Advising Same-Sex Couples With ETFs

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

A Vietnam vet and graduate of both Stanford and Harvard Business School, Norman Boone founded Mosaic Financial Partners in 1987, right at the genesis of the financial planning industry. He had no clients, no assets and two small kids to take care of, but with determination and dedication, Boone built a successful practice over the next three decades. Today Mosaic boasts $600 million in assets under management and 20 employees.

"I think what sets us apart is that we help people put money in context," said Boone. "People almost always already have the answers they need; they just haven't realized it yet, or figured out how to put the individual pieces together."

Another way Mosaic sets itself apart? It proudly markets itself as an LGBT-friendly firm, with financial planner Steve Branton specializing in the particular financial challenges same-sex couples face. "We as a firm try to do everything we can to not only be sensitive to lesbian, gay, bisexual and transgender (LGBT) issues, but to actively support the community," said Boone.

Recently, ETF Report sat down with Boone to discuss the shifting financial landscape for same-sex couples, how ETFs can help LGBT investors and, of course, how Mosaic implements ETFs in its portfolios.

How do you use ETFs at Mosaic?
We were very early adopters of ETFs. We started using them in 2001 or 2002, because they just made so much sense. They’re typically less costly to trade, you can trade them intraday and their tax treatment is typically much more favorable than with mutual funds. You can also do block trading, which is attractive. And if you want to, you can get very specialized with ETFs: If you want to invest in, say, Indian small-caps, there’s an ETF you can use.

There are some operational challenges with ETFs versus mutual funds, however. One of the things that has us a little edgy is the flash crash from a few years ago, when suddenly a couple of ETFs traded at prices that had nothing to do with their underlying net asset value (NAV).

It only happened for a short period of time, but if we’d had in a market order, we could have gotten really hurt. We tend to always put limit orders on ETFs when we trade, but those have their own problems. There’s a three-day wait to get your cash, rather than a one-day wait with mutual funds, and so forth.

So it’s this balance. We try to be thoughtful about what’s going to be best for the client. Sometimes mutual funds are the best option. Sometimes ETFs are the best call. We’re agnostic about it.

How do you use ETFs in your clients’ portfolios?
We tend to be strategic, rather than tactical in our investing. In our portfolios, I’d say we probably use about 10-20 ETFs across various segments or in various ways. There’s a similarity of holdings across our portfolios—not necessarily of allocation, but of holdings—because we believe that if we find a product that’s better than what we’re currently using, then all our clients should have access to it.

What are some of the ETFs you use in your portfolios?
One that we like is the iShares Core MSCI Emerging Markets ETF (IEMG | A-99). That’s different than the iShares MSCI Emerging Markets ETF (EEM | B -98), in that IEMG includes both large- and small-cap emerging stocks. EEM is mostly large stocks. That makes EEM more liquid, so it’s easier to trade in and out of; but since we don’t trade in and out, we’re less concerned about that.

Costwise, though, IEMG is 50 basis points less expensive than EEM. So since we’re not active traders, if we have to pick, we’ll go with IEMG, so we can get more diversification and at less cost.

Do you use any ETNs?
We use two, in particular. One is the Elements Rogers International Commodity Total Return ETN (RJI | C-47). We use that when we want to hold commodities but only taxable money is available, since the ETN has some attractive tax elements to it.

The other one we use is the JPMorgan Alerian MLP ETN (AMJ). We like how AMJ tracks its index better than if we were just using straight equities, and we’re comfortable with the associated credit risk.

Tell me a little about your typical clients.
They range in assets. Our biggest client today is probably about $30 million in net worth, and our smallest client is probably my cousin, who has about $200,000-300,000. Our average portfolio size is about $2.2 million.

You also deal with many LGBT clients.
We do. We as a firm try to do everything we can to not only be sensitive to LGBT issues, but to actively support the community.

Do you think that’s easier to do with you being located in San Francisco? San Francisco has a long history of visibility and support for the LGBT community.
Certainly being in San Francisco is helpful, but it’s not like there’s a deficit of LGBT investors in New York or Los Angeles or Nashville or anywhere else. And there aren’t too many firms, even in San Francisco, that broadcast openness and advocacy for LGBT investors. Certainly the political and social climate here is very supportive of the community, though, so we see it as an opportunity for growth.

Are there ways in which LGBT investors differ from your other clients?
By and large, we see folks with no kids and dual incomes, so they tend to have pretty good money on hand. And in our experience, LGBT clients do show greater concern for what they’re investing in. They care if they’re investing in companies that are supportive of the LGBT community. What you might call “socially responsible investing” matters to many of them.

With the Supreme Court recently legalizing same-sex marriage on a federal level, how will business change for you from here on out?
I don’t know that it necessarily simplifies things, but it does make the problems that same-sex couples face more similar to those of the larger population. Now helping same-sex couples doesn’t require as much of a unique understanding of laws and regulations, or how you manipulate the differences between states. Estate planning, health insurance—these really aren’t the issues that they were before.

Do LGBT investors still have unique financial concerns then?
I’d say there are still issues of transition. For example, same-sex couples will not necessarily be working for a company that’s “enlightened,” though that’s less likely to happen in the Bay Area than in, say, Omaha. So there are just some transition issues in helping clients know what their rights are, and what they have a right to expect.

But LGBT investors face many of the same questions as any other investor, or any other couple: Do we get married or not? What if we get divorced? How do I make sure my partner’s taken care of in case of death or disability? Will we have enough money to retire together comfortably?

At the same time, they often need help thinking through these issues, because they’ve grown up in a culture where they couldn’t even consider marriage as a possibility. So the amount of thought they’ve given to these considerations, and the way they’ve had to think about them, is all different. Educating them on what the issues are and what their choices may be is an incredibly important part of the process. You have to be aware and sensitive to the fact that how they approach these life choices is often very different.