[This article appears in our May 2018 issue of ETF Report.]
Located in a suburb of Philadelphia, Mainline Private Wealth is an RIA that works mainly with high net worth individuals to deliver high-level financial planning, with comprehensive reporting. The firm’s average client size is $5 million. Gary Droz is Mainline’s managing director, with 30 years of experience. In his role, he oversees the firm’s strategic initiatives.
Tell me a little bit about your background and Mainline Private Wealth.
I’ve been an advisor for 30 years, which is a long time. I’m unique in one respect, which is that I’ve never worked for a brokerage firm. When I started my career, I was one of the first independent IAs maybe in the country. And I [always charged] transparent asset-based fees for my compensation. I was there at the beginning of almost every part of the IA industry. There were no IAs when we started. You either worked for Merrill or J.P. Morgan or Morgan Stanley—they were the advisors.
So I had a small firm in Pittsburgh; small meaning about $75-80 million in assets. We formed a new IA in 2012 in Philadelphia. Since then, we’ve grown about sixfold in terms of assets under management and gross revenues. We’ve grown rapidly over the last five or six years.
*RAUM refers to “regulatory assets under management”
AOA refers to “advised on assets”
What drew you to ETFs?
My interest in ETFs began literally at the dawn of the ETF industry. I was using a separately managed account platform that trained me to benchmark by using what was called the style-blended benchmark. William Sharpe developed the whole concept of style orientation; so, large growth, large value, small growth, small value, international and emerging markets—those are core Sharpe categories.
This firm trained me to develop a blended benchmark based on the actual portfolio composition. Clients then began to expect that the benchmark would be conveyed in this way; meanwhile, the firm lost its way performancewise. I would present this style-blended benchmark and quarter after quarter the portfolio would underperform by around 3%, which made me look incredibly stupid to my clients.
Around that time, in 2000, iShares introduced the real game-changing platform. The Russell 1000 growth and value, Russell 2000 growth and value, emerging markets and global developed funds all came out at the same time. It seemed perfect for me—I’d never be under the benchmark because I’d be the benchmark.
Literally the week the iShares came out, I started to migrate my clients from separately managed accounts to ETFs. I was so far ahead of the game in terms of where the industry is now, I was accused of being a moron: “How can you be right? Everybody else is doing anything but that!”
Long story short, the market sort of came toward me. So my experience with ETFs is long. Before that iShares platform came out, there were really only two ETFs—there was the SPDR S&P 500 ETF Trust (SPY), and the PowerShares QQQ Trust (QQQ) was very popular, because it tracked the Nasdaq-100. That was not that interesting to me, because I couldn’t allocate across the whole spectrum; with iShares, you could.
How do you approach investing with ETFs?
I’m a huge believer in asset investing. This is just my personal opinion, but whenever there’s an article written about the downside of ETFs, I think it’s written by firms that have a vested interest in separately managed accounts or fee generation.
We use, with one exception, cap-weighted indexes. We’ve looked at a lot of the smart beta. The only one we like is low vol, low beta. And we use some of that, but we like to have a preponderance of the assets be cap-weighted.
