Inside an ETF Platform Catering to 100,000 Financial Advisers

would be normal again someday. Uh So. Our guest is Tim Clift of Investment, and we found him through actually Morgan Barna, who's in Bloomberg Intelligence and is an analyst with you, and Morgan flagged him because he's got this huge team of research analysts who helped him have this platform that interfaces with more than a hundred thousand advisers, which I thought was really interesting because we always talking about products and e t f s, but we don't

talk about platforms that much. Yeah. I think for somebody who isn't in the business, a good way to put it would be like the platform is sort of like the costco or Whole Foods for advisors. So if you have an advisor that you use. They especially one that doesn't that has broken away from the sort of wire houses like the merrals or ubs is and is on their own independent. They would use an invest net to shop for individual et f s, funds or packages of

them um in a sort of wholesale manner. So what's interesting to me about this conversation in regards to what's going on now and the market is we've seen more and more these the way we watch flows all the time, and we're seeing more and more that models are impacting the flows. You can tell when a model says, you know what, we're shifting out of you know, inflation protective securities into corporates or out of equities and into bonds.

You can see it in the flows. And so more and more these e t f s make it into these models, which are put on the shelf at these proverbial costco or whole foods. The more the flows are impacted by what the models do. And the models can be tactical trading a lot or strategic which don't move all that much. And this guy tim Is basically sits rate in the middle. He's like the gatekeeper of the funds that get on He also works on making the models,

and there's outside people who make the models. So it's a little inside baseball, but I think it's a really interesting um look into how the sort of intermediary channel of e t F flows and investing works. So just to give you some scale, you know, invest Net, this company has about seventy dollars in e t F s's that's about two of all e t F sets, so it's not huge, but it's sizeable. But there they have

growth year over year. And what's also interesting is that in e t F models though, could be something like two hundred to three hundred billions, so getting closer to so and I think that's the chunk we're really going to focus on today. But the vest Net is, like I said, a portion of that chunk in terms of how they fit into the bigger picture. So again Tim Cleft of the vest Net. This was recorded in mid March before our office went on lockdown, so it sounds

especially great because we're not all in closets. And special thanks to Morgan Barnett for helping make this episode happen. By the way, that's funny you bring that up, because remember we wondered which of those e t F s that we pitched in the e t F Tank episode about ten of us all pitched products we thought should exist, and we wondered who would be the first to market. And Morgan's one She pitched a online betting e t F and it is now a reality b e t

Z and it's an instant hit. It's already got six and seven million dollars came out of the gate pretty strong. So congratulations to her. Even though I won in that competition with x mon the x Monday's e t F, she won the real investing with Investment Damn. Welcome to Trallians. Thanks for having me. So what do you do at investment? I wear a lot of different hats, but my primary responsibility is for research and portfolio management for the organization.

So we have a team of analysts that do research on mutual funds ETFs, all sorts of different investment products and then make recommendations to financial advisors UM and to our own portfolio managers that will build model portfolios. Eric thinks your whole foods, how do you describe yourself? I think that's a great description. You know, you know, we could be a thank you. So the Amazon Amazon, but we we are a big open architecture platform, so we

don't We don't necessarily start from a curation standpoint. We open our doors to just about everybody. But we do have teams in how that help advisors and organizations get that list smaller. And I think that the real important thing for people here to understand who might be retail investors themselves, is advisors wealth managers. They don't necessarily do it all themselves. They will outsource a lot of things. So just talk to us about the shoppers at your

quote platform. The people who use them are advisors. What are they getting from you? And and how are et s involved. Yeah, Historically advisors a lot of their practice was built around them building their own models, and I think over time they've understood or have figured out that that's maybe not the best use of their time, that they really need to spend more time with their clients putting together financial plans. Who can I pay to make

these problems go away? Not you, exactly exactly. So you know the advisors now are saying, well, maybe it makes sense for this segment of my business just to go into model portfolios. They all have very different appetite for risk, different time horizons. Within the model structure, you can actually fit a lot of different people into a limited number of model portfolios that will make sense for those. Okay, so model portfolio, model structures, what does that? What was

any of that mean? So think of a model portfolio as a selection of mutual funds or e t f s. No ETFs are the ones that are growing the fastest um with different risk tolerances. So maybe you have three, five, ten different mutual funds or ETFs in the portfolio, and those will change over time as the economy changes or the direction of the goals of the client change. But it's a it's a set portfolio of of these underlying security and and are these tailored for me as an

individual or are they more off the shelf products? So they start off relatively off the shelf. So there may be seven or ten um in a risk spectrum, so from very conservative to very aggressive, and there may be

tax efficient versions of those. But there's also tools you can set on top of these model portfolio so you could say, well, I want to have an e s G or an impact component to it, or I want to add an income infusion to it, so you can do some customization to these, but by and large they start off at least as as um um structured structured individual portfolios. Most people out there know the sixty equity bonds,

and you could do that with two ets. Now I'm assuming you know if you were described one of these portfolios, I know you can't say tickers. Um, we'll we'll say them for you if we need too. But go through what one might look like? Is it you know fifty thirty times? Like, what's going on here? What's an example of one? What's the compositions somebody? What would you put jole in? Basically? Yeah, so they're there are very simple ones and and sometimes those will just be for low

cost solutions. So you know, you can come into these model portfolios with five thousand dollars and get into a model portfolio, but that's only going to have a couple of different tickers to it um. The larger the cases and the more diversified the portfolio. You might have ten or fifteen, but they'll generally have certainly equity and fixed income and international exposure. In some cases they will have

UM alternatives exposure in them too. In some cases, these are almost said it forget it like strategic models where they don't change much at all over time, and others that may be more tactical and move in and out of the market's a little bit more and be more flexible with what's going on in the in the environment. How would model profolios help with rebalancing? How would that help the advisor community? So with model portfolios, you are outsourcing all the selection part of it, but also the

rebalancing part of the portfolios. So every time the market moves significantly, that rebalancing will happen, either from a manager standpoint or investment in our platform will do that. We can set it up and say, well, let's just do it every quarter or once a year or when it hits a certain tolerance and it moves outside of that

risk spectrum that you signed up for. So it seems to me, and you know, the recent sell offs we've been seeing, we have seen a lot of the core E t F s from Vanguard like I VV and VU and I E F A and V E A continue to take in money during the sell offs. Correctly, if I'm wrong, it seems like model portfolios are part of what where the flows are coming from. Despite the market conditions, advisors say, hey, look we're gonna put We're

gonna just use this model. Done now, I'm gonna spend all my time right now coaching this investor to not sell. And that's their big value add Now now they don't have to spend their time as much doing that. Is that kind of what's going on now and what explains some of the flows into these e t s despite the market um on some violent days. Actually it is. I mean, these are these are much stickier assets and and by and large they're part of a financial plan.

So the advisors sat down with a client, they've gone through this long long term goals for the client, and they're saying that this makes the most sense for you. We are not going to jump in and jump out of the market every time something scary happens temporarily long term, these are long term holdings. If you need short term assets, put it somewhere else. These models are really here to you know, generate income over time and to grow over time. And so you don't you don't see those flows nearly

as much as individual tickers. And what kind of time horizon are you typically talking about there? Yeah, time risings might be ten years fifty you know, all the way through retirements, so it could be a fifty year time horizon on on many of these models. Can I throw theory out at you that I've been thinking about, there's this general filling with like, okay, ETFs are going to hurt the market because all these people are gonna run when something gets tough, and they'll be like only one door,

like everybody. They'll say, everybody's gonna try to run out the same exit door. Um, it seems like every single sell off we see the same thing. We see the e t f s tend to take in net flows, as do index mutual funds, which are passive. It seems to me traditionally those are younger clients and more coached clients by these advisors. Now mutual funds people were put in there by a broker who got paid from mutual funds, so less loyalty and traditionally boomers who may have a

shorter time horizon. Could we be looking at a situation for the next at least fifteen twenty years. We're so offs are more about mutual funds having to sell and being under severe pressure rather than the passive side. Is that something you can speak to from where you said, yes, Um, he wrestles with big theories. It's a it's a big theory. And I don't want, I wanted to anyone to think that we're not going to see outflows out of e

t s two as markets get you know, struggle. I just think that you may not have as much fluid e I think the way the trend has been it's really more function of costs. So you know, I think that's where e t f s are have have an advantage. And we've seen by and large advisors more and more focused when they're putting put portfolios together for their clients.

Is much more fee pressure. So anytime they meet with a brand new client and they're in a mutual fund model, very often they're going to be recommending an ETF model or a blended model for their client to reduce the cost because we know that particularly down markets, additional costs are just going to eat away and corrowed at your at your returns. But the person who sought out the e t F is they bought it, they weren't put

in it. And I think that's important because usually that person also is a UH student of behavioral finance as well and has long term mentality understands. As we say, they're chasing patients, not performance, and so I think that anyone that's going into these models, I think that's absolutely true that there's there We're not going to see a

lot of that friction and movement in and out. But I also think you know, a t F are being used from from a hedging vehicle and because you can interdate trade them there there's going to be some movement there. But I think in the in the models for sure, when we don't see nearly the outflows that we'd see another asset classes. Yeah, given the interest you're seeing in e t F only model portfolios, you know, what is your take on the new active non transparent funds coming

to market? Do you think you know, part of the appeal is that they fit into e t F only model portfolio. You know what is your sort of take on I think that's pretty exciting the non transparent um e t F s that are that are moving into

the marketplace. It will it will allow those traditionally beta only or just you know, tracking the market type of portfolios to have the ability to outperform, and it gets a lot of really smart portfolio managers into that space, basically moving their traditional mutual fund models into the ETF structure that's more tax sensitive and just a more efficient vehicle, lower cost. Right, it obviously forces the collapse of the multi share class. Right, they're gonna they're gonna be a

single share class. They're probably gonna be priced. I mean looks like a little bit closer to the institutional costs of the mutual fund. Eric and I you know, have we've talked about there's a clear interest in why fund issuers are moving this direction in part A lot of these strategies have seen outflows, but is there really going to be and I mean, do you see demand from the advisors acting for asking for more active strategies or asking for e t F only model portfolios that have

a better mix of active and passive. Yes, so they're they're not asking for the non transparent e t F s yet. I think once they're more broadly available in the marketplace and they've proven themselves out so that the bid asks are are tight and the ap s can actually create the shares that they need to to to make that market efficient, I think the assets will will flow. Um we're already seeing the active passive blends, but they're

not necessarily the non transparent active passive. So the best of both worlds, right, you can have smart beta, you can have alpha combined, you get the you know, when the markets go down sometimes, you know, the active managers can be a little bit more nimble. So maybe those combined make a lot more sense. So we have advisors

building their actice around building active passive portfolios. So I think once the non transparents get in there, it gives a lot more choice and again you get some benefits of that structure. I do think some of the worry that we will hear with models sometimes is and we see it with the flows. A lot of the flows do go into the like the SNP one you know, vo or IVV and then the ms C I e FO one or the foot seat and they're very similar.

The e M one which is very similar either it's ms CR foot see we call it the core wars or the ag the agg or BND which is the aggregate bonding decks. Um is there any risk to everybody by basically hooking into the same portfolio pound for pound, because from the flows, it doesn't seem like there's a ton of differentiation. But then when you meet with an issue where they will say that they're a niche issue where that they can provide an advisor with differentiation UM

and so. But when we see some of that, but largely it just seems like that all the money is going into the same sort of four et F categories. And we're saying that too. So your traditional strategic model has those core elements to it, and that's where the flows are going into those just those those asset classes. So there, you know, can potentially be some concerned around liquidity for those products if there tends to be movement

all all at the same time. But we also the issuers and the models that are providing those are the biggest ones out there, so that you know, we have certain criteria around how many assets they have to have, how long they've been doing this UM. So we're not as concerned about the liquidity part of it is is UM as we would be for a brand new startup. The other thing we're seeing is that advisers saying, all right, we're going to take that core, but we're gonna build

around it. So we're gonna say, you know, we've got the core for asset classes, and now we're gonna add an income boost from my retirement clients. So there's another model condiments, sprinkle a little relish and mustard the Kenship on the hot dog. That's what Droll likes exactly. I like the relish too, So they'll they'll they'll start building around it and saying, you know, we want to want a little more income in this portfolio, or we want

some different variation. I want liquid alternatives in there somehow so that we can have some downside protection, whatever it might be. So, your your clients are basically advisors, right, and we're seeing puns more wealth managers sort of break off and do their own advisors shop. What do you think the potential of your business looks like here as you see more and more of these advisors competing with one another um and what kind of opportunity and strategic

growth do you see in the near term? Yeah, I think you know, we only see upside right now. The number of advisors that are moving into the model portfolios and out of you old old commission products, or or actually just doing it all themselves. The organizations they work for don't necessarily want them doing that. Anymore. They'd much

rather have um the compliance structure. They'd rather have it outsourced to these enormous firms that have a lot of resources, rather than having an visor just going and picking and choosing on their own. You know, if if if it comes down to some litigation, if they have all this backup that's been done, that's a much safer place to

be than than doing it themselves. You service independent advisors and you know when you talk about Meryl ubs and these bigger networks of fays where they have to sort of subscribe to the Meryl do you find people defect from there and become independent and then you're kind of where they would go to use something similar. Yeah, we see a lot of advisors once their practice gets big or they wanted more independence, that they move over to

the investment platform that that is. That is a common trend. We've seen that for many, many years. And you know, one we want to make sure we have at least the tools and products available that they have where they're coming from. So that was one of the um ideas behind Investment and why it was started to actually give independent advisors the same tools and resources that somebody from the wires would have. But that is that is a continuing trend was seen. So where are you at with

assets now? And where do you think you're gonna get? So we're at a little over three trillion dollars in total assets on the platform UM and as far as discretionary assets, uh, we're we're involved in the actual trading and is about two hundred plus billion and we're growing UM double digits for sure every year. And the models business is growing over thirty percent year over year. Models. Well, I think we're going to come back to this topic repeatedly.

And here's a question I have. So, UM your five percent owned by Black Rocket. They took they bought a small piece of you back in the day, right, Yes, And we've tracked this theme that we call getting closer to the customer. The et f issuers are looking at the writing on the wall. They're like, man, everybody wants everything for four basis points. Those advisor fees over there look pretty juicy there one percent. And I'm not saying Black Rocks doing this per se, but like Vanguard's Launchest

advisory service, so is Schwab. That's the game. That is the game, and it feels like the they're all trying to own the get as closely they can to the advisor that guarantees flows into their funds, and some of them are actually becoming advisors. So from your perch, how are you seeing that trend develop? Yeah, I think all the providers want to have strategic relationships with all the gate gapers or the the big providers and and black Rocks no difference. And you know, I don't want to

say what they are doing is just for distribution. The reason they did the investment, it was just slightly under five percent, but was more for UM technologists. They have a lot of really cool technology tools that they wanted to embed into our platform to make you know, UM advice much more streamlined and simple. So they've they've got some really simple tools that advisors can kind of take shortcuts and get get to either models that they want UM or they can get advice that they want. So

that was really the reason for that, you know. But the closer thing get to to us and that that's not just black Rock, but that's all the providers UM. You know, the more UM that's really where distribution is coming from these days. And you know, it's not lost on us to how much data exists in in the likes of those end investors and on mass when you serve you know, about a third of the advisory community

you know, rolled up. That's a lot of insight for you know, fund issuers who are trying to sort of gore the pockets. Is Yeah, I think from your data is a big thing for us. And we have a lot of data on all those hundred thousand advisors, but all the trends of the flows that we're seeing from

all the different asset managers. So for those and we make that information available to the asset managers, so they can be much more targeted when they're going after um new assets and they know which advisors are selling more of their products and how many proposals are being run every day from on their individual securities and so that instead of from a retail standpoint just trying to put up commercials and trying to you know, blanket everywhere, they

can be very targeted on you know, different organizations and figure out, you know, where where am I best using

my resources. Let's talk about the models that are you said there's over a thousand available right on the platform, so there's there's a hundred fifty providers asset managers that have about fifteen hundred individual models on the platform, um the hundred, So black Rocks one of those, right, okay, And then you've got companies that like CLS that only does this where also there's models that are for long term, but then there's models that are are trying to outperform,

right like a fund of funds? Is that right? And do you have like a separate section in the proverbial food store for the alpha generating ones versus the long term ones. Yeah. So when we're working with and an A Prize and they want to set up models, they're not going to turn on all hundred and fifty organizations models in that They're going to say, all right, we want a low cost solution, we want an income solution, we want a strategic solution, we want a tactical solution,

we want an E s G solution. And they might end up with five, six, ten different types of solutions that all have several different model portfolios attached to it. So it really depends on the distribution chain, the type of advisors that they have with the demand is and so we help them curate that list down to something that's that's more reasonable, so advisors don't have overwhelming choice. What other trends in et F s do you think warrant discussion? A couple of areas that I think we're

seeing trends that are are very strong right now. We talked about et F models. UM. In some cases they're open architecture models, so we'll have a third party picking

the best et F that are out there. But more and more are top two organizations and flows are all coming from firms that are only using their proprietary e t F s, so they're you know, they may not have a selection that's you know, completely broad and can cover all the different areas UM, but it's cheap, right and and there's no management fee on top of it, So our advisors look at those models as the free ones, so they don't have to pay management feed, just the

underlying expenses on those models. So those from a cost standpoint are very attractive. They know the brand names of these big e t F shops, so they're happy to make those available to their clients. So the free I think, is one of the big trends we're saying right now. Yeah, no Bank of New York is rolling out et s, and one of them is zero point zero zero percent

um JP Morgan's is two basis points. I mean people are just look in the future, everybody's canna expect there the core at least of their portfolio to be pretty much free. Right, Yeah, So so you know what I'm

talking about is a management fee on top. So traditionally a lot of the like in other words, they would wave that because you're putting it into their funds exactly, which would probably include some of the non free ones, right, right, but fair enough, But you're right, there's also the underlying is you know, race to zero. So if you're underlying costs or twelve basis points or fourteen basis points, you know, it's hard to compete with. This is a hard question.

But you know, do you think it's it's concerning either overall or for your business as well? Just to share that black Rock and Vanguard have of of passive act of passive management, and I don't I don't think it's a concern, you know, I think it would be. It's a hard entrance point. There's barriers to entry if you just want to go after low cost strategic e t F models. Right, they have a lot of resources. They're

doing a very good job in that space. But I also think there's a lot of opportunity for other et F manufacturers to you know, look at smart beta models or e s G models or whatever it might be that you know that there aren't great options out there in this in the space for so they're they're big, they're doing a good job of it, they've got lots of liquid, and they've got lots of support. You know, I'm not concerned about that at this point. And one

other one. You know, you have obviously a huge research team. How are your capabilities going to have to change with sort of maybe more evaluation of active managers. Yeah, that that's something we have been working on a lot lately.

Um So, traditionally we've done more quantitative screening for traditional e t F s, but now as you're moving into multi factor e t F, so you're moving into these non transparent ETFs, you really have to have somebody looking deep under the hood to understand how that structure works. And so when we're making recommendations, it's it's not just you know, looking at these three or five different factors.

We actually have to understand the team better. Just like you would on a traditional mutual fund or the old school, you know, asset managers, that's you know, what is their investment philosophy? How how's it working? So it's it's certainly evolving in our resources are are shifting more onto the t F side from a research standpoint. Tim, thanks for joining us and brilliance right, Thanks for having me, Thanks

for listening to Trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever else you like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Weber Show, He's at Eric Call Tunas that. You can find Morgan at M Barnes six and you can follow Investnet at e n V intel. This episode of Trillions was produced by Magnus Andricksen. Francesca lead is the head of Bloomberg Podcast. Bye