the family office association audio series: volume 25 with ... · family office association is a...

The Family Office Association Audio Series: Volume 25 with Steve Lockshin

The Future of FinanceHow Robo Advisors are Changing the World

22 Audio Transcript in the FOA Audio Series. Steve Lockshin | © 2016 Family Office Association and Angelo J. Robles

FOA Audio Series: Volume 25 with Steve LockshinThe Future of Finance

How Robo Advisors are Changing the World

Copyright © Family Office Association and Angelo Robles. All rights reserved. This white paper or parts thereof may not be reproduced in any form or redistributed for commercial use. For more information about this publication, please contact [email protected].

Disclaimer: The Family Office Association (FOA) is an affinity group dedicated primarily to the interests of Single Family Offices. FOA is intended to provide members with educational information and a forum in which to exchange information of mutual interest. FOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, FOA does not provide tax, legal or financial advice.

Materials distributed by FOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation or recommendation by FOA. Any investment decisions you may make on the basis of any information provided by FOA is your sole responsibility.

The FOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of Family Office Association. All other product and service marks on materials provided by FOA are the trademarks of their respective owners. All of the intellectual property rights of FOA or its contributors remain the property of FOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the FOA web site.

The information presented by FOA has been obtained by FOA from sources it believes are reliable. However, FOA does not guarantee the accuracy or completeness of any such information. All of such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

500 West Putnam Ave, Suite 400Greenwich, CT 06830

www.familyofficeassociation.com@familyoffice

Steven Lockshin


Steve is an entrepreneur within the wealth advisory industry. In ’94, Steve founded Convergent Wealth Advisors and served as CEO for eighteen years and then Chairman from 2012 through 2014. Under his leadership, the company became one of the largest wealth advisory firms in the industry, perennially recognized as a top IRA and MFO to the ultra-affluent. Steve has ranked number 1 by Barron’s in both their state – California – and national rankings in numerous periods. Steve is also an influencer in the technology side of the industry, being an entrepreneur that has founded multiple companies. He’s an author recently in 2013 of Get Wise to Your Advisor and he will be talking about fiduciary issues, as well, and look forward to that. His latest venture is an RIA titled Ad-vice Period and he also serves an active role in Betterment Institutional.

Steve Lockshin is bionic advisor, industry agitator, and tech enthusiast.

Audio Series Volume 25: The Future of Finance: How Robo Advisors are Changing the World


Angelo J. Robles

Angelo J. Robles is Founder and CEO of the Greenwich, Connecticut-based Family Office Association (FOA), a global membership organization that delivers private educational and networking opportunities, proprietary research, and access to salient thought leadership to multiple generations of wealthy families and the professionals who run their single-family offices.

A member of the Princeton Council on Family Offices and the NYU Stern Family Office Council, Mr. Robles has a long record of leadership positions at top financial-service companies, including UBS. Before launching FOA, he founded and ran several successful entrepreneurial ventures: He served as President of the New England chapter of the Hedge Fund Association, and pioneered online retirement planning for Fortune 1000 executives with two Internet startups - 401KRollover.com and IRARollovers.com.

Author of several books and articles, Mr. Robles has appeared on Bloomberg Television and Radio, and has been quoted in the Wall Street Journal, Thompson Reuters, Institutional Investor, Opalesque, Registered Rep, HFM Week, Investment News, EurekaHedge, The Luxury Institute, Private Asset Management, The Greenwich Times and many other media outlets.

Contact [email protected](203) 570.2898


Family Office Association is a global community of ultra-high net worth families and their single family offices. We are committed to creating value for each family that we serve; value that grows wealth, strengthens legacy, and unites multiple generations by speaking to shared interests and passions. FOA has the resources to solve your most difficult challenges and help you achieve your collective goals: to invest intelligently, give strategically, and learn exponentially.

FOA is the community leader in serving all the key imperatives for ultra-high net worth families, respecting your privacy but enabling an intimate community of global families like yours. Our organization delivers private education and networking opportunities, proprietary research, and access to salient thought leadership that will interest all generations of your family.

Contact Family Office Association500 West Putnam Ave, Suite 400Greenwich, CT 06830Email: [email protected]: www.familyofficeassociation.comTwitter: @familyofficePhone: (203) 570.2898

About Family Office Association


Angelo Robles: Hello, everyone. This is Angelo Robles at Family Office Association. Welcome to our FOA audio podcast. We are joined today by Steve Lockshin. Topic: The Future of Finance, and subtopic; Will Robo Advisors Change the World and Single Family Offices? Now I know some of you may be wondering what the word “robo advisor” means. We’re going to get to that but let me give a little background about Steve.

Steve is an entrepreneur within the wealth advisory industry. In ’94, Steve founded Convergent Wealth Advisors and served as CEO for eighteen years and then Chairman from 2012 through 2014. Under his leadership, the company became one of the largest wealth advisory firms in the industry, perennially recognized as a top IRA and MFO to the ultra-affluent. Steve has ranked number 1 by Barron’s in both their state – California – and national rankings in numerous periods. Steve is also an influencer in the technology side of the industry, being an entrepreneur that has founded multiple companies. He’s an author recently in 2013 of Get Wise to Your Advisor and he will be talking about fiduciary issues, as well, and look forward to that. His latest venture is an RIA titled Advice Period and he also serves an active role in Betterment Institutional.

I could also describe Steve Lockshin as bionic advisor, industry agitator, and tech enthusiast! Steve, how are you?

Steve Lockshin: I’m well. Good morning.

Angelo Robles: Good morning. A pleasure to have you on the call. Let’s get to it. As I hinted in my title/subtitle, I’m sure there are some that have never heard that phrase that I used or don’t really know what it means. So let’s start from the ground up. What’s a robo advisor?

Steve Lockshin: So let’s demystify this a little bit. A robo advisor is nothing more than the algorithms that we’ve used for decades in the industry, seamlessly linked together in a website like Betterment or Wealthfront or Personal Capital. And there’s upwards of two hundred of them now and more appearing every quarter. But it’s just the intersection of technology and traditional math around investments.

Angelo Robles: You were, at one point, among the world’s most successful, acclaimed – and traditional, if I could use that word, but it almost has a negative connotation – RIAs/MFOs and I suppose you’ve always been a step ahead. You

66 Audio Transcript in the FOA Audio Series. Steve Lockshin| © 2016 Family Office Association and Angelo J. Robles

A robo advisor is nothing more than the algorithms that we’ve used for decades in the industry, seamlessly linked together in a website...it’s just the intersection of technology and traditional math around investments.


probably saw some of the writing on the wall. You were an early investor into one of the “robo advisors” and obviously, you’re utilizing it now in your services. Why? What made you see this coming and make that change?

Steve Lockshin: Originally, I started hearing about this in 2009 when the first one kind of was out talking it up and raising money and winning some tech contests. And in 2011, I contacted the CEO of Betterment and said I wanted to come in and see them. And I was impressed that they had, again, automated a lot of things that we do manually in the industry. So they didn’t reinvent the wheel at all, they just made the wheel much more smooth.

So my original thought was this could be very disruptive, I’m going to invest in the company

as a hedge against my business. It very quickly turned into this doesn’t need to be competitive. This really could be a tool that advisors could and should use, and I started pushing them to create an institutional offering to accelerate advisory practices.

So the original thought was wow, this could hurt us. The thought very shortly thereafter was this could help us.

Angelo Robles: And I’m going to take a little bit of a step back for our audience. So traditionally, the perception was that “robo advisors” were going to be direct to the consumer. Young, disruptive entrepreneurs were creating the companies including three or four that you noted and effectively utilizing a new way of looking at things, technology, the early stage of artificial intelligence. We’ll do a little deeper dive into that on what the future of this may look like shortly.

But also, it serves as an opportunity not just direct to consumer but the opportunity to potentially be of value whether it’s a single family office dedicated to one family – now I’m going to say it’s not “there” yet but we’re going to talk about what that future in a couple years may look like. But certainly from the advisory

community, perhaps if they look at it the right way, more friend than foe. Yet I suppose the old guard has been a little maybe not quite on board. How has that panned out since you learned about it in ’09, you went in there in ’11,

you became active both from your personal capital and your interest, that was four years ago? What has changed? Is it starting to take over the world?

Steve Lockshin: I don’t know if it’s starting to take over the world in terms of real asset growth but it’s certainly taking over the world from attention both in the traditional media, as well as industry media. So the original approach

Audio Transcript in the FOA Audio Series. Steve Lockshin | © 2016 Family Office Association and Angelo J. Robles7

[Robo advisors] could really be a tool that [traditional] advisors could and should use, and I started pushing them to create an institutional offering to accelerate advisory practices.



for the robo advisors is, as you said, let’s go directly to consumers and they went after an obvious place, which was people’s wallets. We can do this cheaper, we can do it better. Why overpay for an advisor? And we’ll come back to that later when we talk about what really should advisors be doing and where’s the value. And I think it ties into SFOs, as well.

That approach created an “us versus them” mentality and the media soaked it up. So

perhaps it was a very good marketing approach to get earned media attention. And there was a ton of talk about will robos cannibalize your business. The fact is they’re not doing anything new. They’re using mean variance optimization and you’ll notice across all the different robo advisors, some have different twists. Some have Black-Litterman influence, some have less constraints around the model. But at the end of the day, they look like traditional asset allocation models and the primary difference is they’ve said, “We’re not going to waste money or effort on trying to pick managers that beat the indices. We’re going to reduce costs, we’re going to be fee and cost efficient, and we’re going to be tax efficient.” And that has become their focus.

So it moved from us versus them to now we can help you. I thought advisors would jump all over it. The uptake is way slower than I thought it would be but it is still growing at roughly 100% a quarter, at least from the numbers that I see. It’s nascent from an AUM perspective but I think the reason evaluations are where they are – and they’re obscene on a multiple of revenue, or even multiple of assets, they’re obscenely high. And I think that’s because the VCs understand the potential that these tools have in terms of

disrupting or influencing the marketplace.

So it’s gone from “if” to “when” and I think we’re starting to see the beginnings of “when.” But it’ll take a decade before it really is gigantic.

Angelo Robles: It’s pretty obvious that Millennials, the younger crowd, are very comfortable utilizing technology, are very alert to cost, middleman, inefficiencies, very sensitive to that. Now admittedly, some of them may not have the capital to really be much of a mover relative broadly to the amount of money being managed or wealth management. It seems like it’s just a matter of time. I mean, you said perhaps ten years not only will the services be much different and more advanced but there’ll simply be more adapters. Those that are in their teens, early twenties, and mid-twenties now are going to start to become more affluent and be more direct users. I mean, isn’t that obvious to everyone?

It’s pretty obvious that Millennials, the younger crowd, are very comfortable utilizing technology, are very alert to cost, middleman and inefficiencies.



Steve Lockshin: I think so. But for both investors and most advisors alike in the short term – excuse me, long term is often lunch. They don’t really look that far in advance. So today, Millennials are the largest segment of the workforce. They’re going to inherit thirty to fifty trillion dollars, whatever the number is, when that money transitions and so they are the clients of the future. Advisors just don’t feel like they need to address it.

The other phenomenon is I think the term “robo advisor” is going to go away in the next few years to next five years because everybody – and we’re already seeing it in all the major Wall Street firms – will adopt some form of this technology. They’ll have no choice. And so it really won’t be a differentiated solution, it’ll just be a different experience at each of the firms and folks will go with whoever they go with. Marketing is still the primary driver, unfortunately.

Angelo Robles: Since you brought up that subject – and we’ll get exactly to what robo advisors do for individuals, investors, in a second – some level of success is bound to catch the attention of the significant forces in the industry. So Schwab, a very significant force, has a “robo advisor” and even looking at Wall Street, I think that Jamie Dimon at JP Morgan has been on the forefront for Wall Street New York firms, understanding what the

community of disruption in tech entrepreneurs are doing. Are the largest companies just going to eat up the small ones?

Steve Lockshin: I mean, it’s a short path for them. Innovation in large companies becomes more and more difficult. Merrill’s already announced that they’re going to do something in this space. I think Morgan Stanley announced they’re going to do something in this space. LPL’s announced they’re going to do something in this space. So I think just about every major has said they’re going to do something, or have rolled out something. Fidelity’s rolling out something, as you mentioned. Schwab has, Vanguard has.

So I think they’re all going to have some level of play and it’s a question of how they market it and if they make it adaptable for more complex

clients. Today they haven’t but as they get pushed to do more things or when the next player says, “I’m willing to do this, create a certain amount of functionality that works for a differentiated client segment,” then everybody else will have to follow along.

In the next five years, everyone — and we’re already

seeing it in all the major Wallstreet firms — will adopt

some form of this [robo] technology.



So as I said, it’s gone from “if” to “when.” Now it’s just a question of how quickly people adopt and meet the awareness. And in a minute, I’ll go through and give you a perfect example of my parents and something that I just went through with them to show them the power and so they’re now switching to using a robo.

Angelo Robles: Let’s talk a little bit, a deeper dive effectively into the core services that broadly a “robo advisor” would do. So it’s all going to be on one custodial platform so the reporting is simplified and clean. The interface is normally attractive, it’s easy to use where I think many people will agree that current interface with the client on reporting and aggregation is a little complex and may-be not the way many people like to view it. But probably the real anchor of the benefit is the ability, based on information a client provides, to automatically do asset allocation. Now we may get to the point of an advisor “back” taking that function. But the other two core areas – and I know I’m throwing a lot at the audience and for you to respond to – and probably the big two for a little bit more sophisticated investors at the moment is going to be rebalancing and tax loss harvesting. If you could touch upon those, please.

Steve Lockshin: Sure. So if you take a traditional advisor’s role – and let’s just artificially call it a ten-step process where one is you meet the prospect, find them, and they have interest in what you do. But once they’ve signed on, there’s the account opening process,

the cashiering or funding of it, the goal-setting, the asset allocation, any rebalancing that’s necessary, tax loss harvesting, and reporting. And then the last piece is service.

And so step one is finding them and step ten is servicing. Step two through nine are everything in between. Well, what the robos have done, and they’ve done for advisors so let’s spend time talking about how an advisor might use them or a family office might use them. They might use the institutional solution where all they’re doing as an advisor is using that tool to automate those steps they have to do anyway.

So we measured it. We have relationships with the traditional custodians. If somebody walked in tomorrow and said, “I just inherited a million dollars. I need to open an individual account, a joint account, and an IRA,” it would take us roughly thirty to sixty minutes per account. So think an hour and a half to three hours just to do the paperwork to get them set up. And then the first year, assuming there’s some cash flows and rebalancing, we’re going to put in somewhere between ten and twenty hours in that first year, and roughly ten hours a year thereafter, to manage the account.

With the robo solutions, you can send them a link. The client can populate the account opening experience themselves in less than two minutes. Or now, at least there’s one prepopulated so all they have to do is accept it kind of like an iTunes contract. The contracts are



all built-in. The goal and questionnaire process is built-in. The asset allocation process is built-in, and I’ll put a big asterisk here – it’s already set up so advisors (or SFO) can customize the allocations and even select the ETFs, at least at Betterment Institutional you can. And so the advisor can influence the allocation and express their position in the market. Then all the rebalancing happens automatically. So when you get big down days like we saw in August or we saw, you know, January 4; well, the computer, while the advisor’s busy calling their clients and talking them off the ledge or reminding them to stay the course, the computer is tax loss harvesting. So today’s tax loss harvesting is done predominantly through advisors if it’s done at all, and it’s done episodically. The computer’s always on, it’s always rebalancing, it’s always tax loss harvesting. It doesn’t get afraid. It doesn’t make emotional decisions. And then the reporting is easy.

So that’s what you get out of the experience and it could be used by anybody. It doesn’t replace anything, it just automates process that advisors and family offices are already doing today. I would not underestimate the value of rebalancing, and you noted tax loss harvesting, which the reality is most advisors, at best, do a mediocre job. I think it’s to a degree, taxes are not the most engaging topic. I think it’s underestimated, certainly greatly by many end clients, as well. And for ultra-affluent families, I

think it becomes a major issue that they’re really overlooking. We’ll get a little bit to alternatives shortly and often, the tax inefficiencies there.

One more area that I forgot to mention when I noted effectively the interface, the simplicity, the reporting, rebalancing, and tax loss harvesting; especially for the end consumer going direct but depending on the relationship, the incredible low cost. You know, this is an industry where there’s middlemen, where there’s a lot of hidden charges and these are all the issues that Wall Street has had that it’s getting a little better at. But the ability for today’s Millennials to get what I just noted the way that they want it, and they’re so sensitive to cost or intermediaries where

people are getting more than they should. I mean, again, I know it almost sounds too good. But for those consumers, this appears only so logical in the direction that they’ll be heading.

And I would argue it’s not for Millennials only. Clearly, it’s the lowest cost solution for anybody unless you’re into the billions of dollars and you can actually negotiate an even lower cost, potentially, for an index portfolio. But the typical cost paid by a consumer – and the smaller the client, the more they pay – is in the hundred

When you get big down days...while the advisor’s busy calling their clients talking them off the ledge or reminding them to stay the course, the computer is tax loss harvesting.



to sometimes three hundred basis point range all in for a smaller client. Here, you could be all in, you have a 60/40 portfolio using mostly Blackrock or Vanguard ETFs that’s going to average about fifteen basis points and then the platform costs are fifteen basis points. So for thirty basis points all in, you have a fully diversified portfolio that has all the features we just discussed.

And just to hone in on your tax loss harvesting point, my portfolio – well, which I started in 2012 and I make weekly contributions so I get the benefit of new basis each week – last year, harvested roughly 10% of my corpus and tax losses. And then even with the lower basis, did it again almost 10% last year. So when I say the first last year was 2013 – excuse me, 2014 – the last year was 2015. Well, I live in California and I’m in the highest tax bracket. So assuming I’ve got short term gains elsewhere, that’s worth fifty cents on the dollar to me. So that’s five hundred basis points of pure alpha.

And the obvious next question should be well, yeah, you just set lower basis, you’ll pay the taxes later. If you’re charitable, I can actually take my low basis positions and give them to my donor advised fund, which I do. So I never pay a capital gains tax and I get all the tax losses to use. I see no value in trying to find managers that if they do an exceptional job and add a hundred basis points over the lifetime of my relationship with them, when I can harvest, you know, somewhere between a hundred and

a thousand basis points of tax loss benefits every year.

Angelo Robles: Absolutely. Let’s jump a little bit to – and I know you may disagree to an extent with my next comment – but the opportunity, and maybe more so for a family of great wealth, not just to have a mutual fund or often better an ETF – of course, an ETF, for the most part, is going to be the better option for reasons I’m sure our audience already knows. But wouldn’t it not make sense for technology taking it to a different level effectively on “one click” to have the opportunity to own the underlying securities making up indices like the S&P 500? It would be time consuming to do that now and expensive (trading costs). But there are some companies – I wouldn’t quite call them robo advisors – but companies like Folio, Motif Investing, that have variations of that I’m assuming as robo advisors evolve whether it’s the one you’re aligned with or among the hundreds of others that are out there. That that type of simplicity and ease of use of individually and very simply owning the underlying securities of an index will likely become more commonplace.

Steve Lockshin: It exists today. Wealthfront has what they call direct indexing at five hundred thousand of assets dedicated to direct indexing. And then obviously, there are other traditional managers like Aperio that do these, and there’s a number of folks in that category, too. Betterment will roll it out.



So this, whether it’s at Motif, Folio, the others, the notion of being able to own fractional shares, that ship has sailed. It’s going to become commonplace. I think all custodians will head there in the next few years because they’re going to have to, and you’ll be able to direct index.

The fallacy of that is having more securities actually does not increase the likelihood of tax loss harvesting benefits. Fewer securities actually benefits the consumer more than having more securities, and we’ve seen it time and time again, switching from the S&P, let’s say, to the Russell or Wilshire. Or we’ve seen it just going from a few different ETFs in US to direct indexing because I measure all the different robos.

Angelo Robles: It does create for an opportunity where one wants to have more rather than less holdings – an opportunity for them to be more socially responsible in their investing and excluding certain companies or industries. But we won’t belabor a point on and on. I will ask a question, staying within that same theme and a little bit deeper into that. If that is the case,

in one click you could own the underlying securities in an index so it’s not complex and the trading costs are nominal where right now on the surface, those that don’t know about that, it’s time consuming and expensive. Now that that’s already out there and likely going to grow in interest, pardon my ignorance but specifically, for public equities, why are ETFs and mutual funds even existing? If you can own the underlying securities, it’s in a beautiful interface, it’s simple, it’s effectively the same cost or near the same cost – now I know you partially answered it in your answer before. Is that going to be a threat to the ETF and mutual fund industry?

Steve Lockshin: I think so. I think more to the 40 Act industry than the ETF industry. 40 Act is still bigger than ETF but ETF is growing faster so at some point, those two will cross. Today, at Motif as an example, theoretically, they can replicate any mutual fund that has listed securities. Overseas securities, they are a little more complex with the direct indexing solutions but they’ll get there.

So I think trading costs are going to go to zero. Expense management is going to become a major factor. There’s more and more data out there and that data continually says costs matter, taxes matters. You’ll always have folks who believe – who live in Lake Woebegone and believe that they’re above average and they’ll do better than the next guy and it’s worth hiring that more expensive manager. And every now

...trading costs are going to go to zero. Expense management is going to become a major factor. There’s more and more data out there and that data continually says cost matters, taxes matter.



and again, it may be but for the most part, the data continues to say keep your costs down. And direct indexing will influence the way people invest and mutual funds may not need to be around and those ETFs won’t need to be around. It’s a question of whether you want ten securities in your portfolio or ten thousand securities.

Angelo Robles: Indeed. Let’s transition a little bit into specifically for my audience, families of great wealth, especially if they have a single family office. On the surface – and I wanted to give them your perspective, which you did a great job of a background about what’s going on, what a robo advisor is and what it’s doing. And I’m sure some of them may be listening and saying, “It sounds interesting.” Actually, maybe companies a couple years ago, they would’ve liked to have been investors in, like you were. But why is Angelo having this dialogue? How is it necessarily going to affect me as a one to three hundred million dollar family, as a half billion to a billion, or a multi-billion dollar family? And likely, it’s a little early for that necessarily to be of value. So I’m assuming it’s going to have to have certain estate planning capabilities built in (GRAT etc.), which probably are there right now but just not rolled out in masses.

Why don’t we start a little bit on why those type of families should be interested? And if it’s a little early now, why that could be changing as technology and artificial intelligence improves over the next one, two, three years?

Steve Lockshin: So the short answer is you’re correct. The infrastructure is there to do things in the estate planning arena that don’t exist today in an automated fashion. GRATs are the easiest example where we could separate the holdings in a portfolio into separate GRATs and actually automate the process to trade out, lock in gains or reset losses and GRATs using technology. And I suspect that’ll get rolled out in a year or so. Well, as the uber affluent are not adopting it and so that hasn’t been a prime focus of theirs although my typical clients are very large and I’ve used it. So there are limitations and I can’t use robo advisors – because of certain limitations, I can’t use robo advisors for some things but I suspect that will go away.

The biggest issue is just dividing portfolios up into different pieces. They’re typically run as a portfolio. But it will happen.

Now going to your ultra-affluent families, the family offices, which is my typical client; first is the investment decision. Do you have to have a super complex portfolio? The short answer is no. That’s what all the studies say. I think that – no disrespect to the folks who run family offices. I think a lot of them feel like they need to make it complex, just like a lot of advisors feel like they need to make it complex in order to justify their existence. Those resources that are spent on that, I think could be spent on things like estate planning that really moves the needle with zero risk to the portfolio. It’s pure alpha, just like tax loss harvesting is pretty much pure alpha.



The data – and there’s a great study from UC Davis that came out in 2011, it was updated in 2013 – called “Do University Endowments Earn Alpha?” They looked at all the university endowments that were publicly available for twenty-one years and the consultants don’t really add any value, the active managers don’t add any real value. And alternatives added alpha until they actually put in an alternative benchmark, in which case it said there was no significant alpha there. And all that leads me to believe that a simplified, diversified, low cost portfolio meets the mark 99% of the time. So what should these folks be focusing on and can they use these tools to simplify their lives and allow them to focus on things that truly do add value?

Angelo Robles: And although it’s likely the subject of a separate discussion, something that we’ve done prior research, white papers, conversations, programming about; the importance of liquidity and transparency. And we’ve had the dialogue before. You know, we’re both friendly with multiple alternative managers, among the smartest people that likely we both know. And some of them – some – are going to

be able to get alpha. But when you add in the fact that the incredibly high fee structure means that you’re starting, you know, well behind the starting line compared to most in-vestments. You have limited liquidity and transparency so your ability to hedge and know exactly what you own is at minimum delayed. And then you add in – and I know it’s not the most exciting topic – but again, taxes. Especially if you live in New York City, California, Hawaii, Minnesota, or many of the states or areas where simply there’s high taxes and it’s aggressively traded, like many long-short managers. The net after all that has been proven time and time again over blocks of time that Steve, what you’re saying is accurate. And I think it does come down to sometimes it doesn’t make exciting country

club conversations, it doesn’t make you feel quite as smart if you’re simplifying investing. And I get it. I mean, I can relate a little bit to that, as well. But I think when you look at it, especially in time frames of ten years, that having a simple portfolio that is usually public equity investment

centric and for very large families that want to get more active in privates, you know, I think it’s actually hard to make the net math work on many alternatives and complex strategies. I’m assuming simply you agree that if you wanted to expand a little bit, we’re all ears.

Steve Lockshin: I agree. The simplest test and proof appeared in 2009 from it. So I had

“Do University Endowments Earn Alpha,” a study updated in 2013 revealed that consultants don’t really add any value, the active manager don’t add any real value...



my portfolio that I ran using our research and our access to alternative managers and the best of the best and some passive and some active, some leverage here or there. And then I had some portfolios that I’d set up twenty years earlier for my kids that were on autopilot – auto rebalance, auto contribute, etc.

So the 2008 debacle occurs and in 2009, I happened to look at my portfolios side by side and slow and steady won the race. So with all the effort, all the research, all the time spent, the access to manager, the fees – either reduction or expenses – the extra effort yielded absolutely no value. And I suspect, if I looked in an after-tax basis, the lazy portfolio would’ve done much better.

Angelo Robles: Likely so. And maybe why don’t you share with the audience – you hinted at it earlier, which will maybe pound home that point and then lead us into the next area relative to what advisors should be doing and the fiduciary standard and obligation that they have of the example with your parents.

Steve Lockshin: Yeah. So when I left my old firm, I did not take clients with me. And my parents and I decided it would be best if I just helped them and didn’t have them as clients. So they went to one of the major wirehouses. And they’ve got a portfolio – let’s just say they’re in the estate planning category. They’re not gigantic but they’re large enough that they need to do some estate planning. And over

Thanksgiving this year, I was asked to look at their portfolio. And not only was the reporting impossible to dissect – and I’ve been in business forever doing reporting for other firms as one of our businesses. I could not make hide nor hair. I could not get answers for them. So I finally just took the statements for a year and ran through all the expenses. They’re paying a hundred an fifty basis points all in. Not horrible by industry standards but for a portfolio that was, you know, ten-plus million dollars, it was still higher than it should be.

Well, there was no alpha in the portfolio. The advisors, even though on their website said, “We focus on estate planning,” had never discussed estate planning with them even though they understand the total balance sheet for my folks. And they were doing no active tax law harvesting. It ended up being what is the minimum amount of work that we can do to get our big fat annuity. And unfortunately, I think that is the majority of the industry. There are great folks out there and a lot of them think they’re doing the right thing. But we’ve been trained to sell to people that we can get them in a better asset allocation or we can get them access to a manager they can’t get access to. And that is going to take a lot of time to change and it won’t be until consumers actually force the change that the industry will embrace the change. They’re fighting it tooth and nail.

But it’s a real problem. So we’re moving my folks to one of the robos. I hired them an exceptional



advisor who completely gets the future of the industry who we pay per day. So think about a total change in pricing. It has nothing to do with the AUM. And if they want to spend four days a year with him, they pay him for four days. They want to spend two days, they spend two days. And then the reporting they pay for actual cost. So their cost will have gone all in from a hundred and fifty basis points to somewhere in the neighborhood of thirty-five basis points and I suspect they’ll do better.

Angelo Robles: That’s huge. And maybe that does transition into among as we maybe head to the home stretch the value of an advisor moving forward. What should advisors be doing? And maybe if you could tie that into even if it’s not literal at the moment, the fiduciary responsibility that they should have to their underlying clients.

Steve Lockshin: So first, let’s attack the fiduciary responsibility. According to the 40 Act, to call yourself a fiduciary, there’s a giant loophole, which is avoid or disclose. So as long as you disclose any conflicts of interest, you technically can call yourself a fiduciary. That’s not my definition of fiduciary. My definition of fiduciary is owing a duty to your client where they always are in the first position and you go to great lengths to make sure that they are in no way disadvantaged by some-thing that advantages the advisor.

So to answer the question in that context,

where do advisors add value? Well, for a lot of consumers, they really do need an interpreter. Many of your clients – the family offices, the people are very intelligent. If they wanted to learn how to do surgery on their family member, they probably could but they chose not to be a physician. And some don’t want to deal with their portfolios. No problem paying for an interpreter to help walk them through their goals and help figure out what the right portfolio is. But the act

of coming up with an allocation around those goals or selecting managers or securities has been commoditized. The value of that, if you’re just doing that, is priced somewhere in the – depending on the size but let’s say for a ten million dollar client – somewhere in the ten to twenty basis point range. And that’s all that’s really worth.

The other places that I think an advisor can add value is always communication and helping their client stay calm, taxes and estate planning as I mentioned a couple times, pure alpha items. Reporting is important as clients – particularly the very wealthy clients – create more complexity in their lives to take advantage of estate planning, having somebody that understands all the pieces and can simplify it is of great value.

Where do advisors add value? A lot of consumers really do need an interpreter.



And then having a quarterback because when you have great wealth and you get the complexity of an accountant, a lawyer, some tax strategies, things of that nature – somebody who understands all the pieces is of value. I would argue that the basis point methodology in our industry is tired and needs to go away. There’s no correlation between value and the basis points they pay. It’s just what people are used to paying. I think it should be a flat fee that’s based on complexity and the opportunity to add value.

So I can expand on anything you want there but I didn’t want to run on too long with that answer.

Angelo Robles: No, that’s fine. And my next question, and likely my last – we took enough of your time although it’s incredibly valuable for my audience. And I’m asking you a touch out of sequence. It was probably more applicable three questions ago. Looking forward in the future – and by future, I do not mean ten or twenty years – the future with technology is likely measured in eighteen months. In the next year or two, would it be possible and logical for very large families – a couple of hundred million dollars and up – and understand the principles of what we spoke about from inter-face to, some of the challenges or fallacies in their “alternatives” to the tremendous value of tax harvesting. That although they will likely still have direct real estate, some direct fixed income, and ownership of private companies so there’s always going to be a need for someone

to organize that or reporting or many different aspects. But for the public securities, whether currently individual securities or ETFs but likely, we mentioned with what’s occurring, taking an index then owning the underlying securities very, very easily. And for many families of great wealth, maybe that’s only 5% or 10% of their portfolio. For some, it may be over 70% to 80%. I’ll bet you for most, that probably touches probably 40% to 60% of their portfolio, that robo advisors – and I know the term’s likely going to change so we’re using perhaps an antiquated term – effectively will manage that equity part of their portfolio.

I think the answer is yes and of course, I want you to agree or disagree but maybe expand a little bit upon why, even within a short number of years, that likely should be the scenario.

Steve Lockshin: I think it should be the scenario today. For the core portion of their portfolio, I believe clients should use technology – so we’re calling it robo advisors – to allocate, rebalance, tax loss harvest. To the extent they want to add alternatives around it, fine. To the extent they want to have other securities that you can’t buy through the robo advisor, that’s fine, too, because aggregation is now pretty much available everywhere. And if it’s not, it’s soon to be ubiquitous.

So today, I think clients can drop their fees by a significant amount, which truly drops their bottom line. I don’t think they’re giving



up anything in value. And still address their interests, their areas of concentration, their objectives around alternatives or real estate. But think of the time and expense that’s freed up around the unnecessary complexity in their core portfolio. So long answer to I completely agree with you.

Angelo Robles: Well, of course. Thank you, Steve. On that note, for the audience that is listening to this or in a transcript that will soon follow although in that case, it will be easy. But those that are listening in that want to follow up with you, if you could maybe note your contact info, I’m sure they’ll appreciate that.

Steve Lockshin: Certainly. So AdvicePeriod.com, no spaces, periods, spelled out, is our website for our advisory firm and a lot of the philosophy that I’ve discussed here is on that site, as well as the study I mentioned. And if you’re interested in some of the FinTech companies that I invest in that I think families and family offices could benefit from, Lockshin.com. You can see the companies that I’ve invested in. They’re all FinTech-related. And some of the things that are out there – back to my parents – weren’t available a year ago. You can sign up for FeeX for free, link your accounts, and it’ll tell you what you’re paying not only your advisor

but all the underlying investments as long as they’re liquid. And I suspect in the future, they’ll be able to handle illiquids, as well.

So lots of neat stuff out there and every month, more and more stuff comes out.

Angelo Robles: That’s fantastic. I’m sure that’s going to be a great resource to those listening in. I thank you so much for your time today. We are very fortunate to have been joined by Steve Lock-shin. We look forward to hopefully doing many more.

On that note, this is Angelo Robles at Family Office Association. Thank you for listening in to today’s audio podcast with Steve Lockshin. We look forward to the next one. Steve, have a great day.


the family office association audio series: volume 25 with ... · family office association is a...

Documents