And welcome everyone to another Smart Money Circle episode. I'm Adam Sarhan. With me today is Eric Metz, who's the CIO Chief Investment Officer and Head of Spider Rock Advisors, which is a fully owned subsidiary of Black Rock on Black Rock's SMA platform. They have approximately $250 billion in assets under management. Eric, thank you so much for taking the time and welcome to the Smart Money Circle. Adam, I appreciate it. Looking forward to it. So Eric, I always like to begin.
Can you please tell us your story and how you got to where you are today? Yeah, listen, it's, it's, it's been a fun journey. Maybe some left and right turns that I could have predicted and a lot more turns that that were unpredictable. You know, I, I began my my career in finance or derivatives, I should say, in academia at the University of Michigan and Graduate School studying financial engineering and derivatives themselves. And then I found out that academia was not necessarily for
me and wanted to trade. And so I cut my teeth in the industry with a local proprietary trading shop, which is now global called Chicago Trading Company. So my first real professional job in the industry and began on the floor of the CBOE in the Chicago Market Exchange. So, you know, late 90s, early 2000s, believe it or not, there were 4 predominant exchanges in the options arena, Chicago being
probably the largest. And so I wanted to, to really, you know, learn the trade in the, in the craft from the experts there. And then, you know, realized that the floor was becoming more and more of a digital technological arms race. And so wanted to come off for and, and, and learn the upstairs market. So think low latency prop trading hedge fund style at a few boutique shops again in Chicago for those Chicago
trading people. Ronan Capital. It, it was a very well known name that I was at for three or four years and then joined, you know, with with some really good friends and colleagues of mine, a boutique shop. We had a multifamily office out of New York that backed us in Bangor Capital. And then my CFA sponsor, who is the founder of River North called me in O 8 and asked, you know, hey, I'm managing these close and funds. Would love to see how your expertise and and volatility.
And he knew my background because he was my CFA sponsor. And his name is Patrick Galley. He's the CIO and CEO of River North today called me and we kind of whiteboarded some some of his positions and portfolios and then really got the wheels turning about learning his business where our asset classes could potentially be a creative to theirs.
Think about building better portfolios for institutions and family offices alike that, you know, came with the opportunity to join his team in 2011. And then from there, you know, it was really interesting the time, the timing of that
transition. Asset management, wealth management, robo advisory technology, venture capital, automation, all were hitting the industry kind of the same time with like this transformation and having an ear to the ground, speaking to clients every day, thinking about where their pain
points were. The vision of Spider Rock Advisors, what was built in partnership with what became my, my partner in Spider Rock Advisors, George Papa, who is the founder of Spider Rock. And the idea was, you know, myself at River North who is a derivatives portfolio manager and trader as a fiduciary, you know, managing hedge fund and mutual fund, some SM as but the clients really needed to get more customization. Think about the after tax world.
And these clients were, were domiciled in so many different venues. Think UBS and Merrill Lynch and Fidelity and Schwab and Pershing and Bank of New York and Northern Trust, you name it. And so thinking through the challenges that they foresaw, who in the industry could could actually deliver that? And there were a few and you know, players that had attempts, but nobody with with I'll call it a built for purpose I to the client.
And so we set forth with Spider Rock advisors the vision to build a hub and spoke infrastructure connecting all the private wealth channels to a proprietary build to listen to the needs and client demands and and asks around building parameters and and bespoke derivative solutions. And in doing so, we had to build a bunch of technology like a lot. And it was a big bet. It was very filled of dreams. Ask if if your movie buff, you know, if you build it, they will come.
But we had the clients telling us exactly what to do. And so you know, that was in 2015. We, so we built kind of a lot of tack and, and, and workflow and automation and infrastructure to really deliver a universal hub and spoke derivative solutions platform that has a fiduciary business model to the client and is allows, you know, customization and, and after tax solutions. And then we we bootstrap the whole thing. And then as we continually scaled, we realized we were
facing a distribution challenge. Now that we have clients and we have product market fit, now we have technology, now we have all the solutions. How do we think about distributing this? Because we needed to raise our awareness and our profile and make sure that financial advisors, institutions, family offices like knew of our
capabilities. And so that was really the, the, the inflection point was when we were starting to hit a ceiling on our distribution, you know, a large institution pulled us aside and said, you know, we have thousands and thousands of financial advisors. How on earth do you get a sell and service? And we so we, we began a process and serendipitously, you know, BlackRock came unsolicited to us probably through the rumor mill, heard what we were up to.
And you know, it fit very nicely with their vision of their SMA
platform. And so in 2021, they took a stake in the business, took two seats on my board and you know, wanted us to mature our technology stack and basically prove out that we could scale at the level of a institutional platform like BlackRock. So 2024, our board collectively decided that it was time to, you know, go in house, so to speak, and we became a vertically integrated business unit in May of 24. So that is roughly speaking 25 years and hopefully less than 5 minutes.
Wow, I absolutely love it. So congratulations on your success. It's absolutely fantastic. I love the fact that they contacted you and not the other way around. That typically means stars are aligned up above and there's good things that come after that. So let's talk about Spider Rock. Please let invest. Let's let the audience know what you do, some of your competitive advantages, your investment style, all that fun stuff, please.
Yeah, no, I appreciate it. And, and, and thanks, you know, on, on, on the aforementioned comments. So I, I think there's a few things to, to really, you know, raise awareness around. So number one, derivatives as an asset class for, for, you know, the professional traders in Chicago has always been kind of a staple statement.
But many financial advisors, many fiduciaries, many other asset managers don't have the backgrounds, the infrastructure, the technology to actually go deliver the volatility as an asset class and as as as that's a headline statement. What that actually means is derivatives can solve very unique portfolio challenges to build better risk adjusted returns that other plain vanilla instruments can't, right? Microsoft is a linear instrument.
Microsoft pays a dividend. Microsoft if it's up 10%, the investors up 10%, Microsoft's down 10%, they're down 10%. What derivatives do is they shape distributions. And so think about like at the utility, each person could have the exact same portfolio, but their psychology of wins and losses or gains and losses and they get their monthly statement is very different. That's risk tolerance, right? It's maybe not stated as bluntly.
And So what derivatives really do well and are very uniquely positioned to do better than any other portfolio constructing tool is to shape the outcome that investor is seeking. So if you said to me, I would much prefer up 10, down 8 as opposed to up 10, down 10, OK, derivatives can maybe shape that. Well, what about up 20, down 20? Well, I can't get you up 20, but I get you up 18 and down 12 and
now light bulbs start to go off. And so it's the upside down side capture ratio that things gravity that people gravitate to, it's risk adjusted profiles, it's sharp ratios, it's Sortina ratios. And so when you think through the truest value of what we're delivering, it's re characterizing what a risk adjusted portfolio construction can be now with these instruments. But to do that, you have to have all that infrastructure and all that technology because each investor's unique.
And So what I haven't mentioned there is that's derivatives as an asset class, that's nonlinear payouts, that's building better portfolios, building better sharp ratios. But what I haven't there mentioned there is like the efficiency of our solution set. So I am not asking for an allocation, Adam, your portfolio is fully invested. You're a professional investor. You look at a hedge fund, you look at a private equity, you look at venture capital, they're going to ask you to give them cash.
What I am asking is, right, let me see your portfolio, let me see it. And because of that infrastructure, I can now see exactly what you owned. And if you hire us, we're going to run a bunch of analytics on ways to improve that portfolio. And the way I set up that framework is, you know, Adam, we're sitting in, you know,
pretty close to all time highs. You probably have a lot of equity gains and the reason you probably hold some of those still is because you haven't been able to sell them in rebalance because you don't want to pay the tax bill. And so the capital efficiency here is, can I actually go deliver a better portfolio to you without forcing you to sell something? I'm not asking for your cash.
I'm asking for a lens into your portfolio and ways to improve it. And so if I see that I'm like, Adam, you've been so fortuitous to own Tesla, NVIDIA, Microsoft, if taxes are zero, what would you do? And you'd be like, I actually not at this phase in my life, would not want that much risk. And I actually would like this muni bond portfolio, but I can't do anything about it. Well, insert spider rock advisors. I see your account wherever it sits.
You hire us as a fiduciary. I'm aligned with you. These are not trades. These are perpetual systematic solutions. Once I understand your objectives to go into your account wherever you're domiciled and re optimize your portfolio with an after tax mindset, but try to get you that up 18 down 12. You used to just own Microsoft. Now you own Microsoft pay off profiles that are different and catered to you. So that's like the the the lens of our solutions.
If I tell people we, we are a derivative solutions platform and what that means is I can curate any solution, but I'd rather hear your objectives and I will optimize to those because I got an alphabet suit behind me and acronyms and I can go through all the product lineups. And that could be fun over Saturday if you wanted to be bored for a full day. But it's the goal that you're providing me. I can deliver better than any other instrument.
That's the asset class. That's options as an asset class Spider Rocket Advisors as the fiduciary to that is going to then run that as a core sleeve of your portfolio for a window of time. If if you're thinking you know in a finite period, but most clients start with one and become power users of our of our of our solution kit. Yeah, it makes perfect sense and I love how you explained it. Thank you for that. So do you look at derivatives as an asset class as well? Almost exclusively.
So I will ingest portfolios regardless of what they have equities, fixed income, ETF, single securities, mutual funds. And I'll say, hey Adam, this is this is the ball of wax that that I now have a lens into let's all agree as to what your objectives are and how we could improve them. And so the one that's super obvious and the most conventional is concentrated stock, right?
I have hundreds and hundreds of clients that come to me because their clients, financial advisors speaking, my clients have somebody who has worked at Caterpillar for 25 years, makes sense. And they've amassed a pretty nice nest egg, $7,000,000. But 4 million is in one stock Caterpillar. And they're like this family cannot afford for that asset to have some issue, you know, a rise in which it, you know, goes down 50%, like it would be like lifestyle changing. So what do we need to do?
We need to protect that asset. But the problem is if you sell it and go diversify, you have to pay taxes, right? And our solution set will then say, OK, with advisor and family, how do we think about building you a stronger, more durable portfolio for the next 5 years, 10 years, but really mitigate the risk of that single security. And, you know, that's what options do best. And then as you walk through that, the financial advisors, what about an exchange fund? That's a great thought.
What does an exchange fund do? That Caterpillar family can put their $4 million into exchange fund and get them get a ratable exposure of all other folks that are in similar positions. And then the downside, however, is they're locked up for seven years. And so if you need liquidity or you need transparency, let alone the fees, there's some tax ramifications. In 2018, this example existed. Apple was the family in the, you know, the use case here.
And the financial advisor said, you know, hey, team Spider rock, I just don't want any more Apple exposure. I want a diversified for portfolio, but I need it. I need to be able to get liquidity when I need to. And so we built a solution. Again, everything we do is built for purpose to a client objective that we call exchange fund replication. So it's probably one of our more, I'll call it innovative solutions solving the exact problem of I don't want this security Apple in this case,
Caterpillar in the other. But instead I want a diversified portfolio, but I don't want to sell it today and I need to maintain complete flexibility customization through time. I like my shares, I like my dividend. So we get to keep the shares in the account. And then at the end of six months, two years, three years, unlike seven years, you know, we're re optimizing this through time. And so it's it's been a huge success in solving for that exact client use case.
But hopefully that brings to life like how we engage with folks. It's tell me, tell me what your problem statement is. And if I can improve it better than other conventional measures, then I'll bring stuff to the table for you. I absolutely love it. Let's talk about risk management, Eric. How do you handle risk and what are some mistakes you see people make with respect to risk management? That, that may be the best question I've gotten all week.
Listen, I, I think when you are a professional investor, you have to start with the risk management. A lot of folks in the retail world start with the reward. And that's the if, if I was to say one statement, professional investors manage risk, retail investors seek reward. And that's just behavioral finance, right? And So what we are paid to do is start with analyzing the risk.
And when I tell clients each day risk adjusted returns are what you want, you just don't think about it like that. And I give various metaphors to explain the value of risk adjusted returns. And one that is is very layman centric is every single person that's been on an airplane has always heard the pilot come on and say, you know what, there's some turbulence ahead. We're going to go north and
deviate on our route, 100 miles. It's going to cost us 7 minutes, but we're going to land in San Francisco 7 minutes later. But there will be no turbulence. There's not a single person on that plane. That's like, no, no, no, actually I want to get there 7 minutes faster, go straight through the eye of the storm. Not a single person. But in finance and professional money management, they actually
want that. And because they, the, the allure of the reward forgets the premise of wanting risk adjusted returns. And so we spent countless hours re underwriting what that means for our work. And so go back to that Microsoft example that we began to chat around. I don't like up 10 down 10. I don't like up 20 down 20. I like up 18, down 12. OK. But what are you giving up? Everybody just said I went up 18, down 12, that's better than up 20, down 20. Everybody just agreed to that.
But what they conveniently forget is when it goes up 30, I might only be up 20. So what's what are the symmetries that you're seeking that's risk adjusted returns by the way. And what is the cost to build better symmetries? Sometimes it's foregone upside.
And so how we think about everything in in Spider Rock Advisors for all of our work, whether it's an institution tax exempt, whether it's a billionaire family office, or whether it's the full nest egg of a $3,000,000 family that just entered retirement and everything in between. The idea of building better portfolios has to start with risk adjusted returns. And because I don't have a crystal ball and Adam, I know you know this, I don't know where the S&P is going to go, nor do you.
I don't know where Apple's going to go, let alone, you know, ever, especially in a short window of time. But I can control the risk. I actually can manufacture a risk protocol and the reward where stocks go, what volatility does like that? That's left to forces that are greater than than anybody, right. And so that's that's the principled framework to building better risk adjusted portfolios. OK, I absolutely love it.
So I always joke around at half joking, but say, you know, most people look at the calculator and they start punching in numbers. The seek reward. I love what you said about professionals manage risk and individuals seek reward. Nobody goes to that calculus. I'm gonna buy a million shares of XYZ's and they go up a dollar and make a million bucks, you know, blah, blah, blah. That's what people are just looking at that side of it, but they completely dismiss the risk side of it.
Most people, at least. And 100%. I'd love that. OK, Thank you so much, Eric for explaining that and breaking that down the way you did. Now let's with the conversation, some timeless advice, which is my favorite part of the show. So you like the risk question. But wait, there's more. There's a lot more good questions coming your way still at least. So here we go. What is some timeless lessons you've learned along the way that you'd like to share with
the audience? You can go business, life, relationships, anywhere you want to go. Oh, listen, that's a very thoughtful question. I will. I will segue into that on the heels of our last one. So I'll stay on the investing theme here. One of my first risk managers in the business said your sizing needs to be built in a position with how much you're willing to lose, not how much you want to
make. And so if you can reframe portfolio construction from that, from that bench line benchmark statement, it will completely re engineer how you build better portfolios, right? And so I think how that segues into maybe a broader initiative, you know, timeless advice. We sit in 2026 roughly speaking at all time highs.
I don't think there's ever been a moment in my 25 year professional career in which the dispersion or difference between historical returns and future estimated returns have been at a wider point in history. What does that mean? Capital markets have been very, very fortuitous in compounding. Depending upon your index, 12:14 maybe in the NASDAQ, depending upon your window of time, 18% compounded.
There's not a single consultant institution, Wall Street bank that is looking in the next 10 years with anything north of, I'm going to call it 7 is probably the most bullish estimate I've seen. So if I have a 14% historical tailwind and I have a 7% forward-looking estimate, what does that mean in the world of compliance for financial professionals, past performance is not indicative of future
results. And I laugh and I see you chuckling because how on earth you are going to build the most durable portfolio looking forward given where we sit today without the asset class of derivatives, right. I, I don't know how you'll do it, especially if you think about the after tax components. And yes, that's a biased self-serving statement from the work that we do. But it's math like if I am compounding historically at 15% and I'm forward-looking at 7 and a half.
Oh, by the way, volatilities not going down, it's going up, right? I know we just announced a new Fed chair. We, we know policy is data dependent, but the front of the curve is also likely going down. Like you, you have these structural forces that are in play where equity markets probably pulled returns forward into 2025 and and beyond. 22/20/22 is the only real blip which you know, that was the interest rate saga that now allows us to have actually real yield in, in, in nominal terms.
Listen, I, I think the, the, the advice I would, I would want to you know, maybe shed here is like prudent investing needs to take that into consideration. And so somebody who is over their skis and risk, whether knowingly or unknowingly, this is not a bear market call by any means. This is just prudent portfolio construction and fiduciary risk
management. So that's, that's, that's one like theme that I'm seeing coming from clients, seeing industry research, some of which comes, you know, from, from BlackRock that I kind of coupled together that that it would want to make sure that that's, you know, I'm on the record at least acknowledging that that's the factual backdrop that would
that, that we face. So that's like one on the on the finance side and, and on the investment management side, I've been very fortunate to work with really great people and team. And so I think through just where we operate today and like having an amazing team is the only critical, I'll call it a component or key variable. When I see successful businesses or I see successful teams, it's like the the team, the team, the
team. Like there, there is true, true value and surrounding yourself with individuals that are like minded in some dimensions, but also in, you know, force debate, force critical thinking, force of difference of opinion to get the best out of what it is your mission statement would be. And so I, I can't, you know, in, in all of our work for clients, it's, it's not even remotely possible without the amazing team that we have. Yeah, I love that.
OK, I could ask you a lot more questions than that. I'm going to keep moving forward because I have more questions for you. The flip side of the timeless lessons would be timeless mistakes. What are some timeless mistakes either you've made, you've seen other people make, and how do you learn from them so you don't keep repeating them? Oh wow, Everybody has mistakes. I have many, many, many patience in keeping the objective of the business model. The objective of a client
requires patience. And so I've been a victim of this. I've seen other folks be a victim of this. Patience is required in in any startup. Patience is required in any business model. Patience is required in any portfolio. And the reason why I'm, I'm convicted in this and I'm, I'm, I've learned from this mistake
countless times. But when you are seeking instant gratification, it forces you to make decisions differently when you have patience or time on your side to be thoughtful about your approach to give markets time to recover in some instances. So the parallels in life and the parallels in business and the parallels in portfolios, I think all require patience hasn't really come natural to me. I've had to like impose self-discipline.
So I think that, you know, when when you are convicted in, in the direction you're going, it has to be met with patients in order to, to deliver. Otherwise you'll get frustrated because what you see is the vision is not coming fast enough. So you have to be very disciplined and grounded in in having patients to allow time to be, you know, your friend. Yeah, OK. I love that. And I've experienced similar things on my end with the team and patience and the reward, not
the risk and so on and so forth. So I love what you're sharing here. Thank you. Next question for you. Let's talk about leadership. So you mentioned teams important is to have good leaders. You're a leader. How do you, what have you learned about leadership? What makes a great leader? Any lessons about leadership that you'd like to share with the audience, please? You know, listen, I think it's a, it's a great question. Leadership styles vary.
There's no one leadership style that always is the best leadership style. And so if I was to be self reflective here, changing your leadership style or being dynamic in your leadership style is a skill that I've had to try to, to work on. It changes by market conditions and needs to change by personnel. It needs to change by business unit. If you think technology versus operations versus investments
versus sales and marketing. And I think leadership also needs to have humility and and a humbleness to it. And I've been very fortunate to, to have had mentors and leaders above me and witnessing what's worked for them, how they manage me and my team. And you know, I'll call it using a golf metaphor, basketball, right? I like this leadership style here for this. I like this leadership over here for that.
And, and like I said, you know, the, the team needs to be able to respond to, to various styles of leadership, you know, given the task and the objectives at hand, which change through time and also given competitive forces in market conditions. So I, I think, you know, leadership, there's so many good, you know, I'll call it high profile leaders that have
certain styles. And if you were, you know, and I've read a few few books on, on, on this exact topic only from, from my own edification and, and learning. But being able to change your leadership style when necessary I think is a mission critical key factor in in successful leadership. Yeah, I love that. The evolution, right? Yeah, no, it's real. Yeah, I love that. OK, next question for you. I've learned successful people overcome adversity, handle
adversity different than most. They overcome obstacles. How do you handle adversity and what are some obstacles you had to overcome along the way? Oh, there were a lot of obstacles in the journey of Spider Rock Advisors. Lots. I would go back to that patience dialogue as, as a means to overcome some of obstacles. It's not, it's not there tomorrow, but like if I wait a year and I keep doing what I'm doing and keep my head down and grind like time will alleviate some some, some of the
obstacles. I think the, the, the biggest challenge with respect to this business and obstacles is we were somewhat too early, which again required patience, but we were thinking through some of the technology that we needed to build and the way we wanted to deliver, you know, our, our, our value proposition and the marketplace was, wasn't ready.
And So what does that mean? Clients weren't able to adopt it at scale or the custodian or the back office technology teams weren't equipped to ingest an API or a data feed. And so as opposed to getting frustrated and, and, and throwing your hands in the air, which we probably did at many, many times in a boardroom, but the idea of thinking about how to put yourself in the other side of the table and try to propose solutions around the problem.
So becoming a perpetual problem solver was, was a skill set and, and a business dynamic that we needed to adjust to through time. And listen, I think the biggest obstacle, which, which we all face, because nobody knew what the hell was going on, it was COVID. And so when you're, when you're in these business momentum, business building modes, and then you get thrown not even a curveball, but a haymaker such as COVID.
It's like, how do you improvise? How do you take the vision of where you were going and adjust the vision accordingly? And, and, and by the way, you're, you're managing your family and your team and in the business and clients. Like there was that, that, that obstacle can't be understated, but everybody faced it. And so there was a lot of empathy and sympathy. And so, you know, I think the holistic approach there, you know, there were, there were a lot of success stories through COVID.
There were a lot of, you know, sad stories through COVID. We, we had both, but we came out on the good side of that. And and you know, that was it was a life learning lesson for sure in terms of, you know, overcoming obstacles. I love it. OK, final question for you today, Eric. What is the best piece of advice you'd like to give the audience or your 30 year old self? Oh, my 30 year old self needed a lot of advice.
Listen, I think at the end of the day, the, the advice that I, I would like to, you know, have my team have and, and have somebody that I was to mentor. Chasing success is not, it's not a thing. Chasing passion is a thing. And if you derive energy from your passion and you do it well, success will come. And so it's reverse engineering career paths based upon what motivates you, what you want to learn about, what you derive energy from, and where you find
passion. If you chase success, it won't necessarily work, but I have a lot of confidence in the other path providing a utility of happiness and success. And whatever you measure success in, in a much more higher probabilistic world if if you chase the passion as opposed to the outcome. I fully agree. OK, Eric, this has been athlete fantastic. Thank you so much for coming on the show. We'll have links to your website and everything else in the show notes. And Congrats on your success.
This has been athlete fantastic. Thanks so much, Adam. It's great being here.