Next Wave Of Financial Advisors

Here are nine advisors who are embracing ETFs and taking innovative approaches.

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Reviewed by: Heather Bell
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Edited by: Heather Bell

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

Next Wave of Advisors

Sophia Bera: Financial Advice for the Next Gen

Gen Y Planning isn’t your typical advisory firm. But maybe it’s about to be.

For starters, founder Sophia Bera works almost exclusively with millennial investors between the ages of 25-35. Only a handful of her 43 clients are over 40.

Furthermore, though Gen Y Planning is based in Minneapolis, Bera takes on clients from around the country. Even as many advisors struggle to adapt to online platforms and smart devices, Bera has embraced next-gen technology, keeping in contact with her clients predominately over Skype and email.

“I wanted to help people like me and my friends—younger professionals who didn’t have time to come into a financial planner’s office,” said Bera, who worked at several traditional RIAs before founding Gen Y Planning in 2013.

Even her fee structure is unusual. Most advisors make their money by charging 1% of a client’s total assets, incentivizing them to chase higher and higher net worth clients. Bera, however, charges clients an upfront flat fee to create an initial financial plan, followed by a monthly subscription fee for her advice on how to meet their financial goals. This fee structure allows Bera to work with clients of any asset level, including younger clients with six-figure salaries who simply may not have saved up much money yet.

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It’s a bit unorthodox. But Bera isn’t interested in doing things the way they’ve always been done.

Like an increasing number of advisors, Bera only uses all-ETF portfolios for her clients. “I like ETFs because the cost to own them is so low,” she said. “I can’t control the stock market, but I can control the cost of funds.”

Unlike many advisors, however, she’s embraced the robo-advisor trend, turning to Betterment Institutional to handle the details of portfolio construction and management.

Outsourcing portfolio management to a robo advisor, she says, frees her up to focus on guiding millennials through their unique financial challenges, including paying off student loans and credit card debt, buying first homes or navigating marriage and divorce. “I believe investing can be commoditized, but good financial planning can’t be.”

As time goes on, says Bera, we’ll see more and more firms like hers begin to emerge, particularly those that rely on robo advisors. “Robo advisors are here to stay,” she noted. “And I think traditional advisors should be scared if they place all their value on giving investment advice only. People want comprehensive financial planning; they don’t want to just pay a manager $10,000 on a $1 million portfolio anymore without that added value.”

Next Wave of AdvisorsJosh Brown: Leveraging Social Media

In the financial services industry, it’s rare for an advisor to attribute their success to their writing skill, but for Josh Brown, CEO of Ritholtz Wealth Management, that’s the case.

“The blog led to everything. If I didn’t start the blog, I don’t know what I would be doing,” said Brown, aka “The Reformed Broker,” which is also the name of his blog. Started in 2008 while he was still a broker, the blog has led to 120,000 Twitter followers, several books including “Backstage Wall Street” and hosting CNBC’s “Halftime Report,” among his many media appearances.

“Five years ago, the question was, ‘Josh, how do you have so much time to blog?’ Nobody asks that question anymore, because it’s understood that the blog is the centerpiece of everything I do,” he said. “It’s where people looking for an advisor can get a sense of how I think about the markets and whether I would be a good fit for them.”

Beyond the publicity and recognition his blog has brought him, it’s also brought him clients as well as a tool for communication with the firm’s existing clientele.

“There are some clients who just like to have the ability to check in on what our thoughts are without it having to be a full-blown meeting or phone call or email exchange,” Brown said. “That’s a really powerful part of our value-add.”

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Brown’s casual writing voice and proclivity for humor may seem at odds with the conservative and compliance-obsessed world of the financial industry, but he embraces the regulations and rules that must be followed as a registered investment advisor.

“To give a lot of credit to the regulators, they did the right thing with social media. They gave clear guidelines and didn’t stomp down on it immediately,” he said. “They allowed it to develop. People who want to use social media to pump stocks or lie about their track records eventually get caught.”

Another area where Brown and his firm are on the cutting edge in our 21st-century world is their robo service, Liftoff, which was started about a year ago as a way to serve an underserved segment of the industry.

“The idea of the robo was not, ‘Hey, we want to compete with Betterment.’ That’s not the idea,” Brown said. “We never wanted to have to turn someone away. This is a low-cost, low-maintenance way we could give people a great portfolio and a helpful service.”

And as those Liftoff clients—who can open an account for a minimum of $5,000—get older and accumulate more assets, the next logical step is for those clients to move into the traditional financial planning that the firm offers.

“We’ll be there for them because they’ve already worked with us,” he said.

Next Wave of AdvisorsHeather Ettinger: A Focus on the Female Client

Heather Ettinger has a passion—and a growing reputation—for working with women clients.

As a financial advisor, she always understood that the role of a good advisor is to be a fiduciary, first and foremost. But she quickly realized that when it came to serving women clients—a segment of the market that has been traditionally overlooked—advisors were falling short when it came to education.

Women, she says, are far more interested in advice than in products, and advisors have often been too focused on pushing product. That disconnect is the source of a lot of dissatisfaction among women with their advisors to this day. But Ettinger has been working to correct that.

Back in the late 1980s, while still working at her father’s advisory, Roulston and Co., she began developing what today is a full-fledged educational effort centered on women clients at Fairport Asset Management, a firm born in 2001 from a merger between Roulston and Hickory Group.

The program, “Solutions for Women,” is unique, because it doesn’t sell anything. It’s really a platform for women to learn about money management in a broad sense.

“The idea was that if we empower women around their money, they would be agents of social change,” Ettinger said. “What’s interesting is that women were eager to learn, and really interested in learning about big-picture money management, not just picking winners and losers.”

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Today Ettinger is known in the advisory community as a leader in the effort to better serve women. She is also a keen advocate of segmentation within this market. Fairport is structured in such a way that advisors work in teams, and each team specializes in one or two segments of the population.

Ettinger, for example, is particularly good at working with widows and breadwinner women. Some of her colleagues, for example, focus on divorcees or family business owners.

“We have to be careful not to treat all women the same,” she said. “The reason we’ve been successful is that we picked up a few niches within the women segment, and we are really good at putting ourselves in their shoes, understanding what’s unique about their circumstances, and building a client experience around their needs.

“We doubled our growth rate and dramatically improved our margins by segmenting,” she added. “When you do that you have a much better understanding of how you use your resources, how you address that client’s needs, and how you are consistent in branding and marketing.”

About 50% of Fairport clients today are women, and some 90% of Ettinger’s clients are women—that’s her focus.

Next Wave of AdvisorsDan Egan: It Pays to Be First

Betterment Institutional, one of the first robo advisors to strike it big, now has 200 RIAs signed on to its online advisory platform. Average account sizes top $100,000.

Its success stems not from poaching clients from advisors, says Dan Egan, Betterment’s director of behavioral finance and investments, but from making those advisors’ lives easier.

“Our service takes the burden off RIAs in terms of tax management, asset allocation and performance evaluation. We make it easier for them to focus on the value-add stuff they like doing for their customers,” said Egan.

The Manhattan-based firm offers custom all-ETF portfolios using 30 different funds diversified across 13 asset classes. The Betterment platform automates much of the day-to-day portfolio upkeep, including rebalancing, performance evaluation, even tax-loss harvesting.

Founder Jon Stein launched Betterment in 2010, after years of working as a financial consultant. Frustrated with the financial industry’s emphasis on product-pushing and hidden fees, he wanted to build an investing service that had customers’ best interests at heart.

Stein also recognized that the Internet was becoming more of a force for consumers, and he thought that technology could be leveraged to democratize financial advice and investment management.

“Betterment’s title comes from a better way of investing,” says Egan. “Not in trying to beat the market, but a better way for 90% of the population to get on a stable financial track.”

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Unlike other robo advisors, Betterment is a licensed broker-dealer, meaning technical limitations that might otherwise limit the efficacy of their ETF portfolios pose no problem. Betterment can purchase fractional shares of ETFs, for example, spreading as little as $10 across several different funds.

Betterment’s platform also enables customers to pursue a range of financial goals, allowing customers to both save for retirement and also set up accounts for shorter-term objectives, such as a house down payment or an upcoming wedding.

While the media often characterizes robo advisors as appealing primarily to millennial clients, Egan says that’s not the case for Betterment. Their oldest customer is 92 years old. “While it’s true we tilt toward more Web-savvy customers, I think the idea that older people aren’t comfortable with it is a bit silly,” he said.

What is true, however, is that Betterment’s model allows investors of any asset level to invest in their portfolios. “A lot of firms gate people out of their services at the lower end,” said Egan. “Betterment doesn’t. In fact, we’re one of the few options for people who can only save a little bit of money.”

Egan acknowledges that many in the industry are wary of robo advisors, but he says adaptation is key. “I think we represent the next stage of evolution. We give you a technological solution that can do things much better, so you can focus on the bigger picture.”

Next Wave of AdvisorsHardeep Walia: Taking the Custom Portfolio to the Next Level

Wouldn’t it be great if you could create your own ETF? While that may be a pipe dream for most investors, one brokerage is offering the next best thing. Founded in 2010, Motif Investing allows individual investors to buy baskets of stocks with the click of a button.

While Motif Investing offers traditional brokerage services, including the ability to buy individual stocks, what sets it apart is the ability to invest in “motifs,” or easy-to-understand themes. These include a wide range of themes such as Chinese solar, social networking, fighting Ebola, recent IPOs and income inequality.

Altogether, Motif boasts 150 professionally created themes and 180,000 themes including those created by the firm’s active community of investors.

Much like ETFs, motifs hold a basket of stocks. But unlike the stocks in an ETF—which are typically based on a traditional index—stocks in the motif basket are chosen based on a proprietary (and transparent) methodology to best reflect the theme in question.

The end result is a group of stocks that, in some cases, isn’t radically different from what you would find in the ETF world, but in others, it can be very different. Each motif has a different weighting scheme, from market cap to reserves (in the case of a precious metals motif).

As Hardeep Walia, co-founder and chief executive officer of Motif Investing points out, the number of motifs available far outstrips the number of ETFs on the market, giving clients the ability to invest in themes they would otherwise not have had access to.

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Perhaps the biggest selling point of motifs is that they’re customizable. Want to adjust the weighting of the stocks in the basket? You can do that. Want to add or remove a stock from the basket? You can do that too.

In fact, investors can go so far as to build their own motifs from scratch by including up to 30 stocks or ETFs in the basket as they see fit. Of course, an investor can buy those same stocks at a more traditional brokerage, but Motif allows you to do so for only $9.99.

Another broker could charge up to 30 times that amount, and Motif’s platform is designed to make managing baskets of stocks much easier than it would be elsewhere.

Critics may argue that motifs, which aren’t based on established indexes, are inferior to ETFs, which are. They may also point out that more choice doesn’t necessarily translate into superior returns, and that investors may be better off buying boring, traditional ETFs (or even mutual funds).

But for investors looking for something different and who believe they can outperform the more-well-known and traditional benchmarks, Motif certainly offers that in spades. The firm says that its set of professionally created equity motifs have averaged a 16.3% annual return since January 2012.

Next Wave of AdvisorsRaphael Martorello: Plans Investors Can Stick With

Sometimes, less is more. Most people don’t apply this to the idea of building a client list, but that’s exactly the approach that Raphael Martorello’s LotusGroup takes. The fee-only firm promotes itself as maintaining a client list for which the number of clients per advisor is 75% smaller than for the average advisor, and each client gets a multiperson wealth management team to handle their portfolio.

Martorello says that the firm has used his consultant background to automate many of its processes and keep costs down so that the firm maintains its profitability, despite having fewer clients.

“We don’t even have an office manager,” he noted.

What’s striking about LotusGroup’s approach is how hands-on it actually is and how much the business seems to be focused around developing relationships with clients and targeting the behavioral aspects of investing. The firm’s motto is “Make Life Count”—with an emphasis on its mission of helping investors achieve the lifestyle they want.

Martorello describes his advisors as something akin to “pocket psychologists” in how they relate to clients. Potential clients fill out brief questionnaires designed to figure out what kind of investor they are, but really, more time is spent meeting with LotusGroup’s advisors. And those conversations can be rigorous.

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“It’s not just your traditional ‘aggressive’ or ‘conservative.’ We spend a lot of time with clients to first help them select the appropriate strategy (for example, tactical versus indexing) for them and only then do we help them determine the right risk profile,” he said.

The firm is essentially agnostic when it comes to active versus passive management. LotusGroup offers tactical portfolios that it actively manages and passive portfolios that do targeted, rules-based rebalancings, with 70-80% of all of its portfolio assets invested in ETFs.

“Our view is that it’s not that one or the other is better academically; it’s to figure out which one people will follow,” Martorello said. “In good times, people will follow anything. But when that model doesn’t work—and all models don’t work at some point—which one are they least likely to stop following?”

The firm differentiates between “absolute” and “relative” loss. Investors who are deemed tolerant of absolute losses generally are put into passive portfolios, as they are content to ride out the fluctuations of the market. Those tolerant of relative losses are put into tactical portfolios, because they don’t mind when their portfolio doesn’t keep up with the market. From there, LotusGroup’s advisors coach clients along the way to encourage them to stick with their plan.

Next Wave of AdvisorsAllan Roth: A One-Time Fee and a Forever Plan

To Allan Roth, it all started with a midlife crisis. After 20 years in corporate finance, he had acquired a distaste for the prevailing fee-based advisory model where advice was compensated as a percentage of assets under management.

It made no sense to him that advisors were getting paid to capture as many assets as they could, whether or not that was beneficial to the investor. More than that, Roth was baffled by why advisors were making investing seem so complicated. Long-term index investing was the way to go, he thought, no bells or whistles about it.

That was 12 years ago. That’s when Wealth Logic was born.

Roth’s business model is simple: He sells advice for an hourly fee. It’s strictly fee-for-service like every other profession, but it’s meant to be a one-time deal.

At Wealth Logic, a potential client starts the process by filling out a confidential profile on the company’s website, which is then followed by a conversation with Roth, where he shares his thoughts on a financial game plan, and how many hours of his time he estimates it’ll take to achieve that.

If a contract is signed, the client and Roth get busy doing comprehensive financial planning that involves tax analysis, 401(k) assessments, consultations with a client’s accountants, etc., so that the end product is a specific plan in the form of a portfolio comprising mostly ETFs and index mutual funds. Then a company like Fidelity or Vanguard gets to implement the plan, with Roth facilitating that connection.

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“One of the many reasons I don’t compete with robo advisors is that they’re good once you already have the simplicity,” he said. “But most people come to me with huge tax legacies where they can’t just get out of stuff. I deal with the complexities of reaching simplicity.”

If the model is simple, it’s certainly not for everyone. Roth’s hourly fee is $450. It’s not unusual for a client to spend $5,000-10,000 or more to get a portfolio built.

“Because my hourly fee is high, I can only be cost-effective for large portfolios,” Roth said. “If you have a $500,000 portfolio, and I charge you $10,000 for a plan, I’m charging you 2 percent—I’d then be my worst enemy. I’d be everything I’ve preached against when it comes to keeping fees low.”

Other important traits of Roth’s ideal client are sophistication and a high level of involvement. That’s because clients leave Roth with a road map, a connection to a custodian, and a set of rules to manage their own portfolios going forward. It’s a buy/hold/rebalance approach at its best.

The high barrier to entry hasn’t stopped Wealth Logic from growing. The two-person firm, which earned revenues of only $500 in its first year, today has anywhere from $500 million to $2 billion in assets under advisement, depending on how you count it.

Next Wave of AdvisorsJames Osborne: The Fairness of the Flat Fee

James Osborne, founder and president of Bason Asset Management, is one of an increasing number of RIAs who are rejecting traditional advisory business models when it comes to how they charge their clients.

Before striking out on his own, Osborne worked for a large, traditional investment management firm. Two things, in particular, during that time bothered him.

For one, he realized passive management generally outperformed the active strategies he was providing his clients. For another, he observed that the firm’s largest clients, who were paying the typical 1% advisory fee, were not receiving any significant added services compared with a client with far less assets who was paying the same fee.

“I’m not here to discount the value of what I do for a living or my profession, but what really hit home for me was a tremendous disconnect between what I was doing for this client and how he was paying for the services,” Osborne said of his thoughts when one of his larger clients at his old firm informed him that the advisory fee was the client’s largest single expense.

“I started thinking more and more about how we charge, and what the value proposition is, how other professions charge and do we want to be taken seriously as a profession? And ultimately I started thinking about how many clients I can serve, what I think my time is worth and how much time I spend with each client on average,” he added.

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So when Osborne founded Bason—fittingly, an archaic term for the pans on a balance scale—he basically tossed out the playbook from his old firm.

Now Osborne constructs portfolios primarily using mutual funds offered by passive manager Dimensional Fund Advisors and Vanguard ETFs. ETFs are a big part of most of his clients’ portfolios, he says, citing their efficient tax structure and their lower transaction costs relative to mutual funds.

Most importantly, instead of charging a percentage fee for his services, he introduced a flat fee for all his clients. Everyone pays $4,500 on an annual basis, no matter how much they have in assets. Osborne cheerfully admits he “stole” this idea from other advisors who were already implementing it, but it’s safe to say he’s at the forefront of a new trend.

Among the benefits, the flat fee serves to create a tremendous degree of self-selection among his clients, Osborne says, but it also creates transparency.

In terms of labor and transaction fees, for the kinds of services he offers, it costs Osborne about the same to manage the assets of a client with a $450,000 portfolio as it does a client with a $4.5 million portfolio. Yet factoring in a 1% fee, the first client will pay $40,500 less than the second client. Aren’t economies of scale supposed to result in lower costs for customers?

Next Wave of AdvisorsMark Yusko: Endowment Strategies for Individuals

Endowments are known for generating higher returns every year than the average investor. In the past 20 years, the average endowment has seen annualized returns of 9%, but the average individual investor has raked in only 3.5%.

Behind much of that success lies the Endowment Model pioneered by Yale University’s David Swensen, and Mark Yusko has been bringing that institutional-caliber model to investors everywhere for the past 11 years.

Originally a stock and bond picker himself, first for an insurance company and later for an equity firm, Yusko entered the endowment world when he went to work for the University of Notre Dame in 1993, and later for the University of North Carolina.

“When I went back to my alma mater in 1993, the first thing that came to my mind was, am I going to miss investing, that day-to-day picking of stocks and bonds?” Yusko said. “When I got there, I realized that was the problem. Most people think of investing as picking securities.”

It was during his tenure with endowments that Yusko learned that asset allocation is the key driver of returns. Second to that is careful manager selection and thoughtful portfolio construction. At the very bottom is individual security selection.

But what really makes the model tick is its core value bias.

“Endowments try to continually sell into strength and buy into weakness, and they can do that because they have a long time horizon,” he said. “This is the biggest advantage that endowments have, and it’s the hardest thing to replicate for individual investors.”

Next Wave of Advisors.

Still, Yusko has been offering this model to investors everywhere, helping many realize they too might have the advantage of time, but might not know it; they too could think with a greater value bias, and show a greater penchant toward alternative investments, as he puts it.

His experience has shown that if time and a focus on value are key to success, so is discipline. It’s all about sticking to the plan and rebalancing no matter what. Also important is the understanding that in the endowment world, costs are viewed differently: Rather than seeking primarily to minimize costs, endowments look to maximize long-term returns.

And finally, there’s the misconception of risk associated with this approach due to its heavy tilt toward equity and equitylike investments, according to him. That’s because the Endowment Model has to support 5% spending in perpetuity, and in real terms—meaning it has to generate 5% above inflation. The only asset that’s going to give you that is equities.

“The perception would be that if you’re heavy on equity, you increase risk, but by having different forms of equity that are uncorrelated to one another, you reduce the risk of the overall portfolio,” Yusko said. “On every measure of risk that you can come up with, the endowment fund returns are less risky than traditional stocks and bonds.”

Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.