Catherine Keating on Wealth Management (Podcast)

Previously she was CEO UM. Previously she was Chief executive Officer of Common Funds and Head of Investment Management and CEO of the U s US Private Bank at JP Morrigan. She has really a fascinating background. They are one of the larger asset managers, and so what B and Y Melon does when it comes to UM, generational wealth transfer, and philanthropic planning and all these other areas related to

the core of of wealth management. They are very much a thought leader in the space and and there actions have ripple effects throughout the industry. I found this to be just an absolutely fascinating conversation. We definitely went deep into the weeds discussing things like certain types of retaining test guarante r trusts, but generally everything was very accessible

and quite fascinating. If you're remotely interested in the asset management business or financial planning, will strap yourself in because this is going to be absolutely fascinating. With no further ado, my conversation with Katherine Keating. This is Masters in Business with very Ridholts on Bloomberg Radio. My extra special guest this week is Kathleen Keating. She is the CEO of B and Y Melon's Wealth Management Group, which runs about

two hundred and sixty five billion dollars in assets. Uh B and Y Melon manages two trillion dollars and has over thirty eight trillion dollars in assets custodied. The firm was founded in seventeen eighty four by Alexander Hamilton's. Keating previously was CEO at Common Funds and head of Investment management at the US private bank for JP Morgan. Katherine Keating, Welcome to Bloomberg. Thank you very great to be here. So you have a fascinating background and I want to

start out delving into it. You were the first woman to be CEO at B and Y Melon Wealth Management, and you were one of the only women running investment management or the private banquet at JP Morgan tell Us about your journey. Well, thank you for asking it. You know, it's never about being the first. It's always about not being the last, right in anything you do. So let me stay with that. Let me start with that. You

know here at UM at B and Y Melan. Interestingly enough, you mentioned Alexander Hamilton's You know, we've worked with strong women throughout our history. His widow, Eliza, was actually our first client. People don't know that she was a powerhouse in her own right, sounded the first orphanage here in New York City. Uh So we've worked with strong women throughout our history. You know, as as far as my career, I guess like those people, I've gravitated to UM what

interests me? Right, We work hard in this industry. We want to make a difference. I've had a tremendous passion for trying to help clients, whether it's individuals or institutions, have better financial outcomes. And that's really our purpose that this company. We log it every day and we see on our computers. Our our purpose is to power individuals and institutions to succeed in the financial world. And so UM that's a large part of what has motivated me.

I also think that I just had experiences in my life that have demonstrated how important found financial advice is. Again, whether you're an institution or an individual. Um, when I was a young youngster, eight years old, my dad died very suddenly, and I watched my mom, I was the oldest of three kids. I watched her have to go back to work and then go back to school. She she was a school teacher, and she decided she wanted to go back to school and become a librarian. Um,

that was a career that she loved so much. She just retired a couple of years ago at seventy nine, And so I've kind of watched how important good financial advice is. Obviously, she had to do things like by her own first car. She took us all to the Bolvo dealer. Had done her research Bolbo station wagons with

a Sacist cars back in the nineteen seventies. She took us all to the car dealer, and I remember walking in and having the dealer look at her and say, um, where's Mr Kessler, And of course there wasn't a Mr Kesler. So again I've just seen you know how important um, sound financial planning, investment planning and decisions are in people's lives. I've also seen it an institution. You know, I was lucky enough to go to the college that paid for everything.

I served on the board for years, including through the financial crisis, and I know how important sound financial management is institutions too. It enables them to make it through cycles and continue to accomplish their missions. So, um, a lot of it is just sort of the basics. What motivates you in the morning and how can you contribute to people's lives through your career. So let's talk about

institutions for a moment. You spent a good part of your career as CEO of Common Fund, which was a nonprofit asset manager serving endowments, foundations and other financial institutions. How has that experience colored how you view the world of institutions. So couple of things are important to know about institutional investors versus individuals. The first one is that

every institutional investor knows what its goal is. So if you think about a college endowment, the goal of the college endowment is to earn enough on it's portfolio so that it can make distributions to support the mission. You know, typically four four and a half maybe five percent a year and still exceed inflation right, so called that you know it's inflations two percent and you want to distribute four and a half or five you want to have

returns of over seven percent. They know what their goal is. The second thing about institutions that might be different than individuals is that they have governance and process right, boards and committees. When you think about individuals, neither of those things is necessarily the case. Nobody tells an individual what

their goal has to be. They have to figure that out for themselves, and we spend a lot of time with clients about that, and you don't necessarily have the governance of a board and an investment committee standing in between you and making those decisions. So I think the two things about institutions that are so different is very focused on goals, very well defined, and have governance and process in place to help support it. So let's do

a compare and contrast. What when you're working with an institution, you know who's the head of investing there, and you know who's managing a particular committee. What's that like when you are working with the family, where there might be very different group dynamics, there's going to be often a husband and a wife. Sometimes there's an active second generation or even third generation. How different is working with individuals

versus institutions, So it's it's very different. And in fact, one of having worked in asset management with institutions and also in wealth management for the individuals, one of the things that I try to do is to bridge that gap and take the best practices that institutions have and try to adapt them to families. And so let me give you two real life examples, right, because two and eight a great example. Um, and I'll give you another one.

So what happened in two thousand and eight? We all know the financial crisis, and I was on the board of my college at that time, and just by luck of the calendar, we happen to be having a board meeting and an investment committee meeting on Columbus Day in October, which if you take your mind back to two thousand and eight, you might remember that was the day that all the CEOs from the banks went down to Washington

to take the tart money. So there we were having our regular board meeting and our investment committee meeting, and we had had we had done an enormous amount of work on asset allocation and the strategy for our portfolio, and we had done stress testing and all the things that you do as an institution. And so here we were in the depths of the financial crisis, with thanks CEO taking tart money, and we had to decide as a board and an investment committee, what were we going

to do. We're we going to do what our policy portfolio told us we ought to do, which is rebalance and continue to buy stocks as the market was going down, because that's what our policy had been tested for. And sure enough, we had to lock arms and um do something that was very hard, which was to buy and

rebalance when the market was down. And you tend to see institutions do exactly that because of all of the time that has been spent on the policy portfolio, and because they know time and market is one of their biggest advantages. It's more important than timing the market. On the other hand, when you look at individuals, they don't necessarily have that governance and policy in place, and that's one of the things that we try to do with

our clients. We have all of our clients adopt an investment policy statement and wealth management, just as if they were institutions, and then we try to help them stick with it when it's hardest. And you know, we can watch the industry fund flows and we can see whether clients actually do it. And in fact, interestingly enough, what you saw this year as the market was going down and you watch the flows as we do, right, you saw money flowing into cash. We saw record amounts of

cash and money market funds. We saw money flowing into bond funds. Um, we really didn't see a lot of money flowing into equity funds when the market was down in March, and so we know how hard it is to stay with your portfolio through the cycle. We told our clients to do that and um, you know, if they did, they participated as the market has has come back to reach all time hives. So let me follow up with a question about exactly what you just described.

When your investment committee and institution, which has a perpetual time horizon, is looking at a period like March oh nine or more recently this this past down draft in they're precluded from doing something silly because they have an investment policy statement which prevents them from market timing or there's no upside to a committee to say, sure, what the hell, let's jump in and out and see if we can pick up a couple extra basis points. There's

no financial incentive, there's no glory. It violates their own rules, so they sort of are forced to behave. Well, how do you translate that better behavior to an individual when you're working with them and they're nervous in a period like February or March. Yeah, so it's a great question, Barry. And again, what we really try to do here is we really try to court from the institutional asset management industry over into wealth management. The same institutional processes and

tools been felt institutions for so long. So, as I said, every one of our wealth management clients, we've spent a lot of time with them to actually develop an investment policy statement, just as an institution would have. And how do we do that. We do that by by first and foremost having to figure out what their goal is, Right, every family is different. There's an adage that we can't see one wealthy family. You've seen one wealthy family, and

that's true. Every family is different. Every family has a different near term and long term goal. So the first thing we try to do is really be clear on what that goal is. And most of the time we find that there's two aspects to a US like number one has to do with lifestyle. They want a certain um amount of income to support, you know, a lifestyle, particularly as they move into retirement. And then the second

tends to be about legacy. What are the things that you want to preserve in your family and they could be financial or they could be not financial, um to preserve from one generation to the next. Because our clients have wealth set out with them, and so we focused very very hard on what is that goal, and then we use a lot of modeling tools to show all

the variables that will impact that goal. Some of them are obvious, right the market and asset allocation right so well will trigger back and forth between different asset allocations to show the impact of them over time. Some of them are uniquely in your control spending rates. Every institutional investor has a policy on spending. Nobody requires an individual to have a policy or even a philosophy on spending, and yet it has an enormous amount of impact on

the wealth that you accumulate over time. Increasingly we take into account borrowing, right, our clients don't have to borrow, but just like major companies, that might make sense from a capital allocation perspective. Another thing that we have to take into account is after tax returns. Institutions don't pay taxes. Our clients pay taxes every year and every generation. So you have to keep an eye on after tax returns.

And so we've built models that help us to integrate all of these things and allow us to kind of show clients perspectively the impact of choices on asset allocations, on spending, on borrowing, on taxes, to try to help them chart not only the goal, but what are the things that I have to do to get there. Catherine, let's talk a little bit about the clients of of B and Y. Who who is the typical wealth management customer? Tell us about them? Sure, Berry, our typical client is

a wealthy family. It might also be entities that you think of is being associated with wealthy families. Foundations, endowment's family offices, family businesses, even retirement plans potentially related to families and family entities. So think about the whole ecosystem surrounding wealthy families, the people, and the entities and that's really our clientation. So you guys have been around for quite a long time. Is a fantastic run. Most of your current clients, are they legacies of of B and

Y being around as long as it has been? Are they referrals generational transfers? Where does the typical clients come from within the B and Y melon Um family? So great question, Barry about mostly half of our clients are referred to us from other clients or advisors to UM clients. So think about its half and then the other half comes from all sorts of sources, right just you know, the dynamism of the market wealth is being created around

us all the time. UM. We're obviously pursuing those opportunities. And we do have a combination of clients that have been with us many years. UM. We have a couple of families that have been with a six or seven generations now, which is just truly remarkable and something that we appreciate and try to earn every day. And then we have clients that you know, have just taken their

companies public and our brand new clients this year. So it's really all the sources that you would expect in a long tenure in institution like ours, and and how have clients expectations changed over the years in terms of what they're looking for from you guys, in terms of communication, what they're expecting in terms of performance. Has that shifted over the past decade or two? So that's yes. The

answer to that, barr Is is yes. You know, when I think about when I started my career in this industry back in the nine you know, the typical client might have been a CEO, a CFO with C, a senior corporate executive, and when that client retired, chances are he or she and very often it was the heat retired with a corporate pension plan, right, an annuity for the rest of his life and his spouses life, and

also anything else that they've accumulated in their savings. So when I think of the nineties, I think of wealth management is kind of an and you had your you had your pension plan, and you had any savings that you've accumulated on your own. Well, fast forward to this decade that we're in, and what we see is that, you know, there are very few company provided pension plans anymore in corporate America. Corporate America is shifted from company

provide attention plans to employee funded savings plans. So today everybody is responsible for their own financial futures. And that's a fundamental shift, and that's another reason very that we try to pour over into wealth management. All of the institutional asset management disciplines that you would have seeing a chief financial officer or a chief investment officer used when they were actually providing for people's long term retirements. That's

much less common today. And so our mantra for clients is, you have to be your own CFO, you have to be your own c i O, and we're here to help. H Quite interesting, the past couple of decades have seen a big flow of capital into passive products and indexes. What do you see from your perspective, how is that change in what's going on in the ultra high net worth investment family. So before we look at active or passive,

we look at the ecosystem that we're investing in. Right, what's going on in the global economy, because that's really the ecosystem that we invest in. And in fact, at the beginning of this year, I sent a letter to all of our clients, not knowing of course, in the beginning of January what was going to hold for us.

But recognizing that we were starting a new decades and as we've started this new decade, we looked at global economy, we looked at capital markets, and we we had forecap for our clients, you know, what do we think market returns are going to be in the next decade? And I actually quoted Bill Gates in that letter. He says, we always overestimate what's going to happen in the next two years and underestimate what's going to happen in the

next ten. And one of the things that we said to our clients about the next ten years is that we thought that market returns we're going to be lower, incrementally lower, not significantly lower, but incrementally lower going forward. And there was one major reason for that, and that is that all of the largest economies in the world are aging at the same time, China, Europe, and the United States. And we know what happens when economy's age.

Inflation tends to go down, interest rates tend to go down, yield curves tend to flatten, GDP growth tends to go down, and eventually market returns tend to go down. And we pointed out to our clients, but actually we've been seeing that through this whole new century we're in, I think about it right. Inflation has been coming down, interest rates have been coming down, GDP growth has been coming down,

and market returns have come down incrementally. So what we said to our clients is that's the ecosystem that we think we're going to be in over this next decade. We still do. We've had some really unexpected and very important eventstasy are obviously with the global pandemic and the influence of Congress, the Cisco stimulus, and the Federal Reserve with monetary stimulus, and we actually think that that monetary stimulus and the low interest rates for longer are very

very important to the outlets going forward. Interesting, We're gonna talk more about interest rates in a little bit, but I want to ask you um something that I found fascinating in my research, which was your description of five active wealth practices invests, spend, manage, borrow, protect. Tell us a little bit about what that group of five is and how does it manifest itself in a client's portfolio and their relationship with their advisor at B and Y. Melon.

Thanks for asking Barry, and we have a lot of passion around this because again, as I said, Um, we believe that part of our job, being you know, one of the largest institutional firms out there, is to help our clients benefit from the best institutional practices around those

five things we took. You know, we have the great fortune of having a lot of experience working with wealthy families at this firm, all the way back to the Hamilton's family, as I said, and so you know, our brain trust of people have put their heads together and said, what have we learned over the years, what are the five things? And we didn't know if it was gonna be five. It could have been three, it could have been far. It turns out it's five that we see

allow families to sustain their success every time. First and foremost investing your financial assets, your portfolio, having the right ASSEID allocation, and most importantly, sticking to it when it's hard. Number two, UM, spending. As I said, every institutional investor has a spending rate of spending policy. Understanding the impact of spending on long term returns is very very important. Number Three borrowing. Our clients don't typically have to borrow,

but they can. And one of the things that we joke about is that we you can date yourself, um by saying what the interest rate was on the first mortgage you took out on a house. If it was in the double digits, cancers are, it was in the late eighties, early nineties. If it was in the mid single digits, it was in the nineties. If it, you know, drops even lower, it was sometime in this new um century we're in. And if it's below three percent, you

took it out this year. So you know, our clients don't have to borrow, but they make capital allocation decisions just like any major company does, and so thinking about their balance sheets and thinking about when it might make sense to borrow, particularly when rates are low, for estate planning purposes, for liquidity purposes, for purchases, that's become a

more important discipline. And that that's the third one for investing, sending, borrowing, managing for after tax returns because our clients do pay taxes, and part of that is related to your question about active and passive right passive vehicles um lower costs but also very tax efficient. And what we say to our clients is again with our investment outlook, you've got to eke out excess returns wherever you can, and there are certain classes where that may be less likely. You know,

the US large cap market is very very efficient. Um, we would say, um, you can actually add tax alpha in the US large cap markets, perhaps more effectively and consistently than you can add invest an alpha. But then there are other classes as at classes where markets are much less efficient, and we do encourage them to go um for access returns. And then the last discipline protect

what you have. And that's everything from good cyber practices to estate planning and trusts and things that protect assets to protecting them unfinancial assets. What are the qualities and disciplines in your family that you want to see survived to the next generation. So it's it's invest, send, borrow, manage, protect, as you said, mhm, quite quite intriguing. Let's talk a little bit about what a year we've been living through of virus induced economic shutdown, a thirty decline in the SMP,

tons of volatility. How has this mayhem this year affected clients? Were you guys forced to respond on with new policies and procedures or how did you deal with great question Barry, I mean, how has this pandemic not impacted our business to here in a way? I think it's the question because if you go back to the beginning of March, of the people in my division worked in our offices and we had to transition over a three week period

to them working at home. So, you know, first and foremost, um, you know, kudos to the company for all of the work that it has done over the years in resiliency and in technology, because it actually enabled us We didn't expect us to happen, but it actually enabled us to very very rapidly shift our employees and wealth management from working full time in the offices to working at home. So, um, you know, Fortunately, it turns out in hindsight we were

more prepared than we thought. But apart from that, it meant we had to change our days and so at b M. Y Melon what that meant in March, in April and May, when we were really in the thick of this, the exact a committee of senior leadership group of the company met early every single morning, and in fact some days we met more than once to kind of take a look across the markets, the landscape. What

did we see what's happening. Then. In wealth management, we start our mornings now every single morning together on a market call, kind of guiding our people to what we're seeing in the markets, what changes are we making the portfolios,

what advice are we sharing with clients. During the spring when markets were changing so rapidly, every single Monday, at four o'clock after the markets closed, we held a call for our all of our clients, sharing with them what we were observing and what we were doing UH to

help them. On Tuesdays at four o'clock, we closed our days together with another meeting internally, just gathering people together and talking about some of the new things that UM we have to learn and absorb the fee or whether it's around low interest rates that we have, whether it's around new planning techniques under the Cares Act or other

things UM. And on Fridays for much of this year, we've actually closed our days together and while management four o'clock with a very short call fifteen minutes just reflecting on what the week is meant to all of us

personally and professionally. So we've really changed the way we spend our time because we're going through this crisis in such a different way than any other crisis in our history, which is we're going through it together, but we're sitting separately, and so we're really trying to recreate occasions to come together. So so now we've gotten pretty close to FDA approvals on three separate vaccines that all look extremely promising. What

do you think this is going to do? Not just to reopening generally, but how has this experience changed what the future of the workplace is going to be. Are we're going to go back to en or has twenty left a lasting impression that will change how financial services firm are going to operate in the future. That's a great question, Barry, and I think the answer is that this has fundamentally changed our working model for the future. And so let me talk about the business model. First

of all, how we work with clients. You know, I would have said that for many, many years we had a two legged business model. Part of it was physical, meeting with the client in person, and part of it was digital, the client interacting with us digital at using our tools. I would say that this year we have permanently added a third leg to that business model, which is virtual. So they'll be physical, they'll be digital, but they'll also be virtual because what we found is it's

a very efficient way to meet with people. It's an efficient way to get a family together that may not be living together, they might be living in different states. Um, it's a very very efficient way to get large groups of people together, right just for an hour meeting time. Um, we've we've actually done some virtual events for our clients, given you virtual tours of the Metropolitan Museum of Art that people from all over the country are taking part in,

even without trying to in to New York. Same thing for for the moment as our museums here in the city of Rios m So, I think we have added virtual as the third leg of the business model permanently, and I think that's a really good thing. Huh. Quite quite interesting. So it seemed was an election year and all clients wanted to ask about was what our thoughts were on the outcome of the election and what it

might mean. What was your experience pre election, how are you looking at possible changes, and how um curious and concerned was your client base. So I would say that certain an election year, I would say it's even bigger than that. Twenty twenty a year for the history books when you think about what we've gone through, right, historic actions in the markets, historic actions by central banks, historic

global pandemic, historic election. It's just been a year for the history books, and we're all going to look back on this um and remember what it was like to go through it together. I think specifically with respect to the election, our clients have had questions really about two things, um, leading into the election and after. The first is, you know, elections are really about policies, right, what do we think the policies of the new administration the new Congress might adopt.

And so our clients are business people, they were concerned about policies related to different industry segments, and also about taxes because, of course, as I said before, our clients pay taxes every year and every generation. So those were really the two areas that we were spending time on

with clients. And with respect the taxes, our clients have you know, an understanding that really tax rates in this country have been declining, you know since the nineteen seventy right when we look at federal tax rates, income tax rates, couple of themes, tax rates, corporate tax rates, you know,

they have been coming down. So our clients have been awareness that we are at you know, sort of multi decade low on tax rights, and they also have an awareness that we've got you know, deficit spending and pressures on on the budget, so they focus very very keenly on tax rates. And I think, um, you know, we we wait to see what the outcome of the Georgia

elections will be. Um to clee, you know, what's the more likely outcome on passing some of the policies and related to taxes and other things in the Biden Harris administration. We will see, we will see. So so that raises questions we've we've already seen the certification and the transition um phase begin. That was sort of up in the air for a while. But as you referred, we don't know what's going to happen in the runoff election and whether or not there'll be a change in control in

the Senate. But given that, what sort of things should investors be doing in to prepare for potential changes or should they not are there even if the Senate flips? Does it matter what's done now? Can it wait till? How are you advising clients? So what we would tell our clients is to take the step that makes sense for your long term plans. If it makes sense to diversify. Many of our clients their wealth is created in concentration, right they found the company. They have a concentration and

a single stock. That's how wealth is created in this country. We can think of the wealthiest people in the country and we know how Jeff Bezos and everybody else created their wealth. So we tell them, if it makes sense for your long term plan to be making some changeup to your investment portfolio, perhaps to diversifying, perhaps to taking some capital gains, that you should do that. If it makes sense for the long term, you should stick with

that long term plan. You know, in the meantime, markets tend to like divide. It is government. Markets have done very well with divided government. And we've had divided government actually for much of the last twenty years. So um and and that's what the market is tending to expect right now, is divided government. You've had, you have lower you will have lower democratic majorities in the House. The Senate will be very close. So the market is expecting

a relatively balanced outcome. And what we say to our clients is, you know, stick with that long term plan, and if there are decisions that you make that you would make for the long term, you should make them. There are things that are highly tactical right now. Right interest rates to the lowest that we've seen in our lifetimes, and that includes for the state planning right, inter family gifts, lit interests, trust, interfamily loans, lowest interest rates ever. So

there's a very tactical aspect of that. And the other thing that's tactical is that the estate tax exemption is scheduled, which is currently roughly twenty three million approximately. I lost a husband and a wife that is tended to reduce in the so, you know, using things that are going to go away makes a lot of sense. Let's talk a little bit about alternatives. UH. They play a huge role in the institutional world, especially UH in the endowment space.

We're seeing more and more interest in that space, especially private equity UH these days. How is this going to play out? What sort of interest are you seeing from your client group, and what do you think the future of alternatives are going to be in the investment management space? Good question. You know, our clients are business people and so as a as a baseline, they're very comfortable with private businesses and private markets because that tends to be

how many of them have become successful. So they understand that as as business people. You know, when we think about portfolios and again, trying to have individ digital investors achieved the kinds of long term returns and institution paths alternatives is very much a part of that. And capital market structure has changed a lot over the last twenty years. If we think about capital markets and what's happened, you know, you've seen a steady decline in the number of public

companies in this country. We now have fewer than five thousand public companies. At one time that was as many

as eight thousands. And at the same time, you've seen a very large increase in the number of private companies that are backed by private equity and venture capital funds, to the point where you now have more of those private companies that are backed by private equity funds and venture capital funds then you have public companies, So you have a much bigger investment universe in the private equity space.

And you we also see that companies tend to be staying public longer, particularly to venture backed companies and so there's a very large alternative universe out there where lot of value is being created, and we think it's very important for our clients to have exposure to that for the long term, because what you've seen over time is that when you give up the daily liquidity of a public markets, you tend to earn a liquidity premium and

private markets, and that liquidity premium could be as much as three four five percent a year. And so if I go back to you know, kind of our outlook for markets for the next decade, and the fact that we think public market returns are probably going to be incrementally lower, speaking out, those excess returns that you can get in private markets are going to be even more important for wealthy clients. Let's talk a little bit about

the traditional sixty forty portfolio stocks, bonds. You have called it a quote relic of the past. Tell us why so? The sixty forty portfolio for many, many decades gave clients a combination of um good returns and equity markets you know, call it high single digit returns and equity markets, and good returns and fixed income markets call it mid single

digit returns. In the fixed income markets, you know, as we look ahead, for the reasons that we've we've been discussing, we've see modestly lower returns and public equity markets, and now, particularly this year after the actions of the Federal Reserve and reducing interest rates, we see lower returns and fixed income markets as well. And so the question is what is that sixty forty portfolio becomes in it? And the answer is it really depends upon you, your long term objectives,

your needs for liquidity. But at a minimum, it probably isn't the sixty forty for almost anybody anymore. Right, It might become a sixty five thirty five. It might be

a seventy thirty. It could even be an eight d twenty, depending on your age, your outlook, your needs, your objectives, and those are the that's the modeling that we're going through with every client right now, because we would look at that portfolio that might have fairly reliably delivered call it a seven percent, you know, annualized return over the last couple of decades, and we would say, you know, our outlook right now, it's probably that that's more like

five percent. If you leave left to its own devices, is probably more like five percent. It could even be a little lower. How do we help to capture those additional returns? And it will be some of the things that we've talked about, right, It'll be things like um diversifying into private markets. It will also be about diversifying a bit away from the United States. The United States equity markets have led the world since the financial crisis.

We actually think that we might see a bit of a rotation they're going forward, So diversifying the way from the United States. In your bond portfolio, it probably means having a smaller allocation to bond because the yield will be lower, but it also means finding some other things that you can sort of reliably sleep at night with. Maybe it's more like absolute return hedge funds, for example um so's. It's a tweaking of that portfolio. It is not a huge rewrite. It's a tweak and it's being

tweaked every day, slightly differently for every client. Huh, what do you think in the fixed income space of things like high quality corporates, muni bonds, and we are occasionally getting questions about preferred what are your thoughts there? You know, for us, the fixed income portfolio is the is the balance right to the to the risk that you take in the rest of your portfolio. So we do tend

to focus a lot on quality, right, higher quality. UM, we actually focus very much right now on duration because UM, you know, duration has actually extended, meaning that there's more duration risk in portfolio. So, UM, those are the two things that were most focused on in fixed income right now. I have to ask you a couple of questions about

philanthropy and your clients. I know you're on the investment committee of the Howard Used Medical Institute and the Helmsley Charitable Trust, and you were on a couple of of your alma materas on the investment committees. Uh, how are clients thinking about philanthropy these days? What what issues seem to be dominated Tving make two points about philanthropy. One is that we are a very very generous country and culture, and we've seen that this year. We've seen that across

our client base. We've seen charitable giving going up, and donor advise funds and outright gifts and trust gifts and planned giving. So we are a very very generous country and culture and that's very inspiring. The other thing that I think has been just amazing to watch into a certain extent to be part of this year is to watch how philanthropic resources have gotten together and just attacked where the needs are. Right. So you mentioned Howard Hughes.

You mentioned helpfully they both focus on healthcare and they have dived in UM to opportunities and challenges created and healthcare related to the virus. You know, I think about our company. We have been you know, we're headquartered here in New York City, and we've we've sort of dived in through needs that we've seen here in the city. We've provided iPads to a hospital system for patients to be able to communicate with family members when they couldn't visit.

We've helped homeless shelters get WiFi for students that might be living in shelters that needs to do remote learning. So I think one of the things about this year has just been seeing UM philanthropists dive in to meet the needs that were created so unexpectedly. You mentioned that some of the UM non traditional gifting techniques are quote unquote on sale, things like charitable lead trusts or grant

or retain annuity trusts. Tell us about some of these mechanisms that allow families to very advantageously make donations to their favorite philanthropies. So it really depends very on the type of the gift. If you make an outright gift, you value it on the day of the gift, you know, um what that is, and you've you've made an absolute transfer of it. But sometimes gifts are split interest gifts. You might keep an interest and give away the remainder.

You do that um with a charitable lead trust or a charitable remainder trust. You do that with a grant or retain annuity trust. And the interesting thing about split interest gifts is that you have to value what you're keeping, because that's not a gift. You don't make a gift yourself um, And the gift really is the remainder what

you're not, what you haven't kept. And the reason that there's such a compelling opportunity right now is that the value of what you've kept is discounted at very very very low interest rates UM, and so that means that potentially there could be a large gift just market succeed you know, low interest rates, there could be a large gift um at the end to the beneficiary, whether that's

a charity or a family member. So it's a pretty technical estate planning environment, but lots of opportunities for clients. One of the areas we did not get into was environmental, social and governance E s G investing. Tell us a little bit about that space. What what are your clients thinking? They're so when it comes to environmental, social and governance matters, we view those considerations. It's just basic considerations that you should employ as an investor and as an active manager.

So we look at those considerations when we make decisions as investors. I think that in a in the big scheme of things, you know e s G. Environmental social governance considerations. Interestingly enough, there was a time when people were concerned that if you took those into account, you might be limiting your investment universe. Is therefore, you might potentially limit your return because you're investing in a smaller

universe of companies. In fact, what we've seen happen over the last ten years or so, if investors had come to realize that these are factors that should be taken into account, and if you don't take them into account, you might actually increase your risk. So, in our view, the whole, the whole rubric of E, S G has

now become just a fundamental part of investing. Now, when it comes to any particular family, they might have particular passions or concerns related to E or F or G, and we can take those into account and Taylor that in general as investors, we just look at those factors as things that any um analytical investors should take into account. So so let's stay with the governance side of that.

There was a Deloitte study They found that women in leadership roles in the financial services industry was a rather paltry. At your firm, the leadership group or women, that is quite a success story compared to the industry. How was b n y Melon capable of achieving such such success in that space? Well, look at the wealth management industry. We understand how important diversity is. Our clients are diverse, we represent families, so we know how important it is

to our business. But apart from that, you know, the data is really clear. Diverse leadership teams have lower cost of capital, Diverse investment teams have better investment returns, Diverse sales teams have better sales performance. The data is really clear. The diversity. It's good for business and it's good for investment businesses. So there's simply no question about that. Who asked about why is it that the industry maybe hasn't been as diverse as um we are and that we

wanted to be? And I think there are really two reasons, Verry. The first one is visibility. You know, when I was growing up, I'm from Washington, DC, and when I was growing up, I didn't really see finance or investing or financial services of a career. Back then. This was, you know, in the nineteen and Washington, and I saw lots of

great careers public service and medicine and law. My dad as a lawyer, Um, you know, real estate, all sorts of things, media, But I wouldn't necessarily see financial services. It wasn't until I was a professional that I realized, um, that that was a career you know, that I could pursue.

And so one thing that's happened since then is that Marcus took democratized that shift from pension plans to furrowing case and personal savings markets have democratized, and so I think the industry is much more visible, and I try to do things to make it as visible as I can. For women, part of what we're doing today because I just think it's really important. It's a wonderful industry and a wonderful career. So visibility is the first, but then

the second thing, that's the process. Right. We are in industry that is challenged by markets, the change all day every day. Right, we are in industry that tends to have to absorb information and move very quickly. And sometimes when it comes to diversity, moving too quickly is not the best thing to do. Sometimes you need to slow down.

You need to have a good process, and you need to cast your nest widely when you're thinking about recruiting and promoting, and that does take a little longer, but the but the result tends to be much better if you can just slow down a little and have a great process that's very inclusive. M it's quite interesting we're recording this on a day when black Rock bought a

direct indexing fund for about a billion dollars. What are your thoughts given what you said about tax advantaged alpha of direct indexing and its ability to um generate better after tax returns versus traditional indexing. So I think when it comes to wealth management, there's a role to play for broad market indexes, but there's also a role to play for customizing the indexes. Right, So you might be

customizing them for um particular um tax outcomes. Right, you can tax Harve's losses and customize for the kind of tax outcome you want. You might be customizing them for other reasons, right to form an index that is a little bit different than the market but helps to accomplish

a particular passion and goal with your clients. So I think there are there are roles for broad market indexes, but increasingly I think there are roles for customizing those indexes too, after tax returns or other goals that a client has. And we really see that at the future and in a way that we spend a lot of our time. Let me let me throw a curve ball at you. I know B and Y Melon's founder was Alexander Hamilton's. How did the play resonate within B and

Y Melon? What? What? What was the response within the firm? So obviously we're very proud of our history of Alexander Hamilton's and Eliza, as I said, and Eliza his widow, who was actually our first client in wealth management. We love the musical. We love the musical We love the way it makes our history come to life. We actually enjoyed watching the streaming versions over the summer. One of the fun things that we did UM as a group

in wealth management. But you know, when I think about UM, you know the musical, you know, one of the things

was that that has always top of mind. Has happens to be my favorite song in the musical, as the rumor it happens, and that's the one about the compromise between the Northern States and the Southern States to move the capital from New York City to Washington, d C. I obviously live in New York right now, I'm from Washington, d C. But I think that that whole process of compromise and give and take, it's something that we do every single day as we debate UM, you know, investment

portfolios and decisions and things like that with clients, and I think increasingly it's something that we're all looking to our government to do right in Washington. So we love the We love the show, We love the history that bliss us all the time. And thank you for asking tell us what you're streaming these days. You mentioned the Disney Plus version of Hamilton's which was spectacular. What else are you watching on either Netflix or Amazon Prime or

or whatever. So I'm streaming a couple of things. One is the Crown. I think it's hard to be in a American and not have an affinity for the special relationship we've always had with the UK. I actually even tuned in in the spring when Queen Elizabeth addressed the United Kingdom for only the fifth or sixth time in her whole life about the pandemic, and I found it very inspirational and moving. The only thing that I'm streaming

right now. You know, it remains very hard for independent films to get funded in Hollywood, and that can be particularly the case when they are films about women, uh you know, written by women, stories about women. And so a couple of years ago, I actually invested in a wonderful film. It's called The Time to Spy and it is a true story. It is out on Hulu and

Amazon right now. It is about three women spies in World War two, true story who trained as spies under the Churchill Foreign Office and went into not the occupied territory as part of the war. And it's a wonderful, wonderful story about real women heroes that's the film A Call to Spy and you could find that on Amazon Prime. Tell us about your early mentors who helped to shape

your career. So, one of my early mentors in my career, and it's just an example of the serendipity in this industry, was actually Jack Bogel, who was the founder of the Vangard Group. And I've never worked at the Vanguard Group, and yet um in this industry, I had the chance to meet Jack and work with him and cover him as an industry UM, industry group, industry pere and you know,

I watched him really changed the investment industry. I watched, you know, he had lost his dad at a young age, and he was very, very committed to the success of individual investors. And I remember Vanguard when it was still a small company in celebrating billion versus trilliance, and I watched, you know, his passion and his conviction really build a company that changed the industry. And it's I have It has always stayed with me. I was I was fortunate

to stay in touch with him for his whole life. UM. So Jack Bogel unexpectedly a big mentor of mine, even though I never worked for him. I just had the

great good fortune of working with him. UM. And another one I mentioned earlier my mom, My mom, who became, you know, unexpectedly a widow at thirty two years old, but three little kids that went, um, you know, back to work and back to school and back to work, and learned how to manage her own little you know, pot of life insurance proceeds, and um, you know, stayed with her career until she was seven nine years old because she loved books, since she loved the library, she

was a librarian. And you know, she's been an incredible, incredible mentor for me. So Jack Bogel and my mom two of my mentors, quite quite fascinating. Tell us about your favorite books. What are you reading these days? So? I love to read. I love to read. I actually majored in English in college, and this year I've read recently, Eric Larson was blended in The Vial, which again a great story of church Ill in World War Two and the Battle of Britain, really really good and not a story,

by the way nonfiction. UM. I enjoyed Michelle Obama's Becoming. I haven't read The Rocks book yet, but I will. I will get to that too, And I enjoyed a fiction book that's called The Vanishing Half, which is about two sisters that ended up living very different lives than very twin sisters, very different lives and very different communities, one in a white community, one in black community. Enjoyed

it very much but quite interesting. What sort of advice would you give to a recent college graduate who was interested in a career in investment management? So the first thing I would do is, I would congratulate them for picking a good industry, and the good segments of wealth and investment management industries are dynamic and growing and they will be a good career for for the rest of your career. So congratulations, you pick the great area. And

then I would tell them two things. The first one is that we're a knowledge industry, and so what do you realize they or not? Early years in your career you have the luxury of being very selfish, focusing on yourself and trying to learn as much as you can and get as much knowledge as you can. Because as your as your career progresses, you tend to have more responsibilities, responsibilities for more projects at work, more people at work,

maybe people at home. So these early years whether you know it or not, are years that you can be really selfish and focused on yourself and try to learn as much as you can. And then the second thing that I would tell them is we're a knowledge industry, but knowledge is them enough. We're also an empathy industry because we really work with people and we have to. The first thing you have to do if you want

to be empathetic is adject to listen. And sometimes in our industry the tendency is to tell people everything we know. In fact, what we ought to do first and foremost is the really good listeners, because then we're going to learn about what's important to our clients. And I've just learned over time that you get great success when you combine what you know with what people care about and what you care about. People don't really care about what

you know until they know that you care. And so that combination of learning learning, learning early in your career, but also building empathy and listening skills, that's the perfect combination in this industry, and that's what I would encourage them to focus on. And our final question, what do you know about the world of investment management today that you wish you knew back in the es when you

were first getting started. So what I know about the world of investment management today that I wish I knew back in the if that success is about a lot more than beating the market. Beating the market is one of those disciplines. And absolutely want to beat the market or at least meet the markets over time. But real success comes from knowing what your goal is, charting of course to get there, staying with it. And it's a

lot more than the market. As we talked about, Yes, investing as part of long term success, but so is managing your balance sheet and deciding how much in leather to borrow, So in spending and deciding what's the appropriate send rate to help you achieve your goals. So is managing taxes and managing for after tax returns, and so is protecting what you have. So you know those five

disciplines invest, borrow, then managed to protect. When I started my career, I was laser focused on investing, and I would tell everybody to broaden your horizons because success is about a lot more than beating the market. Thank you, Catherine for being so generous with your time. We have been speaking with Katherine Keating. She is the CEO of b n y Melon's wealth management division. If you enjoy this conversation, well, be sure and check out all of

our previous interviews. We have about four hundred of them, and you can find them at iTunes, Spotify, Stitcher, wherever you feed your podcast fix. We love your comments, feed back and suggestions. Write to us at m IB podcast at Bloomberg dot net. Give us a review on Apple iTunes. You can check out my weekly column on Bloomberg dot com slash Opinion. Follow me on Twitter at Rid Halts. Sign up for our daily reading list at Rid Halts

dot com. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Maroufle is my audio engineer. Michael Boyle is my producer. Attika val Broun is our project manager. Michael Batnick is my head of research. I'm Barry Riholts. You've been listening to Masters in Business on Bloomberg Radio.