Founder and CIO Rick Ferri: Masters in Business (Audio)

Uh the at Smith Barney. The head of his company was Jamie Diamond, and he went to Jamie and said, Hey, this low cost et F thing is going to be huge, we should do something, and uh, Diamond kind of blew

him off. Ah, he still had a few years left in his contract, so he thought carefully about it and mapped out what became Portfolios Solutions, which was very much ahead of its time, one of the first low cost asset allocation all et F portfolios or mostly t F portfolios, and launched with a modest amount of money and built

it into a billion dollar business. What I found so fascinating about the conversation is that Rick is really one of these people who basically identified a need, a shortcoming, and what Wall Street was offering identified it offered it to his company. They turned him down and said this is too important. I'm going to go do this myself. And UM he's also you know, a quite a gentleman. He's just a delightful person. After the interview, we went

out to breakfast. I had some of my office mates join us, and he basically, UM gave us just a fascinating UM Beyond the hour and a half we talked here even more inside baseball details of what it was like leaving setting up. He tells the story in the show about Hey, we I pulled a desk out of the garbage and set this up in my living room. My wife was my first employee. And that's how he did this and built it into a billion dollar business. Uh.

They have one point four billion in assets. And it's really fascinating to see how, Um, a person with an idea can say here's how I'm gonna manifest this idea in a business and make this real and it turned out to be really, really substantial. Um, he was way way ahead of his time. He's still ahead of his time. I think he's been very insightful in how he constantly evaluates and constantly analyzes the data that his business produces

in order to improve that business. For those of you who work in the industry three or are just curious as to how the business of asset management works, I think you'll find this to be a fascinating conversation. Without further ado, here is the Master's in Business Chat with Rick Ferry. This is Master's in Business with Barry Ridholts on Bloomberg Radio Today. My guest is Rick Ferry. He is the founder and chief investment officer of Portfolio Solutions.

A little background about Rick. He is a retired Marine Corps fighter pilot. Is that correct? And and from there he somehow transitioned into finance. We'll find out specifically how that took place. He's the author of is it seven books on investing? Uh? Six books myself and then a co author. Oh and then a seventh with a co author. Great, And here's the your your background as you follow a low cost et f based asset allocation form of listening.

But the story is that twenty years ago you were a stockbroker at Smith Barney and you had an idea that, gee, this is way too expensive and too much turnover. So you went to the head of the company, some guy named Jamie Diamond, and said, Hey, I have this great idea for us. Let's offer a low cost asset management plan, really low turnover, very very client friendly. And uh, he basically gave you a flat out no, that's not what we do. You quit and said, I'm gonna take this

plan and do it myself. Is that a fair description, That's a very accurate description. Only I didn't quit right away. I had a I took upfront money when I switched from Kidder Peabody over to Smith Barney, so I had a five year contract. And if I left after two years, which is when I had the conversation with Jamie, I would have had to pay back all of this money. And I had redecorated my house. We bought a pop up Emperor, and so I wasn't able to pay it back.

But I took the three years to plan my company, create a business plan, right my first book, so that when I left Smith Barney, I was ready to go. And so you launched Portfolio Solutions. What year that's for two of this timing. Now now you manage one point four billion in assets, is at a ballpark number. That's correct and so so somewhere between being a fighter pilot and getting turned down by Jamie Diamond, what was the transition from the Marines to finance, Like, how did you

work your way to Wall Street? Well, my undergraduate degree was in business administration and then in night. As you know, we were in a pretty bad recession at the time, and there was no jobs available. The unemployment rate was double digits, interest rates were sky high. Uh. I decided at that time I was going to serve the country, and I went into the Marine Corps. Uh. And when I took the test to go into the Marine Corps, they asked me if I wanted to take the test

to become a pilot and go to flight school. Had you ever shown previous interest in flying or was this just out a left field. I saw a picture in the brochure. I said, that looks pretty cool. It certainly does. So I said, okay, I'll take the test, and I did, and I did fine. And they gave me the physical and check my eyesight and my height and all kinds of things probe me in all kinds of different ways.

And then they gave me the opportunity after I finished my Officers Candidate School and then Infantry Officers school called Basic School, they allowed me to go down to Pennscola, Florida and try my hand at flight school, which I did and UH finished that, ended up down in Kingsville, Texas. Married somebody down there, which is why I lived down there now. And UH was in the Marine Corps for eight years, did two tours overseas and then left and

went into the reserves. And when I did leave the Marine Corps active duty, I was looking for a finance job and I was picked up by Kitter Peabody, and that's how my career began in this industry. What were you flying before you while you were in the Marines, I flew A six Intruders and I flew A four Skyhawks. So ward Hogs and the wall Hogs are air force plane. Isn't this similar? Isn't that a six a similar? Or

is this a totally different? Places it's a it's a different platform than than the A ten, but a ten. That's what I was thinking, that that's the wall got it? And so you did a couple of tours overseas and then peat body. What was it like starting out there. Well, I was under the impression, like a lot of people were, that stockbrokers were investment analysts and that we went out and found the best investments for our clients, which made money for them, which in turn made money for the company,

which in turn made money for me. And I thought that stockbrokers did. So their training program quickly disabused you of that. I went through the boot camp, if you will, UH and learned how to make a thousand cold calls a day and try to sell a thousand shares of the latest stock. And I began to realize at the beginning that maybe this wasn't what I thought it was.

But I did stay in it for ten years in total. Wow, that's amazing, and so Kiter Peabody then transitions over to Smith Barney and UH that was a an eye opening experience as well. Well. What happened was, UM, I began to do uh a lot of analysis on the money manager as we were hiring at Peabody to manage money for our clients. And I wrote a program, quite long program and quatro pro. Do you remember that it was a programmable spreadsheet program, so I pre excel pre excel

and UH. But it was programmable, so I could take the data from active money managers and I could compare them to appropriate benchmarks. First, I could use it to determine what the appropriate benchmarks were, and then I could do an analysis to see how they were doing relative to the appropriate benchmarks. Now, a lot of this technology is off the shelf now, but back then, and you

push a single button everybody's relative performance. But back in late nineteen eighties or early you know, you had to create it yourself. So I created the software, and of course when you get into that detail of it, you really see a lot of things that other people weren't seeing at the time. And what I was seeing was that the active managers were not beating their benchmark. In fact,

that really weren't coming close to the benchmark. And that's before you get to higher fees that active managers have a tendency to to charge. That has to have a big impact on on the bottom line of clients. I'm Barry Rehults. You're listening a Masters in Business on Bloomberg Radio. My special guest this week is Rick Ferry. He is the founder and CEO of Portfolio Solutions, an asset manager that runs one point four billion dollars before the break.

We were discussing the advantages of or the disadvantages of active management, and how so few people actually beat their benchmark. Tell us how you discovered indexing and while you gravitated that way. So as I was doing this quantitative analysis or attribution analysis on the active managers and realizing they weren't beating their benchmarks. In fact, they weren't coming close to their benchmarks. Most of them were not UH, I began paying more attention to what Vanguard was doing and

indexing UH. And in I read John Bogel's first book, Bogel on Mutual Funds, and I was very, very frustrated at the time of what was going on in my industry. And again I was at Smith Barney at the time, and I read this book and it was an epiphany. It was I called it my AHA moment. I can recall exactly where where this happened. I was at a

House of Horrors. My children, we were teenagers, and they were going through the House of Horrors before Halloween, and I was sitting in the parking lot waiting for him, and they were screaming and yelling and chains I was going on and I'm reading John Vogel's book and I'm screaming and yelling in my car, saying, I can't believe how stupid I've been. This is so obvious what John Vogel is saying here. I am seeing this daily in

my business. I mean, he's right. And I had what I like to call a chemical reaction at that point, and I was a change of religion. It was an epiphany. So so that was was truly when you're you pivoted? Is the new tech jar? Okay, so your business pivoted and you said, no more stock picking, no more mutual fund picking. I'm just gonna do a broad asset allocation

and not worry about worry about the selection process. Well not really, because I remember that was so I not a lot of ETFs, not a lot of of Today there's a thousand locals CTSS. Back then you had a handful you can work off of. So I investigated this. I'm getting this is October. So then in is when I went to Jamie and I asked him if I could create a program at Smith Parney that used Vanguard index funds and packages them together into an asset allocation

for our clients. And then we would charge a reasonable fifty basis point management fee. And that's when Jamie told me that wouldn't be possible, and sort of not that many words, he just said, wouldn't be possible, too many, too many words. He just said no, and that was the end of it. He said a little more than that. But that's correct. Um, that's that's fascinating. So, by the way, I mean, James a great guy. I mean, I he was always very approachable and I don't want to I mean,

he had a job to do. Like so let me digress a little bit. So, so who are your early mentors who bog Vogel obviously, how do you gym pact? Who else had an influence? Well, you had a lot of them on your show, Vogel, Charlie Ellis, I mean the Ellis Ellis was what a phenomenal conversation. And these people were the icons back then. They were the ones who recognized the problems. And there was there was others,

more academics. As you read Samuelson and so forth, As you read you realize that there was a whole group of very smart people out there who had already realized this and so and it was hidden though. I mean it really was pushed back as far as you could push it back. And but the academics spoke for themselves. The data was there, and so if you believe the data, you're going to go this way. And that's what I did. So let's talk a bit about index and so why

do you think it is? And and Charlie Ellis gave his explanation, why is it that active managers can cannot consistently beat the market? Well, it's a zero sum game where the total market return is a finite dollar amount. Every year market's worth twenty trillion dollars. You get a certain rate of return from dividends, you get a certain rate of return from capital game. It's a finite amount

of money. So if you have one group of people who's trying to get more than that, it has to come from another group of people who get less than that minus fees, or you can just capture your fair share. So in the long run, it's a fee game. Period you have money that goes from one set of managers to another and then back again. And skill is very difficult to even determine, let alone actually identify in advance.

So the best thing for most people to do is to just buy a very low cost portfolio of index funds and sit on it. And that's the answer. So so that raises a really interesting question about the practice management of of running money. And weich about this in our office all the time. How much of what you do is behavioral consulting and how much of it is you know, really trying to prevent people from being their

own worst enemies when it comes to investing. Well, I think it's the same thing behavioral consulting and being your worst enemy. Um, how much of the practice are those factors? What what do you time wise are you how much? How often does this come up? Yeah, so nine of my practice is behavioral control. Wow, that's amazing. Well, because the portfolios don't change. I haven't changed the portfolio in

five years. Now. You might have a different allocation than the next person between stocks and bonds, but you know that's the driving factor after that, and we put the portfolio together as stocks and index funds and bond index funds. It shouldn't change. I mean, the process then is just staying the course. It's it's driving down the middle of the road and being safe and not going to the after going to the right and that and that's what

we try to do. Are My whole idea is to keep the clients going down the middle of the road, be disciplined, and if they can do that, then they'll get the benefits of the markets. If they veer one way or the other, it gets you know, Harry. So now let's talk about how you handle clients in the event of some turmoil. What was it like in two thousand when you know the dot com has collapsed or even worse. I've heard stories from guys who were running assets.

I was a market strategist then, and the hard thing was you're running a moderate portfolio. It's doing fairly well, but other people are making sixty eight in the junkiest of the dot com stocks, and how do you compete with that? Even though we all know how that ends. You'll find the right clients. Really it gets down to realized that not this isn't for everyone, and I need to find clients who also have the religion and they're just looking for somebody to help them put the portfolio

together and execute. I can't go out and try to convert people. That just doesn't work. You just want to attract clients who buy into your philosophy, and you're there to prevent them from from hurting themselves. And it's not my philosophy, but buying into the philosophy correct that I've already bought in. And then they're looking for a way to execute and and get it done, and that's where we can come in. I'm Barry Ridholts. You're listening to

Masters in Business on Bloomberg Radio. My guest today is Rick Ferry. He is the founder and c i O of Portfolio Solutions, And before the break, we were discussing, UH, some of the impact of technology on the business of asset management. So let's start out with UM, the robo advisors. What you what do you think about that line of of asset management. I think it's important. I think it's UM a very good methodology for younger people that didn't

exist before. Now it's used for everyone, but for younger people in particular because it gets them into this philosophy of investing a whole lot faster than they would have and making regular monthly contract the whole process of saving for retirement as well as investing properly. So uh, the saving for retirement, a regular regular amount going in is

is it's very important, um. But the real interest for me and the robo advisors is that it gets young people interested in index funds and asset allocation doing it the proper way right from the start. So I think that's really important. You know, a quick digression. I've discovered that a lot of people have to wander in the desert a little bit before they come to the promised lands.

And not to get too biblical, but it seems that the people who really buy into the concept of indexing and low cost asset allocation have to have played the stock picking game they had or the market timing game, and they had to come to the same realization you you did that Hey, this is feudal. Let me try something that that seems to make more sense. And they tend not to find that in the twenties and thirties. It tends to be something they discover later in life.

I completely agree with that, because they've been through the gauntlet, so to speak, and now they've had their pivot epiphany, aha moment, whatever you wanna call it. But the robos, now, if you're young in your twenties and thirties and you're using this technology. You're getting it right away, even though maybe you don't understand it at first, and that's good because it saves you a lot of money and it

educates you on on the power of this strategy. So let me ask the question differently, what does a human offer at a robo or an let's call them what they are really it's software algorithmically driven allocation models. What kind of human offer that that these models can't? Well? A human offers advice. Now, people who are in their twenties and thirties may not need a lot more advice than just put money away, pick an asset allocation that you're going to be able to live with through all

market conditions, and just shovel it away. Because my theory is that younger people are fairly homogeneous group. You're getting out of college, you don't have a lot of money, may be paying off debt, just getting married, starting a family, and so it's a fairly homogeneous group. But as you get into your forties and fifties, the differences between us financially and socially just changed dramatically, and as as you're approaching retirement, you really need much more than what a

computer can give you. As far as answers, and you are seeking much more holistic at vice on everything have to do with your finances. And this is where advisors will sort of take the money from the robos just when the robos are becoming profitable on a client. And so the that's what I see occurring. And uh so, so let's talk about that advice. And I jotted a

few notes down. Tax issues, inter generational wealth transfer. Are these issues that are million dollar or five million dollar accounts or are there things that people who are in the one thousand to a million dollar range really are gonna need. Yeah, the the big issue is income distribution after retirement and is my money going to last? That is the question, the big question out there. We by the way, in our office, this is the um you're preaching to the choir. We hear this all the time.

I'm concerned that I'm going to outlive my money. And we hear that from people with tens of millions of dollars that they're concerned that it's not gonna last. Absolutely, it's universal. I heard the same thing, and I hear it quite often. And you sit back and you say, you only need a hundred and fifty tho dollars from your ten million dollar portfolio and you're worried about running out of money. And I don't know what the mental

block is there. Maybe some PhD student can do a thesis or something on it, but there's an incredible mental block when they need to be told, or I'm really told, you're not going to run on the money. If you do this sensible strategy and you don't go out and buy a bunch of Ferrari's, you're not going to run out of money. Just one, limited to one. That's all anybody needs. You don't need a few. So that's the

universal big question. And you can get on a website and fill out a bunch of questionnaires and do some Monty Callo simulations or whatever, it just doesn't replace the human advisor who's sitting there looking at you and saying you don't have anything to worry about, and your spouse has nothing to worry about. You've got plenty of money, and that's that's not going to go away. That the there's no computer that's going to take that away. I'm

Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My guest today is Rick Ferry. He is the founder and chief investment officer of Portfolio Solutions, a one point four billion dollar asset management firm. We were talking earlier about the impact of of what the venture cap was called fintech, so some of its robo advisors, but there's a lot of other technological advances. I have to assume you're doing things today that you couldn't have dreamt about

twenty years ago. What's the technology like in running a firm? Well, sure, there's been a lot of productivity gains and across the board UM actual portfolio management software, trading software, UH, client contact software, UH phone systems. It allows you to manage more relationships than you had in the past, so you become more productive of in this business, just like in

all other industries. Same same with UM performance reporting. It's it's pretty much the entire business has been made faster, better, smarter, smaller than it was previously. That that footprint, I assume you're seeing the same same thing. Yeah, and the technology has become much less expensive and there's much more of it and there's a lot of competition, so prices have come down. So what we sell in our industry as

intellectual property. That's my value added. Uh, and be the ability in many ways to be able to explain to people sometimes relatively complicated concepts in a very simplified way so that they can understand it. Uh. And that that's the value added. I can't add any value. I'll performing the market and UH. You know I'm not going to give them higher dividend yields from the SMP five hundred. But UM, I have to be able to deliver this intellectual property in an efficient manner so that I remain

competitive in the marketplace, keep your keep your costs low. Um. You are very forward looking in the mid nineties when you first proposed this idea of a low cost asset management firm too to Jamie Diamond at at Smith Barney back then. So let me bring us up to speed and ask you this question. What do you see looking out ten years in the future for the advisory business. Well,

advisors are going to have to offer different levels of service. Uh. Like your firm, We're going to be offering a robo advisor, which is one level, and it's going to be one price. It's going to be a very low fee. Then there's the next level of some guidance, uh, and a touch perhaps once a year um, and then a lot of technology touches if you will, with the client and that will be just a slightly higher fee than what the robo fee would be. And then there's a comprehend of

financial planning, but not face to face. Are you seeing this as potentially happening across the entire industry? I think people are going to specialize or is it going to be or is that just going to be a mix of different companies doing different things. I think that the robot advisors will have to get into face a personal advice.

They'll have to have human advice or they're gonna lose their clients, and that they're really they're going to realize this as the clients grow up and get more money and get more complicated lives, they're gonna need actual personal advice, and uh, they're going to have to merge or create that personal advice. And then there are times when people become not price sensitive anymore because of that a point in their life where they really need advice and the

cost of that advice. At this point in their lives, when they're nearing retirement, they're no longer price sensitive. They just want good quality advice, and you have to be able to offer that as well at a higher level hold. And then when they're ready beyond that into retirement for a while, they want to step back to the lower advice model, they could do that at a lower price point. So I call this the vertical advisor idea. And you

think that's going to be more widely adopted. I don't know if it's going to be widely adopted or not. I know that likes you said back in the nine nineties, and when I started the low cost Indexing solution UM, it was ahead of its time, and I think this is where people will go eventually. So now let's talk a little bit about running an advisory business and interacting with clients. What's the biggest mistake you see that the average investor makes. The average investor, the biggest mistake they

make is not staying disciplined to a strategy. But let's keep them go back from that. The average investor doesn't have a philosophy, and philosophy is different than strategy. You and I have the same philosophy about investing. You at Charlie Ellis here, John Bogel, I mean we have the

same yet, but you haven't. We'd love to get them, be sure and pass along the Okay, Um, so we have the same philosophy, but I don't know what your portfolio looks like as far as what funds you have for your clients, and you don't really know what my portfolio looks like what funds I have from my clients. That's called strategy. Uh, philosophy is universal. Strategy becomes personal

and personal to the individual client. So, first off, I think that's important and in a book I'm actually writing right now, that people get the philosophy first, they have the the moment, the pivot, the the epiphany of what it's all about. That you get the philosophy first, and then once you get the philosophy, then you can develop a strategy. And then once you develop a strategy, you implement that strategy some way, and then you have to have the discipline to stay with it. So it's really

three different things. You need the philosophy, you need to implement create a good strategy for yourself, and then you need a way of implementing it and staying disciplined with it. And so all three of those things are missing. So there's really three issues. People confuse them all. By the way, philosophy, strategy, discipline really becomes the key. How much how much of this is disrupted just by normal emotional ups and downs

of the average human creature. Well, again, if you had the philosophy, it's much less probability, much lower probability that it's going to be disrupted. If you've got the vision, then you're a strategy. You'll be able to maintain it

during all market conditions pretty much, it's high probability. But if you don't have the vision, if you don't have the philosophy and you have some strategy that you heard on the radio last week, or your your adviser or somebody got you into last year and it's not working, Uh, you're gonna change it. You're gonna have a higher turnover, and you're not gonna stay disciplined. So that's why I I say that the biggest mistake people have is they

don't have the philosophy. First, You've got to get that down first. Then you develop a strategy, and then you're more likely to stay disciplined. We're speaking with Rick Ferry of Portfolio Solutions discussing some of the classic errors that investors make. And we were just talking about why philosophy is the most important thing. So you remind me a little bit of some of the things that Larry Sweddrow has said, and I'll ask you the same question I

asked him. So what is it that investors should do when we start to see volatility in the market, or earnings start coming out poorly, or the economic data takes a turn to the south? What what should people do when? How do you deal with the pushback you get? Because I know what your answer is gonna be from from clients. So I lived through both the tech crash and two thousand two thousand and one. Remember I started my company and then lived through the financial crisis, so two pretty

tough times. But the only thing that we did for clients during that period of time, besides due regular rebalancing, was keep them focused on the long term. And then those clients who really had an issue, and I know that they had an issue when they use this phrase classic phrase for all advisors, remember it, I can't sleep at night. Classic phrase, which means the next step is capitulation.

They're going to sell everything. When a client says I can't sleep at night, you have to do something as an advisor, and what you have to do is you have to lower their risk permanently because we the advisor has probably made a mistake and allowed them or assess their risk tolerance at too higher a level than what it really was. Well, let me let me interrupt you there, because again I'm we're very familiar with the same process.

But one can't help but notice that what people say a during a bull market is very often not what they feel during a bear market. That's correct, And so we find out what people's real tolerance for risk is after they've lost because right now, so we launched after the bear market in in o eight oh nine, a few years after that, and we're seeing the exact opposite of that. It's not suddenly that people's risk tolerance is

getting worse. It's that people who said they were conservative, Suddenly you're seeing markets go up every year, especially sm P up thirty pcent. Hey, why don't we have more U S docks? We aren't we? Well that was last year. European and emerging market stocks are doing terrible. That's where you want to be, not chasing what just ran up. And that's what rebalancing is. About But what do you do when you're gonna get it both ways? You're gonna

get it to the upside and the downside. Even if someone says I'm conservative and suddenly in a bull market that assessment was wrong, how much of that is just human nature, that whatever is going on at the moment is changing what they think they're there risk tolerance is right. So you asked me what percentage of my business is psychology and you know, trying to control human behavior, and what part is actual portfolio management? Uh, changing the client's portfolios.

And the answer is as humans. So I don't want to do anything. I mean, my my goal is to not do anything. You actually had a blog post that said portfolio changes at a glacial pace. Glacial pace. Yeah. So the idea though, is to not do anything. So when I hear it both ways, like right now, you're right, we're getting the calls about well, you know, we could be a little more because starts out with bonds. Bonds are yielding zero, So why don't I want to be in bonds? You know the real return of zero, I

should be in stocks. I have the conversation about how am I going to live in retirement when my when interest rates are so low and therefore I should be

more in stocks. And all I'm saying is people right now with justifying reasons, are coming up with reasons why they should be more aggressive, and I have to do the exact opposite of what I did in two thousand and one and two thousand and eight, which is tame the expectations uh down, as opposed to reverse of where what I had to do in the past, which is to you know, bring the expectations up. We've been speaking

with Rick Ferry of Portfolio Solutions. If you enjoy this conversation, be sure and check out our full podcast extras where we let the tape run and continue the conversation. Be sure and check out my daily column on Bloomberg View dot com. Follow me on Twitter at rid Halts. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast portion of our show. My special guest this week is Rick Ferry. Um let

me give people a little background about Rick. So I read and follow a lot of people, and you know, intellectually, there are certain quants I follow because I like their mathematical analysis of investing and asset allocation, and to people like Jim O'Shaughnessy and Cliff Fastness and there's a there's a whole run of guys like that Um West Um Alpha Architect. I love that that blog. He does some

really interesting momentum value analyzes. But when we were leaving to launch a new firm, we started looking around and saying, hey, who did this right? Who had the right idea, the right concept, the right execution. And we kept coming up to you. We kept finding, Hey, Portfolio Solutions seems to

really have set this up. Look, there are tens of thousands of advisors there, and there are thousands, I want to say hundreds, if not thousands, of advisors running nine figures, and a whole lot of people running eight figures, and and but there's there's only a in our opinion, only a small handful of people that from the business perspective of, Hey, what's the right way to set this up? What's the right way to execute? You kept on coming up in

in our you know, same situation. Although it wasn't three years, but it was really the last year of thinking about it and doing these things that we said, let's model this, let's let's war game this and figure out whose approach has made a lot of sense. This podcast tends to be listened to by a lot of advisors, some of whom were at big firms thinking about launching on their own, some of whom have already launched on their own and

have had, you know, a little bit of challenges. So I thought you would really be a perfect person to speak to about that because because you were so helpful, Um, your example was so helpful when when we were launching. So let let's go back to our earlier conversation about when you were launching your firm. So you spent did you say three years teeing this up? Is that about right?

Three years um thinking about it writing the book? I mean how much time you could go home at night, sitting your home office on the computer and map out business strategy. Basically, that's correct. That's that's what I did, um for three years. Well, the beginning of that was coming up with the strategies how I was going to

manage money. The next couple of years we're coming up with how I was going to set up an investment advisor, you know, all of the compliance things, and then the last corporate set up the compliance, the pay roll, the back end of running an smen business. It's like running a fairly complicated business with an overlay of a lot of regulator a lot of compliance. Yes, so you had to figure out the compliance puzzle. And then the very last year I spent, you know, I had to register

to the company. I had to do everything under the radar. By the way, because I was still at Smith Barney. Is that what you use Portfolio Solutions instead of Rick Ferry asset management? No, actually, Barry, I used portfolio Solutions to make it more Um, uh have the longevity of the company. I mean, I believed in the philosophy and I could train other people to work with me to to do this, and if something happened to me, I could hit by a bus or whatever, the company would survive.

And so I didn't want to have my name in it. Lehman Brothers was around a hundred sixty and uh, you know it, long after Lehman passed away, Dick Fold helped drive the company. That that's true, but I just felt like, um, you're not the only one that makes a lot of sense. Portfolio Solutions was a name that I just sort of tells people what we do. We come up with a

solution for your portfolio using this philosophy. So the last year going into launch, I had finished writing the book and was looking for distribution of the book, and you know the marketing and getting the website ready and all

that stuff that goes behind launching. And so in July of after I UM was off contract now with Smith Barney, I had fulfilled my five year contract and I vested in a pension plan by the way, and all of my City Group stock options vested, which was nice because I was able to catch them made at a nice high price and get that money to buy the software, technology and whatnot that I needed. So that's what I did it it it does take quite quite a while

to really do it right, I think. So when you left Smith Barney, would you leave in terms of how many assets did you bring with you? I brought the thirty five clients and sixty million dollars of assets. That was my beginning in correct, And I was charging one quarter of a percent manage fae ascid management fake, so you're really not throwing off a whole lot of revenues. At that time, I was working on in my living room.

I had an old desk that I picked up out of the junk pile when I was in the Marine Corps. One day somebody threw a wooden desk out and it was an old Korean War desk. I grabbed it and threw it in the back of my truck. So I had that in my living room. I set up a costco table where my wife filled out paperwork for clients in another corner of the living room. And this was portfolio solutions. That's amazing, and so now let's let's talk about how Hey, now, let's talk about hey, how that

developed from sixty million to one point for billion. So who's the typical portfolio solution client. Typical portfolio solution client is um approximately sixty years old, has a total net worth of about three million dollars, liquid net worth of about two million dollars. And so that is, uh, you know, typical client who is either approaching retirement or rolling over into retirement. And that's our typical client today. We talked

about this briefly during the broadcast portion. How significant is planning for that distribution post retirement, how how important is that to clients and how important is that to your practice. Well, it's becoming much more important because the baby boomers are getting more into retirements. Sixty per day I think is so sixty people per day have the big question in

their mind, am I going to make it? Um? So Originally, when I launched fifteen years ago, there weren't as many people asking the question, But now that the baby boomers are approaching that we have had to um come up with different serve is that help them answer this question? And that's why we're doing this vertical advisor idea, which we had talked about in a previous program. So you talked earlier also about finding clients who buy into the philosophy that that you and I both espoused. Let me

ask the opposite question. How often do you come across clients that early in the prospect process you recognize, hey, this guy is not a good fit. Quite often recognized there not a good fit. And I'll tell you what the tell tale phrases. Well, don't we get the so what's your sharp ratio? Sort the question that that's an automatical Well, exactly the same thing. You're talking about performance? So if I get the question from a prospect, what's

your performance spent? Over the last five years. It is just a red flag because if you really understood what we did and you and you had the philosophy you're in the church, you wouldn't ask that question. Here's what the market did, here's what emerging markets and and developed that US did, here's what fixed income did, here's your mix. Basically, this is what you did, and so there's no ambiguity

about it. Um So when people are asking questions about performance, they don't have the vision and they're not going to be a good client. So that's the number one key right there there, tip off that this isn't gonna work. You have a fun yourself having to fire a client. I know that's an expression people outside of Wall Street may not be all that familiar with, but that's the phrase, Hey, sometimes you gotta fire a client. How often does that happen?

If you've done a good job screening them in the beginning, it shouldn't happen. But every now and then. I know I have fired clients in the past because they they called too much, they take up too much time, and at that point and we have to say, you know, we're not the right advisor. We're not going to have we can't. We can't have a discussion with you about what happened in the stock market today and then have another discussion with you tomorrow, and then have another discussion

the next day. That's emblematic of a deeper issue beneath. It's not the stock market. They're essentially saying, I'm not buying into the philosophy, right, they don't have the philosophy, because if they had the philosophy, then they wouldn't be asking those questions. So it's not a good fit. So the way I fire a client and say, you know this, I don't think we're really the right company for you. I think you need another type of advisor than what we can offer. And that's how I fire the client,

if you gently. But it's true though, it's true. It's it's it's a fact that they need more. I mean they should be at you know, the wire houses, because that's what the wire houses do well, that amongst other other sort of things. Um, and we talked about technology the other day, you mentioned the wire houses, So tip bically, what what for those people who may not be familiar with the phrase that typically refers to the big brokerage firms think Morgan, Stanley, Merrill Lynch. In the old days

it was Bear Stearns and Lehman Brothers. But I guess you could put JP Morrigan and well Will's. Fargo is also has A used to have a brokerage division. I think they still do. So what's going on on the old school side of the business these days? Um, they seem to con still. But even though we read about these big teams leaving, these billion dollar teams an off elsewhere, their assets under management continue to grow. They are not. Um, they are not hurting these days for business. What what's

happening on that side of the street. Well, I really don't know what I couldn't I couldn't answer. Let me let me phrase it differently. How often have you seen clients come to you from big wire houses, from from places like Maryland? Morgan? Probably fifty of our new clients that come in come from the big wire houses. But realize, what's happened since Bernie made off is that clients have diversified into several different advisors. So it's not whereas it

used to all come from one place. Now when we get a new client and they'll be transferring in assets from two or three different places. People have diversified more and in fact, even with advisors, UM, we still get our fair share of people who have us manage all of their money. But I think that in the in the world of post Bernie made Off, that people are comfortable splitting their money between a couple of advisors as well, and we've see more more of that in the last

few years. That's really interesting. You would think the lesson is, hey, don't put your money with somebody who doesn't use a third party trusted custodian UH and pretends to run the money themselves. But that's that's a UH. That's a different UM analysis is hey, it's not us, it's t D or Fidelity or Schwab or whoever. People are are holding their money, so we don't have the right the ability

to go in and and steal your money. Bernie Madoff had the money going right into his checking and can't understand. I understand what happened, but Phil. But emotionally people are basically saying, well, I'm just in case somebody is dishonest, I'm gonna split my money in three places so I can't lose it all with We've seen more of that post financial crisis than we did before the financial crisis. That's correct. So now let's talk a little bit about

the financial crisis. You mentioned what it was like living through two thousand, two thousand one. How disruptive was oh eight o nine to your practice. How much did clients freak out or were people you know, all right, this is gonna suck, but we'll come out fine and everything will be okay on the other side, even though just at the time it very much felt like, hey, this is a one off, this is a unique end of world sort of thing, or at least that's how a

lot of places were describing it. Sure, so of course we've got a lot of phone calls, just like everyone else. And of those people, after talking with them, didn't do anything, which was good. We didn't we didn't have to do

anything with their portfolios. The other ten percent, a portion of them terminated, they capitulated before we even had a chance to talk with them about three Okay, that's not you know, we hear our stories about people just you know, losing their mind, and and people have a third of people's business going away because they freaked out about a particular you know, one particular not not from We were

at a different firm at the time. But you know, you hear stories going on, you read about people blowing up and imploding, and you know, it's really a challenge to to deal with that sort of influx of of panicked client phone calls. But not not in the not

in our business. I mean the philosophy we have again and yeah, the low cost to try to create the correct allocation for you in the long term, educating the clients and reminding them, Um, a vast majority of our clients didn't do anything, Um panic phone call, no nervous emails, past majority. Really that's fantastic. Just you know, you continue to do what you do. And it's because they had they were in the church, they understood it that they

were part of the philosophy. They got it. Hey, this is gonna write tough, but we'll write it out and we'll be fine on the other side. Right, Because you you have to select clients who have the same philosophy as you. You can't try to convert people. I mean, we can try to convert people on radio shows and such, but by the time we're speaking with them one on one as an advisor, they have to already we have to already see eye to eye because if not, I can't convert you. So I was gonna That leads me

to a question. I've been thinking about how much time do you spend educating clients, because there's a fine line between proselytizing and saying, hey, let me give you a deeper dive into why we have this philosophy and and and where does that cross the lawn? Sure, so most of my education has done through the books and my blog and articles as opposed to one on one conversation. Again, because I structured this company to be a low fee,

including our fee. Uh, I can't go out and try to convert people, um, you know, person one on one. I don't have the time for it. I don't have the resources for it. You know. I can't do that. So but I can do it in mass by writing books. And then they come to me because they read the book, they read a blog, or they read a lot of stuff and they ended up coming to me and saying, I get it. Now, I'm interested in having you manage my assets. Well that's a good conversation. So the farm itself,

you mentioned you're you're running lean. How many employees do you have, Well, we actually now have about sixteen total employees. We have one point four billion dollars. That's not a huge ratio. So there. My my formula has always been one new employee for every hundred million of assets and try to keep to that as much as I can. But as you get larger over a billion dollars, you need to add different levels, like I had to add a compliance manager full time. Um, you have to add

an operations manager full time. That was over a billion dollars. That's when it becomes hey, I can't just outsource this. There are things known as r A in a box or outside compliance companies. You can now outsource chief compliance officers. There's third parties that will actually be registered on on the UH form adv with the SEC and they're not an employee, their third party consultants, but they're on your your SEC documents. A billion dollars is the one in

the same way you start, I think. So, I mean there are different levels as you grow your advisory firm where you realize you have to uh do creative reconstruction of what's the word destruction? Right, I'm sorry, So you're you realize that what you've put together can take you to certain point, and then you've got to recreate it and that will take you to another point. So it's scales and then a certain point you notice, hey there

are a lot of stress points here. I need to throw some some intelligence and a body of that, maybe a little technology and that. And again technology does drive a lot of this. So as technology gets better, we are able to do scale it more so it can go further. But as you continue to grow, you have to change things to scale up. For EXAMP, there was came a point when I personally couldn't speak with all

the clients anymore. So we began to hire UH Certified Financial planners who came in and now we have three full time certified financial planners. They're speaking with the clients on a day to day basis and I'm just they're saying, hey, thank you for being with us, and you know, if you have any questions for me, just give me a call. But it's the cfps who are speaking with the clients one on one now on a daily basis. We do something very similar, although we haven't you know, we're eighteen

months old. We haven't scaled up the way the way you have what's fascinating in the process of developing this is so we use certain reporting and performance software like O'Ryan and years ago to crank out what you push a button and Orion generates. It would take two accountants working for a week to get the quarterly statements out to the clients. I remember those days. Today all the clients have full access to it. They push your button, they get We tell them, hey, it's seven access, but

please try not to check. You know, look at your monthly, quarterly year to date. You're fine, but don't obsess over and it's going to go up and down. That's what

markets do. And we have actually now outsourced a lot of our portfolio management function to Black Diamond and so this just just occurred and were so we're coming off of um A p X, which is advents in in house you know, on server software, and we've going to the cloud black Diamond, and we are uh and and they are actually doing a lot of our reconciliation and uh it's the back end. It's the administrative an accounting and and reporting function, reporting functions and portal and all

of that for the clients. So uh, although it's expensive for us, we're paying about a hundred thousand dollars a year for this, but a per household basis, it's really not terrible. Well, it's also now I don't have to hire two people in portfolio management. So it's those two two c pas that you were saying in the back,

crunching the numbers. Okay, So though those people I don't have to hire because I've been able to use technology and put it up in the cloud and outsource it to UM Black Diamond, and then also do a subadvisor role or a camp role using that same technology, which

allows me now to expand my intellectual property. Which again that's what I'm selling to other advisors who don't want to manage money, and they can put their clients with us and we can manage their clients money in a customized fashion at a very low fee, using the same technology. It's funny because it's it's a business line that we've been exploring because we get inquiries all the time from other advisors. UM you do the same thing I do. You go around the country, you speak at a lot

of conferences. One of the questions I ask if I'm speaking to a room full of cfps or financial planners of some sort. Hey, how many of you run your own assets? Less than half of hands, that's correct? And then how many of you are happy with your outside management? And less than half of those are good questions. It's really a fascinating So on that business line of you're the institutional advisor to other advisors, advisor subadvisor, what do you what do you charge them in terms of UM

asset fees? So the portfolio management fee to their clients is twenty five basis points. But then if we do some administrative work for the advisor themselves, like collect their fees for them, it's a little bit more than that. And so here's the debate that we've had internally. How much does that make what you offer as portfolio solutions to potential clients UM less valuable as opposed, or let

me rephrase that less unique. So right now, if someone wants Rick Ferry, they have to come to Rick Ferry. But if this advisory to advisor's business expands, are you running the risk that people are getting Rick Ferry with

out having to pay Rick Ferry directly? No, because the way I looked at at the pricing of this is that we get paid twenty five basis points for portfolio management, whether it's through the robo advisor which we're creating, whether it's through our own channel, or whether it's through a subadvising. We're getting paid twenty five basis points for the intellectual property of and the running of the portfolio and creating the portfolio. The extra fees are for advice. Either you're

going to get the advice from my CFPS or advice exactly. Listen. I'm a big believer in that we had Larry Sweddrow here before. I'm a big fan of Carl Richards sure who who does the sharpie sketches and rites in the Times. And I think Buckingham runs about five billion dollars. I'm doing this off the top of my head, so double check this when you hear this. But I think they

advise on another two billions. That's bam, bam, that's right Buckingham. Yeah, exactly, And what happened there and I can speak for for bucking Ham, but what they did was they created an asset management company called Buckingham Asset Management, and they realize that they can run money, not just for their own clients and advise their own clients but since they had built out the back office, they can run money for other advisors using their strategies as well. But it's the

other advisor who gets paid the advisory fee. They get paid the portfolio management fate. And it's the same thing with the portfolio solutions. You're breaking the you're breaking the

total cost to the client into discrete pieces. You're paying this much for the asset management business, You're paying this much for the advisory side for this that that's correct, and but but of course all the advisors who go with us have to have the same philosophy, so it's not like we're going to do tactical asset allocation because

of advisor believes in that. So just like a d f A and just like a BAM client, you you you have the philosophy and then you're coming to us for UM implementation and advice perhaps if you're an advice there on how to structure the portfolio. I mean, do you really want to have the SMP five hundred or should you have a total market Uh, you know, do you need a q q Q you know NASA dec I mean, really, what is that? Um? You're you're jingling

a hundred thoughts in my head. One on on fun families, one on why the SMP is not your favorite asset management one on smart beta. Let me let me throw some of these out out of you. So our portfolios are Vanguard, Dimensional funds, some Black Rocks, some UM Double Line, some Wisdom Tree. What what fun families do you tend to focus on? Well, it's mostly Vanguard in d f A. That's that's a majority of our assets. Um. There might

be uh an eye share or two out there. But you know, we're trying to capture the return of a risk in the marketplace. I don't even want to call it an asset class because asset classes may not have returns. And yeah, as we're looking at a risk in the marketplace, called it market beta at US equity beta, if you will. And so we're gonna trying to capture that. Well, now what's the best way to capture that? Well, first you have to look at all the different products that are available.

There's different indexes out there. There's a Russell three thousand, there's a Dow Jones Total Market, there's the CRISP Total

total Market index, I mean five thousand. Okay, So now you have all the indexes that out there that have been created that capture this, and then you have to go to the marketplace and see what products are tracking these indexes, and you end up running into Vanguard, and you run into I Shares, and you run into State Street, and you also are now running into Schwab and so you have to do an analysis of uh fees and turnover taxes to come up with what is the best

product that I can select that best captures the risk that I'm trying to capture and a lot of times and as a BT Vanguard UM they're pretty clearly the lowest course provider almost across the board for beta, for beta correct for for just marking for people who just want to get what the market is returned stock market

and bond market. That's correct. Now, if you're talking about smart beta, if you will, or factor investing UM, strategic beta, alternative beta, additional beta, exotic beta, whatever you want to call it. I mean, the fact is you're you're not actually going after the market. You're going after a strategy that's used in the market. Then you have to try to figure out how can in what risks by the way of that strategy giving you and therefore, what risk

premiums you might be able to draw from it. Now you have to look at what is my best bang for the buck, I mean what funds produce. It gives me the highest exposures to those risks, therefore potentially highest exposures to those risk premiums for the amount of fee that I'm paying. And here is where you end up with somebody like d f A, because even though they're not inexpensive relative to Vanguard, I mean they are more expensive. You're getting more bang for the buck. You're getting more

risk exposure to the risks that you want. So uh, you would look at them. You would look at research affiliates. Uh raffy, you would look at other types of products that are in that space. So we we had um on in terms of both Vanguard and resource affiliates. The conversation we had with Jack Brennan was quite fascinating and I asked him, Hey, how come you guys aren't doing smart Beta and uh, he's chairman now he's no longer CEO, and I think that it's something that they've been wrestling

with internally. We're we have coming up in a few months. We're gonna have David Booth, we're gonna have that conversation about UM their particular form of I don't know if I would call it smart beta so much as I would call it a a tilt towards small cap and value. That's really how they built their brand. I think they're running about three hundred plus billion dollars. Well, first of all,

smart beta is just a marketing term. I mean, there's nothing smart about there's nothing smart inherently smart about taking more risk. I mean, if you decide to take more risk to get a higher return, fine, and you decide that the risk isn't going to be beta, but it's going to be small cap risk, or it's going to be UH value risk or momentum risk, or it's going to be quality risk or something. I mean, if you believe in Fama French methodology, you're gonna say these are risks.

Eugene Fama recent winner of the Nobel Prize for his work on UM efficient markets and and how challenging it is to beat the market. And French is also ah. Is he a former Chicago or Pennsylvania? You gotta try

to remember where he went, where he teaches. But he's a consultant to UH Dimensional Funds and is one of the key architects of Hey, here's a factor that FAMA, the FAMA French three factor model, which UM codified if you will, the the idea that portfolios have three distinct risks and you can measure the risk, and the risks are the return, the sensitivity to the market, the sensitivity of small caps to large gaps, and the sensitivity of

basically value stocks to growth stocks. And that covers the variability of a diversified portfolio stocks, so kind of captures most of it. There's a there's a few others in there, like momentum and quality. Now, so it's really a five factor model that captures a great portion of the variability of of a diverse, fied stock portfolio. So you can now design your equity portfolios to have tilts are overweightings to these various risks with the hope of getting a

higher return than the market. Although you know, in the farmer French world, it's only because you're taking more risk, right. The translation is small caps are less covered, they have less Wall Street coverage, they're less understood, there are thousands of them, they have a tendency less liquidity. They tend to wink in and out of existence, and hence you're getting compensated a little more um for the additional risk.

There's also less efficiency in that space, and that's why there's some I hate to use a dirty word, alpha to be captured. When we had our conversation with Rob are not of research affiliates, I really liked his definition of smart data, which was, hey, a market cap weighted

index is the worst way to assemble one index. And you run into all these problems, especially at the end of the cycle when it's you know, think back to thousand and when it was the Cisco's and Yahoo's and and I can't even remember the other companies that were the prime drivers back then. And if instead of doing it market cap based, hey, you do it by revenue of profits or dividends or some other reasonable factor. That that's his explanation. You're you're you confused. He's well, I know,

I know Rob very well. I speak with Rob all the time, and uh, I'm a big proponent of what he's doing. I follow all his research and uh, and they do a great job. That said, but however, I can tell you from the south because that's just a g that we just don't see in New Year anymore. That's a lost era. However, this idea that it is something wrong about a cap weighted index is just wrong.

Cap Weighted index are a measurement of the value of the equity market, and that's what they were designed to do, and only only out of sheer poor performance by the act of managers have indexing using cap waiting become so popular in otherwids. You're trying, you're trying to say that this isn't a good way to invest, yet it outperforms most everything out It's like our form of government, right, but a terrible government. Democracy is terrible, except is the

worst form of government except for all others. So that's really interesting. So you are on the same page as John Bogel when it comes to smart beta, but I think in two very specific ways. He's not a fan of smart beta, and I'm saying dimensional isn't a smart beta so much as a These are the factors that but it's all the same thing. Again. Smart better is just a marketing term, and Rob picked up on it,

Rob or not. I mean, he picked up on the word smart, but he loved it because all of a sudden, it was a very easy way to talk about fundamental indexing, and it made it sound so chic. Fundamental indexing is

a much better description the absolutely. In fact, I had this conversation with Rob or Not I said, fundamental indexing has legs because it actually describes what you're doing smart and it seems to work for people who want to have those have those uh you know tilts if you will towards value stocks Uh siffically, Um sure, I mean it's it's a methodology or a strategy that you can use to get those tilts of d f A S and other strategy you can use to get those tilts.

So there's a lot of different strategies out there that you can use to get these various tilts. And it's a question of cost per unit of risk, you know, from our perspective as an advisor looking at all these different products out there, determining how much tilt is there, how much load is there to these various factors risk factors, and how much am I paying over beta to get

those loads? And it's a cost per unit of risk to come up with what funds you should invest in if you decide to even do this Now it's a big question whether you should even do it. You have to really understand it to do it, because if you don't understand it, then the next time these things don't work. Like in the nine nineties when large cap growth was doing very well, value was just you know, getting plumber.

You were cool hearing people say in the nineteen nine So I've been in the business lat warm Buffett is washed up. He's old school. He just hasn't adapted to the new paradigm. The new paradigm. You remember that exactly that that was the word, the new paradigm. And and

here's the thing. If our clients or advisors don't understand what they're really doing with this smart beta stuff and doesn't really understand where the potential returns are supposed to be coming from, then how long are they going to stick with this strategy when it doesn't work for ten years? And there have been ten year periods of time where that it didn't work. So, and what's going to happen to your business if you hang your hat on this

stuff and it doesn't work. What are your client's going to think of it? And how long are they gonna stick with you? When the guy down the road is just doing what the markets doing and you're not. And so there's a certain business risk to advisors to going down this road. And if you do, how much are

you going to expose the portfolio to it? And uh, we we made the decision that no more than twenty five recent of the equity portfolio will be exposed to these various factors and the rest of it's just going to be beta, because, um, I don't know if it's gonna work. I know we worked in the last fifteen years. It was fabulous coming off the tech bubble um. But if you look back ten years prior to that and it's not so rosy. It looks really bad. So, um, I don't know if it's gonna work for ten years

going forward. There's a thing called factor crowding. Have you heard that storm before? Okay, So you've got all this money coming into these smart beta strategies, a lot of it potentially for the wrong reason. They're they're chasing performance and chasing the hot dot, if you will. They're chasing

smart beta rather than factor investing. That that crowded trade approach is why nothing works always all the time, and you tend to see suddenly valuable full out of favor, just as growth fell out of favor, and the core adherence to that will ride it out because they know eventually again we cross the desert and get to the promise land. But um, that that's just the nature of

of human psychology and investing. And I don't know if we are at a point where so much money is going into these strategies that we're gonna have a very poor period of performance for a while or not any chance we're going to see that in indexing. And I have with people is hey, Van God is now three trillion dollars, but there's you know, sixty trillion dollars in in investable assets that are either equity or equity related. It's a tiny percentage of of take. Indexing is still

the minority investment versus active management. Tuck with David Blitzer from another guest for you, if you're looking for somebody would be great to have on the show. I think, um, two trillion dollars are directly benchmark to the SMP five. Yet there's still volatility between SPI stocks. In other words, it really hasn't changed the market, you know a little bit, perhaps, But if you're buying a total market as opposed to the SMP. It's a wash there, there's no effect on

you at all. So uh, I don't think that how how how much uh indexing is too much indexing of the market being index Maybe that becomes too much. I mean, I don't know what the answer is. And the thesis is that if indexing as indexing grows, it just creates opportunity for people who are not in death and that's that's not true. And if we haven't seen that at all last year large no, I mean when it managed like six some massive size, that then creates a little

bit for the alpha chase. That's the theory. Only remember we just said that two trillion dollars is already benchmarked to the SMP fire Yet last year only fiftent of large capus managers i'll perform the SMP five. So where's the data? Not yet? The argument would be, well, as the as alpha is created by people identifying inefficiencies, and as more and more people leave active, that's how you

generate uh. You know, the Ellis thesis is there's so many smart, hardworking, intelligent people chasing alpha they kind of cancel each other out. Once that number of alpha chasers drop. Look, we have ten thousand hedge funds. The Jim Chanos had said, you know, alpha is created by two hundred hedge funds out of ten thousand ps. It's the two hundred hedgephones that existed when there were only two hundred hedge funds. It's the same two hundred guys and every all these

other alpha chasers are really just fee chasers UM. So maybe you need that same sort of situation to take place before the active funds start to create some value. There's, like Charlie Ella said, there's too many people so that there is almost no inefficiencies left to be mined. There's no alpha left to be gotten because they all cancel each other out, essentially. I'll add something to that too, which is that there not only are there a lot of alpha chasers now, but there's also less stocks on

the stock exchange. So the number of stocks on the US exchanges that that trade with any amount of volume UM has been cut in half since so over the last twenty years used to be holding there just be over seven thousand stocks that trade on the U S stock exchanges that had enough volume to be in the CRISP indexes that is now down to something like thirty, So companies are no longer capitalizing themselves using private Equit

is less companies trading on the US exchanges. So you've got you've got more advisors and more hedge funds chasing fewer opportunities just because there were just fewer companies too. It should be no surprise that alpha is based going away. For the most part, there's less and less people. At one point in time. It was in any given year, it was never the same people, and that was pre fee.

But the numbers we used to hear was people were outperforming, and then it became I watched that sort of drip. Unless you're gonna tell me, I'm gonna tell you otherwise. Um, depending what part of the market you're looking at, there's always that part of the market that outperforms. So if large cap stocks out perform last year, you're going to find that few large cap active managers outperform, and if small cap underperformed, you're gonna find that more small cap

active managers outperformed than large cap managers. On why is that? Because the the index is a pure and the managers are messy. So if small cap underperformed, in large cap outperformed, and the managers are messy and they kind of bleed off into mid cap and even some small cap even though they're still in the morning star arge cap box.

They're gonna underperform because they're bleeding. And the index itself is pure classic style drift leads to right that that sort of this issue and it's not really style different just this is that they do more of a equal waiting approach rather than the market cap waiting. Okay, now you get the small cap side and small cap underperforms.

But since the small cap managers are not old small cap, they're bleed off into some mid cap you know, maybe even a large cap or something, they're gonna pick that up, that that style difference up, and they're going to outperform. So in the asset class or the style that underperforms, you will find more managers that outperform, and in the style that outperformed, you're gonna find more managers that underperform. That makes sense. So it's it's I see exactly where

you're you're going with that. Um let me bring this back to John Bogel because I wanted to ask you something I got a lot of push back to a column where I basically said, hey, let me tell you what John Bogel is wrong. And it wasn't that his philosophy of indexing was wrong or his low cost, low turnover approach was wrong. There are certain things that I disagree with him about, and I'm finding that you disagree with him as well. And oh, look at you. I'm gonna,

I'm gonna, I'm gonna listen. I am not. I disagree with John on a few things. Okay, So let's let's start with the t f s. Right. He is not a fan of exchange traded funds because he says people tend to use them to overtrade with Sure, he says it's like throwing giving match to matches to an arsonist or something like that. Um something. Yeah. Yet if you get with him privately, he will say that there's a handful of E t F that actually makes sense. So you're outing him as not as anti e t F

as he claims. Here's the here's the irony of the situation. E t F s have done more to promote John Bogel's philosophy than anything in the last twenty five years. So all of the robo advice, there's all of the other advisers out there that are doing et F mainly using beta type products to put together an asset allocation

that is promoting John bogel strategy. So the irony is, even though John doesn't like exchange traded funds or is said publicly doesn't like them, that product or that structure has done more to promote his philosophy than anything in a very long time. So he should love ets for that reason. Let's talk a little bit about UM overseas investing. I'm assuming your asset allocation has not just US stocks

but developed x US, emerging markets, etcetera. Bogel, not a fan, says the currency risk offsets any gains that you'll get from overseas investing. How how would you reconcile that with John's? Uh? Your approach? With John's approach, and by the way, full disclosure, I'm in your camp, I think. And that's before we start talking about currency hedgdtfs like you can buy UM from Wisdom Tree for Japan is pretty pure. Europe kind of misses half of it. But um, how do you

reconcile that with Bogel? John's a brilliant guy. Here comes some texts. Guy. What I really mean to say is, however, I've never believed that in his approach to the fact that while US companies are doing at least in the SP their business overseas, therefore you getting overseas exposure. That's true, but overseas companies are doing business with the US as well. So I like the idea of getting more diversification in

a portfolio. Remember we talked about the US equity market is shrinking, the number of names of shrinking, and getting more names in the portfolio via international where things are expanding and more names are coming on board, especially in the emerging markets. Is it helps offset the fact that

the US equity market number of issuers are shrinking. But in addition to that, I like the idea of getting some currency diversification in my portfolio, even though you're getting it sort of with US equities because they're doing business overseas. Therefore the earnings of US companies are being affected by currencies. This is a direct currency play, and doing rebalancing between US and international gives you a little bit of a

rebalancing benefit between the currencies. So mathematically, John's idea, hasn't it. It makes it sounds good. You know it's populist if you will, But you know, from a academic standpoint, you really want to have about international we're on the We're more or less on the same page of your total portfolio. So when we look around the world, I to say Europe is about of the global equity exposure, at least by cap you throw in that that's yours. I'm still

working on the cappuccino um. By the way, for those of you who are listening, one of the fun things about every time we come into Bloomberg is you have a variety of unsweetened flavored waters, all more or less tests taste the same. That's cherry, the other one was lemon. It's always That's why I described this place as the East Coast Google, because you walk in and it's just it's kind of madness. People don't realize this, but you see this part of the building. When Mike Bloomberg pushes

a button, it turns into a rocket and week. So in the last five minutes we have let I got a couple of questions that I don't wanna skip um and that I try and ask um. I try and ask everybody, UM, let's let's let's go to the two two big ones and you could wax for as long as you like on this. The first is, you've seen a lot of changes in the industry since you began. What do you think is the most significant and is

this for the better or worse? Or maybe I can rephrase that, what what changes do you see have impacted the industry for the better? And what is still out there that what changes have impacted it for the worse? Tough. One for the better is certainly the technology. It's made it so much more efficient, and it really has tightened up our ability to analyze UM portfolios, analyzed products. UM. I think that the transparency also is better than it

used to be as well. So uh, it's made me, made our clients, made our company, and made the whole industry more productive. So that's that's good. What's bad? Nothing's changed on Wall Street? Really, UM. You take a good product like indexing, and you've got to smear it all up by calling it something else. And you know, active management takes something as pure and beautiful, if you will, as you know, a straight market index fund, and and

now everything is an index. Every active management strategy that you can think of is now an index and and you have to add these new indexes to your portfolio to give you diversification. It's kind of complete nonsense. So e T s, while they've been great to promote the idea of John Voglo's philosophy, they have also polluted the pure concept of what indexing is. And that might be why he's not a huge fan of e T s

is one of the reasons. So last question before we have to send you on your way, And I asked this everybody you started in night here, it is what do you know today that you wish you knew when you started out? Wow, that's a long, thoughtful pause. Yeah. I always tell the people as I get older, I know less. So it's just a difficult questions. Your head is filled with so much stuff, it's harder to access things. That's what I'm finding. At a certain point your brain

is just full and I need a backup drive. That that's what it feels like. But there's certainly has to be things that is part of your daily operations, your philosophy, your thought process that would have been enormously helpful when you began, you know, one of my clients, who is now deceased, said to me when I started my company, Rick, you're going to be enormously successful. I didn't. I didn't think this. I said, well, I'm just working out in my living room out of this old wooden desk I

pulled out of the trash can. He goes, you're gonna

be enormously successful. You have to make a decision. You're either gonna just going to continue to work out of your living room and have maybe sixty clients and you're gonna earn a good living with you and your wife and maybe one assistant, or you're gonna go out and you're gonna build a big, multibillion dollar money management company and you're gonna hire all kinds of people, and you're gonna have all kinds of hr issues, and you're going to have a business that you're gonna have to run.

And he said, you're gonna have to make a decision at some point whether you just want to work out of your living room and just take on the twenty five clients and be happy, or whether you want to build this colossal thing. And I don't know if I guess, I what what? I what? I learned in the last

twenty five years. Is he's absolutely right. I mean, there's nothing wrong with just working out of your living room with twenty five clients and helping those twenty five clients, And there's nothing wrong with going on and building a multibillion dollar business. But um, I always thought that it was the right thing to do back when I was forty years old, to go out and build a multibillion dollar business. But in fact, now that I'm fifty seven, I think that working on in my living room with

twenty five clients seems it's not a bad idea. A lot less headaches than running a big bus. Well, Rick, thank you so much for being so generous with your time. You've been listening to my conversation with Rick Ferry, founder, chief investment officer of Portfolio Solutions. Be sure and check out our other podcasts. Take a look at this on Apple iTunes. Look an inch up or down you'll see the other forty podcasts. Check out my daily column on Bloomberg,

view my regular blog at Dholtz dot com. People want to find you um Portfolio Solutions dot com and what is your handle on Twitter? Uh Rick Underscore Ferry is my quitter handle, and I also have a blog website at Rick Ferry dot com Rick Ferry dot com. You've been listening to Masters in Business on Bloomberg Radio.