a good living with you and your wife
• 1:25:10
  Speaker 1: and maybe one assistant, or you're gonna go out and
• 1:25:12
  Speaker 1: you're gonna build a big, multibillion dollar money management company
• 1:25:15
  Speaker 1: and you're gonna hire all kinds of people, and you're
• 1:25:19
  Speaker 1: gonna have all kinds of hr issues, and you're going
• 1:25:21
  Speaker 1: to have a business that you're gonna have to run.
• 1:25:25
  Speaker 1: And he said, you're gonna have to make a decision
• 1:25:28
  Speaker 1: at some point whether you just want to work out
• 1:25:30
  Speaker 1: of your living room and just take on the twenty
• 1:25:31
  Speaker 1: five clients and be happy, or whether you want to
• 1:25:34
  Speaker 1: build this colossal thing. And I don't know if I guess,
• 1:25:40
  Speaker 1: I what what? I what? I learned in the last
• 1:25:43
  Speaker 1: twenty five years. Is he's absolutely right. I mean, there's
• 1:25:45
  Speaker 1: nothing wrong with just working out of your living room
• 1:25:49
  Speaker 1: with twenty five clients and helping those twenty five clients,
• 1:25:52
  Speaker 1: And there's nothing wrong with going on and building a
• 1:25:55
  Speaker 1: multibillion dollar business. But um, I always thought that it
• 1:25:59
  Speaker 1: was the right thing to do back when I was
• 1:26:02
  Speaker 1: forty years old, to go out and build a multibillion
• 1:26:04
  Speaker 1: dollar business. But in fact, now that I'm fifty seven,
• 1:26:07
  Speaker 1: I think that working on in my living room with
• 1:26:09
  Speaker 1: twenty five clients seems it's not a bad idea. A
• 1:26:13
  Speaker 1: lot less headaches than running a big bus. Well, Rick,
• 1:26:16
  Speaker 1: thank you so much for being so generous with your time.
• 1:26:19
  Speaker 1: You've been listening to my conversation with Rick Ferry, founder,
• 1:26:23
  Speaker 1: chief investment officer of Portfolio Solutions. Be sure and check
• 1:26:27
  Speaker 1: out our other podcasts. Take a look at this on
• 1:26:30
  Speaker 1: Apple iTunes. Look an inch up or down you'll see
• 1:26:33
  Speaker 1: the other forty podcasts. Check out my daily column on Bloomberg,
• 1:26:37
  Speaker 1: view my regular blog at Dholtz dot com. People want
• 1:26:41
  Speaker 1: to find you um Portfolio Solutions dot com and what
• 1:26:44
  Speaker 1: is your handle on Twitter? Uh Rick Underscore Ferry is
• 1:26:49
  Speaker 1: my quitter handle, and I also have a blog website
• 1:26:51
  Speaker 1: at Rick Ferry dot com Rick Ferry dot com. You've
• 1:26:54
  Speaker 1: been listening to Masters in Business on Bloomberg Radio.