Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day, we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast map. We're down here at the broadcasting live from Commonwealth's twenty twenty three National Financial Advisors Conference, or at the Gaylord Rockies Resort in Aurora, Colorado, literally right next door to the airport. I mean, you've plans of flying over, flying out's and for somebody likes planes, it's a great place to be here. We're joined here at the conference
down here by Trap Cloman, COO and President of Commonwealth. Trap, thanks so much for joining us. Thanks for having us down out here in Denver. Talk to us about Commonwealth. You guys have got it's like two thousand financial advisors. What do they need from you guys? Because these markets are very either they're very difficult to navigate, equities, fixed income, alternatives. How do you try to help your rias out there?
Yeah, it's it's a fascinating and endlessly challenging opportunity for us because so much is continuously changing, both in the financial markets. Frankly, technology has become such a big part of any business, but especially for financial advisors. And then of course you overlay regulation. So as you think about the opportunities we have, it's to be a great business partner for these rias and duly registered advisors who really you know, their greatest opportunity, the greatest value, is their
relationship with their clients. So if we think about our role in the ecosystem, how can we maximize their time
their opportunities to spend time with their clients. Uh So, yeah, we look through our research team to take on as much of that work as possible, and especially in these markets and you know volatile global political events, bringing our economists to bear to help them help navigate that, you know, really build a lot more portfolios, bring more takeechnology so they can do research faster, trade faster, and then white label and communicate it out to their clients so they
can really present themselves rightfully. Is subject matter experts and really you know, tying personal needs on an individual level to you know, the marketplace and I just think that's a fantastic service that they do, you know, for over five hundred households in America, and you know, we're very proud to be a part of that.
So when I talk to some of the rias around here this year and other years, they say, Man, the back office stuff is really consuming more and more of my time. That's where I need some leverage so I can talk to my clients. So I can you know, really provide some value out of advice. How do you guys try to address that?
Yeah, that's exactly it, and it's only growing if you look at some of the rule proposals right now about protection of consumer data, which we fully agree with, but the difficulty in navigating that and managing the technology. So one of the values of having scale and being in the business that we're in we can focus on the complexity of trading, of compliance, of technology and you know ri I as. You know, if you look at the history,
it really started upstream with large institutional rias. And what's great about what's going on in the industry is that's been moving downstream because it goes downstream to you know, smaller, more retail focused uh RIA shops, there's greater need to outsource more of those capabilities to subject matter experts, and we have the size and the scale to get incredible technologists, incredible INFOSEC people, you know, great people again in our
research teams, if you will. So we really look to surround them on every way possible and then you know, be there to meet them in their needs. Because every advisor is also different. We don't take a cookie cookie cutter approach.
They're all different.
But you know, what's the average size of the of the I R I A that you guys are supporting And is it easier now for them to compete with the big banks than it would have been, say ten years ago.
Yeah. Absolutely.
So.
We we have over twenty two hundred advisors, but they're in about nine hundred offices together, and so we tend to measure productivity across those offices and it's about two hundred and forty you know, two hundred and fifty depending on the market's million on average per office. And so outside of the wirehouse landscape, you know, we have the
largest producers in the industry. When you start to look at the regionals and independence and some of the insurance and bank place and one of the reasons we have been so successful, I love the question, is because a lot of the capabilities that used to only be accessible in that bank, you know, the wirehouse, the large bank environment, are now available much more broadly and individual rias you know, can't necessarily access that on their own, and so there
are more and more business partners who are bringing more alternative investments, banking capabilities, more sophisticated trust solutions, high net worth absolutely, and having you know, a monopoly on internal product and a fiduciary world isn't an advantage anymore. So I've really like kind of the democratization of what's going on in the industry, and it's really given advisors a lot more choice and flexibility and how they do their business, which is obviously great.
Why does and I read about this.
I've been on Wall Street for over thirty five years, and it's been a constant trend advisors leaving some of the big wirehouses and going out independent, and it kind of, I guess it ebbs and flows in terms of the of the pace. What's the general reason why an advisor would leave a Merrill Lynch, a Smith Barney and kind of go out on his or her own.
Yeah.
The reasons have you know, changed and involved and fluctuated over the years, but one of the constants has been ultimately you are now an entrepreneur, you own your business. And one of the fascinated trends, one of the great trends going on in the industry is the value of
those businesses is going up significantly. So I expect to see that trend rise because when you're as an employee, uh, you know, you're obviously you paid your salary hopefully you know, they treat you well on the way out, But ultimately it's the bank's book. It's the bank's clients that they're going to you know, push it back out to all of their other employees. When you've broken to independence and you own your own shop, you can you know monetize
that business, uh for great value. And so if you think about your own financial planning, you're getting a higher payout and you can sell your business at the end financially, it just makes a world of sense. And then you know, uh, the other big trend as advisors really like having the autonomy and the flexibility to make their own decisions and put their clients first and not to say that isn't
necessarily happening in the employee model per se. But there's a lot of competing, uh, you know, priorities in that type of environment. When when you're an employee, and also especially of public companies. Uh, when when you have the opportunity to go independent, you're your own boss and we're a partner for you. You don't work for commonwealth, we support you.
What's the what's the typical kind of I guess asset allocation for one of your rias? Is it you know, stocks and bonds or is it also alternatives? I guess how sophisticated did they get? How how far away did they get away from that sixty forty portfolio?
Yeah, the sixty to forty portfolio is definitely evolving, but it's more in the construct of it. So I think the end result is greater diversification. But you're obviously seeing much more use of ETFs than mutual funds for you know, greater tax efficiency, much more demand for SMA solutions with something separately manage the council where you can have you know, individual holdings within a portfolio, a managed portfolio and an index,
but then you can self select a little bit. So if you have some preferences that align with your goals or beliefs, or you have some holdings that you know you don't want to part with because of tax consequences, but you want to jump into a model, You're not forced to sell out of your position just to adhere to a model. So it gives our team and our advisors the ability to really make many more investments much
more individual, uh, you know, customize for their investor. And so yeah, at the end of the day, we're seeing steady growth in SMAs and you know which ultimately hold mute funds, ETF stocks, fixed income, but also you know, greater growth in alts. You know, I mentioned a minute ago how the democratization RIA is moving downstream. The same with the investment product. The massive flin American has now far greater access to alternative investments and you know funds
of funds with private equity and hedge funds. So we're seeing for you know, greater demand there and opportunity, which is great.
So what's your view on the economy given your position there?
Trap I far smarter people than myself who spend a lot more time on the economy. In short, the way I, you know, I try and think about it is if you are chasing whether it's the markets, interest rates, or the economy, and trying to run your business solely in that moment, you're often going to be left behind. What what how we like to manage commonwealth and work with our advisors is see through the economic uh, you know, variables in the market fluctuations and the interest rate volatility.
Uh.
Plan long term as as best you can. And of course you have both businesses and clients who have immediate short term needs. And then again, the people are far smarter than myself come to bear and can really help out in those situations.
TRAP undergrad from the University of Virginia. I'm a big fan of the WA Who's one and five in football?
Yeah hopefully not the football team, Yes, yeah, I go Who's But yeah, it's it's it's real hard these days, and it's been hard for a long time. My daughter just went to Syracuse though, so I was all ready to follow Syracuse as well, but that they're struggling too, So I guess I have to wait next year.
Yeah exactly, But you always have a basketball season as well. Let's at the Paul Truder Jones Arena.
John Paul Jones, John Paul Jones.
Yeah, okay, awesome, very good stuff, all r beautiful place. Yeah, it is all right. Trep.
Plumbing, thanks so much for joining us. Trap is the COO and president of Commonwealth. They're sponsoring this conference here in Denver, Colorado. Just outside of Denver in Aurora, Colorado. Some good stuff out here.
You're listening to the team Ken's are live program Bloomberg Markets weekdays at ten am Eastern.
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Matt Miller, he's in that Bloomberg Interactor Broker studio in New York City. I am here live from the Commonwealths twenty twenty three National Financial Advisors Conference. We're at the Gaylord Rockies Resort in Aurora, Colorado, and Matt I can report that the sausage biscuits are to die for here.
Awesome.
Fire you right up, get you set for the rest of the day. All right, let's talk to our next guest, your Advance Bars. He's a wealth strategist and founder at your Dedicated Fiduciary YDF. Vance, thanks so much for joining us here. Tell us what you guys do at y DF.
WHYDF is a family office style fiduciary financial planning firm that discretionarily manages assets for our sixty seven families which are all around the country, and our focus really is in the advanced planning area. Prior to founding my firm eight years ago, I spent a decade traveling the country full time, specifically consulting and teaching private wealth managers on
how to invest for their high net worth clients. And I realized that much of the industry, unfortunately doesn't focus on advanced planning, and that is why I started our firm.
Hey, Matt Vance, he's part of that financial mafia there, Danielle Di Martino Booth, David Kotok, all those folks Camp Kotok know, so he goes to Camp camp Kotok. Absolutely, Hey Vance, I'd love to just kind of get here. We love talking to Danielle and mister Kotok and kind of like to get their views. So when you go up there and you chat with those really smart folks about the markets, if you had to go up there today, what would your call be?
Right now just in terms of the markets, the economy, how are you looking at things?
It would be the same call that I had a couple months ago when I was at Danny Camp Kotok, which was amazing because I have read and corresponded, you know, with these folks, and then to be a peer among them is just truly amazing. I'm in the higher for longer camp, which is an unpopular view.
Higher inflation, higher rates kind of yes, okay.
Yeah, very much so, and there's there's rationale to that.
My view is that the economy changed during COVID, and there's this collective palpable belief not only among our clients but also the investing public that because of the interest rate raises visa Viva FED starting in March of twenty twenty two, that unemployment is going to spike and that we're going to have this recession and it's going to be horrible, and if the FED is going to cut rates back to zero, launch the printing press again. And
I fundamentally disagree with that. During COVID, people age fifty five and older were able to retire largely. Hey, you know what, it's a pleasure to be here, right, I'll get there someday.
I hope.
I'm in no rush, by the way, But in any event, they were able to.
Retire because of the large s of their nest eggs, which was a product of the thirteen year quantitative using zero interest rate policy era that we had. People thirty years of age and younger were able to move back in with mom and dad and go back to school. So how human beings behave has materially changed, and because of that we have a different economy, if you will. If the Fed were to come out and cut rates now, my view is that it would reignite inflation and we
would be in this sort of vicious cycle. So if we look at the real rate, which is interest rates minus inflation, were at about two and a half over the last five decades, what has it been about two and a half, So we believe that we're not going to see a precipitous drop in that. Because of that, the investment landscape has in fact changed, But there's opportunity there.
What do you think about you know, Paul's been asking this allocation question. I heard top I heard the surveillance team talking about it this morning as well. Forty sixty we're supposed to see a comeback, and it seems like bonds and stocks are moving the same direction every day. How do you solve that? Solve that problem.
Interestingly, cash is no longer trash because of the interest rate and environment that we are currently in. Clients have come out and pointed out the fact that we can really have a great return stream in money markets and or tea bills. This is this funny term tea bill and chill. And we were an early adopter to the tea bill trade, having largely blown out of bond mutual funds in December of twenty twenty one. So if you rewind back the Fed, the House, the Treasury, we're all
saying inflation is transitory. Inflation is transitory. Inflation is transitory. When you hear that messaging consistently over multiple months, yet the inflation data keep increasing, Maybe just maybe it's not transitory. And we all know the rest of that story. When we look at the correlation between equities and fixed income, it is important to diversify, but we have to go back to the pre COVID era playbook and understand how to deploy across equities and fixed income and real estate
and so forth. So given the interest rate and environment, we think we're pretty close to the FED largely being done. That creates an opportunity for getting back into specific types of duration, whether it's individual issues or some bond funds or even potentially ETFs. Regardless, we're going to be long duration here in the next three to six months, depending on how it plays out.
All Right, So we sit back here and we've got a FED that I guess we're high.
I'm in the Campta.
It is just kind of high for longer, and I think I think eventually they're gonna cut because I need to refinance my mortgage I just took out. When you talk to clients, one of the things I hear a lot when I'm talking to private wealth is family offices and kind of just tax planning and estate planning. I mean, do people get that right yet? I mean, do people you talk to are they are they savvy enough to kind of deal with that?
No, And having spent thousands of hours inside of wealth management firms and with financial advisors for a decade, that was my largest observation. There's a huge generational shift in terms of asset transfer that's going to happen from the boomers to largely Gen X, but also millennials. And people like to make jokes about millennials, but let me tell you they're a very purpose driven cohort. They're really smart. They grew up with technology. They really don't need to
have help selecting ets. The real alpha, if you will, is in the advice idiosyncratic to the family. And my cry to the wealth management industry is to bring maximum value by way of incorporating true tax planning. For example, a financial advisor cannot bring maximum value to a family unless they are literally looking through and analyzing the tax returns.
I'd liken it to this. If a client has ever been.
To a medical specialist, what's the first thing they ask for the general health history from the GP, Well, I need that. I need the equivalent of that, which is the last three to five years of tax returns, so that I can look for different planning opportunities. Big planning cliff coming up, which is the sun setting of the Tax Cuts and Jobs Act, and that will happen December thirty first of twenty twenty five. We're going to blink, it's going to be here, but the current estate tax
threshold will be cut in half. So the largest underserved cohort in the wealth management industry is that million to twenty five million.
Dollar liquid profile.
Why because many of the retail financial advisors and I'm talking old guard retail financial advisors don't have the advanced planning technical expertise and acumen to understand certain things like idgits and islets and grots and different types of grand tour trusts and so forth.
And if you're.
One with a really high level money problem, which is having twenty five million liquid a lot of the private wealth firms don't focus on you because their minimum is fifty million.
And above me.
And these are big numbers, right, But there's a huge opportunity. And one of the great things about Commonwealth is that there's a big push for the advanced planning area with respect to bringing maximum value.
All right, So I gotta go to this because this is a theme I've been going on.
University of Maryland.
The worst conference decision of all time for you guys to leave the ACC and it's set off twenty five years of disaster in college sports. Twenty five years later, what did the Terps feel about their.
Moved leaving for the Big ten?
I'm really sorry to disappoint you. So I love San Diego, California very much, and I grew up in Maryland. Right native of Maryland or not crabby, I might add. But I had moved to San Diego at nineteen and realized that if I stayed, I probably would never go back to school. So I went back to Maryland, to the University of Maryland because they have a great neuroscience program. Yep,
seldom do I use my undergrad degree at neuroscience. But then again, i'd use it every day when looking at portfolios and estate planning and tax planning and so forth. But I couldn't tell you the first thing about the terps. As soon as I graduated, I went right back to San Diego. Smart move life had a different plan, and I ended up in institutional investing and then here.
Good awesome stuff. Vince, thanks so much for joining us. Vance.
Barci's a strategist, a founder at YDF. That's your dedicated fiduciary. I working with a lot of the folks here at Common, with a lot of the rias at Common.
Author.
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Fuck now about politics, though, because yesterday the GOP chose a Speaker of the House candidate, it's not been brought to a vote on the House floor yet and may not be brought to a House a vote on the House floor this week. Wendy Schiller joins us professor over at Brown University. Wendy, this is obviously a gigantic mess. And I noticed today that there's a few never scalezers, which I think that term is meaningless because of course they'll vote for scalize if they get what they want.
But one of them is George Santos. So we're in a position where the Republicans have to bargain with George Santos to get their candidate elected as House Speaker of the House.
But you're raising a really interesting point because also any measure to expel, because the House can expel its own members. They can censure, but it can also expel, and so any measure to expel George Santos requires that there'd be a governance structure of the House, that there'll be a speaker in place. Now the interim Speaker, Patrick McHenry of
North Carolina, he can do that. He can be in the House that way, So they could actually try to kick George Sandos out before they have repeated votes on the speakership.
This is an absolute to.
Me, a crisis for the Congressional Republican Party, but not necessarily for Donald Trump or Ronda Santis or Nikki Haley or Tim Scott or any of the other contenders for the presidential nomination. So there are you know, there's pressure on the Republicans, but it's really how do you keep
the House? And are the voters of California New York who really gave the Republicans the majority with additional seats and flip seats in twenty twenty two, are they going to be happy with this and put up with this or will the Democrats manage to put a moderate up in those races and take those seats back.
One of the other things I noticed, Wendy, you know, we all talk about the fact that maybe the Senate needs to come down here and like put an adult in the room, right, But even when you know, Kevin McCarthy does a bipartisan deal, and of course he's punished by being thrown out of that position. But even then, what they're, what the adult in the room is allowing
them to do, is spend recklessly like children. So it's like there's no good solution, right, either they're shut down and not governing, or they're governing but spending like there's no tomorrow.
What's going to happen.
Well, when you say spending, I goes, there's no tomorrow. There was a debt ceiling deal.
And I'm saying, if you keep running one and a half trillion dollar deficits and we have thirty three trillion dollars in debt, that's not the way you should run your finances.
So what's interesting to me, though, is that the choices.
That are framed, I think are a false dichotomy for us, for the American people, for everybody.
Right, you say yourself, oh, well, you know you have.
To cut this kind of spending, but we still want to have tax cuts and give money back to the American people. But the American people also need a national defense, they need roads, that aren't going to destroy their cars. They're going to need some sort of mass transportation. They're going to need climate help to adjust the climate change, they need disaster relief.
How do you pay for all that? You can't cut all the revenue and.
Still pay for all these things that Americans are used to, not to mention the big entitlements, which as you well know, are about thirty to forty percent now of the federal budget, which are just you can't touch them, right, So.
Why why can't we touch them? And how much longer do we have enough money to pay Social Security without borrowing?
Well, I don't know. I'm old enough to remember.
You know, the last two times SO Security was in crisis and.
They came to terms.
They raised the age, they raised how much money they have to pay. You know, one of the good things I think is that income levels are now adjusted for inflation. They go up in terms of how you know what income level is the cap I'm paying So Security. You can raise that cap quite a bit more and still generate money. People are living longer. We want great healthcare
in America. Therefore, if we want everybody to have it, I don't disagree with you that cuts need to be made, and in particular, the Democrats have a problem because they want everything from the federal side. But in fact it's easier to hold things accountable sometimes at the state level.
It's closer to home. Theoretically, I'm a tiny state, Rhode Island. We have a huge budget. We can't keep track of all the money.
So government itself is you can argue unmanageable and inefficient, but targeting programs that actually affect that, you know, the people who need the money most, it's probably not the smartest way to make government work better.
And they're just so polarized they can't see straight. But I don't see any of the people, including.
The eight people who are blocking the speaker, turning down federal money.
Some states are trying.
To do that because they don't want implement policies that's you know, the state government. But those federal commerce people are not saying no to the Highway AID, they're not saying no to the Day After AID, They're not saying no to the fundamental things that the federal government funds. So there's also a fair bit of a hipocracy that runs rampant, not just the Republican side, but the Democratic side as well.
Hey, Wendy, let's switch gears a little bit of focus on Israel that it was quite the past two or three days for President Biden. The administration Secretary Defense Lincoln is in Israel as we speak. How do you kind of view the Biden and the Biden administration response so far.
Well, there's the national security element of course, anti terrorism, and I think many people have equated the sentiment.
In Israel to the one that we experienced after nine to eleven, So.
The shock, the destruction, the loss of life, but there's also a tremendous amount of loss of life now in Gaza, militarily people, but also Amas, but also civilians, many, many civilians. This is a really difficult time for the Democratic Party politically because the very left wing of the Democrat Party, as we saw in New York last week, has been advocate at very vocal in their support for Palestine, and you know, not as willing to criticize Hamas sometimes as
other people. This is very delicate for the Democrats who need every single vote possible a year from now. And how do you actually perceive a strong coort for Israel if Israel continues to defend itself but the casualties civilian wise in Gaza increase, that becomes a problem for the Democrats, and you know, that's a very hard balance for the president. The sentiment in America is generally pro Israel to defend
itself against the terrorist attack. How long that lasts depends on how much involvement Biden approves in terms of the United States.
No boots on the ground. I think there's no support for that in America. But what do you do?
How do you give military support but stay within the boundaries. Biden has a lot of experience, and one thing Americans might want to think about is when you are electing the next president, how much.
Experience do they have.
Dealing with these kinds of crises versus having no experience with them. I think that's going to affect our presidential considerations as well.
I wonder if they can tie aid for Ukraine to aid to Israel, because a lot I'm sure of these, especially right wing Republicans, who don't want to help Ukraine defend itself against a Russian invasion definitely do want to help Israel. Do you think they tie those things together or is it insulting to do that?
No?
I mean I mean the Democrats putting those two things together. I think strategically fighting against incursion and invasion.
Might be a theme.
And certainly Russia has been accused of atrocity and Ukrainian soldiers have also been accused of atrocity, so I think.
It gets very tricky to do that.
But it also limits the capacity for Republicans to be isolationists. Now right, you can't say we don't want to get involved, but we want to help Israel. That's just really hard to do an independents and districts won't really put up with that, I don't think. So it puts the Republicans in a tough mind to say yes to Israel but no to Ukraine.
And I think you're right, but I think to actively tie.
Together in a package has risks for the Democrats as well. But the pressure is on the Republicans to decide whether they want to sort of say no to in being involved in anything, but then get credit for supporting a response against Hamas.
So I think it puts pressure.
And since there is no leader really of the Republican Party in the House right now, you know, the spokesperson's Mitch McConnell on the Senate sign and we know that he's been having health difficulties.
But he has experienced. He doesn't you're a fan of experience. Mitch has it.
Mitch has it, but there's a fair number of other Republicans in the Senate right now that that do. And it's it's it's interesting to me how we you know, one year it's the Senate's fault. They're filibustering, Ted Cruise is shutting everything down.
They're horrible. Let's get rid of the philibuscher, Let's make it more.
Like the House.
And then the House falls apart and we look to the Senate and say, oh, can't they save the day.
So I think we have a christ the leadership on all sides, more so right now in the Republican Party.
Than the den.
All Right, Wendy, thank you so much for that. We really appreciate getting your thoughts there. Wendy Schilder, she's a professor at Brown University.
You're listening to the Team ken'shar Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
Well, we have Asam Naji here in the studio. I'm pleased to say he's the president CEO of Marcus and Milla chap and we're going to talk a little bit of real estate with him in the face of, you know, rates that just continue to arise.
Paul Hassan.
Paul the other day was quoting, I think the bank rate thirty year mortgage out to eight percent, which has got to put real pressure on a market where affordability is already off the charts. What does this mean for real estate?
Back with you.
The answer to that question, Matt, is a severe disruption in trading activity, in investors' ability to value real estate, and a lot of uncertainty out there. On the housing front. We're seeing anyone who has a low interest rate already declined to bring inventory to market or stay put, which
is really reducing sales velocity there As a buyer. The affordability has gone so out of control that people are renting apartments longer, they're staying in their apartments much longer than anticipated, and the renewal rates of apartments are actually showing really good rent growth. On the commercial side, it's
not just the price to this location. It's the fact that banks have pulled out of the market by pricing themselves out of the market, and other lenders have not been able to step in to make up for what banks normally do in financing commercial real estate. So there's a real log jam in the marketplace as we speak.
So on the housing side and the residential side, there's just not any preowned houses trading hands. Right on the commercial real estate side, what you're saying is people can't get refinancing that they need, and so what are they forced to sell.
Well, the refinancing issue in and of itself is a serious one because the loans that are maturing today were issued five to seven years ago. Thankfully, a lot of equity has been built up, a lot of rank growth has been basically achieved, So not every maturing loan is in trouble, but there is a pretty good chunk of the maturing loans, especially in office not really so much any other property type that is having to either be sold as distressed or having to get a workout between
the lender and the borrower. The Treasury and the Fed have really pushed lenders to work with the borrowers to avoid a fire sale if you will. So we're not expecting a huge wave of fire sale and even in the office sector, but you're already starting to see some distress sales in older office product. Newer office product is actually performing better than most people realize.
All right, haseam, I am a huge bear when it comes to commercial real estate in you know, particularly the office space. I just think we have a doom loop kind of building here where you know, and you know the values of these real estates are nowhere near enough to support their debt. And it's going to become really apparent when we see some transactions across the market and reset the market. So I'm wondering, have we ever have
we seen anything in like New York, Chicago, San Francisco, La. Like, I haven't really seen any big, big property in New York trade. And when it does trade, I'm afraid it's gonna be at thirty forty fifty percent discount.
How are you thinking about that?
It really depends on the asset. Some of the assets that are going to trade will phone the exact description that you're sharing right now. Older office product has vacancy rates in the twenty to twenty five percent or higher newer office product on average, meaning the build in the last fifteen years or earlier, is half that about eleven percent. So there is a huge dichotomy and the obsolescence of
older office buildings. Unlike obsolescence of shopping centers, where you could knock down a shopping center or an old warehouse that is obsolete and have a reuse or reimagination, it's much harder to do that with older office product. So the reuse is one rescue channel. Another is just a pure discounting of the asset to what the fair market value would be. Believe it or not, there is a
lot of entrepreneurial buyers of that product. We're actually helping a number of them either go directly to the lenders or wait for product to come to market, but the cycle will be pretty ugly for that older office stock that you're describing, Paul.
Yeah, what's going to happen to you know? Bloomberg Business Week did a cool piece last year about the Third Avenue Corridor, which has a lot of that office space with the problem that you're talking about. It's just unconvertible. There's no way to make it into apartments, and nobody wants to use.
It as office space.
What happens do We just have a ton of storage space buildings all the way down Third Avenue and in the middle of Manhattan, some of the most expensive real estate in the world.
Here's what I predict. I predict opportunistic buyers will come and buy it, as Paul was saying, thirty forty cents on the dollar. They'll upgrade it, do a value add and wait for the return to office to improve. It's never going to go back to pre pandemic. But I also think we've come off the lows of people's resistance to come back into the office. Urban America is not
dead forever. It's hit really hard right now. But those opportunistic investors, because of the basis points they're going to basically come in on acquiring those assets or the price point versus replacement cost, have a much longer kind of a viewpoint on it and a time horizon than a two or three year hold.
So there's just a repricing then of assets. That's your view then, and this gets big, this is like thirty five thousand feet, But what's your view on the cities of America?
Well, Urban America is taking it on the Chin, no question about it, whether it's Chicago or San Francisco or Seattle or anywhere else. Now, if you look at Miami, if you look at even the comeback we were seeing in somewhere like Seattle versus San Francisco, Chicago, or New York, you can see that the comeback can be affected in those other markets. It's just going to take a lot
of time. New York, adding one hundred thousand jobs in the last twelve months is actually much better off than other urban areas because we are creating those jobs and a lot of young people want to live here.
Yeah, that's pretty well. We haven't got the congestion charge yet, so just wait for that.
And John Tucker is.
Going to be staying home and doing all of his broadcasting from the shore.
But Matt, you know, one thing to add is there is such a judge the book by the cover. Everyone's talking about commercial real estate as though the whole industry is older office build and older office buildings are an important segment. But office, as I pointed out last time I was on the air with you guys, makes up fifteen percent of the total outstanding commercial loans. And if
you look at the entire commercial real set industry. It makes up twenty four percent of the total bank loans outstanding, so it's a much smaller percentage of risk than people realize. And we're concerned that this perception of older office is going to affect financing for self storage units or shopping centers even or apartments that are doing much better.
So I was going to ask, then, looking at the whole pie of commercial real estate, and office space, as you're pointing out, is just a fairly small piece.
What are the parts of the pie that you like?
Well, fifty percent of the outstanding commercial loans held by banks is in multifamily, ninety five percent occupancies RENK growth has flattened out after jumping almost thirty percent in the last three years, so it's taking a little bit of a breather. And within multi family, we have a lot of assets that were financed on short term financing with debt fund in the last three years that are already coming due. They're having some problems refining as well, but nothing like the office market.
But do you see opportunity there then? I mean, in multifamily, if you get a good deal a low valuation, do you go and snap it.
Up absolutely for any property that on an equal to equal basis is coming to market fifteen to twenty percent below peak pricing as of March of twenty twenty two, we have multiple bits, multiple offers for those assets.
All right, fascinating stuff, Sam, Thanks so much for coming in. I always appreciate you stopping by. Asam Naji is the president and CEO of Marcus and Millichapter.
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We're broadcasting live from Commonwealth twenty twenty three and National Financial Advisors Conference. We're here at the Gaylord Rockies Resort in Aurora, Colorado. Joined next by Shelbyquino. She's a certified financial planner at Independent Wealth Management. She joins me here at the conference here in Colorado. Shelby, so we'll talk about the markets and stuff like that. But what I
find interesting about your background. You've been into business a long time, but you lead an all women team of financial advisors. Now, I do see in the mixture a lot of women here, But tell me what's the percentage of women in kind of like the in your line of the business, financial advisory business.
Yeah, thank you, Paul, good morning. Right now, the statistics are still under twenty percent women financial advisors in our industry. We haven't grown the way we'd like to have grown, certainly in the last ten years, so we're working on that.
So I guess the issue here is for a lot of folks is let me get people into these financial services.
I've had a lot of experience in recruiting. At the entry level.
You get a lot of diversity because it's easy to go onto a campus or something and find a diverse incoming class. But then four, five, six, seven years later, when it's time to do for the promotion for leadership positions, it's not so diverse anymore. Do you find that in your experience as well?
Yes, we do, and we're trying to change that. I'm not sure we know exactly why that is. Certainly there's some extra pressure to you know, run a financial planning practice investment firm along with everything else you want to do personally.
So yep, all right, So let's get to your business here. Talk to us about just what you're telling your clients these days about these markets. You know, last year was a tough, tough year, whether in your equities or you're in fixed income. This year is a little bit better, certainly the equity side, if you're in the right names. I guess what are you telling your clients these days?
Yeah, you know, this has been historic. Celebrate forty years in the business next year. And I think that twenty two having the combination of the stock and the bond market in negative territory, the average balance fund sixteen down sixteen to eighteen percent. It tested the best of the best. We do our best to assess where a risk temperament is with our clients and run through the respective you know, tests on that. But this past year we found out
where the risk temperament really was. So we're telling them it's, you know, we got to take a deep breath. With us. We're huge proponents of having emergency cash set aside so that we can actually allocate a portfolio of quality investment holdings to see them through on their short term, medium term, long term goals. But this has been such a balancing act between the technicality of this market and the emotional wherewithal So it's it's been a it's been a heavy lift.
So do you still how do you diversify a portfolio now or how do you protect against correlations?
Yeah, you know, that's that has been an interesting challenge obviously last year, where we've historically relied on the bond market to stabilize the portfolio and create that income stream, we couldn't go there, and so there was heavier cash positions. I you know, we look out in every sector of the market to determine you know, that risk reward temperament, and it's been you know, a combination. So there's some you know, solid dividend paying stocks in there, We've got
some commodity exposure. We've tried to keep it simple. I you know, historically have used some of the more advanced instruments and not always been rewarded for the ex or expense we pay. Internally.
Well, I mean, you could go I mean I've been telling people after twenty twenty two, where there's no place to highe equities down double digits, even most fixed income classes down double digits, which had never happened before. I can sit here at until your treasury at five point zero seven percent. Even my twenty seven year old daughter called me and says, I'm gonna go put some money into a Hi savings account for Marcus. So she's already playing the markets and she's in the music business.
So I can sit there in.
Some of these relatively secure places and get a decent return.
Yeah, so you know what, And Marcus has been a solid place for short term money and emergency funds. That's an easy call. So for maybe short term emergency funds, great, but we got you know, it's time.
To dip your toe in yep.
And I think perspective in this environment is the most important thing. And with all the noise that we've got going on out there, that's really hard to do.
All right, So what are some of So if I want to come to you, if I came to and I said that, you know, sixty forty portfolio, it sounds reasonable to me. What's what stocks would you look at? What sectors would you look at? Or how would you think about that five set out? You know, I've got my five and ten yere horizon.
Yeah, you know, Paul, I think it's actually we we love growth. I mean, this Ai, it's real. But I think at the end of the day, you have to be balanced the heavy you know, we've we've relied on the large cap space for the bulk of the returns, and I think it's time to make sure you've got the mid cap and the small cap exposure for the next wave. You know, we look at that one hundred year chart of this market. We've been through really difficult times.
Before we're going to get through this, you've got to be positioned to be able to take advantage of it.
Is I mean, you guys, and I'm sure everybody in Colorado is in fantastic shape, but the rest of America needs a little help. You mentioned AI, and it makes me think of what I've come to dub Ai Junior, and that's the GLP one drugs.
What do you think about that?
Is it really like a strategy changing development or is it just fun for us to talk about in a few stocks.
No, you know what, from the sounds of it and everything I've read, it sounds like it is a real thing. And I think, you know, the innovation that we're seeing in the healthcare space and also in the automotive industry is pretty mind bending. So, you know, used properly, I think AI could be enormously impactful.
Hey Shelby, thank you so much for joining us. Trancano Certified Financial Planner or Independent Wealth Management, Independent Wealth Strategies joining us here at the conference in Aurora, Colorado.
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I'm bringing Peter Essel. He is a senior vice president of Investment management and Research at Commonwealth, and Peter I spent a long part of my career in equity and investment research.
Tell me how you guys do it at Commonwealth?
Sure, absolutely, thanks for having me so. Our role is in support of roughly twenty five hundred independent advisors, where we cover everything from individual equities to mutual fund research to credit analysis on the fixed income side, and what we've seen as of late is that there's been a strong interest in creating model based solutions. So we've really partnered with a lot of our advisors acting more so as like an outsourced CIO capacity, where we support them
in their model construction efforts, monitoring, and so forth. In addition to that, there are a number of advisors who have elected to outsource investment management to us, and so we directly advise over twelve billion in assets and then advise on another about one hundred and fifty billion or so.
Wow.
Okay, So what's a typical I guess what's a typical ask from an RAA from you guys from your organizations to say, hey, should I buy Apple? Or are you know is this AI thing for real? What kind of request do you typically get? Absolutely, honestly, it's anything under the sun at this point, everything from AI stocks to the latest and greatest to going back a few years ago looking at cannabis stocks. And what we've seen recently is a lot of advisors looking for a red flag analysis.
So that is everything from taking a deep dive into a client's perspective of portfolio that comes over looking at structured products individual equities like you talked about. In addition to just general outlook and commentary around the direction of
the economy. So obviously with inflationary concerns persisting pretty heavily as of late, they want our views on interest rates and what that outlook looks like and how that should be reflected in their portfolio positioning related to duration and so forth. So honestly, it runs the gamut from individual security analysis all the way out to views on the markets and the economy.
So what's a red flag I mean?
Is that.
Is that like if I think two years ago, weedstocks are definitely screaming by because I see that, you know, revenues are picking up in the states where they're legal, and I feel like it's time to get in. But you come back and say, well, they're not federally legal yet and they can't do any banking, so and this would be a very bad idea.
This would be a very bad idea.
It can come in that form. It generally involves a look into a security as it relates to a client's
investment risk tolerance. So, for instance, if there's a high concentration in distressed debt for an eighty year old investor who has very little assets and as a conservatively positioned risk tolerance that would be a major red flag for US, obviously, But there are instances where, yes, on a security specific basis, where you have sort of these thematic plays that are very binary in nature, where they can either sort of the clouds or basically turn out into pennies. That would
be a red flag for US as well. But generally it relates to the client's risk tolerance.
So what are you telling your clients these days about, I don't know, just kind of you have like a market here that you guys are pretty constructive on the ECUADEM markets are not, So how do you how do you kind of frame it out for them?
Yeah, generally we try to deploy a twelve to twenty four month outlook and we often try to sift through the noise. And a perfect example of that would be March of twenty twenty, where obviously there was a lot
going on. Markets were down. I believe the SMP was down over thirty percent in the course of a month, and that's an environment where we tend to get a little bit more optimistic and like to add risk into our portfolios, and we did so on In fact, it was on March twenty third twenty twenty where we added equity exposure roughly eight hundred basis points for a sixty forty portfolio. So we like to look for those opportunities of volatility when when investors are rushing for the exits,
we're generally rushing in. But as far as as our outlook at this point, you know, there's clearly a lot going on on the geopolitical side of things. Again, we like to look through that noise and you know, deploy that twelve to twenty four outlook, and we are still optimistic. Heading into this year, there was a lot there were a lot of economists out on the streets saying that
this was the year of the recession. This is probably the most anticipated recession in my career, and we sort of take the opposite or took the opposite of you to that where we saw more of the goldilocks economy scenario, which thankfully has played out year to date. And we're somewhat concerned at this point because it seems like a majority of those economists have now shifted more in line with what our outlook is, where we continue to see
modest wage growth. We do believe inflation is going to to reach the Fed's mandate by Q four of twenty twenty four, And as such, we don't think that there's going to be a significant rise on the long end of the curve, and we're mentioning to our clients and advisors that they think that they should think about redeploying some of that cash that they'd stock potted. Peter does pass six to twelve months.
Does the spending of the US government not concern you? I mean, we, you know, post COVID are still running trillion dollar plus plus plus deficits every year, and you know we've already amassed such a huge debt it's towering over our GDP. That's the kind of thing that would make me, as an investor, want to join the bond vigilantes and drive those long term rates up.
Drive those long term rates.
Up right, I hear what you're saying. I mean, certainly next year the politicians will be throwing stones ahead of the election, and there's going to be some volatility as it relates to the fiscal deficit. But still at the DA I mean, the US Treasury is the benchmark yield,
the benchmark asset around the world. So even if there are concerns over our fiscal issues, there's going to be a significant amount of demand from foreign governance, from large pension plans that will help keep yields at a reasonable level.
What are you saying about the fixed income space again, I'm kind of a scaredy after what happened in twenty twenty two, where there's no place left the high equities or fixing come and I feel like, if I can get five percent for giving my money to Uncle Sam for a couple of years, that's not a bad thing.
That's that's absolutely how we're looking at it. So if you can get four and a half four point seventy five on a ten year treasury locked in and clip that coupon over the next ten years, we feel that's a much more attractive option than placing all your assets into a cash like exposure that perhaps is giving you a little bit more. You're getting five to five and a quarter, but will that be five and a quarter
for the next decade. We don't necessarily think so. So that's why we've been advising our advisors to think about inching out in duration and locking in some of those higher yields for the next ten years.
How much you use ETFs or how much do your rias use ETFs? Because when I came to the business, there weren't any ETFs, it was mutual funds. Now now the ETFs are taking all the market share.
Yep, they certainly are, I believe asset wise it's split fifty to fifty at this point, with maybe just a little bit more in ETFs. We are seeing them, and we've seen a lot of core satellite type portfolios which the core, the base is allocated to either index mutual funds or ETFs, and then advisors are rounding out that exposure with higher active share, higher concentration active mutual fund managers.
But certainly over the next few years, with the evolution of ets in the active space, we're really going to become product agnostic, where if there's a viable solution on the ATF side, if it's active, we can allocate to that. We'll take a look at active mutual funds, passive ETFs, et cetera. Alternatives.
Do your clients ask you about alternatives?
We do get private equity or private credit or other kind of stuff.
Oh, absolutely, both on the private and the liquid side, and the way we generally approach alternatives is that it's it's when it get we get asked, well should I allocate to alternatives? It's kind of like saying, well should I I'm hungry, I should eat food? Right, There's many different types of alternatives out there, as you mentioned, private equity,
private credit, there's managed futures, et cetera. So it really comes down to the type of exposure that you're looking for, the type of factor you're looking for in a portfolio. But certainly for higher net worth clients, we are seeing a greater interest as of late on the private credit side of things.
And that's where all the money's going. It seems like private right, all right, Peter, thanks so much for joining us. Peter sla He's our senior VP of Investment Management and Research at Commonwealth.
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