Using ETFs For High Net Worth Clients

July 27, 2015

[This article originally appeared in our July issue of ETF Report.]

As The Notorious B.I.G. once said, "mo' money, mo' problems."

High net worth clients have unique challenges in their portfolios, including the balancing act of keeping costs low and returns high, while also minimizing one's tax footprint. That's where ETFs, which tend to be inexpensive and tax efficient, can make a measurable difference.

Since 1998, Miller Investment Management has dedicated itself to serving, among others, the needs of high net worth families. Miller has used ETFs in client portfolios since 2001, citing their tax efficiency and lower expenses over mutual funds. "Their low cost is primary to us," says partner Wyn Evans.

Recently, ETF Report sat down with Evans to learn more about how the firm uses ETFs for high net worth clients.

What sets Miller Investment apart from its competitors?

I'd say our secret sauce is our Investment Strategy Committee, which meets every two weeks. The people on the committee bring diverse backgrounds to the table.

For example, a lot of our clients are taxable—basically, high net wealth families—so wealth transfer and taxation become an issue. One of the committee members, Richard Rosen, is a trusts and estates attorney. Another, Bob Peck, used to manage money for Ross Perot and the Murchisons; now he runs his own hedge fund. Ditto Paul Isaac, who runs Arbiter Partners, a long/short hedge fund that has an outstanding record. Paul Miller was one of the founding partners of the very successful firm Miller Anderson & Sherrerd, which was sold to Morgan Stanley. Larry Chimerine, our economist, used to run Chase Econometrics.

Sounds like you've got a lot of smart minds on deck.

Exactly. They're our idea generators. They're the ones who say, "Maybe you ought to take a position there," or "You ought to think about moving out of that."

Then it's our responsibility on the Portfolio Management Committee, of which I'm a part, to research those ideas and figure out how to put the plan into action. That's where ETFs come in.

How do ETFs fit into your portfolios?

Rather than buying individual securities, we almost always use pooled investment vehicles, be they ETFs, open-ended funds or closed-end funds. Every once in a while we will buy individual securities, but it's pretty rare, because we like to stay focused on the macro issues, instead of getting tied up in the weeds.

We're always struggling with how to get the best after-fee returns for our clients, and we've found that ETFs are typically lower cost than something that's actively managed. Maybe the active manager is 1%, and the ETF is 0.5%. So if you're going to use active management, the question is always: Will the active manager be able to provide enough outperformance to overcome that difference in fee?

As you might guess, in places like U.S. large-cap equities, it's difficult for them to outperform, so we tend to go more into ETFs. For example, we have a pretty big allocation to the SPDR S&P 500 ETF (SPY | A-98).

But once you start getting into sectors, sometimes it's not so difficult to find active managers who outperform. Several years ago, we decided to make a technology allocation. Vanguard has a cheap ETF product: the Vanguard Information Technology ETF (VGT | A-94). But then we looked into T. Rowe Price, and their technology funds really outperformed. So in that case, we went with the active manager. Maybe that's not what you want to hear! But it's what we did.

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