0:00

Please stay tuned for important

0:02

disclosure information at the conclusion

0:04

of this episode. Hi,

0:06

and welcome to the Longview. I'm Jeff Batak,

0:09

Chief Ratings Officer at MorningStar Research

0:11

Services.

0:12

And I'm Christine Ben's director of personal

0:14

finance and retirement planning for MorningStar.

0:16

Our guest this week is Dave Notig.

0:19

Dave is financial futurist at Vedify,

0:21

a data and research firm that focuses on the

0:23

ETF industry. as well as nascent

0:26

technologies like digital assets. Dave

0:29

Bowes decades of experience analyzing

0:31

and writing about the investment management business

0:34

both at vettify and before that at

0:36

ETF dot com. Dave's

0:38

a sought after speaker and frequently quoted

0:40

in the media on matters pertaining to the ETF

0:42

industry market structure,

0:44

and many other topics. He's also

0:46

the author of a book on ETFs called

0:48

A Comprehensive Guide to Exchange Traded

0:51

Funds. Dave received his bachelor's

0:53

degree in creative writing from the University

0:55

of Massachusetts Amherst and

0:57

his MBA from Boston University. Dave,

1:00

welcome to the Longview. Well,

1:02

thank you for having me. It's our pleasure.

1:04

Thanks so much for being with us. I

1:07

wanted to start with futurism,

1:09

your title is financial futurist. I'm

1:13

curious, knowing a lot of innovations don't

1:16

pan out. What's the framework you've applied

1:18

in trying to separate game

1:20

changers from what might be

1:23

right of the middle tweaks or what,

1:25

frankly, look to be just kinda dumb ideas.

1:28

What's the process that you've used? Well,

1:30

I mean, one of the great things about inventing your

1:32

own job title is that you generally

1:34

also get to invent how you do the

1:36

job. And so I I sort got

1:38

the double whammy here. the way I

1:40

think about things is whatever

1:43

the topic is in finance. And I think finance

1:45

is just frankly the most interesting sandbox

1:47

in sort of the human experience, which is why

1:50

I've spent my whole career in it. I

1:52

sort of feel like there's three things to

1:54

really understanding, and that's really the

1:56

point of futurism, if you will, it's

1:58

really understanding. And I think

2:00

I start by trying to think about the

2:02

past. So let's say we're just talking about, I don't

2:04

know, stock trading and the mechanics

2:06

there of, well, you got to go back and start with

2:08

the buttonwood tree. You have to really understand

2:11

how stock trading came

2:13

to be. and all of its little

2:15

evolutionary steps until you

2:17

get to the present. It doesn't

2:19

mean you have to understand every word of every

2:21

regulation written in nineteen twenty seven

2:23

or something that, but you do need to have

2:25

that context. And then

2:28

once once you have that background, then

2:30

I I sort of think about looking at a given

2:33

topic area like knowing. I don't

2:35

know whether you know that word knowing is like when

2:37

you take a part of typewriter and you lay out all

2:39

the little pieces on a piece of paper and you take a

2:41

really beautiful picture of it. I feel like

2:43

you have to do that with the topic. So again, if

2:45

we were looking at stock trading, it's

2:47

a matter of laying out okay, well, from

2:49

birth to death, what does a stock look

2:51

like? How is it used as a funding source

2:54

after an IPO? All the way

2:56

to how companies dissolve or

2:58

get rolled up inside other companies. and

3:00

all the little steps along the way.

3:02

And that just sort of seems like the

3:04

baseline. That's that gives you a clear understanding

3:06

of the state of play And then when

3:08

you think about where things going, that's when

3:10

I actually shift gears entirely and I start

3:13

thinking about people. Because people

3:15

are the only reason things ever change. Right?

3:17

People confound whatever the status

3:19

quo is. So if you've got that knoll

3:21

type rater out in front of you, you then have

3:23

to ask yourself, okay, well, who are all the different

3:25

people who need to interact with this? What

3:28

are their motivations and objectives?

3:30

What are the tools they're bringing today that

3:32

maybe they weren't bringing yesterday? what

3:34

technology is influencing how they're

3:36

gonna change their behavior. And if you

3:38

take that people component and apply it to the

3:41

system, I think you can make reasonable

3:43

projections about where the market's

3:45

going to be going. And I certainly don't think

3:47

I have a particular an

3:49

angle on the crystal ball there. I just

3:51

think that there are not a lot of folks

3:53

who ask that last question. How are people

3:56

going to confound this? and we run into

3:58

it when we have hiccups in the market all the time.

3:59

Right? When we had, you know, Robinhood or

4:02

when we've got d fire, when we have some, you know,

4:04

Vault Magetan, then all of a sudden we

4:06

start talking about people, I usually think

4:08

that's a bit late. Howard Bauchner: So

4:10

maybe to bring this into concrete

4:12

terms, Can you give us an example

4:14

of a financial innovation that you think is

4:17

going to be really important to investors and

4:19

advisors in the future yet

4:21

we're you're finding it hard to sell them

4:23

on it. And then maybe the flip side,

4:25

what's something that you think is totally

4:26

overhyped, some sort of financial innovation?

4:29

Sure. Sure. Well, I mean, I'll I'll let

4:31

me do that in reverse order. So I think I think

4:34

I think direct indexing is is

4:36

a great example of something that is both

4:38

a really useful technological

4:40

and investment innovation that also

4:42

I think got a little bit overhyped. And I think

4:44

I'm part of the problem there. Right? I got very

4:46

excited about direct indexing maybe a

4:48

decade ago. When you could start

4:51

seeing the writing on the wall for how

4:53

it was gonna start rolling down from institutional

4:55

SMAs where we never used to call it direct

4:57

indexing all the way down to the individual

5:00

investor where now you've got, you know, Schwab

5:02

rolling this out effectively at the hundred

5:04

thousand dollar account ish level. I

5:06

think that gets overhyped because people don't

5:08

realize that it's tool. It's not a panacea.

5:11

And I think that's true with a lot of innovations.

5:13

We get excited about them, and so we assume

5:15

they're going to solve all of our problems.

5:18

to flip that forward, I would

5:20

say tokenized asset management is

5:22

the one where to me, it's

5:24

extremely clear. It's where the

5:26

future of asset management heads,

5:29

effectively when we trade stocks and bonds.

5:31

Now we are trading a kind of token.

5:33

We don't call it that, but from

5:35

a notional perspective, that's what it is.

5:37

And so the really interesting stuff

5:40

being done in the decentralized finance

5:42

and crypto ecosystem bridging

5:44

over into these traditional asset classes.

5:47

I don't think it's rocket science to look at that

5:49

and say, okay, ten years from

5:51

now, the idea that we're going to be trading

5:53

and settling through DTCC

5:55

seems ridiculous to me. Right? I mean,

5:57

it's we're we're gonna be kicking these cobalt

6:00

servers until they're dead. and

6:02

we've already got better ways of doing it. So

6:04

that's one of those things where I think there's just

6:06

too much of a gap for people to cross,

6:08

for them to be able to say, well, of course,

6:10

I'll be trading tokens in my Schwab

6:12

account in ten years. To

6:14

me, it seems obvious, but I think it'll just

6:16

take some time for people to realize

6:17

it. Maybe

6:19

just stick on the topic of tokenization, which

6:21

I think is, you know, it's probably gonna

6:24

be foreign to at least the subset

6:26

of our listeners. maybe can you

6:28

try to place that in the context of,

6:30

say, a financial advisor's practice

6:32

and and how maybe in five or

6:34

ten years, perhaps it sooner than that? tokenization

6:37

will change aspects of how it is they

6:39

serve clients. Where do you think it would

6:41

be most apparent that tokenization

6:43

is is the breakthrough that you think it could

6:45

be? Well, interestingly, I

6:47

think advisors are actually gonna be one of the most

6:49

interesting cases. Right? Just like they are

6:51

for direct indexing. Right? I think almost

6:53

everything interesting seems to happen at the

6:55

the co phase of the financial advisor

6:57

relationship. So when I talk about tokenization,

7:00

what I mean is instead of buying

7:02

a share of Tesla through the New York Stock

7:04

Exchange and then going through overnight settlement

7:06

and then having that ledger entry

7:08

be moved over to my Schwab account

7:10

or my Fidelity count. Instead,

7:13

the thing that we will be trading will

7:15

actually be a digital entity

7:17

itself. Like, you can think of it as a non fungible

7:19

token except instead of a picture of a

7:21

cat, what you're referencing is

7:23

the shares of Tesla held in

7:25

some master account. This is precisely how

7:27

for instance, FTX Europe works

7:29

right now I can trade Tesla

7:31

tokens at FTX. What I'm trading

7:34

back and forth with other people is

7:36

a token which is instantaneously settled.

7:38

There's no settlement process. There's no third

7:41

party in the middle. It's it's literally just

7:43

this digital item that I can move back and

7:45

forth at the speed of light. And it

7:47

represents a share in a pool of actual

7:49

Tesla stock, which is held in a brokerage account

7:51

in Germany somewhere. That's effectively

7:53

the model I think we will end up with in

7:55

the US eventually. It's

7:57

actually sort of the model we have. Now people

7:59

don't realize it right now when you trade Tesla,

8:02

you're not really trading Tesla, you're trading

8:04

a ledger in free at Seaton Company in

8:06

New York, but most people don't know that unless

8:08

they're crazy dumb nerds like me.

8:10

So I think that these things bridge

8:12

naturally. And and once you get to

8:14

that point, when you have a tokenized Tesla,

8:17

it allows you to do all sorts of cool things

8:19

that you can do in d fire right now, like run

8:21

an entire portfolio through a smart contract

8:25

or or just instantaneously and

8:27

with extreme precision you

8:29

know, rebalance. It enables things that right

8:31

now sound ridiculous like continuous

8:33

rebalancing but that become trivial once

8:35

you're in a tokenized world.

8:36

So

8:38

for non futurists like me and Jeff

8:40

and I would guess a lot of our listeners

8:43

too, what or who you

8:45

recommend we pay attention to in order to

8:47

stay more current, but without kind of being pulled

8:49

down rabbit

8:50

holes or being left hopelessly confused

8:52

about some of those things? Well,

8:54

the rabbit holes are typically the fun part, so I'm

8:56

not sure I'm gonna try to convince anybody not

8:59

to go down the rabbit holes. But

9:01

I I think the most common

9:03

answer there is is that you

9:05

have to keep a broad view. And,

9:07

you know, I mean, that's sort of the name of your podcast

9:09

too. You have to keep a long view and you gotta keep a broad

9:11

view. I think we all live in

9:13

our own very narrow reality

9:15

tunnels based on our friends, based on our

9:17

colleagues, based on the the

9:19

media we consume, based on our references.

9:21

I mean, you know, Christine, you and I have kicked

9:23

things back and forth in Twitter before because we're

9:25

obviously both eighties kids. Right? That's a

9:27

reference set. the

9:29

reference set that we have that gives us a kind of

9:31

shorthand, and that can be incredibly

9:34

valuable, but it can also be a real

9:36

set of shackles that keep you tied into certain

9:38

ways of thinking. So I think

9:40

the thing that I do to try to really

9:42

keep an open mind is consume

9:44

media that I would never in a million

9:46

years consume if I was just doing it for

9:48

pleasure. Right? I think a lot of us

9:50

listened to the same music we listened to when we

9:52

were in college, we watched the same movies

9:54

we watch in college or at least the same

9:56

actors. I mean, think about how popular

9:58

Maverick was. Right? I mean, that's the ultimate, you

10:00

know, eighties kid throwback there. So I

10:02

force myself to listen to

10:04

only new music as much as I can.

10:07

When I do consume video content, I

10:09

try to only consume current stuff

10:11

that's not targeted at fifty six

10:13

year old white guys in New England. And I

10:15

think that that's a really important part because

10:17

even if you disagree with it, even if you don't

10:19

particularly like it, it

10:21

doesn't make it culturally irrelevant, that

10:23

actually makes it culturally more important.

10:25

Because without that, you just live it in this

10:27

ever narrowing blinders world

10:29

that I think it's impossible to see the hand in

10:31

front of your face much less what might be happening

10:34

next year or the thereafter. Wanted to

10:37

shift and talk about indexing. I don't think a

10:39

conversation would be complete with you, Dave. If we

10:41

didn't talk about indexing a subject to which

10:43

you've devoted much much

10:45

analysis and in a lot of

10:47

your career and writings years

10:49

ago, and I suppose this is a form of futurism,

10:52

you correctly foresaw that ETFs would

10:54

take market share from funds. what do you think

10:56

ultimately happens to the traditional

10:58

open end fund industry? Will

11:00

it shrink into oblivion? Or

11:02

are there some things that you think open end

11:04

funds intrinsically do better than ETFs

11:06

that'll sustain the industry? I

11:09

I think it's very much a horse's

11:11

course's kind of situation. I

11:13

think it's important to remember that

11:15

all of these wrappers, ETFs,

11:17

variable annuities, mutual funds, direct

11:19

indexing, all of these things are

11:21

just regulatory hacks. Right?

11:23

None of them is in any way a

11:25

purest form of investing.

11:27

Even the way we think about the

11:29

US stock market. That is

11:31

itself a regulatory construct.

11:33

And there are other ways of doing that.

11:35

And in other companies and countries

11:38

have other ways of doing that kind of common

11:40

ownership. So I think we get trapped with

11:42

this idea that somehow these

11:44

regulatory structures are manifest

11:46

destiny. What manifest destiny to

11:48

me is that we will

11:50

inevitably disintermediate. We

11:52

will inevitably simplify and we

11:54

will inevitably reduce costs wherever

11:56

possible. Those seem inexorable to me.

11:58

I mean, it's sort of mark Twain's death

12:00

and taxes. nothing in financial history

12:02

has ever gotten in the way of that movement. Right?

12:04

I mean, mutual funds go back to the

12:06

fourteen hundreds, and they pretty much been

12:08

getting cheaper and simpler and

12:10

easier to us ever since. So

12:12

the traditional mutual fund structure

12:14

right now has a couple of regulatory

12:17

advantages that I don't see going

12:19

away. not the least of which is fractional

12:21

share ownership, which makes things like 401K

12:23

is doable and easy, and

12:25

twelve b one fees, which allow you to fund things

12:27

like record keeping, think

12:29

that as long as those are still

12:31

real needs in the body purpose

12:33

of American investors, then mutual

12:35

funds are gonna be just fine. I think, you know,

12:38

whether it's fifteen trillion dollars in them

12:40

sitting right now. There'll be more than that next

12:42

year just based on market movement, most

12:44

likely, just because money is going to

12:46

go into the find contribution business. But I

12:48

do think the mutual funds

12:50

become more and more of a a niche

12:52

vehicle for retirement savings

12:54

and ETFs become the

12:56

if they haven't already become the default

12:59

vehicle for any other kind of

13:01

non tax deferred exposure. that could

13:03

change, of course, with the stroke of a pen. You could

13:05

change the way the IRS can taxes things. You

13:07

could change the way Arisa works.

13:09

There's there's lots of what ifs you could do, but

13:11

I don't really see much impetus

13:13

for any of that to change much in the next five to

13:15

ten years. So I think as far as I

13:17

can tell, mutual funds will remain

13:19

the default case for foreign

13:21

case. Do you think a

13:22

lot of fund companies will convert their

13:25

open end funds to ETFs it seems like

13:27

to this point, they've been kind of selective about

13:29

what they'll have to convert. Howard

13:31

Bauchner:

13:31

Yeah, it's a question of what they can.

13:34

If you're I'm just gonna pull something out

13:36

of a hat. But if you're out of Gabelli,

13:38

right? And you've got some giant mutual fund

13:40

that's well situated in a hundred and

13:42

fifty large 401K

13:44

plans, and it's got five or six different shared

13:47

classes based on which, you know, versions being

13:49

taken places. That's a nightmare

13:51

to convert into an ETF.

13:53

because somehow you have to deal with all of those

13:56

existing holders who aren't necessarily ready

13:58

to take whole shares instead of fractional

14:00

shares. You gotta solve that problem.

14:02

And certainly, those are solvable problems.

14:05

Lawyers make a lot of money solving those problems, but

14:07

there's not a lot of reason to do it,

14:09

which is why I think you've seen the path

14:11

of sort of the middle way here, if you

14:13

will, which is that easy to

14:15

convert funds, those that are not

14:17

in tax deferred plans

14:20

which often means funds that are tax

14:22

managed, which is, for instance, the DFA funds that

14:24

converted, those were actually tax aware

14:26

funds. They were designed for taxable investors.

14:28

That makes a ton of sense to convert. And that's what

14:30

we've seen most of the conversions in

14:33

is those sort of more tax aware

14:35

type strategies I

14:37

don't really see a huge need

14:39

for, you know, a Fidelity

14:41

Magellan to convert when they can simply want

14:43

a clone strategy, and that's kind of what we've

14:45

seen with most of those name above

14:47

the title active management

14:49

strategies from mutual fund business. So I I think

14:51

we're probably on the course we're gonna

14:53

see for a while. They'll definitely be acceleration.

14:55

We're already seeing that this year. Dozens and

14:57

dozens of funds have already converted this year.

14:59

Most of them have done pretty well in

15:01

terms of either gaining or holding

15:03

some assets. But at the end of the day,

15:05

people still have to wanna buy it. And

15:07

that's not always the case, you know, that the

15:09

ETF investor is a natural buyer of

15:11

a mutual fund that just happened to

15:12

convert. Let shift

15:14

and talk about direct indexing, which you

15:17

referenced earlier. So

15:19

I suppose we could view direct indexing in

15:21

a sense as a threat. to

15:23

traditional indexing in the same way that I

15:25

suppose ETFs posed a threat

15:27

which was realized to mutual funds,

15:29

traditional mutual funds we've

15:31

talked about direct indexing previously on the

15:33

podcast. You know, I I think that

15:35

we've gotten, like, some positive, some

15:37

negatives. I think that More

15:39

recently, there have been questions about whether it is

15:41

overhyped. It seems like you concur to a degree.

15:43

But to what degree do you think

15:45

direct indexing could take share

15:47

from ETFs and the same way ETFs took

15:49

share from mutual funds? I

15:51

think it's gonna be pretty much around the

15:53

edges. I the way I like to think

15:55

about this is that, you know, where are

15:57

the real value propositions in

15:59

this investment management ecosystem?

16:02

And we know the difference between

16:04

whether you're getting your, say, SMB five

16:06

hundred exposure through a direct index

16:08

or through spy or through a mutual

16:10

fund or through an annuity product or

16:12

whatever. is largely just

16:14

one of convenience and regulatory

16:16

arbitrage. So the

16:18

value is actually the SMB five

16:20

hundred. The intellectual property that goes

16:22

into that collection of securities. It has

16:24

some value. It's been adopted

16:26

in many formats. It's it's a

16:28

fungible exposure. It's traded as

16:30

options and leverage with

16:32

futures exposures. So that makes it

16:34

valuable. That intellectual property has

16:36

value. So whether that IP

16:38

ends up expressed in an index

16:40

through a direct indexing product or it

16:42

gets expressed through an active

16:44

manager who's simply referencing that as

16:46

a benchmark, the intellectual

16:48

property still has the value.

16:50

So, yeah, there you know, people

16:52

may migrate between vehicles

16:54

based on what their specific needs

16:57

are. but I don't think that that obviates the

16:59

value of intellectual property. And I think that's

17:01

true whether you're an active bond

17:03

manager or whether you're a big

17:05

index or I think that that intellectual

17:07

property is what has value.

17:09

The thing that's exciting about direct indexing

17:11

is that it really strips everything

17:13

down to the value of that IP. Right? If I've got

17:15

a direct indexing platform, let's say, I'm

17:18

with Canvas over at Franklin, and

17:20

I've done my sort of

17:22

tweaked ESG strategy or I've done my

17:24

tweaked factor based strategy there,

17:27

the value to me is not the fact that

17:29

it's direct index, it's the intellectual property

17:31

under the hood, and then some things

17:33

that I can get away with indirect indexing, I

17:35

can't elsewhere, like single stock tax loss

17:38

harvesting. So, yeah, I think there'll be some

17:40

eating around the edges, but that doesn't make

17:42

me concerned for the quote unquote, you know,

17:44

asset management industry because ultimately

17:46

the asset management industry tree

17:48

needs to be about intellectual property and

17:51

convenience. And if it's not solving either one of

17:53

those things, then your business doesn't have a reason

17:55

to exist. So

17:57

can you

17:57

discuss what you see as the key

17:59

imperatives for direct indexing, the

18:02

key advantages? Is

18:04

it personalization and and

18:06

tax optimization? Anything

18:09

else? Yeah.

18:09

So it's interesting when I first started

18:11

really digging in to the the direct

18:14

indexing space about a decade ago. It was

18:16

still pretty nascent. It was pretty much people

18:18

like parametric, which we're doing what I would call

18:20

sort of slightly tweaked big

18:22

indexes. They it wasn't so much that they

18:24

were making giant bets. If

18:26

they were just allowing you to invest say, the

18:28

SB5 hundred with some tweaks here

18:30

and there. And at the time, when I would

18:32

talk to the the bigger adviser groups

18:35

or some of the institutions that were using

18:37

that product, You would hear things

18:39

around tax slash harvesting, of course, here

18:41

and there. You'd hear about

18:43

specific tweaks that perhaps an endowment

18:46

had you know, and no fossil fuels mandate or something like that. And

18:48

that indirect indexing made it

18:50

fairly trivial to implement those

18:52

things. And I assumed that that would

18:54

case as this hit the more rank and

18:56

file advisor. What's actually

18:58

the case, which I've learned really in the

19:00

last couple years is I've gotten talk to

19:02

advisers that have really leaned in on

19:04

some of the adviser forward direct

19:06

indexing products is the number

19:08

one big use case is actually

19:10

single position management. It's

19:12

the executive who has, you

19:15

know, twenty five percent of their net worth

19:17

tied up in Google stock. and

19:19

they've got to manage that down

19:21

over time. And so, you know, they work with

19:23

their adviser to create a selling

19:25

plan. They work with an adviser to

19:27

create offsetting exposures so that they're not hyper exposed to

19:29

tech or hyper exposed to ad

19:31

services or whichever part of that business they may have

19:33

career connection to as

19:35

well. And it turns out that seems to be

19:37

the killer app for a lot of advisors,

19:39

that position management piece of it.

19:41

Now, the fact that you also get

19:43

some tax benefits because of the single stock tax

19:45

loss harvesting makes that even

19:48

better. But often it seems to

19:50

be that big concentrated

19:52

un cell able position that needs to be managed

19:54

where DI is just absolute

19:57

silver bullet. What

19:59

about the personalization piece? I hear you

20:01

loud and clear that it sounds like there may

20:03

be some other use cases

20:06

that are more common single stock management like

20:08

you talked about. But for somebody that's

20:10

trying to sort of quantify the

20:12

benefits that personalization might

20:15

confer through a direct indexing solution of

20:17

some kind. Any thoughts on

20:19

sort of how it is they should be weighing

20:21

the pros and cons of, okay, get

20:23

something that's personalized, it confers x amount of

20:26

benefit to me versus I just buy,

20:28

say, a set of ETFs off the shelf and

20:30

it's not as personalized, but maybe it's a little bit

20:32

cheaper and simpler. do you think

20:34

they they should sort of reckon with that?

20:36

I I mean, I do think that

20:38

it's reasonable to be a little bit

20:40

paranoid about the complexity. The complexity issues are

20:42

real. I remember five or six years ago when some

20:44

of these first plans started rolling out,

20:47

one of the big blockers was that a lot

20:49

of professional tax management software

20:52

that CPAs use couldn't handle more

20:54

than five hundred line items on

20:57

schedules. So so if you all of a sudden switched

20:59

over to a direct indexing account, you could

21:01

have a portfolio that now needs to be

21:03

reported with a thousand lines on

21:05

your taxes. which is a think

21:07

it's reasonable to be

21:09

cautious about some of that. The

21:11

personalization component, if it's not

21:13

for your particular financial

21:15

situation, IE, like we're talking about

21:17

a single stock rundown situation,

21:19

a particular tax issue that you're

21:21

dealing with, most of the personalization

21:23

seems to be around ESG issues,

21:25

which again, I think DI is a

21:27

fantastic way to implement that

21:29

because it really can be highly personalized.

21:32

I mean, depending on which platform you look at,

21:34

you know, I've seen versions of this where you have a

21:36

slider on you know, animal welfare. And you can that

21:38

could be the one thing that you actually skew

21:40

your portfolio on. It's just animal

21:43

welfare. You wanna make sure you don't have any companies

21:45

that are doing animal or whatever it is.

21:47

And that's a really unique level of

21:49

personalization that you're never gonna

21:51

get in ETFs. Right? There are too many

21:53

compromises you have to make making

21:55

a packaged product for everybody. Now,

21:57

whether that's worth the complexity

21:59

of managing a DI portfolio

22:02

is entirely up to the

22:04

individual. I mean, I'll I'll speak personally. I'm not sure I

22:06

have a great use case for it with

22:08

my portfolio. I think it would be clever

22:10

and interesting to be in a DI

22:13

platform, but I don't really need it. I

22:15

have the most boring portfolio in the

22:17

world. But that's not everybody.

22:19

So I I really do think it ends

22:21

up being not to be a cop out here. It's bit of a personal

22:23

decision. Right? How much does it matter to

22:25

you to be able to express your

22:27

values or your opinion directly

22:29

into your portfolio?

22:32

So you referenced

22:32

your own portfolio, Dave. I'm

22:35

curious, what's in that boring portfolio,

22:37

maybe in real general terms?

22:39

Yeah.

22:39

I mean, in general terms, it's

22:41

just incredibly cheap, boring, low

22:43

cost index mutual funds. And I've

22:45

done that intentionally, frankly, since

22:48

the mid nineties. As soon as I started playing

22:50

in the ETF business, I kind of made a a

22:52

rule that I just wasn't gonna be owning and

22:54

trading ETFs. It's strictly as a

22:56

way to end up in trouble

22:58

someday by talking something I happen to

23:00

own or not owning something I happen to like

23:02

or whatever. So and there's no reason

23:04

for that. I I have been in compliance regimes

23:06

where I all those things were monitored.

23:08

I I don't happen to be currently,

23:10

but it's just made my life easier.

23:13

So you know, it's not an

23:15

endorsement, but, you know, I've had accounts at

23:17

most of the major custodians

23:19

over the years with various companies 401

23:21

k's in personal accounts, and everything is

23:23

in, you know, sub ten basis

23:25

point cheap indexing from

23:27

stocks bonds commodities. What have

23:30

a shift in talk about governance and regulation, which

23:32

are topics that you've written about recently? In fact,

23:34

over the summer, you wrote I'd

23:36

be shocked. And these are your words. I'd be shocked if we don't see at

23:38

least some trial balloons floating in

23:40

the next year, Unseverely limiting,

23:43

or altering how asset managers vote

23:46

proxy. these. What kind of trial balloons

23:48

do you foresee? And, Nat, do you think there'll be a

23:50

positive for investors? Well,

23:52

we got the big one, which was the

23:54

index which was floated in

23:56

the Senate and will will die with

23:58

this congress. I'm quite sure. But that was the

24:00

ultimate that wasn't even trial balloon. That was

24:02

something that theoretically could have got voted

24:04

on and passed and signed. I don't think it would have happened.

24:07

But the intent of the index act

24:10

was to effectively remove

24:12

the ability of index asset

24:15

managers to vote the shares on behalf

24:17

of their clients without explicit

24:19

instructions, meaning BlackRock seats

24:21

free vanguard would simply not be

24:24

allowed to vote in, say,

24:26

Tesla's next proxy unless

24:28

they had gone out to all of their

24:30

shareholders and said, how do you wanna to vote

24:32

on this proxy question. That sounds on the

24:34

surface. It makes a good sound bite. We're giving

24:36

our votes back to investors dot dot

24:38

dot The way was actually written was

24:40

somewhat nefarious, and it was actually

24:43

designed to be unimplementable, and therefore, the

24:45

only safe harbor asset managers had

24:47

was not vote at all. which

24:49

would have taken about twenty five percent of the votes out

24:51

of circulation more in the mid cap

24:53

space. If that happened, it would

24:55

end up being tons of mid cap companies

24:57

would no longer be able to have annual meetings because

24:59

they wouldn't get proxies anymore. They wouldn't have,

25:01

you know, a quorum to be able to even hold

25:03

their meetings. So there's lots of weird unintended

25:06

consequence But that was just a

25:08

first salvo. I do think we will end up

25:11

with some sort of change to the

25:13

rules around proxy voting that hopefully

25:15

at least allow asset managers

25:17

to pull their investor base about

25:19

what they care about. in

25:21

my ideal world, they would actually have a way to

25:23

do proxy delegation. So for instance, if I'm

25:26

in a Schwab fund, I'd be

25:28

able to check a box that says, I'm

25:30

gonna have the Sierra Club be my

25:32

default voting block for

25:34

any issues that come up. If the Sierra Club

25:36

has an opinion, I wanna follow them, and if

25:38

they don't, to all vote with the House or whatever.

25:41

However, you wanna think about it. It could be, you know, Center for

25:43

America progress. Whatever you want

25:45

as your default proxy

25:47

system. That should be the way it

25:49

works. Nobody really wants to vote three

25:51

thousand proxies a year. I think that's

25:53

that's pretty pretty well understood.

25:56

but I do think that there is a middle way. Their company

25:58

is solving this in Europe, a company named Dimelo

26:00

is doing great work on this. In

26:02

the US, we've got real regular

26:04

tory issues that are not gonna get solved by the stroke

26:07

of a pen. The way the forty act is

26:09

written in my interpretation, it

26:11

actually acquire legislation,

26:13

not just regulation to change this.

26:15

And once we get to the point of having

26:17

something go through Congress, I just don't

26:19

see it happening, frankly, in the

26:21

next three to six years. I don't think there's a lot

26:23

of impetus to make it happen, but I

26:25

do think that there's a better way.

26:28

There already

26:29

sabers being rattled about Vanguard

26:31

and BlackRock accounting for such a large share

26:33

of the stock market. What do you think

26:35

is the end game there? And

26:37

could envision scenario where curbs are

26:40

perhaps placed on these firms or

26:42

indexing more generally?

26:44

Well, I certainly people want to.

26:46

Right? I mean, that's that is the stated

26:49

intent of both Ted Cruz and Bernie

26:51

Sanders. And when you get those two agree being on

26:53

something, it's definitely worth paying

26:55

attention because that tends to mean something is going to happen,

26:57

but it also tends to mean that somebody's probably not

26:59

paying attention to what's really going on on

27:01

the paper. in the middle. So I do

27:03

think that that attention is not going to

27:05

go anywhere. I think most of the

27:07

attention will focus on this issue of

27:09

voting. and governance. And I do think

27:11

that those are solvable problems.

27:13

I actually think that the right answer is

27:15

we just need to get voting way out more

27:17

in front. And if people wanna pick

27:20

asset manager a versus asset manager

27:22

b based on how they're gonna

27:24

vote. That's great. That's capitalism. Right?

27:26

Let people vote with their wallets. about

27:28

what kind of company they want managing

27:30

their money. The bigger issue or

27:32

I would just say the market structure issue

27:35

around, you know, do index providers have too

27:37

much influence into stock prices

27:39

and flows? Those are real issues.

27:41

And as much as I've spent, you know,

27:43

most of my entire career, a little

27:45

bit on defense for indexing just

27:48

because, you know, for most investors, it makes

27:50

a ton of sense and the math is there.

27:52

There are real issues with the current market

27:54

structure and the dominance, not just

27:56

of index funds, but particularly target date

27:59

funds. There's been some really fascinating

28:01

activity last couple of years, which suggests

28:03

the sort of endless bid of target date

28:05

funds and then the rebalance trades

28:07

that come in continuously

28:10

with targeted funds as they

28:12

become less and less risky over time, but new

28:14

money comes in at the front end of the

28:16

curve, that that actually has pretty

28:18

significant market impact in

28:20

terms of sort of raising the

28:22

market level in a way that doesn't make a ton

28:24

of sense from a traditional, you

28:27

know, efficient market hypothesis. So

28:29

there's a paper called the inelastic market hypothesis that I

28:31

think does a pretty darn good job with the math.

28:33

I followed the math as hard as I could and recreated

28:35

what I could of it, which was not all

28:38

of it. And those are real issues. And I think those are things that for the

28:40

next five or ten years, we're really gonna have to

28:42

wrestle with. But I I don't think they're

28:44

necessarily the kind of thing that you saw with

28:46

the stroke a pen. Right? We're not gonna

28:48

unwind the index complexes

28:50

that dominate corporate finance. I

28:52

mean, think about the idea of, like, banning the S

28:54

and P five hundred. how would you even do

28:56

that? And think about the tens of

28:59

trillions of dollars of notional in the derivatives

29:01

market that we get affected.

29:03

So I I think do anything that's stupid,

29:05

but that's what I worry about.

29:07

Wanna talk about a related

29:09

topic, which is ESG

29:12

do you think the rise of indexing is incompatible

29:15

with the promotion of a more

29:17

just sustainable world, which

29:19

I think is a up reported goal of

29:22

some who are ESG proponents?

29:24

Do I think in I

29:26

I don't think index and and

29:28

sort of ESG or indexing in

29:31

the adjust sustainable world are are

29:33

incompatible. I do think that there

29:35

is a strong role here for

29:37

active managers. let me put it that

29:39

way. So, you know, look, if you're if you're

29:41

a big believer that

29:43

investing in climate

29:45

change solutions is a long term financial win,

29:48

whether it's from a risk management perspective or just

29:50

because that's the way the rest of the world seems to

29:52

be going. they're great index ways

29:54

to approach that belief system. Right?

29:56

Whether it's buying a solar energy

29:58

ETF or a net zero ETF. So I

29:59

think you can Express ESG

30:02

opinions effectively in index

30:04

products. Where I think it gets a

30:06

little trickier is when you say, okay, we've

30:08

got a couple things we're doing at

30:10

once. We We have a social justice

30:12

angle that we believe in strongly. We've got a

30:14

risk management and corporate governance and

30:16

malfeasance thing that we think has real

30:18

impact on portfolio construction. and

30:20

long term returns. And we've got, you know,

30:22

a whole another set of things that we're trying to get

30:24

done around climate change. And you put

30:26

all those things in one package and say, and here's

30:28

your five hundred stock index. I

30:31

think that is I I people

30:33

criticize that and I think there's reason to

30:35

criticize that. I think it's trying to do too

30:37

many things at I've

30:39

likened it to, well, okay,

30:41

let's say you are a big believer in

30:43

factor investing and you think factors are the

30:45

one thing that really drive long term equity

30:47

returns and you say great, I'm gonna be in a multi factor

30:49

portfolio and I'm always gonna be invested

30:51

in eight factors. Well, guess what? You're basically in

30:53

the S and P five hundred at that point. If

30:55

you say, oh, I'm just gonna be a value

30:57

investor, great. Buy an index fund

30:59

that's buying value stocks. If you're

31:01

right, you'll be well taken care

31:03

of. But you know, a all factor, all model, all the

31:05

time portfolio is kind of pointless. And

31:07

that's where I think, if you really wanna

31:09

invest that way, active management

31:11

can be a huge benefit

31:13

to expressing that opinion. I think ESG

31:15

is similar. Right? If you've got three or

31:17

four potentially conflicting

31:20

objectives, having a person, a

31:22

team that you trust adjudicating

31:25

that seems rational to

31:27

me. So

31:28

does ESG as it's currently

31:31

defined succeed in advancing key

31:33

environmental, social and governance objectives? Or

31:35

do you think it's kind of a red herring?

31:37

I

31:38

think we're at

31:40

a crossroads is the short answer. I mean, I I'm

31:42

fine of saying that, you know, we need we're gonna have to

31:45

discover ESG two point o And

31:47

a lot of that's gonna come down to

31:49

definitions, which is really boring. But, you

31:51

know, I hate the phrase ESG.

31:53

I don't really know that many people

31:55

who love it. It is by definition bolting things together

31:58

that may not have anything to do with each

32:00

other. Right? Like whether or not you get

32:02

sued because you bribe your competitors

32:05

is utterly irrelevant to whether or not you

32:07

have a large carbon footprint, but

32:09

they're both ESG factors, one's an E

32:11

and one's a G. Right? And they're also probably irrelevant

32:13

to whether or not you've got a diverse board.

32:15

So ESG already by itself

32:17

is conflating several objectives

32:20

at once. And so that's

32:22

my biggest concern is that we've

32:24

lumped these things together much like we tried

32:26

to do with smart beta and

32:28

say it's one thing and

32:30

ESG is never gonna be one thing.

32:32

It's always going to be contentious. There

32:34

will always be people on the other side of

32:36

these trades. there should be. Right? I

32:38

mean, because from a capital perspective,

32:40

you know, if we take something as simple as

32:42

climate change, if we reward

32:44

companies ESG investing by buying

32:46

more of their stock because they do

32:48

good things. Well, guess what? We're

32:50

changing the cost of capital structure there.

32:52

And energy companies all of a

32:54

sudden should return more. That's how cost of capital

32:57

works. Right? If you increase the cost of

32:59

capital for your quote unquote

33:01

bad industry, By definition, your cost of

33:03

capital is a pretty good proxy for your

33:05

expected returns. They should make more

33:07

money. They'll be folks who are gonna buy

33:09

those things because of that. Now

33:11

that isn't necessarily how the math is working right

33:13

now. I suspect because there's a strong

33:15

ESG momentum effect, meaning more money

33:18

is chasing more money is chasing

33:20

more money. But long term, you

33:22

would expect these things to have a

33:24

certain back and forth imbalance.

33:26

I don't know whether that answered your question

33:28

at all. It

33:29

it

33:29

did. I wanted to

33:31

go back. You mentioned ESG two

33:34

point o as you put it, I think, a

33:36

moment ago. Can you walk through

33:38

that next iteration of ESG

33:40

that perhaps you envision taking shape?

33:42

It sounds like maybe one

33:44

of the differences is, whereas today those things

33:46

are kind of mushed together, the EES

33:49

and the G, perhaps in the

33:51

future, they'll be separated and

33:53

there'll be greater focus brought to bear. Do you think

33:55

that's one part of ESG two point

33:57

zero? Yeah. I

33:58

I do think it's part of

33:59

really defining different objectives

34:02

and different tools. So, like, I I mean, a great example

34:04

is what we're seeing right now between strive

34:07

and engine number one. So these

34:09

are two companies, both I mean,

34:11

the Stride has launched all their But effectively, what you're gonna end up with

34:13

is two companies owning the same

34:15

portfolio with radically different

34:18

voting perspectives. And

34:20

I actually think that that's great on the

34:22

surface. I think people should be having those

34:24

different perspectives. But we're gonna end

34:26

up calling both of those things

34:28

values based investing in some format or another. And obviously,

34:30

it's ridiculous to think that one company

34:32

that is voting to drill drill drill and the

34:34

other company that is trying to get folks on the Exxon

34:36

board to get

34:38

them to stop drilling and focus on carbon transition

34:40

that those would both be, quote unquote,

34:42

ESG funds might seem ridiculous, but

34:44

that is

34:46

in fact the vector on which those two companies are

34:48

playing the game, that strikes me

34:50

as interesting and important. And I think

34:52

those are the kinds of conversations we need

34:54

to have. Some of it will be

34:56

around voting. Some of it will be around

34:58

avoidance. I don't want my money

35:00

going to XYZ company I

35:02

disagree with. there's

35:04

pretty limited evidence that you actually move

35:06

the needle very much by not investing

35:08

by effectively boycotting your capital.

35:11

but it will make people feel better, and I

35:13

think there's value in that as well. I mean,

35:15

people are people. And I do think as

35:17

a group, as society, as

35:19

we start doing those things, we will in fact change

35:21

the cost of capital for these companies and

35:23

that does in fact move the needle. I just

35:26

as an example, I just did a really

35:28

fascinating interview that go up the next couple

35:30

weeks with the environmental defense fund in

35:32

Microsoft, talking about the

35:34

specific things that individual

35:36

companies do when they

35:38

get that better cost of capital. Right? Because Microsoft did get, you know, scores

35:40

incredibly well in most of those

35:42

metrics. So I really dug in with, like, well, what do you

35:44

do with that quote

35:46

unquote, x straw money that the

35:48

market gives you. And it turns out they do some

35:50

pretty awesome stuff. Right? They fund entire

35:52

water systems for whole countries.

35:54

Right? And and all sorts of things

35:56

like that. And Those really do move

35:58

the needle. I do think that those change

35:59

the world one step at a time.

36:02

Is it the most effective way to do it with,

36:04

you know, a a more vigorous

36:06

political response, perhaps be better.

36:08

I don't know. But this is the world we live

36:10

in. We project power through money, and we

36:12

project

36:13

money through corporations. wanted

36:14

to switch over to discuss asset allocation. As you

36:16

know, until recently, it had really paid off

36:19

to stick with the classic US

36:21

sixty-forty portfolio mix

36:24

as US stocks and bonds crushed almost everything else.

36:26

So it's a different story. Now, if

36:28

you were to tinker with the sixty-forty,

36:30

what would you add or adjust?

36:34

Well, boy, it's real different

36:35

now than it was six months

36:37

ago. I mean, that's that's really

36:39

the challenges that you

36:41

know, honestly, for almost all of my

36:44

career, we've been in a declining interest rate

36:46

environment. I mean, not entirely. You know, I mean, I

36:48

started investing in the

36:50

eighties, but certainly for most of the last twenty or thirty

36:52

years, it's it's been a pretty much a one way

36:54

ticket. And a lot of what we think

36:56

about in terms of the math

36:58

of that academic

37:00

finance looks back on that

37:02

period as gospel, right, that this is what

37:04

bonds and stocks do when they are

37:06

held together. I think that that

37:08

math is changing. And so I'm

37:10

extraordinarily reluctant to lean

37:12

into academic finance

37:14

that's really based. Most of that's actually

37:16

based on post war analysis that we then

37:18

tried to implement in the eighties and nineties.

37:21

I think we're on the verge of

37:23

a new version of academic finance.

37:25

I mentioned the inelastic market hypothesis is

37:27

one of the potential perturbators

37:30

of of how we think about

37:32

things. So I actually sort of object to the sixty forty portfolio

37:34

on fundamental grounds, which is I'm not

37:36

even sure I believe the priestess

37:38

that got us to the

37:40

sixty forty portfolio anymore. Now obviously, today, if you've got

37:42

money to put to work in a high inflation

37:44

environment where you can actually now get

37:46

real yields out of the

37:48

yield market, The math is

37:50

very different than it's ever been in my

37:52

investing lifetime, and I think it's reasonable

37:54

for investors to ask why they

37:56

own things. I think

37:58

owning bonds still makes sense

38:00

from a preservation of capital perspective

38:02

and from an income generation perspective.

38:05

but I don't think it's the case that there's

38:07

a magical mix with bonds anymore

38:09

that somehow gives you the

38:12

diversification free lunch that we all learned about in business

38:14

school. So I I think it's

38:16

gonna be a really exciting couple of years for

38:18

academic finances. We start wrestling

38:20

with the modern bond market looks like in

38:22

a world where we've got high inflation

38:24

and yields available on the table.

38:26

Things like leverage become much

38:28

more interesting in this environment than they

38:30

have been for the last twenty years. and a

38:32

lot of folks were accidentally using leverage all over

38:34

the place in their portfolios. And all of a

38:37

sudden, that's gonna get real expensive. And so I

38:39

think those kinds of things are we're

38:41

just starting to see how they pan out. I mean, just things

38:43

like how people are doing short term financing

38:45

of market making activities in the derivatives

38:48

market. That all blows up and has to

38:50

be reimagined.

38:51

You mentioned bonds, I wanted to ask

38:53

you about that. We've seen a spate of

38:55

outflows from bond funds in

38:58

recent months in a way it's unsurprising because bond funds have

39:00

been losers as rates have risen.

39:02

But have you been surprised that

39:04

investors haven't been more tempted by

39:06

higher yields?

39:08

I think we'll get there.

39:10

I think this is a natural

39:12

taking a deep breath moment

39:14

for the markets. we actually the ETF side

39:16

of the balance sheet, we've had some of the

39:18

best months we've ever had in terms of treasury inflows

39:21

all at the short end of

39:23

the curve. not a lot going into the twenties, but, you know, there are

39:25

a lot of short term bond funds or

39:27

SHY or or the, you know, two years,

39:29

three years, the five

39:32

year durations. Those seem to be catching a bit more of a bid. And

39:34

that seems more like parking than

39:36

investing. You know, people putting cash on the

39:38

sidelines as

39:40

it were but now being able to get a little bit of yield out of it. I've

39:42

been encouraged to see

39:44

the success of funds like

39:46

JPST, which is JPMorgan's short

39:48

term ETF. because, like,

39:50

that makes sense to me. Having an active

39:52

manager really managing for

39:54

maximizing yield, but keeping

39:56

the risk really low at short end of

39:58

the curve in this kind of environment. I mean, that is to me

40:00

the ultimate case for active management because this is

40:02

not a time you just want to be sitting in

40:04

the two's and then taking a nap for

40:08

ninety days. who the heck knows what could happen. I also think

40:10

that the ETF part of the fixed

40:12

income market is still so nascent. I

40:14

mean, we still have so much room

40:16

for product there's still only a

40:18

handful of bigger active managers in

40:20

the space. We're just starting to get

40:22

some of what I would consider core building

40:24

blocks for more interesting strategies.

40:26

We've had you know, the on the

40:28

run treasury funds launch where you can just get the ten year forever, basically, and they'll

40:30

rotate it for you. Bond block just launched

40:32

the target duration treasury stuff.

40:36

along with their sort of corporate bond sector funds.

40:38

Like, those to me are natural building blocks. We've

40:40

had those in the equity side of the house in

40:43

the US for twenty years at this point, so we still got

40:45

a lot of catch up to do. Howard Bauchner: So you

40:47

referenced feeling enthusiastic

40:48

about active management in

40:52

bond funds. We've seen one of the

40:54

longest stretches of outflows

40:56

from active bond funds. I think this has

40:58

been the worst twelve month period

41:00

for active fixed income flows in fifteen years. So do you think

41:02

that the same could happen to the active

41:04

bond complex that happened to

41:06

active US large

41:08

cap funds?

41:09

You know, it's it's it's always hard

41:12

to tease apart the why on

41:14

something like that. I mean, you

41:16

pointed out you know, a

41:18

couple questions ago that, you know, one of the reasons we've

41:20

seen so many outflows and bonds is because

41:22

we've been in a rising interest rate environment and

41:24

a really strongly rising interest

41:26

rate environment. and nobody wants to be holding the paper when that's

41:28

happening. So I suspect that that

41:30

is most of it, but I also

41:32

think that markets like

41:34

this are where heroes get

41:36

made. And we we know

41:38

that on the equity side of things all the time.

41:40

Right? When when March twenty twenty

41:42

rolled around, I think those of us who've been for crack

41:44

your knuckles because we're gonna nominate seven or

41:46

eight heroes off the end of this because somebody's gonna

41:48

call it exactly right. Right? Just coin

41:52

flipping. somebody's gonna buy on the day that we bought them. I I think

41:54

we're gonna do the same thing here in bonds

41:56

where we're gonna look back and say six

41:58

months, we're gonna be like, okay,

42:01

these three active bond

42:03

managers extracted every basis point

42:05

of value out of the bond market all the

42:07

way up and have waited all the downturn.

42:09

Somebody got it right. and we'll find that out. And

42:11

then those folks will get billions of dollars, and then they will probably not perform that

42:13

well for the next year. We all know how that

42:16

works. But I do think that we're gonna

42:18

see that the

42:20

biggest thing that's happened in the bond market in

42:22

my lifetime. What's going on right now? I mean,

42:24

we've literally never raised rates as fast as

42:26

we just raised rates. So and

42:28

we've certainly never done it in this sort of world of accidental

42:31

MMT and eight percent inflation.

42:33

So it's exciting. It's

42:36

a little terrifying. I'm really glad I'm not an active bond

42:38

manager, but I'm not worried that somehow as a

42:40

class, they're all gonna go get new jobs. I think we're

42:42

just gonna nominate a new

42:44

set heroes. wanted

42:46

to ask you about the adviser

42:48

market. I think you said before that

42:50

the adviser market tends to leave

42:54

the charge unfinancial innovation when it comes to things like

42:56

portfolio construction and analysis.

42:58

What's a current example where

43:00

this is playing out right now?

43:04

Well, it's sort of interesting. The advisor

43:06

tech space is just so big and so

43:08

huge. And I think that

43:11

certainly, I tend to get hyper focused on

43:13

the portfolio pieces of it because that tends to be

43:15

the most interesting. So, you know, folks that are out

43:17

there doing portfolio construction stuff or even

43:20

just connecting interest rales together.

43:22

Like, Orion has been doing a lot of

43:24

work with everyone from an on ramp

43:26

on the crypto side to other

43:28

folks that are doing weird

43:30

ESG direct indexing. And so there there are a lot of these sort of

43:32

fintech or adviser tech

43:34

aggregators that are really making this

43:36

a whole lot easier for advisers to

43:38

get access to new

43:40

stuff, to get access to, you

43:42

know, managers they might not have gotten access

43:44

to. But that's actually not where most of the

43:46

interesting developments going on. If you look at sort

43:48

of the giant quilt. Michael Kitsi has a great chart on this with, like,

43:50

every advisor tech company out

43:52

there, ninety percent of those companies don't touch

43:54

the portfolio. What

43:56

they do is they help advisors run their businesses better, whether

43:59

that's financial planning, whether that's

44:01

risk management, whether it's

44:03

just communicating with their customers. I mean,

44:05

my favorite adviser tech company I've talked to in

44:07

the last two years does one incredibly

44:10

tiny little thing. It's this company

44:12

called nudge. And all they

44:14

do is basically create an email

44:16

tickler system for clients to do

44:18

actions like update

44:20

your will. or close that account at Fidelity, you don't need anymore.

44:22

But they create an ecosystem around it

44:24

that ties into the CRM system, the

44:26

adviser works,

44:28

So all of a sudden, these actions that need to happen

44:30

outside of the advisers control

44:32

actually have a process

44:35

to get done That sounds boring. It sounds incredibly tiny.

44:37

And for every adviser I've talked to who's who's

44:40

using it, it's transformed their

44:42

entire business. because this is

44:44

the number one problem a lot of advisers

44:46

have is getting their clients to do the

44:48

things they say they'll

44:50

do. So all of those little things

44:52

around the edges of the financial advisor practice are now the ones getting

44:54

tackled by fintech companies

44:57

And I think that's super cool, particularly some of the behavioral

45:00

finance stuff that's coming down the

45:02

pike. There's, I don't know, a dozen companies

45:04

out there building either

45:06

models or education systems to

45:08

help advisers solve those problems

45:10

to have better conversations with their

45:12

clients. That to me is what gets

45:14

me excited. So

45:15

earlier in the conversation at the beginning,

45:18

you referenced emerging technologies

45:20

like Crypto and Defy,

45:22

which you think and write a lot

45:24

about in your work. what

45:26

relevance will these have to

45:28

investors and advisors in five or

45:30

ten years?

45:32

I think what

45:33

I try to do is separate the idea of

45:36

Crypto as a thing one puts

45:38

money in hoping that the numbers

45:40

go up. and crypto a set of technologies for how

45:42

money moves and interacts.

45:44

I'm sort of uninterested in

45:46

whether or not Bitcoin goes

45:49

forty thousand again. I mean, I mean, it'd be great. I

45:51

know lots of people who are invested in it, and I like my

45:53

friends to make money. That's all great. But from a

45:55

does it matter perspective, whether

45:57

this or that coin is successful or this or that

45:59

effort is successful really won't matter.

46:02

We're very much in the sort of dot com

46:04

era of tech investing and all that stuff. And there'll be

46:06

big winners

46:08

out that we can all say, if only I'd put my money in twenty years blah

46:10

blah blah, that's not what I

46:12

find interesting. What's interesting to me is

46:15

where the tech is is going in

46:17

terms of how money talks and how money moves. So the

46:19

things that are going on in smart contracts

46:21

part of the world you

46:23

know, we talked little bit about tokenization. That's a big

46:26

part of it as well. But even if we look at

46:28

things like how companies

46:30

get funded, how bonds get issued. Like, I I think

46:32

what's going on in blockchain bond

46:34

issuance is fascinating. And we've seen

46:36

examples Santander

46:39

Singapore, El Salvador. I mean, there's

46:41

there's dozens of examples now of really

46:43

interesting and innovative products that sort

46:45

of usurp the way we think

46:47

about securities. Now obviously huge regulatory issues around that,

46:49

and Gary Genthor's happy to chat with us every day about

46:52

that. But that to me is the interesting stuff

46:54

is how we make these things

46:56

interact. Right?

46:58

I mean, just you talked to an average this this one blew my mind. The

47:00

average adviser who's doing cash management for

47:03

his client directly to

47:05

the treasury mark. meaning he's either running a bond ladder

47:07

or he's like, you know, buying tens for his customers and

47:10

then rolling them out every year. It's just

47:12

basically managing

47:14

direct bonds. I've had

47:16

numerous advisers tell me that because of

47:18

platform limitations, that costs

47:20

them something on the

47:22

order of twenty basis points round trip, which is an

47:24

insanely large amount if if you're

47:26

curious, if you've never traded bonds before. It's

47:28

an obscene amount

47:30

of slippage to be able to

47:32

manage treasuries, which theoretically you can buy

47:34

for free as an individual investor through

47:36

Treasury Direct. Those types of

47:38

inefficiencies get crushed

47:40

by crypto. because there

47:42

are no slippages. Right? These

47:44

are direct one to one

47:46

transactions where everything is negotiated and

47:48

everything is

47:50

transparent upfront. So the idea that you could just usurp any of that

47:52

part of the ecosystem with

47:54

Crypto rails, I find really

47:56

exciting and I do think that that changes the

47:58

game. Now,

48:00

you know, maybe other people that get excited about twenty basis points, you

48:02

know, in our line of work where we're chasing indexes all

48:04

day, a basis point actually matters.

48:07

So those are huge gaps in the modern

48:10

market.

48:11

What caused the

48:15

crypto crash? And do you think it was foreseeable? And and also, what

48:17

do you think it portends for

48:19

the future? Well, I

48:21

mean, I'm I'm not

48:23

gonna hold myself out as the ultimate be all

48:25

end all on crypto asset prices. I think we had numerous

48:28

things going on both this time

48:30

and the last time

48:32

crypto crashed and it will

48:34

also happen the next time crypto crashes. One is that because bitcoin and

48:36

Ethereum in particular are

48:39

staked assets, meaning while

48:41

yes people own bitcoin and yes people own

48:44

Ethereum, those are also the coin of the realm

48:46

to participate in the rest of the

48:48

Defy Ecosystem them. So if you wanna

48:50

play around in some offering that

48:52

some fly by night guy is doing that you think is really

48:54

interesting or if you wanna play in the

48:56

NFT space, you wanna start writing smart contracts to do management

48:58

or whatever it is you think you're gonna do

49:00

that's interesting in crypto. The

49:02

base currency, the base meat

49:05

that you need to work with is most likely Bitcoin or

49:08

ETH. And because of that, it gets

49:10

staked into a protocol, it gets staked into

49:12

an ecosystem, and then that

49:14

thing itself then gets restated.

49:16

So it's a little bit of a

49:18

rehypothelification problem where you end up with

49:20

what essentially ends up

49:22

being leveraged in the way we measure

49:24

these things. What that means is when something breaks or simply when

49:26

something stops to be interesting at the

49:28

end of the curve like say NFTs,

49:32

and we we sort of all the air comes out of that. Well, all

49:34

this money doesn't just it's not like people sell

49:36

one thing. That sort of creates a cascading

49:40

effect And so now what used to look like a trillion dollar

49:42

ecosystem, overnight looks like a half trillion dollar

49:44

ecosystem, even though it may

49:46

be the case that very few people sold

49:48

any Bitcoin

49:50

or sold any eath, you're just unwinding these

49:52

layers of staking and these layers often

49:54

of leverage in the system. So

49:56

we shook a lot of that out

49:59

and what that meant was. A lot of people ended

50:01

up with Bitcoin, they didn't want anymore, and so they ended

50:03

up selling it. And they ended up a lot of Ethan didn't

50:05

want anymore, so they ended up selling it, and that drives

50:07

down the natural price. So I think

50:09

that's a big piece of it. That's a observation. A lot of folks have

50:11

pointed out that. And then, of course,

50:13

I I mean, it

50:16

seems reasonable to suggest that we were in a bit of a speculative bubble

50:18

as well. Right? I think we can

50:20

all see what happened during the pandemic, whether

50:24

it was with meme stocks or even sector rotation

50:26

or crypto or real estate

50:28

investing or people buying

50:30

fancy watches, there was a lot of

50:32

money flush around the system and a lot of

50:34

that money did end up in crypto and a lot of

50:36

that money has gone away. And so I

50:38

think you get those two combo platters

50:40

together of an ecosystem that relied on restaking

50:42

and leverage and a

50:44

speculative bubble coming out of the pandemic and a

50:46

lot of the money in

50:48

the system. I mean, I think the writing

50:50

was pretty much on the wall. That doesn't mean

50:52

anybody could have called it. It could have gone for another two

50:54

years or could have ended in twenty

50:56

twenty one. What's your

50:58

take on

50:58

the ETF model portfolios that a

51:00

lot of the big providers have used as

51:02

kind of conduits to their products?

51:05

seems like there are clearly benefits, but in some

51:07

ways it seems like deja vu

51:09

where advisors might put a lot of their

51:11

assets with a single fund company.

51:13

Yeah. I

51:14

I go back and forth

51:16

on the portfolio stuff. It's

51:18

a tricky one to even get your

51:21

hands around because if I I mean, I could produce a pay you

51:23

know, if we have a Vettify model portfolio by the end of this phone call,

51:25

nobody would put any money in it, but it would be another

51:27

model portfolio we have to pay

51:30

attention to. And and so

51:32

because it is this sort of unregulated

51:34

intellectual property, this idea of

51:36

what a portfolio looks like, it is

51:38

the case that every issuer has a set of model

51:40

portfolios, every brokerage firm has a set of

51:42

model portfolios, every big

51:44

adviser group often has their own

51:46

set of model

51:48

portfolios, some of which are

51:50

heavily tracked and have tens of

51:52

billions of dollars, and them and some of which have no

51:54

money attached to

51:56

them whatsoever. So I worry about model portfolios for that

51:58

reason because they are effectively

52:00

just unregulated

52:02

intellectual property. Look, I think for a

52:04

lot of advisors, they're a great

52:06

shorthand. But, like, you should

52:08

approach a model portfolio the way you would approach

52:10

any other asset management product. Ask

52:12

yourself whether or not you're a buyer of the intellectual

52:14

property. I think it's very

52:16

reasonable to be skeptical of a house

52:18

model, particularly coming from an

52:20

asset manager. that's suggesting you

52:22

put most of your money into their

52:24

specific funds. I think that's obvious what they're trying

52:26

to do. It's very transparent.

52:28

I think most of the time those are fairly well intentioned.

52:30

When I've talked to asset managers who were

52:32

doing that, they're not necessarily

52:34

thinking that

52:36

gosh, we're gonna get billions of dollars in this exact paper portfolio

52:38

that we're putting out there. We're gonna get it listed

52:40

on Envestnet, and they're gonna put their money directly

52:44

into that. Instead, a lot of those model portfolios are actually more

52:46

like education tools to show advisors

52:48

how funds fit together. And that

52:50

is a question

52:52

I get from advisors all the time. When they move into the ETF

52:54

space, I'll get DM saying,

52:56

okay, I'm a believer in ETFs

52:58

now,

52:59

the like but like, Do

53:00

I need five? Do I need fifty? Do I

53:02

need one? Like, what's the what's the

53:04

right answer? And of course, there is no magic

53:06

right answer for anybody. I

53:09

guess my concern about model portfolios would be they can

53:11

often apply complexity in unnecessary

53:14

ways because an

53:17

asset manager or even an adviser wants

53:19

to be able to show that they're quote unquote

53:21

doing something with their clients money.

53:24

And to be honest, most model

53:26

portfolios that have more than five positions in

53:28

them, probably don't need the extra

53:30

positions. They're probably there just to

53:32

look good. But, you know, really

53:34

does it make much difference if you break out

53:36

your US exposure into

53:38

six different US equity ETFs or if

53:40

you're just putting it in the one that kind of

53:42

rolls up the way you wanted it

53:44

in the first place? Probably

53:45

not. For the last question, thought we'd have a little

53:47

fun. You're an avid music fan.

53:50

what have you had on heavy rotation lately? Oh

53:52

my gosh. Well, this we got another

53:56

hour. So I'll give you

53:58

I'll give you a hot one that literally

53:59

dropped today as we're recording this, which is a new

54:02

album from Philadelphia artist

54:04

Alex g. who is

54:06

an indie musician from Philadelphia.

54:08

I'm guessing he's about thirty.

54:10

Philadelphia has been on on a

54:12

there's five or six really great bands coming out of but Alex

54:14

G just dropped that album called

54:16

God Save The Animals. Really unique

54:18

stuff, a little bit of

54:22

sort of folk rock indie stuff going on, but actually he

54:24

comes from more of a Mobi electronica

54:26

angle. And so that's that's

54:28

been my jam on pretty heavy rotation.

54:32

certainly today and the singles from that over the last couple weeks have been have

54:35

been phenomenal. Awesome, tip. Thanks so

54:37

much for that. And Dave, thanks so much

54:39

for this conversation, which has

54:41

been really fun and enlightening. Thanks for being

54:43

our guest. Gosh. Thank you so much for

54:46

having me. I wish we could do another

54:48

hour too.

54:48

Thanks so much, Dave. Thanks.

54:50

Thanks

54:51

for joining us on

54:53

the

54:53

Longview. If you could, please take a

54:55

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55:33

This recording

55:34

is for informational purposes

55:36

only and should not be considered

55:38

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55:40

are as of the date of boarding. Such

55:43

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55:43

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55:45

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55:47

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55:49

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55:51

Morningstar and its affiliates are not

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55:55

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55:57

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55:59

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56:04

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56:07

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MorningStar Inc. and is registered

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and Exchange Commission.

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Research services shall not be responsible for any trading decisions,

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damages, or

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other losses resulting from

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or related to the

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analysis use or opinions or their use. Past performance

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is not a guarantee of future results.

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All investments are such to

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investment risks, including possible loss of

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principle. Individuals should seriously consider

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if an investment is suitable for

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them by referencing their own investment

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objectives, and risk profile before

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making

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any investment decision.