Latest / Views from 6,230 / Stop Maximizing Returns. Start Maximizing After-Tax Wealth

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Stop Maximizing Returns. Start Maximizing After-Tax Wealth · Views from 6,230

• 0:10
  Shang Approval first video1827908984: Hello, everyone portfolio construction has evolved over the years as more pressure has been put on the 60/40 portfolio, and innovation has brought more sophisticated investment strategies to retail investors, while a bigger emphasis has been placed on limiting tax
• 0:29
  Shang Approval first video1827908984: obligations.
• 0:30
  Shang Approval first video1827908984: Well, I have on an industry expert who's gonna share his thoughts a- and a very interesting take on portfolio construction and generating tax alpha.
• 0:42
  Shang Approval first video1827908984: All right.
• 0:43
  Shang Approval first video1827908984: Let's go ahead and get started.
• 0:44
  Shang Approval first video1827908984: I have already talked enough, and let's go ahead and bring on the star of the show.
• 0:49
  Shang Approval first video1827908984: I'd like to give a very warm welcome to Sheng Cao.
• 0:53
  Shang Approval first video1827908984: Sheng is a co-founder and managing partner at Dishmi Capital.
• 0:58
  Shang Approval first video1827908984: Sheng, thank you so much for coming on the show.
• 1:01
  Shang Approval first video1827908984: It's an honor to have you.
• 1:02
  Shang Approval first video1827908984: I'm really excited about this conversation.
• 1:04
  Shang Approval first video1827908984: As you know, limiting taxes, generating tax alpha is very important today.
• 1:10
  Shang Approval first video1827908984: So, um, can you go ahead and please tell us a little bit more about yourself and Dishmi Capital?
• 1:16
  Shang Approval first video1827908984: Absolutely.
• 1:17
  Shang Approval first video1827908984: And first of all, Ryan, thank you so much for having me.
• 1:19
  Shang Approval first video1827908984: I'm really excited for our conversation.
• 1:21
  Shang Approval first video1827908984: Uh, just a quick background on myself.
• 1:23
  Shang Approval first video1827908984: Um, you know, I've worked on Wall Street for 20-plus years, with the bulk of my time spent actually on the institutional asset management side.
• 1:31
  Shang Approval first video1827908984: I would say my formative years were with PIMCO in the early 2010s, uh, on the fixed income side.
• 1:36
  Shang Approval first video1827908984: I've also spent time at J.P.
• 1:38
  Shang Approval first video1827908984: Morgan and Goldman Sachs.
• 1:39
  Shang Approval first video1827908984: Uh, always had a bit of an entrepreneurial bent myself, and so, uh, during COVID, when we were all working from home, I joined a group of PIMCO colleagues and helped build an asset management firm called Simplify Asset Management.
• 1:51
  Shang Approval first video1827908984: We were the some of the first in the ETF industry to put over-the-counter and listed derivatives into the ETF wrapper.
• 1:57
  Shang Approval first video1827908984: Also worked on things like Section 351 exchanges, which we can get into more later.
• 2:01
  Shang Approval first video1827908984: Uh, but what I was seeing was that there was this democratization of some really complex, sophisticated products that can really help move the needle.
• 2:09
  Shang Approval first video1827908984: So about a year ago, I launched my firm, Dishmi Capital.
• 2:12
  Shang Approval first video1827908984: Uh, quite simply, we're an SEC-registered investment advisory firm.
• 2:16
  Shang Approval first video1827908984: Uh, and what we specialize and do for folks is we try to think, uh, very thoughtfully about things like tax alpha, alternative investing, uh, because we see there's so many really great tools and solutions out there that can
• 2:28
  Shang Approval first video1827908984: really move the needle for taxable investors.
• 2:30
  Shang Approval first video1827908984: Yeah, that's fantastic, Sheng.
• 2:32
  Shang Approval first video1827908984: I love your experience.
• 2:33
  Shang Approval first video1827908984: You started at PIMCO.
• 2:35
  Shang Approval first video1827908984: I know the team over at Simplify very well.
• 2:38
  Shang Approval first video1827908984: Great team.
• 2:39
  Shang Approval first video1827908984: You've started a great thing there.
• 2:41
  Shang Approval first video1827908984: Love it.
• 2:41
  Shang Approval first video1827908984: So let's, um, focus on Dishme.
• 2:44
  Shang Approval first video1827908984: Why did you start Dishme Capital?
• 2:46
  Shang Approval first video1827908984: What was it?
• 2:47
  Shang Approval first video1827908984: You just thought- Yeah "You know what?
• 2:48
  Shang Approval first video1827908984: Let's, let's go on my own here and- Yeah do my own thing."
• 2:51
  Shang Approval first video1827908984: Or, or what was the thinking behind starting it?
• 2:54
  Shang Approval first video1827908984: Yeah.
• 2:55
  Shang Approval first video1827908984: You know, and it comes down to a very, like, personal and visceral experience I had with my own family.
• 3:00
  Shang Approval first video1827908984: Um, when I was, you know, getting my MBA degree at UCLA in the, you know, 2015, 2014, my fiance, who's now my wife, um, was in biotech, and she had joined this fledgling startup in Santa Monica, which ended
• 3:13
  Shang Approval first video1827908984: up going public and then getting acquired by Gilead for, like, billi- billions and billions of dollars.
• 3:18
  Shang Approval first video1827908984: And I'll never forget the morning we woke up where we were these two young kids with, you know, tons of grad school debt, you know, didn't have two nickels to rub together, and overnight we became, I guess, what
• 3:27
  Shang Approval first video1827908984: you would call a high net worth individual.
• 3:29
  Shang Approval first video1827908984: Uh, along that path, you know, I always say I- we made so many mistakes because we really didn't know what we were doing, and we didn't go and seek the advice of, you know, someone who could help us
• 3:40
  Shang Approval first video1827908984: navigate this.
• 3:41
  Shang Approval first video1827908984: Um, at the time, you know, we were just thrilled and delighted.
• 3:45
  Shang Approval first video1827908984: You know, we were...
• 3:46
  Shang Approval first video1827908984: I remember it was almost euphoric when we got the news that the company was bought.
• 3:49
  Shang Approval first video1827908984: But what we didn't realize was we had actually just signed on to get on for the rollercoaster ride of our lives, right?
• 3:54
  Shang Approval first video1827908984: Because when you have a big portion of your net worth in a single stock, you get on the ups and the downs, and you can see some really big swings.
• 4:02
  Shang Approval first video1827908984: And so that experience really taught me a lot, and I spent the next 10-plus years of my life really building some products that can help, you know, things like exchange funds.
• 4:11
  Shang Approval first video1827908984: I also use tools like variable prepaid forwards.
• 4:14
  Shang Approval first video1827908984: Uh, in recent years, we've seen the rise of things like tax wear long-short.
• 4:17
  Shang Approval first video1827908984: So this whole solution set, you know, has been brought to market by all these asset management firms.
• 4:22
  Shang Approval first video1827908984: And now as advisors on the independent side, right, we have this really cool opportunity to work with this whole solution set and really help tax law advisors navigate these types of events.
• 4:32
  Shang Approval first video1827908984: Sheng, I love that.
• 4:33
  Shang Approval first video1827908984: I love that you, you know, started based on your, you know, personal experiences, your- and your wife's.
• 4:39
  Shang Approval first video1827908984: That's fantastic.
• 4:40
  Shang Approval first video1827908984: And I feel as if what you went through then, you and your wife, and, you know, have all this exposure in one stock.
• 4:49
  Shang Approval first video1827908984: You know, you, you had a liquidity event worked out well.
• 4:53
  Shang Approval first video1827908984: I feel like more and more people are experiencing that now with these AI startups and these tech startups.
• 5:00
  Shang Approval first video1827908984: Now all of a sudden they sell, they merge, they have this liquidity event, and now all of a sudden they're in flux with all this money that maybe they didn't have yesterday.
• 5:10
  Shang Approval first video1827908984: So I have a feeling your experience works very well with what's going on today.
• 5:16
  Shang Approval first video1827908984: A- absolutely.
• 5:17
  Shang Approval first video1827908984: And, you know, the, the one lesson that I really picked up was it's never too early to start planning and thinking ahead.
• 5:23
  Shang Approval first video1827908984: Um, for us, you know, in like 2015, 2016, we were engaged, two, two young kids living in an apartment.
• 5:30
  Shang Approval first video1827908984: Um, you know, we had aspirations and we had goals, right?
• 5:33
  Shang Approval first video1827908984: This was what our life was about, and we wanted to get married, we wanted to buy a home and start a family.
• 5:39
  Shang Approval first video1827908984: And in hindsight, had we planned more proactively, we co- could have probably achieved a lot of those goals and objectives in a way that was potentially more tax efficient.
• 5:49
  Shang Approval first video1827908984: You know, uh, we wouldn't have gotten surprised with the massive tax bill when we went to see our CPA at, you know, the start of the year.
• 5:56
  Shang Approval first video1827908984: Um, and so, you know, that extra ounce of planning, it doesn't take a lot of effort or time, but it can go a really long way in helping, you know, change the outcomes of these situations.
• 6:05
  Shang Approval first video1827908984: Yeah.
• 6:05
  Shang Approval first video1827908984: That's fantastic.
• 6:07
  Shang Approval first video1827908984: And you brought up, you know, taxes.
• 6:09
  Shang Approval first video1827908984: I'm sure, you know, when you get that liquidity event, let's say you sell a business or, you know, you capitalize on a, you know, being part of a business that was sold- Tax is our big impact on, on
• 6:25
  Shang Approval first video1827908984: that liquidity event and, and bringing money.
• 6:28
  Shang Approval first video1827908984: And you mentioned during your time at PIMCO, you've compared, um, today's taxable wealth management industry and the fixed income industry before Bill Gross really transformed it at PIMCO.
• 6:41
  Shang Approval first video1827908984: You state that advisors are leaving structural alpha on the table.
• 6:46
  Shang Approval first video1827908984: What similarities do you see, and why is now the right time to rethink portfolio construction for that taxable investor?
• 6:55
  Shang Approval first video1827908984: Yeah.
• 6:55
  Shang Approval first video1827908984: Yeah, absolutely, Ryan.
• 6:56
  Shang Approval first video1827908984: And, you know, just to share with, you know, your viewers, you know, it's-- I, I drew the comparison to, you know, PIMCO in the '70s where at the time bonds were a very sleepy part of, you know, the
• 7:07
  Shang Approval first video1827908984: market.
• 7:07
  Shang Approval first video1827908984: People would just buy and clip coupons and hold them to maturity.
• 7:11
  Shang Approval first video1827908984: Then along came, uh, you know, these, the scrappy group of folks who said, "Hey, why don't we actively manage this?
• 7:16
  Shang Approval first video1827908984: We can trade them.
• 7:17
  Shang Approval first video1827908984: We can try to buy them for a certain price, sell them for more.
• 7:20
  Shang Approval first video1827908984: We can roll down the yield curve."
• 7:22
  Shang Approval first video1827908984: And then as the derivatives market started evolving, they started using things like options and very, very early on things like swaps.
• 7:29
  Shang Approval first video1827908984: And this was able to create sort of the structural advantage in how they built and created portfolios.
• 7:35
  Shang Approval first video1827908984: Uh, you know, I worked there from the start of 2011 to the end of 2014, so just under four years.
• 7:39
  Shang Approval first video1827908984: But when I was there, I remember, you know, we had an equity suite, you know, at the time, uh, at PIMCO.
• 7:45
  Shang Approval first video1827908984: And what they were doing was effectively using derivatives to replicate some sort of beta or broad S&P 500 exposure.
• 7:53
  Shang Approval first video1827908984: But when you use derivatives, they can be very capital efficient.
• 7:56
  Shang Approval first video1827908984: And so let's say for every $10 of exposure in the S&P 500, you might only need to outlay two or $3, and that remaining seven or $8 can be actively managed and to buy things like, you know, investment
• 8:08
  Shang Approval first video1827908984: grade corporate bonds or, you know, agency debt or something that can outperform sort of the cost of financing.
• 8:14
  Shang Approval first video1827908984: And you end up with a exposure that looks and feels very much like the S&P 500, but is structurally set up to outperform it just by a little bit.
• 8:22
  Shang Approval first video1827908984: And so that concept always stuck with me, and we see a lot of parallels to that today in sort of the tax-ware investing world for individuals.
• 8:29
  Shang Approval first video1827908984: Yeah, it's interesting because now within just ETF wrappers, all the derivatives that are now being used in the ETF wrapper, they've become very popular, whether it's using to generate, uh, or enhance income or eliminating drawdown, uh, risk.
• 8:48
  Shang Approval first video1827908984: So it's interesting that, you know, PIMCO was doing it, you know, 10 years ago.
• 8:53
  Shang Approval first video1827908984: That's fantastic.
• 8:54
  Shang Approval first video1827908984: Absolutely, yeah.
• 8:55
  Shang Approval first video1827908984: So you suggest that many advisors still optimize portfol- portfolios primarily for, uh, pre-tax returns using traditional risk allocation or asset allocation models, whether it's 60/40 or just a, you know, efficient frontier mean-variance optimization.
• 9:14
  Shang Approval first video1827908984: How should financial advisors begin shifting their mindset toward maximizing after-tax wealth instead of simply maximizing investment returns via a 60/40 portfolio framework?
• 9:29
  Shang Approval first video1827908984: Yeah.
• 9:29
  Shang Approval first video1827908984: Yeah, absolutely, Ryan.
• 9:30
  Shang Approval first video1827908984: And I think first and foremost, you know, I would say, you know, I think you and I and most of your viewers, in fact, all of your viewers, you know, we all eat after-tax returns.
• 9:38
  Shang Approval first video1827908984: Like, the things we pay our mortgages with, you know, our kids' tuition, like our food on the table, those are after-tax dollars that we spend.
• 9:45
  Shang Approval first video1827908984: So it's very important to think through both the pre-tax as well as the after-tax lens.
• 9:50
  Shang Approval first video1827908984: And, you know, historically in the industry, at least from everything I've seen, the general portfolio construction process might look something like this.
• 9:57
  Shang Approval first video1827908984: You know, you'll sit down with your advisor, have a conversation about your goals, your objectives, your risk tolerance.
• 10:03
  Shang Approval first video1827908984: Some of that data might get plugged into some financial planning software.
• 10:07
  Shang Approval first video1827908984: Uh, they'll share a Monte Carlo simulation to make it look really fancy.
• 10:11
  Shang Approval first video1827908984: Maybe they'll share a probability number of you achieving your goals.
• 10:14
  Shang Approval first video1827908984: And they also take your starting portfolio today, and usually they show you a new portfolio which will increase the chance of you hitting your goals, right?
• 10:21
  Shang Approval first video1827908984: And so when you think about that, it's a very static process that sort of just assumes, like, this moment in time, this portfolio I'm gonna show you is gonna be the right thing for us to do for the
• 10:32
  Shang Approval first video1827908984: next, you know, three to five years.
• 10:33
  Shang Approval first video1827908984: Plus, we may maybe make some tactical adjustments along the way.
• 10:37
  Shang Approval first video1827908984: And currently, all of the inputs that got baked into this whole process, right, the capital market assumptions, those mean-variance optimization things we did, uh, those are all based on, you know, like pre-tax returns and, you know, correlations that
• 10:49
  Shang Approval first video1827908984: were sort of based on historical precedents.
• 10:51
  Shang Approval first video1827908984: So there's a lot of assumptions baked into this.
• 10:54
  Shang Approval first video1827908984: And what I'm saying is that I think, you know, that's a good process.
• 10:58
  Shang Approval first video1827908984: It's works reasonably well for most people.
• 11:01
  Shang Approval first video1827908984: But when you think reasonably well, it also leaves a lot on the table.
• 11:04
  Shang Approval first video1827908984: And so maybe a different way to think about it is to think rather than go through this static process, we should think dynamically over a period of time because our tax realization, our tax profiles are gonna evolve, right?
• 11:16
  Shang Approval first video1827908984: We should think through holistically both the asset side as well as the liability side.
• 11:21
  Shang Approval first video1827908984: You know, like, much like a pension plan might do liability-driven investing, let's think about both sides of that, right?
• 11:27
  Shang Approval first video1827908984: And then let's bring some of these new solutions that we've kind of, you know, have come to market and are accessible to most of us.
• 11:33
  Shang Approval first video1827908984: Maybe there's ways we can help, you know, augment some of those return profiles.
• 11:37
  Shang Approval first video1827908984: So there's a lot of different ways to slice and dice this, but I'm saying I think we can maybe evolve from beyond that traditional planning process into something different.
• 11:45
  Shang Approval first video1827908984: Yeah, Sheng, I think that's fantastic.
• 11:46
  Shang Approval first video1827908984: You know, at Zephyr and, you know, we focus...
• 11:49
  Shang Approval first video1827908984: I've done a lot of research.
• 11:50
  Shang Approval first video1827908984: I'm a big advocate of mean-variance optimization, the efficient front, and just, um, modern portfolio theory.
• 11:59
  Shang Approval first video1827908984: However, things have changed, just like the nine-style equity box.
• 12:04
  Shang Approval first video1827908984: Maybe it's time to move past that.
• 12:06
  Shang Approval first video1827908984: Um, things are evolving.
• 12:08
  Shang Approval first video1827908984: You know, that worked really good when it was just basic US equities, foreign equities, fixed income, and create a portfolio.
• 12:17
  Shang Approval first video1827908984: But now things have changed, so now I think it's a very good point that maybe you broaden the horizon in terms of building that portfolio, portfolio construction.
• 12:27
  Shang Approval first video1827908984: And you've come up, you've mentioned it just briefly there, come up with a three-dimensional framework, which includes time, the balance sheet, and an investment solution set.
• 12:38
  Shang Approval first video1827908984: Can you maybe talk more and walk through each, uh, each dimension, explain why considering all three together can create better client outcomes?
• 12:48
  Shang Approval first video1827908984: Yeah, absolutely.
• 12:49
  Shang Approval first video1827908984: Um, you know, I would say first, for time, you know, the reality is we are individuals that have finite time horizons.
• 12:57
  Shang Approval first video1827908984: A lot of the previous portfolio construction processes maybe were borrowed from the institutional world, like the endowment model.
• 13:04
  Shang Approval first video1827908984: You know, endowments have infinite horizons, right?
• 13:06
  Shang Approval first video1827908984: They don't fear emo- they don't feel emotions the way we do, like fear and greed.
• 13:10
  Shang Approval first video1827908984: Uh, and so we should maybe tailor the way we invest, you know, from there.
• 13:15
  Shang Approval first video1827908984: Uh, and concurrently, right, if you can imagine if you're an individual navigating an upcoming sale of a business, you might have a concentrated single stock position, or just maybe a very complex, varying, you know, tax, um, picture, you
• 13:27
  Shang Approval first video1827908984: know, over the next few years of your life.
• 13:29
  Shang Approval first video1827908984: You wanna be thoughtful around that.
• 13:30
  Shang Approval first video1827908984: You wanna plan for that, right?
• 13:32
  Shang Approval first video1827908984: Something you do this year might look a little bit different the next year.
• 13:35
  Shang Approval first video1827908984: And importantly, by doing those different things, you can really move the needle and add significant value.
• 13:40
  Shang Approval first video1827908984: Um, along the lines of the asset and liability side, you know, it, it just seems so obvious where, like, you know, we are individuals, much like corporations, that have assets and, and liabilities on both sides of the balance
• 13:52
  Shang Approval first video1827908984: sheet.
• 13:52
  Shang Approval first video1827908984: But the reality is the industry is so silent on the, on only the asset side, right?
• 13:57
  Shang Approval first video1827908984: And even within the asset side, you carve out these sub-asset classes and, you know, no one's really thinking about how should we borrow efficiently.
• 14:03
  Shang Approval first video1827908984: Everyone's sort of borrowing just in time, right?
• 14:06
  Shang Approval first video1827908984: If I wanna buy a house, oh, shoot, I should call the bank and try to figure out a mortgage.
• 14:09
  Shang Approval first video1827908984: You know, if I'm gonna buy some, buy a car, you know, I should get a car loan.
• 14:13
  Shang Approval first video1827908984: But no one's really thinking, "Well, let's proactively, structurally set up our balance sheet so that we have the flexibility to borrow at the lowest cost possible, and have that flexibility on hand for whenever we need it."
• 14:24
  Shang Approval first video1827908984: So that's the way that we think about borrowing.
• 14:27
  Shang Approval first video1827908984: Uh, and then lastly, the solution set.
• 14:29
  Shang Approval first video1827908984: You know, like, it's been really incredible the last few years.
• 14:31
  Shang Approval first video1827908984: You know, as I mentioned, things like tax-aware long-short, tax-aware trader hedge funds, the variable prepaid forwards, flex color options, SPX box spreads, you know, exchange funds.
• 14:43
  Shang Approval first video1827908984: These are now accessible to individual investors through advisors, you know.
• 14:47
  Shang Approval first video1827908984: And so they've become so much more accessible from even just five years ago.
• 14:50
  Shang Approval first video1827908984: So the toolkit has really, really greatly expanded.
• 14:53
  Shang Approval first video1827908984: Mm-hmm.
• 14:54
  Shang Approval first video1827908984: I agree.
• 14:55
  Shang Approval first video1827908984: That, uh, the solution set, like you said, is expand- Every day we're getting new exotic ETFs, which depending on where you sit, might be a little bit too exotic for some.
• 15:08
  Shang Approval first video1827908984: But again, it helps, you know, potentially build better investment, uh, portfolios for clients to help them achieve their goals- Yeah if they're used the right way.
• 15:16
  Shang Approval first video1827908984: I love your take on the balance sheet and just borrowing.
• 15:19
  Shang Approval first video1827908984: Like you said, n- I'd say 99% of us, we just say, "All right, buy a car.
• 15:24
  Shang Approval first video1827908984: We gotta go to the big banks and, and get a car loan or a mortgage," and there's not very many other options.
• 15:32
  Shang Approval first video1827908984: So I'm glad you brought that up.
• 15:33
  Shang Approval first video1827908984: And is, is there a place where clients can maybe, or- You know, borrowers can get more information- Yeah about doing different things there?
• 15:43
  Shang Approval first video1827908984: Yeah.
• 15:43
  Shang Approval first video1827908984: You know, and, and I had this conversation actually very recently, um, with an individual who's looking to buy a new home.
• 15:50
  Shang Approval first video1827908984: And I think traditionally the order of operations might be to borrow first, then buy, right?
• 15:55
  Shang Approval first video1827908984: You go to your bank, apply for a mortgage, go through underwriting, and then you can go acquire the house with a down payment and with the mortgage.
• 16:02
  Shang Approval first video1827908984: What that ends up happening is, if you do it that way, you are capped at up to 750,000 of, of, uh, deductible interest on that mortgage debt.
• 16:10
  Shang Approval first video1827908984: And so, you know, you can actually change the order of operations by buying first and then borrowing.
• 16:18
  Shang Approval first video1827908984: And if you do it that way, you end up actually...
• 16:20
  Shang Approval first video1827908984: you can actually override that $750,000 cap.
• 16:23
  Shang Approval first video1827908984: And one of the potential paths we discussed was, well, if you happen to have a brokerage account with a portfolio on there, let's take a look at that, and maybe there's ways we can de-risk that, you know, portfolio.
• 16:35
  Shang Approval first video1827908984: If it's, say, in equities or single stock, maybe we can collar the position so that it's, we know worst case this is gonna be the floor.
• 16:42
  Shang Approval first video1827908984: But once the floor is established, we can do something like trade an SPX box spread, which can allow you to borrow at pretty much near or at risk-free rates.
• 16:51
  Shang Approval first video1827908984: And it's also a very tax efficient way to borrow because you can deduct the cost of borrowing.
• 16:55
  Shang Approval first video1827908984: And then you take that, those proceeds and you buy the house.
• 16:58
  Shang Approval first video1827908984: Once you've bought the house, you can do a cash out refinance through your bank, right?
• 17:02
  Shang Approval first video1827908984: And then those proceeds are, are deductible and limited against, uh, you know, things like investment, uh, interest from investing.
• 17:09
  Shang Approval first video1827908984: And so there's just, you know, creative ways to think about the order of operations and, you know, in conjunction with your bank, with your advisor, your tax advisor.
• 17:16
  Shang Approval first video1827908984: Uh, you know, I think there's just ways to unlock some value for clients that are looking to, to undergo these major transactions in their life.
• 17:22
  Shang Approval first video1827908984: Yeah.
• 17:22
  Shang Approval first video1827908984: That's fantastic.
• 17:23
  Shang Approval first video1827908984: And like you said, Shane, e- for a lot of people they're, you know, they don't think of that way of, you know, tax alpha, right?
• 17:33
  Shang Approval first video1827908984: So lot of good options out there.
• 17:35
  Shang Approval first video1827908984: You know, reach out to somebody like yourself who can, you know, help financial advisors with those different ideas.
• 17:41
  Shang Approval first video1827908984: And you've talked about institutional investors, you know, investing like an institution in a hedge fund approach.
• 17:50
  Shang Approval first video1827908984: Their approach to portfolio construction is different than most wealth managers.
• 17:56
  Shang Approval first video1827908984: What are the biggest lessons advisors can borrow from institutional portfolio management without making portfolios overly complicated?
• 18:07
  Shang Approval first video1827908984: Yeah.
• 18:08
  Shang Approval first video1827908984: And I think that's one of the exciting things you, you touched on earlier too, Ryan, which is this proliferation of, you know, ETFs.
• 18:14
  Shang Approval first video1827908984: And, you know, I think at this point there's more ETFs than there are single stocks.
• 18:18
  Shang Approval first video1827908984: Uh, but along the way, you know, there's been some really interesting products that have democratized what's been traditional and institutional investment strategies.
• 18:28
  Shang Approval first video1827908984: Portable alpha, return stacking, you know, derivatives, hedging, liquid alternatives.
• 18:34
  Shang Approval first video1827908984: And now, you know, advisors and individual investors can potentially use these tools to really create better, more robust and optimal portfolios.
• 18:42
  Shang Approval first video1827908984: Um, I'll give you one really simple low-hanging fruit example, which is, you know, historically, we've sort of depended on stocks and bonds to be diversifying to each other.
• 18:52
  Shang Approval first video1827908984: You know, bonds are supposed to dampen the volatility, but you might have a time like in 2022 when the Fed commenced, you know, the rate hiking cycle, and bonds sold off that year, equity sold off as well, where
• 19:03
  Shang Approval first video1827908984: that sixty forty, you know, suddenly broke down.
• 19:06
  Shang Approval first video1827908984: You know, something like managed futures or trend following, you know, historically these exposures have provided really great amounts of things, what we call crisis alpha, right?
• 19:14
  Shang Approval first video1827908984: These are low to kind of, you know, low teens to high single digits, absolute returns that are uncorrelated with both stocks and bonds.
• 19:22
  Shang Approval first video1827908984: So you can imagine in a scenario like twenty twenty two, obviously, with the caveat that past performance is not indicative of future performance.
• 19:28
  Shang Approval first video1827908984: But, you know, it's delivered sort of a diversification effect, and that's made for better, more robust portfolios for investors.
• 19:35
  Shang Approval first video1827908984: So tools like that are now at pretty much everyone's fingertips, and it's an exciting time.
• 19:40
  Shang Approval first video1827908984: Yeah, and at the f- at the, you know, kind of outside looking in, they sound complicated.
• 19:46
  Shang Approval first video1827908984: They might sound like, "You know what?
• 19:48
  Shang Approval first video1827908984: How am I gonna explain this to a client?"
• 19:51
  Shang Approval first video1827908984: But there's a lot of education out there now, whether it's on a podcast or blogs about this, and, and help, like Dishme, that, you know, can help advisors understand these strategies where...
• 20:04
  Shang Approval first video1827908984: And if they're in a ETF wrapper, they're much easier to implement than, say, doing a collared spread or all these o- different- Yeah option strategies on your own.
• 20:13
  Shang Approval first video1827908984: So I love that there's all this democratization in investing.
• 20:18
  Shang Approval first video1827908984: But again, financial advisors, I say this a lot, make sure you know what you're getting into.
• 20:23
  Shang Approval first video1827908984: Do the research on these strategies so you can, um, help your clients and position them better.
• 20:31
  Shang Approval first video1827908984: Absolutely.
• 20:32
  Shang Approval first video1827908984: You know, many advisors, they focus on generating investment alpha.
• 20:37
  Shang Approval first video1827908984: You know, we here at, you know, Zephyr, we talk a lot about generating alpha.
• 20:42
  Shang Approval first video1827908984: It's very important.
• 20:43
  Shang Approval first video1827908984: But you make the compelling case that tax alpha can compound into significant lifetime wealth.
• 20:50
  Shang Approval first video1827908984: In your experience, where are advisors leaving the greatest tax opportunities untapped, and what changes could have the biggest impact for affluent clients?
• 21:01
  Shang Approval first video1827908984: Yeah, absolutely.
• 21:02
  Shang Approval first video1827908984: And, you know, uh, just in terms of alpha, you know, it's incredibly ephemeral, difficult to capture, you know, and there are some very, very smart people, people much smarter than me, who are trying to seek that out in
• 21:16
  Shang Approval first video1827908984: the form of, you know, hedge funds, venture capital, private equity.
• 21:20
  Shang Approval first video1827908984: Where I think as an advisor I can truly add value is by doing very rigorous, thoughtful diligence on these said manner, right?
• 21:29
  Shang Approval first video1827908984: In terms of investment alpha, pre-tax alpha, um, I, I don't think I'm the right person to go pick stocks and think that they're gonna outperform the S&P or something like that.
• 21:39
  Shang Approval first video1827908984: But we, we know a number of managers that are very thoughtful and have a track record of doing so.
• 21:43
  Shang Approval first video1827908984: So that's on the investment alpha side.
• 21:44
  Shang Approval first video1827908984: I think my role is more diligence, research, right?
• 21:47
  Shang Approval first video1827908984: Staying up to trends, uh, of what's going on in the industry and getting access, importantly, for our clients.
• 21:52
  Shang Approval first video1827908984: I think as advisors, though, the tax office side is something that we can really add a ton of value on.
• 21:57
  Shang Approval first video1827908984: A lot of that lies, frankly, in just the structuring of both the asset side and the liability side of a client's balance sheet.
• 22:04
  Shang Approval first video1827908984: You know, when I think of a client's, you know, assets that they hold, there's sort of two roles, right?
• 22:08
  Shang Approval first video1827908984: There's the investment role it has to fulfill, right?
• 22:10
  Shang Approval first video1827908984: Think maybe you have some core US equities, you know, that's your growth bucket, that's gonna keep up with inflation.
• 22:17
  Shang Approval first video1827908984: Uh, you know, long term, you know, over 10, 20 years, it should, you know, grow into something very meaningful.
• 22:23
  Shang Approval first video1827908984: But there's also a tax side of it, right?
• 22:25
  Shang Approval first video1827908984: And so is there a way that maybe we can restructure those core US equity exposures in a way that's gonna help you produce better after-tax results, right?
• 22:34
  Shang Approval first video1827908984: And so that's where I think advisors can really step in using some of those tools we mentioned earlier, and really help reshape the client's assets and liabilities, right?
• 22:42
  Shang Approval first video1827908984: And align it in a way that matches their overall tax profile.
• 22:46
  Shang Approval first video1827908984: Mm-hmm.
• 22:47
  Shang Approval first video1827908984: Yeah.
• 22:47
  Shang Approval first video1827908984: Going back to the investment alpha, generating alpha now is so difficult with markets as efficient as ever.
• 22:56
  Shang Approval first video1827908984: Then you have, you know, such high concentration in those 10 names, big tech, makes it very difficult to generate alpha.
• 23:03
  Shang Approval first video1827908984: So like you said, there's a lot of other ways to generate alpha that doesn't involve the investment part, which is very difficult.
• 23:11
  Shang Approval first video1827908984: So very good points.
• 23:13
  Shang Approval first video1827908984: You discussed strategies and p- earlier, like, you know, we have the long-short overlays, we have exchange fund, y- this Section 351 exchanges, which are becoming very popular now, variable prepaid forwards, and other sophisticated planning tools.
• 23:31
  Shang Approval first video1827908984: Which of these do you believe are becoming mainstream for advisors working with high net worth clients, and which maybe remain underutilized despite their potential?
• 23:42
  Shang Approval first video1827908984: I would say, Ryan, I think all of them except one that you mentioned are starting to go very mainstream.
• 23:48
  Shang Approval first video1827908984: And, you know, we talked to a number of folks, um, earlier this, uh, year in May.
• 23:54
  Shang Approval first video1827908984: My friend Brent Sullivan, you know, he had his inaugural event BASIS Northwest.
• 23:59
  Shang Approval first video1827908984: We congregated about 300-plus investors, advisors, allocators, and asset managers, and it was really exciting to hear the buzz around this stuff.
• 24:07
  Shang Approval first video1827908984: Like, everyone was thinking about after-tax as well as pre-tax returns.
• 24:11
  Shang Approval first video1827908984: Everyone was very familiar with the toolkits.
• 24:14
  Shang Approval first video1827908984: Uh, the asset managers that were there were continuing to innovate and, you know, evolve in this, uh, solution set.
• 24:20
  Shang Approval first video1827908984: So it's a really exciting time there.
• 24:21
  Shang Approval first video1827908984: I did think, though, that the one area, the one, you know, kind of solution that has not gotten as much traction, which has surprised me, is the Section 351 exchange.
• 24:30
  Shang Approval first video1827908984: Um, you know, I saw this stuff firsthand in 2021, 2022 when I was working on an ETF company.
• 24:36
  Shang Approval first video1827908984: Uh, but at this point, you know, we're hearing that there's a lot of interest kind of building up, but there's also a knowledge gap.
• 24:42
  Shang Approval first video1827908984: I think one from the advisor side, and two from the individual investor side.
• 24:46
  Shang Approval first video1827908984: You know, there's times maybe it sounds very complicated and perhaps very difficult operationally to pull off.
• 24:53
  Shang Approval first video1827908984: Uh, but a number of firms have made this very accessible.
• 24:56
  Shang Approval first video1827908984: And then for the right person, like it could be a really, really great sort of tax efficient way to offload some of these concentrated, you know, highly appreciated stock positions you mentioned earlier, Ryan.
• 25:06
  Shang Approval first video1827908984: Like, the top 10 names in the S- have grown tremendously.
• 25:10
  Shang Approval first video1827908984: You can take that, diversify it into something broader, like an S&P 500 exposure, uh, in a very tax-deferred, efficient manner.
• 25:17
  Shang Approval first video1827908984: Yeah, you're exactly right.
• 25:19
  Shang Approval first video1827908984: I've had some conversations on the 351 exchanges.
• 25:23
  Shang Approval first video1827908984: I do think that, like you said, the knowledge gap there, it might sound more confusing than what it is, the paperwork.
• 25:31
  Shang Approval first video1827908984: And again, it goes back to your personal experience.
• 25:35
  Shang Approval first video1827908984: You know what?
• 25:35
  Shang Approval first video1827908984: You might liquidate a big holding in, like, a tech company all of a sudden, or you give one share.
• 25:43
  Shang Approval first video1827908984: You're working for NVIDIA, and you've got this huge holding in NVIDIA.
• 25:47
  Shang Approval first video1827908984: It's run up.
• 25:48
  Shang Approval first video1827908984: Now, what do you do with it?
• 25:50
  Shang Approval first video1827908984: You know, you don't want this huge tax obligation, so great, uh, great opportunities there.
• 25:56
  Shang Approval first video1827908984: One point that I believe is very interesting that you have mentioned is that client portfolios should evolve around life events, like, uh, business sales, IPOs, equity compensation, retirement, you name it.
• 26:11
  Shang Approval first video1827908984: Normally, you know, I've done a lot of research on this about rebalancing and what's the best rebalancing year, quarterly, monthly.
• 26:19
  Shang Approval first video1827908984: Typically, I say rebalance on a year basis.
• 26:22
  Shang Approval first video1827908984: But you're saying do it more around life events.
• 26:26
  Shang Approval first video1827908984: How can advisors create a more dynamic planning process that proactively captures tax opportunities before these events occur?
• 26:35
  Shang Approval first video1827908984: Yeah, absolutely.
• 26:36
  Shang Approval first video1827908984: And you know, I, I, I believe so strongly that, you know, these key life events, inflection points are where advisors can really move the needle and add tremendous value.
• 26:47
  Shang Approval first video1827908984: Um, not just from, like, a pure quantitative perspective of, like, after-tax returns, but also, you know, from just support, empathy, like, you know, having prior experiences helping other clients navigate it, assuring the folks that are going through this.
• 27:01
  Shang Approval first video1827908984: Um, you know, valuable both from a quantifiable as well as qualitative perspective.
• 27:06
  Shang Approval first video1827908984: Um, but yeah.
• 27:07
  Shang Approval first video1827908984: And exactly.
• 27:07
  Shang Approval first video1827908984: You know, whether it's, you know, something as simple as, "Hey, we wanna get married," "We wanna start a family," "We wanna buy a house," or, "I'm selling my company," or, "My company just went public," you know, or, "I
• 27:17
  Shang Approval first video1827908984: wanna sell this other asset on my balance sheet," or something like that, um, these are major moments in people's lives.
• 27:23
  Shang Approval first video1827908984: And for advisors to be able to step in with not just great advice and empathy and, you know, assurance that they're gonna help navigate this process, but also bring these tools to the client, show them how we can
• 27:34
  Shang Approval first video1827908984: thoughtfully combine them to best align with their goals, their objectives, their needs, right?
• 27:38
  Shang Approval first video1827908984: That's so valuable.
• 27:39
  Shang Approval first video1827908984: And so, you know, when I think of when we thought about how we were gonna launch our firm, you know, of course, a couple of years ago, we started laying the groundwork.
• 27:47
  Shang Approval first video1827908984: It was...
• 27:47
  Shang Approval first video1827908984: You know, we wanna be able to offer a solution that is helping quantifiably add value and remove friction from a client's life.
• 27:55
  Shang Approval first video1827908984: You know, I could go out there and give general planning advice, talk about retirement, but these things are a little bit farther off in time and perhaps not as visceral.
• 28:04
  Shang Approval first video1827908984: But if we can step in at an inflection point in a client's life and really add a ton of value, I think that makes me feel like I'm adding, you know, more to the client, and the client sees
• 28:12
  Shang Approval first video1827908984: this real well.
• 28:12
  Shang Approval first video1827908984: So that's why I'm a big fan of just, like, focusing on these inflection points where we can help out Yeah, that's fantastic.
• 28:18
  Shang Approval first video1827908984: And it goes along with the whole entire planning.
• 28:21
  Shang Approval first video1827908984: Plan ahead, whether it's tax planning, financial planning, estate planning.
• 28:26
  Shang Approval first video1827908984: It's very important.
• 28:28
  Shang Approval first video1827908984: Yeah.
• 28:28
  Shang Approval first video1827908984: Shane, great conversation.
• 28:30
  Shang Approval first video1827908984: Let's finish up.
• 28:31
  Shang Approval first video1827908984: Bring out your crystal ball here real quick, and let's, uh, fast-forward five years.
• 28:36
  Shang Approval first video1827908984: What do you think will separate the leading advisory firms from everyone else?
• 28:41
  Shang Approval first video1827908984: And will tax-aware portfolio construction become a standard like financial planning is today?
• 28:49
  Shang Approval first video1827908984: And, um, you know, years ago when I started, not many advisors do- did financial planning.
• 28:55
  Shang Approval first video1827908984: Now they have to.
• 28:56
  Shang Approval first video1827908984: It's like table stakes.
• 28:57
  Shang Approval first video1827908984: Do you think tax-aware portfolio construction will be the same?
• 29:00
  Shang Approval first video1827908984: I, I think so, and I think that it's gonna be sort of table stakes, you know, five years, you know, out where, you know, individual advisors are gonna have to have a strong grasp of these solutions.
• 29:12
  Shang Approval first video1827908984: And they've just become so democratized, you know, so popular.
• 29:16
  Shang Approval first video1827908984: You know, they're being covered in the media, and so people are reading about them and learning about them, and they're gonna have questions for advisors.
• 29:22
  Shang Approval first video1827908984: So, you know, it's important for us to really get a strong understanding of how these tools work, how they can help, what are the trade-offs.
• 29:30
  Shang Approval first video1827908984: There's no free lunch, right?
• 29:31
  Shang Approval first video1827908984: There's risks, but there's also benefits.
• 29:33
  Shang Approval first video1827908984: Um, and really getting a grasp of that, I think that's gonna be sort of table stakes.
• 29:37
  Shang Approval first video1827908984: The other thing I- I'll say, too, is, you know, and I sort of obviously have a, you know, horse in this race in that we are an independent SECRA.
• 29:43
  Shang Approval first video1827908984: I do think that we're gonna continue to see growth of the independent channel, right?
• 29:47
  Shang Approval first video1827908984: Obviously, you can work with an advisor at a bank, a brokerage, you know, a broker-dealer, wirehouse, uh, as well as an independent, you know, firm.
• 29:55
  Shang Approval first video1827908984: And part of the reason is that because the product set is evolving and there's so much proliferation of just the sheer number of products, the complexity, independent advisors are very well situated to adopt these very quickly, to, you
• 30:08
  Shang Approval first video1827908984: know, be very agile and, you know, c- fast in the decision-making and ultimately help clients implement it.
• 30:13
  Shang Approval first video1827908984: So, you know, I think we'll continue to see the growth of the independent channel.
• 30:16
  Shang Approval first video1827908984: Perhaps a lot of advisors will jump in, like myself, and launch their own firms.
• 30:20
  Shang Approval first video1827908984: But it's all a very exciting time to be an advisor.
• 30:22
  Shang Approval first video1827908984: Yeah, you are exactly right, Shane.
• 30:25
  Shang Approval first video1827908984: That's a great way of wrapping up this conversation because, like you said, there-- Investment management, offering mutual funds, ETFs, just individual stocks, it's y- it's commoditized, right?
• 30:36
  Shang Approval first video1827908984: It's commoditized.
• 30:38
  Shang Approval first video1827908984: Investors, they can go, you know, Robinhood.
• 30:40
  Shang Approval first video1827908984: They can go online and get basically all those different investments.
• 30:44
  Shang Approval first video1827908984: What I think is gonna separate themselves, you know, being independent so you can offer different planning services like tax planning, tax-aware portfolio construction.
• 30:54
  Shang Approval first video1827908984: That's really how you're gonna be able to separate yourself, and I think that's where we're gonna be moving forward, you know, in five years is more the relationship building versus a transaction.
• 31:05
  Shang Approval first video1827908984: And exactly what you said, everything that we've talked about really point goes to that picture, that direction of, you know, relationship building.
• 31:15
  Shang Approval first video1827908984: Absolutely.
• 31:16
  Shang Approval first video1827908984: Shang, thank you so much for coming on the show.
• 31:19
  Shang Approval first video1827908984: Great conversation.
• 31:21
  Shang Approval first video1827908984: I learned a lot.
• 31:22
  Shang Approval first video1827908984: Really fascinating stuff.
• 31:23
  Shang Approval first video1827908984: I love talking about the different ways of building portfolios, evolving from modern portfolio theory to, you know, more tax planning, tax alpha generating, the three dimensions.
• 31:35
  Shang Approval first video1827908984: Fantastic stuff.
• 31:37
  Shang Approval first video1827908984: Really fun.
• 31:38
  Shang Approval first video1827908984: Where can our listeners get more information about Dishme Capital?
• 31:43
  Shang Approval first video1827908984: Yeah.
• 31:43
  Shang Approval first video1827908984: Um, I'm very reachable, whether it's on LinkedIn or Twitter, you can find me.
• 31:48
  Shang Approval first video1827908984: Um, you can visit our website.
• 31:50
  Shang Approval first video1827908984: Uh, I have a personal blog I run.
• 31:52
  Shang Approval first video1827908984: It's just www.taxalphashang, uh, .com.
• 31:57
  Shang Approval first video1827908984: And, you know, I...
• 31:58
  Shang Approval first video1827908984: That's where I publish some of the writing that we do, uh, as well as, you know, things like podcasts like this event, Ryan.
• 32:03
  Shang Approval first video1827908984: So folks can visit that and, and watch and read some more.
• 32:05
  Shang Approval first video1827908984: So more than welcome to reach out anytime if anyone wants to continue the conversation.
• 32:09
  Shang Approval first video1827908984: Yeah.
• 32:10
  Shang Approval first video1827908984: Fantastic, Shang.
• 32:11
  Shang Approval first video1827908984: Thank you.
• 32:12
  Shang Approval first video1827908984: And thank you everyone for listening.
• 32:13
  Shang Approval first video1827908984: You can watch all of our other episodes on YouTube and all the other platforms you listen to your favorite podcasts.
• 32:19
  Shang Approval first video1827908984: Please be sure to like and subscribe to those channels and give us a follow on LinkedIn.
• 32:23
  Shang Approval first video1827908984: Thank you very much and have a great rest of your week.