Top Notch Firm Keeps Costs Low

 

In 2014, Bingham, Osborn & Scarborough won the prestigious Charles Schwab Impact Best-in-Business Impact Award, a testament to the strength of the RIA’s management style. 

 

Over its 30-year history, this San Francisco-based firm has stayed one step ahead of the markets and its competition by intelligently using every tool in its kit. It’s focused on recruiting top talent and promoting from within. It ceaselessly refines and improve how it relates to clients and how it builds relationships. And it’s also been an early adopter of new investment tools and technologies—including the ETF. 

 

Bingham, Osborn & Scarborough began using ETFs almost as soon as they were available, according to managing principal Kevin Dorwin. That early faith has been amply rewarded in consistent, low-cost returns for its clients. 

 

Recently, ETF Report sat down with Dorwin to learn more about how Bingham, Osborn & Scarborough uses ETFs in its practice. 

 

 

It wanted a firm with a consistent track record of strong business management. For example, we’ve managed a transition from the original founders to a new generation of owners and advisors, which very few firms have been able to do successfully. We’ve implemented a lot of new technologies successfully. We’ve been innovative in how we’ve developed new client relationships and in how we’ve marketed our firm. And of course, we’ve provided very consistent, good investment results for our clients, leading to strong retention rates, even amongst our peers. 

 

About 85% are individual clients, typically high net worth individuals in the range of $5 million to $100 million in AUM. We manage all their assets for the most part, and provide them with complete financial advice. 

 

The other 15% are endowments, nonprofits and other institutions, for whom we primarily do investment management. Those are folks who really want that diversified, low-cost approach, which we provide with ETFs and mutual funds. 

 

We started moving over to ETFs as soon as they became available in the late ’90s. The reason we started using them is that, particularly in the equity markets, they did a fabulous job of representing asset classes at very low cost and with extremely high liquidity and transparency. Those were all elements of our approach, so they were a natural fit.

 

We primarily use ETFs to represent the most liquid investment markets at very low cost. That includes representation of the large-cap U.S. market through the use of SPDRs, as well as exposure to the most liquid parts of the foreign stock markets, including EAFE. 

 

We also like them for emerging markets, because we find that in that space, active managers and even passively managed mutual funds don’t have the advantages that ETFs have, in terms of cost and liquidity. ETF performance really is better than what you can get in other vehicles. 

 

For other asset classes, we also use ETFs as a complement or even as an alternative to mutual funds where it makes sense, for tax efficiency or other reasons. We use them in small-cap markets, both domestic and international. We occasionally use them for commodities exposure. But we’ve been less inclined to use ETFs in bond markets. 

 

We’re still trying to get comfortable with ETF liquidity in those markets. The ETF structure works very well in equity markets because they’re very liquid. But the bond market can be less liquid, particularly when you get into municipal bonds and so on. In periods of stress, like 2008 and 2009, the value of the underlying securities can significantly deviate from the price of the ETF. 

 

Because we value stability and liquidity in our bond portfolios, we haven’t been inclined to take on that risk to use ETFs in those markets, not when there are so many other mutual funds and individual bond options available. 

 

For example, in the real estate market, we use the Vanguard REIT ETF (VNQ | A-89). For dividend exposure, we like the iShares Dow Jones Select Dividend ETF (DVY | A-66). We’re also looking at the WisdomTree dividend-paying ETFs, such as their Equity Income ETF (DHS | A-89) and their LargeCap Dividend ETF (DLN | A-100). 

 

Also, we’re continually screening some alternatively indexed ETFs, such as the Guggenheim S&P 500 Equal Weight ETF (RSP | A-84) or the PowerShares FTSE RAFI US 1000 ETF (PRF | A-88).

 

On the foreign side, if our clients want more dividend exposure, we’ll evaluate something like the iShares International Select Dividend ETF (IDV | B-70) or the WisdomTree International LargeCap Dividend ETF (DOL | B-90). Some clients also like to use country-specific ETFs for additional exposure. So we’re looking at the iPath MSCI India ETN (INP | D-94) or the iShares China Large-Cap ETF (FXI | B-47).

 

In practice, we probably use about five to 10 quite a bit, then another 15-20 as needed, or strategically. 

 

I think sometimes clients have difficulty understanding what an ETF actually is. So a lot of times, you end up describing them as a form of a mutual fund, just with different characteristics. It’s a way that they can understand it more easily: a collection of securities that trades in a basket and trades throughout the day and so on. 

 

But I think today clients are much more aware of what ETFs are, even more so than they were five years ago. Five years ago, they were still a foreign concept to many clients. 

 

They just became more prevalent, I think. There’s been more communication about ETFs everywhere, so our clients are hearing the word more often. It’s much the same way that mutual funds were categorized 10, 15 years ago. People have become that familiar with ETFs, even though many may not understand the intricacies of how they work. 

 

Yes. In fact, that’s one of the reasons we tried to avoid using some of the bond ETFs. People ran into quite a bit of trouble during that time period. We didn’t have a lot of trouble with the ETFs we were using, though, so that wasn’t a big issue for us. 

 

The big concern right now, I think, is that bond interest rates are so low. I think people have been feeling for some time that interest rates will go up, so they’re worried about how to earn a return that’s better than conventional bonds without taking on the risk of equity markets. They’re intrigued with some of the newer products that are being created. Sometimes people will ask about certain ETFs that might hedge some risks, particularly since the stock market has been up for so many years now and they’re getting concerned about valuations. 

 

We’re also seeing now that foreign markets are improving—some interest in increasing foreign exposure through ETFs or mutual funds. But I think the big thing is that people are starting to get more reticent of a correction in the markets. They feel that that’s coming, I think, so they want to know: What do I do with my portfolio now?