Is Direct Indexing Coming for the ETF?

on Amazon. But let's move on. UM, I was like, why don't big pensions just by the e t F. Well, they can go and get the SMP done for even cheaper than the e t F. So separately managed to accounts come up in my research just terms you just buy all the stocks directly and you let a black rock just do it. They it's it's almost like your own private e t F and you don't have to go to the public pool down the street, and institutions

like that. It's cheaper, and ultimately the problem with that is in order to get at that pricing, you would need a hundred million dollars, So it was really an institutional thing. The more money you have, the lower you get charged. That's just generally how investing works. And direct indexing has now come along with technology and sort of said hey, let's democratize this and bring it to advisors. And there's a couple advantages they think are going to

appeal to advisors. There's some competition with mutual funds and ets, which I think, with a heart of our discussion, some have I actually have heard the term E t F killer for direct indexing because obviously if you use this, you wouldn't use an E t F or you might use them together. Um, so I thought, you know, we should explore this. We recently wrote a note about it where he went through some of the advantages like a tail the tape between E t F and direct indexing.

But E t F s aren't all who this competes with. But there's tax benefits and customization benefits which will go over. But direct indexing is kind of if E t F are the new kid on the block, this is sort of the new new kid on the block in terms of investment products. So to help us understand them, we're joined by Morgan Barna of Bloomberg Intelligence and also Brian Langstrat who's the CEO of Parametric? What's Parametric the largest

direct indexing platform company at three billion dollars. So if Parametric or an et F, fish or I think you'd rank fourth just to sort of say this is how big this is getting. So three billion is a ton of money. Um. That that said, I think, A that's way bigger than most others. And B direct indexing and SMAs are obviously very linked and like s m as are big, like black Rock has over a trillion in s m as. So it's a it's a it's kind of a gray area on where direct indexing begins and

s m A ends. But let's just say that Parametric is the biggest of this new wave this time on trillions exploring direct indexing. Brian Morgan welcoming trillions. Thanks joining So, Brian, I want to start with you. Where did this space come from? Yeah, So, Parametric started what is called erect indexing, or building a separately managed to count to target an index and then customize it. So it's been around for

our shop for twenty seven years. We think we were one of the first, if not the first, But when we started it, there wasn't a lot of conversation about

it and how did it come to be. Yeah, Um, we had a family office client who had struggled with that kind of age old dilemma of hiring and firing active managers, comparing them to a passive universe, one growth, one value, and together with their consultant, came with the idea, instead of hiring and firing and evaluating these active managers equity managers, let's buy the universe we compare themselves to. And the really innovation they had gonna have some money

to be able to say I'm not buy the universe. Yeah, well, I think you can build and manage a separately managed to count the tracks and index for I mean, it's not a mass affluent product. It's not a product for the masses. But you know, with a with a portfolio size of a quarter of a million dollars, half a million dollars, a million dollars with really consistent tracking here, so you have the same pre tax experiences that universe

and index a custom index, the SMP five, the Rustle three. Um. The idea that they had was instead of just tracking the universe, and it was their idea, not ours. Uh, let's do it. But Let's be cognizant of the tax impact. Let's not just rebalance. Let's not trade the securities when if it comes out of the index er and it let's not Let's think about where the gains are, where the losses are in the portfolio. That kind of customization requires you to do it on a separate account basis,

portfolio by portfolio. Let's um and then let's let's let's have two objectives, track that universe and really minimize the tax impact of the portfolio. They brought the idea to us. We said that was interesting. We were a small firm, didn't have a lot to do UM and we soon found that a lot of the people were interested in the idea. Could you capture the benefit of indexing, the broad diversification, the consistent performance, the low costs, but you

add additional value through customization. And there really are three types of customization that drive this. Now. Tax is still the biggest E. S G and R I, re sponsible investing, and then creating your own bespoke exposure, something that's not available in a typical pooled, commingled vehicle. And you know, for the last twenty seven years, it's a little bit amusing to me to think about this as the new kid on the block. I was, I was the portfolio

manager twenty seven years ago on the account. Uh. And hundreds of billions of dollars later. Uh. It's become quite an interesting alternative for some. I wouldn't call an E t F killer for some versus E t F and index mutual funds. It's interesting though. Labeling matters, Like I compared direct indexing is to E t F some mutual funds as smart beta is too quantitative. Quantitative has been around for a long time, right, you know, decades, but they that smart beta label made it seem new and

fresh and democratized. This so I think that is why it tends to be looked at as the new thing. Yeah, and tax regimes come and go, you know, to act rates increase, they decrease people's sensitivity to taxes. Technology has made it more more easily done, more easily understandable. But we've been hammering away at this for for for two and a half decades. What's changed in that time in terms of what what the vehicle actually looks like? Yeah,

not a lot um. It's really like to say, a parametric we only have one or two or three good ideas in thirty years, and this idea is pretty good. Yeah. Well, there's people I think that they have good ideas every day about what to invest, and we don't um the idea. It's a very very simple idea, and that is capture what we all know inherently to be the value and power and the compelling logic of index based investing. But

do it in a separate account. And once you cross that line from commingled to separate account, the world opens up to you in terms of customization. You can fund with the pre existing securities. You don't have to fund with cash, so you don't have to realize the gains on the way in if they're there. That's huge for many people. You can do loss harvesting. Loss harvesting is probably the most commonly mentioned benefit, but it's it is

not the end all. It is a lot other You can do a lot of other tax management, gifting of securities up and then you can build the exposure that might be a little bit different than the index. You can put a responsible screen on it. You can you can say I like to tilt toward value. So the technology to build and understand how you manage those exposures.

Continues to evolve. Uh, we continue to innovate around the edges about that central core ideas the same as it was in two You just had a strategic kind of alignment with Eden Vans. What does this do for the parametric I mean you've you've been part of Eating Vans for a long time now, but um, this new alignment with the fixed income business and the technology, what what

are you looking forward to? Yeah? And and that just I want to piggyback off that, which is that this is I've always heard direct indexing is an equity thing, right is it mostly for the equities? But can you do fixed income also? I guess can you talk about what part of your portfolio can you direct indexing? Right now? Yeah? So if we think about direct indexing buying and holding a broadly diversified exposure, a fixed income exposure and equity exposure,

or maybe both in the same account. Uh, they're the most popular fixed income type solution in that vein or laddered portfolios, ladder municipal bond portfolios, ladder corporate bond portfolios. It's a business that has been built up within Eating Vance since two thousand and eight I think may have started a few years later, but recently we combined those products and that investment technique and those investment skills in the technology with Parametry who kind of redrew the boundaries

within Eating Vance. And now we're coming to market with both and we always did before, but we're doing in a coordinated way. We're investing in the systems in the technology, we're investing in the digital tools around it, we're investing in the performance reporting. And that's really what it means to us to kind of reshape the eaton Vance business aiming at this very exciting growth market. There's not a

lot of growth opportunities in the investment management business. As you guys know, Uh, the investment management businesses shift thing toward rules based, systematic, low cost, clear value added products, away from the traditional value proposition of alpha or active management. And we've got a great franchise across that. So let's bring this up. Let's what we'll tackle this in a couple of blocks. Firsts, customization. That's a big benefit here,

it's the only benefit. Well, the tax thing that's customization. Okay, well, okay, Well we'll break customization into two parts. Picking the stocks and the tax. When I hear this proposed, it sounds so good. Hey, you don't like this company? Does this? Pull it out? It's like an E s G kind of customization. Or if you work at Apple and you have a lot of their stock, you can pluck that out. Here's the thing, though, we all know that that makes

the client the active manager. Now and we all know, like you take the I Shares Social Index, it's underperforming the SMP by over ten years. Are people gonna be able to stomach that if they don't uh, completely tie or beat the SMP, because that is a for whatever reason, the SNP is like God or you know, in the in this in portfolios, and if you customize, your odds of beating it are pretty low. You become an active manager.

And we know it's hard. So how how does that work? Yeah, so you've you've hit the central trade off of direct indexing, and that is you accept a certain amount of deviation what we call a quant manager tracking air versus the index, in order to avail yourself of the customization. You do

it every time you harvest a loss. You do it every time you put it in in the s G and r I. Every time you tilt, and so the investor has to believe we can show that over time those small differences from those customization decisions, those variances versus a pure tracking index are worth it to them. They average out to be very low on a pretax basis, and the after tax or the E S g R I benefit comes through very dramatically, and we can show that

now over twenty five years. So when you deviate from an index, there's a lot of different ways to do it. If I'm tilting toward a factor or a sector or an industry read well, then I'm probably going to see myself with long periods of outperformance or under performance. But if my entire deviation from the index can be understood as very small mis waitings on an individual stock based what a risk model would call idiosyncratic risk, they average

out over time to look like the index. So if you look at a Parametric composite over twenty years, the pre tax performance almost indistinguishable from the pre tax performance of the index. It's the after tax, but we're trading. That's our currency tracking error or mistracking versus customization benefit, and our engineers at Parametric are working on that from a thousand different angles. But you're right, you have to be willing to accept a difference in order to avail

yourself of the customization. Now, obviously, with with an e t F, let's just say the sp F und you can now get that for four three basis points, probably two and one in the next couple of years. If I can get a whole portfolio for under ten bits at this point ten basis points. Um, how much does

this cost? And how hard is it to dislodge such a compelling value proposition, which is this sort of like et F portfolio, especially from the advisor's mindset, because um, that's good for them, lower their fund fees more their fees is intact. Yeah, no, we love to think about the trade off there. So let's just make it a Let's say it cost you thirty basis points for a direct index portfolio and you can get the e t F for free. All right, let's just start with it.

Thirty basis points is are bogey. We gotta add thirty basis points and value over time, otherwise you need to go do something else. And the majority of the d F investors should stick with ETFs. But if you find yourself in a position where you have pay high taxes, you're fund with pre existing securities, you've got a long time horizon, you're terriably inclined. We can add a hundred and fifty two hundred basis points a year and after

tax performance value above the return of an index. Uh So that's that's in my mind, one of the best tradeoffs and money management. How you take fifty basis points of tracking, are you get a hundred fifty basis points of excess return? You pay thirty basis points for it. Any quantitative manager out there, we think that puts us in the top courttile top death style. That's the trade off. But it but it isn't just the after tax performance business.

If we've been able to build a round a pre existing holding or a series of holdings and defer the gain and not for a long term. If they have charitably inclined, so every year they want to give five percent of that portfolio two percent to charity, and we can go into the separate account and we can select the most advantageous tax lots, the tax lots that have the largest embedded unrealized gain and give those. Then the

value starts to add up. So the trade off of our fees and the fees inherent in the portfolio, and the cost versus the benefit, we think is very compelling, not to everyone investors of size investors, uh you know, uh, with tax sensitive investors who have long time horizons, on and on and on. I think the majority of the money in ETFs gually the taxable money should be in a direct ecnticcy, but maybe not. The majority of the

investors in ETF should be in direct indexing. So when when clients and investors come to you, how much of what you're offering is literally out of the box solution off the shelf solution versus something that's totally customized for them, And like are you looking at like, hey, I've got some mutual funds that have just been kicking around forever. Can you absorb those and do something with them? Yeah? So there, there, you've just hit on the difficulty in

running the business. So commingled vehicles ETF. Some mutual funds are great for money managers that you can just the leverage the economies of scale, the marginal costs wonderful custom Separate accounts are a lot of work. We have to customize on the way in. We have to customize during the management. Then we have to defend that customization and client service and performance reporting. So uh it is we

do all of the things you talked about. The simplest example is you come to me with cash and you want to plain vanilla index or a standard index like the Rustle one, and you want simple loss harvesting. That's a pretty plain vanilla portfolio. We probably don't have to work hard to set that up. And if you understand how much cash am I bringing, you know we are Our minimums are two fifty dollars and many UH programs and platforms, so uh you know, we run about forty

thousand individually separately managed accounts. They range from a billion dollar account for some of the wealthiest investors in the country down to to to UH portfolio that would be in the king And what percent are you dealing with the advisor versus a direct investor. Almost every UH portfolio that we manage comes with an advisor. And I think

you hit on the point. One thing that direct indexing does above and beyond this after tax performance value and customization value relative to its fees is it becomes a tool for the advisor to do value added wealth management. So it's good for the client, but it's great for the advisors conversation. They can create a portfolio that has real value that you can't just walk across the street and get another one that looks like it. You can't.

You don't see an advertisement for it on the Super Bowl uh television where you think here's a branded et F. This is a bespoke portfolio created in concert with the advisor that solves a problem for the investor. Yeah, we'll say we um we I just went to Wealth Stack, which is that conference fintech ish. This is a big deal.

And Morgan and I talked about this a lot. When we look at the tail of the tape is the technology and the value add Advisors are on the hunt for value add let's face it, because they better min Vanguard. Everybody's doing cheap advice. Now, Morgan, um, why don't you riff on this because I think you have the most knowledge about this sort of technological revolution going on in

the advisor world. Yeah, I'm so interested in the way that it seems like parametric and eating vans are now so focused on the ability to scale accounts at a lower um, a lower access point, but in part create create efficiencies you can continue to really invest. There's this seems like such a period for investing in technology enables advisors.

What how does that plan to the distribution um. The dilemma that I think in understanding this marketplace is how much of the marketplace for this type of investing is to do it yourself? Because there are tools that the investor can just log on and build these portfolios or a robo when they can hire someone, or are these tools that an advisor can use themselves in their practice

to do it themselves. My belief after watching this for about twenty five years is that the market for the do it yourself investor, to do it yourself advisor is relatively small. Uh and that's talking my own book. We've seen the growth, we continue to see it. Maybe that will change, but the the tools are are improving. But the advice, the consultative, the defense, the ultimate fiduciary responsibility for the performance and any errors or that occurred to

it need to land on a money manager. So most of the fintech firms. We had our head trader leave Parametric twenty some years ago and start a firm to bring direct indexing technology directly and put it on the desk of the advisor. They eventually pivoted away. There are a lot of firms out there, but the our size and the size of our largest competitors in this space

are people who actually manage the money. So our job and our goal and our vision is to continue to build technology that enables the advisor to use our services to the best advantage for themselves and the clients. And how about some of the turn key asset management players that are sort of developing these They already have huge advisor networks and this becomes defense for them from you know, clients you know considering either being bequested accounts or you know,

considering self managing. How does that play? We view them as clients for us. We we work within many of the largest turn key asset management providers. We work within every wealth management platform, advice platform. UM. They can choose to build the technology themselves, hire someone else by a fintech, or they can work with a firm like ours. The market continues to expand there will be room for all

of those business models. UM. You know, we'll see. And when I posted about this on Twitter, UM two advisors wrote back and just said, if I use direct indexing, does the client statement show five hundred stocks? And um, I remember looking. I did a every time that there's an election for president, I look at the financial disclosures

of each candidate to find out like how they invest them. Yeah, and you look at like when you get them, and it's always like seven to thirty mutual funds, maybe some ETFs, but Donald Trump was like thirty five pages of stocks. And I I imagine something overwhelming coming to a client or an advisor, having that fear of handing them just pages and pages of equities and them not really understanding what they do. Because when you look at a couple of funds, you kind of understand where you are. Yeah,

that partment feels like really old school. Actually, it's like a step back. That's what somebody said when we when we started in the broker dealer platforms and took our family office services and move them into the advice platform. Some of the initial advisors used to call it management by phone book because is the statements that would show up on their clients doorstep worth so thick. Uh. But the industry, the value is here. So the inventustry evolved

one way to keep your job out, Yeah, exactly. The the the suppression of movement to our electronic confirms electronic statements, and the way that the savvy platforms and advisors compressed the parametric line or a competitors line into a single line. We've we've solved that for a large part um. We don't own all five hundred stocks in the SP's it's maybe a difference without a distinction, without a difference, we own maybe three twenty five or two hundred and fifty,

and we'll let people cap it. There are competitors of eyes who who build direct indexing with seventy five twenty five names, you know, more than seven or eight mutual funds. But maybe I wasn't quite fair earlier. There's two trade offs between stepping away from an et F and moving to a direct indexing. First is that tracking or that mistracking difference that I think pays you very well. The second is complexity, and technology is helping us deliver this

service cheaper with less of that complexity. Bird And but look, if you can add the kind of value that's shown here relative to the other opportunities that advisor and clients have to improve their performance. I think people increasingly get over those two things. One other thing, though, is that the e d F comes with this rapper, right, and that rapper is backed by the SEC and it's all sanctioned and everything. This is a step outside that world. How do you address that want to client? Yeah, I

haven't seen that so much. I think that's already been done on the advice advisor's side. They've already educated their client on the value of an acseparately managed account. You know. I think that's a headline, a pretty interesting idea. But if you're really lift up the hood and say, look what I am owning here is three hundred of the S and P five hundred names, the you know, the most highly evaluated and followed companies in the world. I'm

owning them in a fully transparent, separate account. If something happens to Parametric or happens, you know, they blow up. I still own those stocks tomorrow in my brokerage account. There's no black box, inherent secret mix here, there's no leverage, there's no there's very little trading. So I think people think, Okay, I don't have an SEC forty Act registration fund. But I get over that pretty quickly, let's talk about the taxes. So that obviously this tax advantage you said a hundred

fifty points. I was talking to somebody who said, yeah, that that's good for a while, but it does run out, especially if the market keeps going up. Obviously, with the market going up, finding losses is hard, and I think that's why in twenty team we saw a huge dramatic move of flows because people realize some gains, and mutual funds we saw et F taken way more money than they should have. So the two questions are, one, do you if the market keeps going up, do you run

out of losses and that tax benefit just diminishes? And then too, if the market goes down, obviously then you could you use e t F s as well. So can you talk about like the head winds of the tax Yeah, so let's take those in a couple of couple of both of those dimensions. So you're absolutely right. Over time, given an upward trending market and a loss harvesting portfolio, the portfolio becomes what we call locked up. Every position in the portfolio was at an unrealized gain.

If it wasn't, you would have traded it brought the cost basis down, and so the after tax value of loss harvesting diminishes over time. How fast depends where the markets are headed, what initial cost basis you started with, what the what we call the internal volatility of the market is. But to me, that is a criticism but

also a wonderful outcome. If you can buy a broad based equity portfolio loss harvested for ten years, track the market, how this tax benefit, and end up with a broadly diversified equity portfolios cost basis is significantly lower than its market value. Uh, you've won, all right, So that's not a reason not to do it ten years ago. It's but you may want to shift your focus at the end of ten years too. You know, you may have

additional cash flows, you may be gifting. You may want to terminate the manager or lower the fee because you're no longer getting that tax advantage when the portfolios locked up. But that's a that's an observation, But to me, it's not a very powerful criticism. I'm saying that's the best

possible outcome. We could track the market for fifteen years, end up with a locked up portfolio, have ourselves the full granular customization ability to do gifting and estate planning, whatever it may be, and continue to track the market. So it is what it is. It's a great outcome. A little bit of a red herring in terms of a criticism. Let's say the market goes down, does your does that tax advantage pitch diminished? Because now advisors like, well, yeah,

I'm sitting on a bunch of losses in funds. Yeah, as you might suspect that. We we we thought deeply about that. Or it's pretty the if you if you own a fund and you want to lost harvest, you gotta get all the wayut of that fund. Okay, you have to be out of the market for thirty days, or you buy an equivalent et F and you have

to worry about wash sales. If you want harvest losses in a in a diversified separate account with the granular individual stocks, you can maintain your full market exposure and harvest the losses. Uh, you can harvest, you know, so if you know you have that degrees of freedom, you have that so you can harvest more losses. Because the average market may have gone to the et F may have gone down eight percent, but the segments of the market individual securities that are down fifteen twenty, and you

can harvest that out, maintain your market exposure. Continue to look at that as a as an opportunity. You cannot do any worse and an individually managed, separate account and lost harvesting than you can in an ETF portfolio, and you can certainly do better. One thing, you know, we we're watching and considering is this huge wealth transfer coming

from you know, a prior generation. So one of the huge benefits I think is like considered to be the largest transfer of wealth over intrillian so I think over something over three trillion. So, by the way, is this is millennials inheriting from boomers who they're constantly like yelling at, how nice talk about in the hand that fees you. Sorry, just a side note that I can't help. But one of the huge benefits is being able to fund um

one of these accounts within kind scurities. Right, So, how many of the clients new clients that you see are younger investors that are gifted individual securities and are way more prone to manage those in a passive way as opposed to how they were formerly managed. Yeah, so there's there's nuances in there that's been to start with the headline fifty in the portfolios we open five zero fund with individual securities in kind. So we're almost a lead

lead pipe cinch. No brainer for funding in kind, because if you fund an e t F, you're gonna sell everything realized the gains and walk in the door and you maybe create a tax drag you'll never overcome with a feed difference. So um, there's a lot of things that go into thinking about that. Our current tax law allows stocks with unrealized gains to be stepped up and you know, and have their basis marked up to the market value if it goes through an estate planning process.

So a lot of inheritors you know, uh errors uh, don't come with large unrealized gains because they've had their cost bases stepped up. But so many of the actual portfolios that we look at are coming from a historical uh individual security management, either themselves or their advisor or

an sim A program that may have stocks. And we very very commercially point at that benefit and say, if you were to liquidate this portfolio and fund and ETF, it costs you seventy dollars and realized tax in taxes, and if you give it to a parametry portfolio, allow us to work it around, it'll cost you three dollars. I'm giving a hypothetical example. And this process is now kept in your portfolio. It's deferral fifty some thousand dollars in that rough example. That can work for you for

as long as you need that index exposure. You need that exposure. Uh, that's just that drives a great deal of the interest. Yeah, and we mentioned we talked about thirty thirty five basis points for for these strategies. That's obviously a little bit dilutive to your parent company's sort of usual margins. And now you're looking at really scaling. How does the conversation go for how sticky these assets are that the total margin dollars might be be better

over time. What are the conversations? Yeah, so you have to distinguish between the revenue realization. So the fee rate is lower, I would argue that the operating margins are not. So we may earn thirty basis points for a portfolio, twenty five or less for a very large one versus a traditional active strategy in which may earn the company fifty or sixty basis points. But if we can get to scale and we can provide that and we can have a long term portfolio. These are long term portfolio.

If you have a short time arise and loss harvesting makes no sense at all because you're just going to harvest the loss and then realize the subsequent gain when you trade the portfolio. We can build a pretty compelling net present value business. So I think we'll eat Vans recognize that in two thousand three when they made the investment in Parametric. In two thousand nineteen, they recognize that. We recognize that, you know, to a much much larger degree.

And and this year especially, how is the distribution conversation changed? How does this how does this more strategic combination change sort of advisors act us to what you've been providing for so many years. Yeah, I think we're turning up the volume a bit. We're trying to bring connected, uh coordinated products to the market which have fixed income and and and and equities in the same portfolio or in

the same conversation. We can you know, you can do lost harvesting, and we do in our Ladder Communities Municipal bond in corporate portfolios. You can you can tax aware, rebalance the portfolio, crossed asset classes, we can provide consolidated reporting. We can bring the other wealth management solutions like the

exchange fund that EAT events delivers to the market. So we're trying to put all of these like capabilities which we think are industry leading as individual products, but certainly industry leading as a combination, and we're trying to just make sure that there is understood as possible in the market. Okay, let's talk about tracking. Um it's for topic, but it's important.

Tracking difference is ultimately the cost you pay because it's net all the fees, right e t f s like the Vanguard and Black Rocks, they are insanely good at tracking. They've got desks, they can do security lendings, they know how to outsmart the hedge funds for the most part. So if you look at something like v o O, it may charge three, but it's tracking is like one

basis point. Tracking requires rebalances, dividends, corporate actions. How confident could I be if I was an adviser to say, you know, how much slippage am I going to get with you? Because you're not one of these gigantic experienced firms that is tracking UM with you know, much more money and has a lot more um I don't know brand name behind it. Yeah, So think about tracking is being two things. First of all, the costs that you say are always negative, you know, so they don't they're

tracking only goes one direction. Your cost is going to subtract from your return. The other tracking are from your miswaiting. The purposeful miswaiting of the securities has an our view, a mean of zero. It can be positive, it can be negative, and given a long enough time, it's going to average itself out if you're doing this consciously. And so we we we create let's it's typical to have the tracking error. Let's just use that term, which is think about it as the kind of a common boundaril

of about fifty basis points. So we're not even in the same game as the v Oh, we're not even in the same game. Let me pause there. I just want to say, let's assume I just wanted the SMP because I know I'm going to pick these thocks or eliminate a couple that are gonna it's my tracking. But for the rest I want to make sure that I'm getting every last bit of juice from the SMP index, and I don't want any slippage for the rest. But so let's just say I just wanted SMP from you.

Could you deliver tracking that is in line with a Van Garter black Rock. You wouldn't want to hire us, I shouldn't hire us. Yeah. So a family office early days looked at me when I explained tracking air and he says, look, you're whipping the wrong horse. He says, I'm going to be invested in this twenty years. And whether or not I get the SMP plus ten or minus ten or plus thirty or minus thirty, that doesn't matter to me. I'm trying to create and build my wealth.

I'm trying to protect it. And if I can get fifty sixty basis points of tax value and that tracking error, that's the right horse. Whether or not I'm up five or basis points more fiber basis points less than a than an ultimate arbitrary market measure, that's the wrong horse. But you do all those things right. You can take care of the corporate action solutely, every detail, reinvest the dividends and markets and international we do, we do, We do a little less liquid, right, Yeah, we do a

lot increasingly the portfolios that we invest in. Our global investors advisors want to create a global beta portfolio tracking a global you know, all world index. Why do you think that's happening? Well, I think that again. You you want to you want to give yourself as many degrees of freedom as you can. So instead of just investing in the SMP market, you can invest in the FA market. International is not having a good run. Later, cross sectional volatility,

I'll get nerdy on you. So cross sectional volatility when Japan's up, UK maybe down, when securities in the tech sector in in the United States are up, you know, maybe the German banks are down. So you can again have as a quant you can have a more successful outcome of tracking this diverse index and harvesting losses across it. So you've gone, you've you've expanded your tools set in your granular, separate account and so that makes a lot

of sense. And basically, since you've been running like a ten billion a year net inflow for that custom core, you know, do you see that accelerating with you know, lower account minimums. Yeah, I don't necessarily think lower account minimums are are going to drive and maybe as much as some. And I'm not a big believer in the e t F killer and kind of driving this down. I think you need to be an investor with a certain type of portfolio and a certain tax sensitivity, and

a certain relationship with the advisor. So many people may differ from me on that um I think this is ultimately a advisor driven high net worth market product, but there's a lot of opportunity for us to continue to grow and faster. I think of it as this. You know, you guys know this better than me, and you can

quote the statistics. But every year there's a flow of money toward index base most of them and e t f s and opening mutual funds into index based strategies, both equity and fixed income, hundreds of billions of dollars parametric and our competitors. We divert off of that stream, a small percentage of that into custom separate accounts uh where, And the people who choose it are choosing it rationally because the value to them is much greater than the

tracking air in the feast. We can, through education and continued innovation, continue to divert off more and more of that every year and parametric. We want our share. We want to continue to grow market share and b the market leader, but the others will get it as well. How big can it get? You can get a lot bigger than it is, and it should in my view. But I would have told you that in nineteen and then you know we're a we're a three d billion.

But that's a thirty year road. Yeah, that's interesting. Yes, By launched the ninete So you guys are actually just as old twenty six years ash or whatever, early nineties. You're not based in New York. You're based in Seattle, that's right, So talk to us about what you're in Seattle in the early nineties, which is like, that's like being in the nucleus of one of the greatest musical rock renaissance is known demand known as grunge. Can tell

me some stories. Oh, well, you know, I graduated from college the University of Washington nineteen ninety and all of the bands that you're talking about, Nirvana, you know, Pearl Jam, all of those were just starting to show up in the clubs and so you know, as a young person, we would we would find ourselves. That shows that in hindsight, we would think that was incredible and we could tell these great stories. At the moment, we may have not

a predicative. You were around when Eddie Vetter used to climb on top of the roof the ceiling and like dropped down into the crowd. Right, Yeah, seeing Alison change, he got wealthy and he's like, yeah, I I'm not going to do yeah. Yeah, well now he plays Safeco Field and three nights and and uh, yeah, you can't do that and brings out the last time I was there, he brought out to teach his children's teacher onto the stage.

It's a different world. Um. Yeah, the Crocodile Cafe. I don't know if you guys come there, you know, one of the you know, seeing seeing some of the initial bands there. I'm going there in nineteen. It was a great fun. Well again, you don't know that. You're twenty

two year old kid. You're trying to find a job and you're going to music and you know, I mean when we showed up, I think Seattle showed up on the cover of Time magazine and we became this hot place and everybody was wearing their plaid and and uh, we kind of sense. This was kind of cool. But you know, the Seattle music scene continues to be interesting. Do you take some of that into your job, some of that like grunge, rebellious spirit. Yeah, I don't know.

We do take Seattle and I do. Yeah, I was there. I saw Pearl Jam when they played Safegal last year. No, now, I'm you know, fifty something with my wife and trying to leave leave earlier teacher, Yeah, cheering for And you said earlier your your neighbor opened for Pearl James first year. Yeah. So my neighbor, who's now a vice president of Microsoft, was the lead singer in a band that opened for Mike. Uh so. But again, even looking at him across the fence,

now you think what happened to you? You know, at one point you were at the epicenter and uh but it's great fun. But the audacity of Seattle, Amazon, Starbucks, Microsoft, the business building and it does wash over you. You do have a sense that you can do something, maybe on a national scale or global scale, where you wouldn't from someone from Portland. Yeah, well, there's a little rivalry. He's a husky, I'm a duck. Oh no, you didn't tell me that at the beginning this all off, who's

from Portland? So he just rattled off, like so many cool people, Well you know Nike Adidas, like we'll throw back. It's yeah, it's just a friend. You know the Ducks one this year though, the football game, that was a great Yeah. You know, I wanted to actually ask you, like one final question, which was this started with a conversation with the family office way back. When are you guys still working with that family there's still a client today.

I mean that's a layup question. Thank you for asking, but yes, twenty seven years later, that group is still works with it. Brian Morgan, thank you so much for joining us on Trillians. Thank you for having me, Thanks for listening to Trillions until next time. You can find us on the Bloomberg term, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Weber Show,

He's at Eric Ballcunas. You can find Morrigan at m Barnes six and Parametric at Parametric LLC. Trillions is produced by Magnus Hendrickson. Francesca Levy is the head of Bloomberg Podcast. Bye