Wealth/Stack 2019: Live Blog

September 08, 2019

[Editor's Note: Time stamps are in PT]

That's the end of his talk, and the end of our live blog of Wealth/Stack 2019. Thanks for following along in real time, and we'll see you next time!

10:31 AM: "I don't think we need subscriptions to solve this NP problem," he says. "I think we need the Amazon Prime model."

With Amazon Prime, you don't get anything for it day one. But the more you use it, the more you discover from it: videos, free shipping, and so on. This is how Nadig thinks that financial advice is going to go.

10:28 AM: He brings up Grove, which has been bought by Wealthfront. Grove sent funds to Facet Wealth that tries to provide the family office experience. Very few of these services have anything to do with AUM. And the question becomes, how do you get paid?

The answer is subscription fees, like Netflix, Peloton  or Schwab. But these people aren't helping clients understand whether or not they should convert their house into an AirBNB. "It's a band-aid" over these automated services.

10:25 AM: Here are the more interesting things he's hearing from advisors. Home ownership: the trend is away from home ownership. AirBNB is changing the home equity market and real estate income management. "That's an NP problem," he says.

Education is another. Not saving for education, per se, but, where do you go, how do you decide that, whether they should get a degree at all, because of student loans and how they fit within the potential unemployment spectrum?

Others: having babies, taxes, buying cars, insurance, bill payments, etc. "Family office stuff," he says. "But it's not."

10:22 AM: You can do a lot of work on trying to think about behavioral finance, but you're still doing the math wrong, says Nadig, because you're trying to think about process and systems. One size does not fit all.

He brings up direct indexing, which creates "an illusion of being super tailored for the individual," he says. But this is not the interesting things he's hearing from advisors.

10:19 AM: Now Nadig is taking a digression into math and the P=NP problem. There are math problems that are reasonable to execute and are easy to scale (P); and there are math problems that are hard to execute and brutally complex when scaled (NP). Investing and advice are P and NP problems. Investing is easy to scale, easy to execute.

Advice is not. "People are messy, human creatures," he says. It's hard to scale advice, hard to scale execution. It's an NP problem. He puts up a quote about the advisory business: "This would be so much easier without the clients."

10:14 AM: So the industry's reaction to all this? The fee wars. But it's boring. "If I see this on one more conference agenda, I'm going to become a farmer," he says. "Again: solved problem."

What this leads to is a panic among active managers. Even the biggest active managers don't want to be in the investment management business anymore. Robo advisors are coming in and democratizing asset management and making it super-cheap as well.

"If you're a stock jockey," says Nadig. "Get out of the business." The business that's going to make you money, he says, is advice.

10:11 AM: "Active management is a fad that has run its course," he adds. Active managers don't beat their bogeys. And investors have overwhelmingly chosen passive products.

Smart beta hasn't moved the needle much. It's hard to find "growth-y" growth funds that aren't just momentum funds in disguise; value-y value ETFs are easier to find, but still tough. So you end up with "bizarre benchmark-hugging funds." He puts up a chart of MTUM and USMV: The returns year to date are almost entirely the same.

"Investors aren't that dumb," he adds. "They aren't putting a ton of money into these products."

10:07 AM: Welcome back for our final live-blogged session of Wealth/Stack 2019: "The Next-Gen Advisor: Why Investing Is Boring And Advice Is Sexy," a talk given by our very own Dave Nadig.

He admits he rewrote his entire speech last night, because he heard so many great ideas at the conference. But the first thing he says: "Investing is pretty dull. It's fundamentally a solved problem." He mentions we have a bunch of products that solve problems, a functioning regulatory regime and so on.

5:26 PM: Audience question: What's the likelihood of a real deal done with China?

Arone says a real deal will get done, but that the time horizon will be a lot longer than anybody expected. Both sides have an incentive to strike a deal.

5:23 PM: First question from the audience: What impact has QE had on our current environment?

Boockvar says that QE has failed in the objective of creating economic activity, as opposed to just creating a wealth effect. It didn't do much for people who didn't own those assets already.

Arone adds that QE has already caught up with us. All the policies that are designed to spur inflation aren't working: "I don't think there's a path back, fiscal or monetary policy, to the good ole days of 4%."

5:20 PM: Next question: Are there particularly difficult questions clients are asking you?

Arone says clients are very curious about the presidential election and how it's going to impact the economy. Its impact about portfolios will be minimal, he says, but people are still asking.

Boockvar brings up the negative rate environment. "In 4,000 years, we've never had it," he said. "There's no playbook for it. It's difficult to see what the ripple effects of them are."

Arone says that the argument was that we would see breakaway inflation. We have seen that inflation, he says; we've seen that across all assets, everywhere.

5:17 PM: Boockvar says Thursday's ECB meeting will be "hugely crucial." He says that Europe and Japan have realized the damage that quantitative easing has done to their economies. The question now is whether the hawks or Drahgi win out.

The transition out of negative rates will be a massive shift, he adds. It could be "consequential" for the world's bond markets.

5:13 PM: Massa asks: What's your most contrarian macro outlook?

Boockvar answers, "emerging Asia"; meaning, not just China, but also Singapore and India and other parts of the emerging parts of the region.

Arone answers, "U.S. financials." They're massively unloved, he says, but they're trading at a massive discount to the market, but their earnings and operations are looking pretty good.

Saccocia answers, "the U.S. housing market." She calls out single-family rentals, and adds that the housing stock in the U.S. has been underbuilt since the financial crisis.

5:10 PM: Massa asks, "What levers are left to pull on the fiscal stimulus side?" Saccocia says there are very few. Fiscal stimulus has historically been what has pulled us out of recession. An infrastructure bill would be the most popular way, but it's unlikely to pass before the election, she says. "It's going to be difficult for us to count on the U.S. government to pull us out of a recession," she adds.

5:05 PM: Moderator Annie Massa asks: What advice should you give a client who's worried about a bear market, besides stay invested? Saccocia answers first: "We try to think about short-term impacts that could curtail long-term plans," she says, and that people should think about adding liquidity into the portfolio in a limited fashion to address those impacts.

Boockvar agrees. "Try to have a year or so of liquidity set aside," so regardless of whatever tweet there is, your short-term needs will be met. He also cautions to tilt toward investments that are more cheaply valued. "Be prepared psychologically to deal with the downturn," he says.

Arone says his view is that, in bear markets, quality typically does pretty well as does low volatility. If you're concerned about that, think about moving up in quality in both your equity and fixed income portfolios.

5:00 PM: The topic shifts to the Hong Kong political situation and whether it'll play into the trade war. Saccocia says that her concern is that with the continued tension we see in Hong Kong coincident with the discussions of trade agreements, it would paint us in a bad light if we celebrate a resolution of the trade war while an authoritarian government takes over what used to be a sovereign land.

The topic shifts to politics and the presidential election next year. Arone believes that Trump is likely to be reelected, especially if he's facing a progressive Democrat. Boockvar brings up the Senate. If the Republicans keep the Senate, while Democrats get the House, then the change won't be so radical. But if the Democrats take Congress and the White House, that will be a big change.

4:55 PM: Our last live blog panel of the day is "The 2020 Macro Panel: How To Read The Tea Leaves" with Michael Arone, Peter Boockvar and Shannon Saccocia.

The first question pertains to the Fed. Boockvar says that he believes the Fed is full of very smart people, but that when they decide to raise or lower rates, it has more to do with how the economy is doing than anything else.

Arone says "lowering interest rates are like potato chips; you can't just have one." He sees more interest rate lowerings on the horizon, likely because of global fundamentals. The Fed is trying to protect the U.S. right now from "forces outside the U.S. sneezing and the U.S. catching a cold."

12:10 PM: Nadig asks the final question, "Is private equity in a bubble?" Lindzon answers that we have a bubble, but it's for rich people; the retail investor hasn't paid the price.

Housel says that the big loser is the employees of the firm. The private investor will get their money back, but the employees are the ones who are hurt when the bubble crashes.

Lindzon brings up a category called "pre-wealth," that helps employees get equity inside their own unicorns. We're going to see movement to help workers get some liquidity in the five or 10 years before the company goes public.

12:05 PM: Question from the audience: How do we differentiate between tech that's truly awful vs. truly groundbreaking? Housel says, "Hindsight." If you think of it in VC terms, you're going to make the vast majority of your returns on a small minority of your holdings.  The vast majority of them are going to fail.

If you have to deal with clients under $100,000, and you're not recommending a robo, you should be, says Lindzon: "Help them move up the food chain."

12:00 PM: The topic shifts to "the true use" of AI to replace investment management. "How much of it is real and how much of it is what quants have been doing all this time?" asks Nadig.

A lot of times there's not a lot of firm definitions on what AI means, says Housel, "so it's just a marketing term."

Shriner adds that we don't have the data infrastructure in place to actually use AI. Until we can get disparate systems talking to each other, talking about using AI is mostly just marketing.

Lindzon says AI is mostly ridiculous, but what isn't ridiculous is relationships and trust. So you have a choice: "You can either be not online, totally, or be completely online." The point of this business is trust, he adds. "I think the next stage of advisement is helping your clients do these new, innovative things."

11:55 AM: Nadig asks about how you think about valuations of new technologies. Shriner says it depends on the type of tech you're talking about and the time over which you're talking it. He brings up crypto. You don't have a lot of use cases on bitcoin, says Housel, so how do you value it effectively?

"I think valuations are crazy," says Lindzon. He brings up first-mover advantage for Uber, Robinhood, which has helped them but "just because you're first to market doesn't mean you're going to win." He cautions new investors to welcome large seed money, but not to chase these sorts of deals.

Housel adds that "the increase in capital is out of control" for private equity markets. The little VC funds are desperate for deals; they just want to write a check. So they end up with valuations that don't always make sense.

11:50 AM: "We're reimagining UI, reimagining business model and trust," says Lindzon about how technology is changing the advice industry. "I don't trust Jamie Dimon," he says, adding that he trusts FinTwit folks more. "I think the investment advisor business is the best business to be in in the next 30 years. I think we're building an investment generation."

"Where do you think the man/machine interface is?" Nadig asks Shriner. Shriner answers, "Most people lean heavily toward machine: they can 'solve that' with an algorithm." Workflow is something that can be automated, agrees Lindzon.

"That sounds boring," says Nadig.

"What's wrong with boring?" says Lindzon.

11:45 AM: Back to the live blog, now with "Radical Future: What The Smart Money Is Betting On," moderated by Dave Nadig and featuring Morgan Housel, Tripp Shriner and Howard Lindzon.

Housel starts off by saying, "The first generation of technology sucks." But then it gets better and disrupts, and there's a rebellion against it from the people whose livelihood it disrupts. "The only tech that people ever jumped on board for immediately was the polio vaccine."

"That's true with the biggest innovation in the financial industry in the past 50 years: the index fund," he adds, saying that, "of course if you're a portfolio manager, you're going to push back against that."

8:50 AM: Last question. Time for the panelists' ETF predictions for the next 12 months.

Rosenbluth says he believes active equity ETFs will be the big gainers.

Johnson says the overwhelming majority of flows will go into low-cost, boring, cap-weighted funds.

Balchunas says you'll see more ETF closures than launches.

Kashner says we'll see more downside protection products come to market.

Hougan says we'll see a meltdown in the active fixed income mutual fund market.

Nadig says we'll see increased focus on corporate governance from investors.

8:50 AM: Lydon brings up the Michael Burry's allegation that passive investing is destroying price discovery and thus the markets. "Literally every data point he points to is wrong," says Nadig. He brings up the fact that correlations are not collapsing; more price discovery is happening than ever before.

Balchunas adds that there's a perception that passive investors are "weak hands" who will flee the market the moment it wobbles. That's just not true, he says. "I've yet to see evidence that index investors are the first ones to panic and head for the hills."

8:47 AM: Hougan says bitcoin has stabilized. Rosenbluth's eyes pop. "Did you say stabilize? Bitcoin?" Hougan says that volatility has gone down significantly over the past several months.

Bitcoin "feels like very expensive therapy," says Kashner.

8:45 AM: Now the topic moves to bitcoin ETFs. A lot of the hurdles preventing an ETF's approval have gone away, says Hougan. He demurs on predictions, but "I will say we're much, much closer."

He also brings up that institutional money is still flowing into digital assets, through non-ETF products. "A couple hundred million dollars a week are going into these other channels."

"I think every advisor out there has a client who has asked them about crypto," he adds. "And they want to have an answer on hand."

8:40 AM: The topic shifts to non-transparent active ETFs. "I think this is a solution in search of a problem, and one that ETF investors don't face," says Johnson. This is for active managers who don't want to give away their proprietary strategy, he says. "Frankly, they're flattering themselves if anybody cares."

In ETFs, active managers can only invest in so many things, he says. "Why would you want to get active management with handcuffs on?" Also, active managers when they enter ETFs forfeit their ability to close their fund.

"It's easy to look at a room full of advisors and investors and ask who is this product for?" says Nadig. "But this structure is for institutions who still have enormous allocations to actively managed mutual funds who desperately want to manage their liquidity."

"It's easy for us to forget there is more money in active equity mutual funds than in passive funds," adds Rosenbluth. "They would love to keep the same product they already have, except they'll pay less and have it in an easier way."

8:33 AM: Thematic investing is really picking up, says Rosenbluth. Instead of having to choose between Amazon.com and Pets.com, advisors can just buy a diversified basket of stocks.

Thematic investing has always been popular, says Johnson. "The ETF graveyard is littered with shiny ideas." He brings up the shipping ETF, the whisky ETF. "Just know the risks of what you're getting into."

"I think of thematic ETFs as behavioral release valve for your clients," says Hougan. "This gives them a relatively safe way to not blow themselves up, but still give them a way to participate in interesting corners of the market."

8:28 AM: The topic switches to ESG. Kashner says that in this space, there are clear signs of investor interest and the fee war. She brings up Ilmarinen's seeding of the SUSL and USSG earlier the year.

Lydon asks, "Will there ever be demand?" The panel laughs. "There is demand," says Rosenbluth.

Nadig brings up the fact that $13 trillion of institutional dollars are tied to ESG mandates. He says we're going to see growth in bespoke institutional ETF products, like SUSL and USSG, and in retail interest in ESG-wrappered products.

Hougan says he's surprised that we haven't seen any reskinning of traditional ETFs with an ESG overlay, as Larry Fink hinted at in his shareholder letter last year.

8:23 AM: "The better question is, 'Should advisors be buying the AGG?'" says Balchunas. It's incredibly easy to beat the AGG, he adds.

Johnson says you have to remember why people buy bonds: to diversify equity risk. "Should you use your bond portfolio for alpha generation?"

Kashner agrees: "Maybe performance-chasing in the bond market isn't the best idea."

8:20 AM: The topic shifts to fixed income, and whether it's OK that investors are 'splitting out' the AGG. 

"It's important not to lose sight of the fact that in fixed income markets, you still see solid performance," says Johnson. "The other piece is, too, fixed income managers can only pull so many levers (credit and duration) and to the extent you can pull those on your own, it becomes a decision of active discretion. Do you want to outsource that active discretion to a manager? Or do you want to own it?" We're also seeing higher use of fixed income ETFs among active managers, too, he adds.

"I think this has been horrible for most advisors," disagrees Nadig. "The ETF market got this exactly wrong. The best thing you could do over the past 18 months is move to the absolute farthest duration possible. But investors did the exact opposite; they moved to the shortest space. It's been an absolute bloodbath."

8:15 AM: "The fee war is as real in the smart beta space as anywhere else," adds Kashner. "Smart beta might actually be smart, if you paid only 3 basis points for it."

"That makes it no different than active management, though," says Johnson.

"It never was," says Kashner.

"Smart beta has become synonymous with defense," adds Nadig. "We have seen some growth in that space, but it's been entirely in the defensive sector, products that are explicitly saying we'll keep you out of trouble in rocky markets."

8:13 AM: Hougan predicts that the money going into USMV will flee once the market shifts, because people don't realize that they're also equally exposed to momentum with that product. Smart beta flows in general have been anemic this year.

Nadig pops in to say the shift isn't into beta products, per se. It's into low cost. "There has been a huge change in investor behavior; it's just into 3, 4 basis point products."

8:10 AM: "ETFs are a swiss army knife," says Johnson. "They've grown because they've benefited from the substitution effect away from individual securities." But ETFs have also benefited from securities lending activity, he says, where create-to-lend activity exists to satisfy short interest, not long. "Trying to divine anything about investor sentiment based on ETF flows is awfully difficult."

8:00 AM: We're back! First up: "The Battle Of The ETF Pundits," featuring Matt Hougan, Ben Johnson, Eric Balchunas, Elisabeth Kashner, Todd Rosenbluth, and our very own Dave Nadig. Moderator is Tom Lydon.

The first question goes to Kashner about setting the scene for ETFs in 2019. Most flows have gone into broad-based, low cost beta ETFs, she says, but she also mentions USMV, a factor ETF that FactSet's research has shown actually meets its low vol objective. "I'm not a fan of smart beta, but we ran the numbers, and it works," she says. "Flows have actually gone to a product that works!"

5:00 PM: Questions from the audience. "How do you view the counterpoint of risk and luck when solving the retirement income problem?" Schrager explains how timing is everything when it comes to retirement. "You want to lock in those lucky times," she says. When you meet your goals, take the risk off the table and put it into a fixed income portfolio, then maybe put in some discretionary market in the markets, if you want to.

"Is there a field you haven't researched, but would like to?" Schrager answers that there's a bunch. "Once you heard how this community manages their risk, then you just want to know how they all do it."

4:55 PM: Now Schrager is talking about horse breeding, and how the industry is going about it all wrong. "You're definitely not going to be able to engineer the next Secretariat," says Schrager. "But you can on average create a horse that will win more often."

As she tells an anecdote about horse breeding "teasers," the room is in stitches.

4:50 PM: More on risk: "We've set people up to think in terms about wealth, instead of income," says Schrager. "If you know how much you need in retirement, and you've met that, then there's no need to stay in risky markets beyond that."

She talks about fixed income investing, and how when investors retire, they should move their portfolios into longer-duration instruments instead of short-duration Treasuries, for example, so that they're less exposed to interest rate risk. 

4:45 PM: Now the conversation has moved to risk. "There's a lot of evidence that people who take a lot of risks get good at it," says Schrager about professional poker players.

"He just sees risk everywhere," says Schrager about Richard Burton, who read her dissertation and with whom she later worked. "When you start seeing risk everywhere, it really changes your world view."

4:30 PM: First up: "An Economist Walks Into A Brothel..." where Ritholtz's Blair DuQuesnay interviews author and economist Allison Schrager. Schrager first discusses her economic research on brothels, including financial literacy and lessons on negotiation skills with the employees there.

4:00 PM: Welcome to the ETF.com live blog of the first Wealth/Stack conference! The "by advisors, for advisors" conference, organized by mega-RIA Ritholtz Wealth Management, aims to bridge the gap between technology, investment management and practice management.

Over the next 2 1/2 days, we'll be reporting live from the event, bringing you practical tips and the latest insights from some of the smartest minds in the advisory business. Our coverage starts later today with the 4:30 p.m. PT panel, "An Economist Walks Into A Brothel ..." Keep checking back for more!

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