A Q&A with Barry Ritholtz: ETF Perspectives

June 11, 2019

Barry Ritholtz

Barry Ritholtz

Advisors are first and foremost behavioral coaches

By the time Barry Ritholtz and his partners launched Ritholtz Wealth Management (RWM) in the autumn of 2013, low-cost ETFs had become a nearly optimal way for advisors to bring low-cost investing to their clients. So it is that ETFs are a big and growing piece of business at RWM, a registered investment advisor that now manages about $1 billion.

Ritholtz, a lawyer by training and an ex-trader with an abiding curiosity about the world, has been on a circuitous journey to get where he is today. For example, as a trader who loved the rush, he couldn't deny that the whole endeavor was basically a crapshoot for traders and customers. And in his years on the buy side, he couldn't make peace with the fact that he owned assets but had no plans.

And so he and his partners formed RWM, a firm that puts its fiduciary duty to clients at the very center of the practice. That means ETFs are front and center in its asset allocation plans. It also means that teaching the investment world—clients and nonclients alike—that having a plan and sticking to it is the height of wisdom.

Ritholtz Wealth Management LLC

Vanguard: Why did you choose to strike out on your own as an advisor?

Barry Ritholtz: We launched the current business, Ritholtz Wealth Management, in September 2013.

That was after I was a trader on the sell side from the 1990s till about ten years ago. Being a trader was a rush and extremely fun. But I came away from that experience with an insight that the more people do on a trading desk, the worse off they are. As hard as it may be to accept, traders are really better off doing less.

So I switched to the buy side about ten years ago. It was a hybrid RIA/broker-dealer firm. But that business model was flawed. We were not interested in the latest hedge fund or the latest private equity offering or the latest transactional trade. It's not what we were looking to do.

So you wanted to do more asset allocation and more "financial planning"?

BR: Yes. Merely recommending an asset to a client without having a longer-term objective in mind is futile. I thought this was pretty basic stuff, but it was not how many people who call themselves financial advisors operate. So it was my core thought from the very beginning to integrate financial planning into asset management.

Let me tell you, running a business is a full-time job, separate from managing assets.

That's one of the reasons we created an ensemble practice. Rather than be jacks-of-all-trades, with each person doing everything, we wanted our people to specialize. Specialization has allowed us all to grow in ways that we couldn't have as individual managers who had to do everything.

Was RWM ETF-centric from the beginning?

BR: Absolutely! A very substantial amount of the assets we manage are in ETFs. ETFs have all these tremendous advantages: They're certainly very tax-efficient, and for a very modest cost, you can get pretty much any type of exposure you want.

I know some people have said ETFs encourage trading because they trade intraday. But that's not how we operate. Typically, our clients are looking to us to make longer-term investments for retirement or generational wealth transfers. We're not active traders, so we regard the knock that ETFs are tradable, as simply a statement of fact. But only if you trade them. And we don't, so it doesn't make any difference to us. We just like all of the tremendous advantages of ETFs, and we avoid the disadvantages.

How does an advisor add value in 2019?

BR: Of all the different things that advisors do for clients, whether it's asset allocation or building a financial plan, behavioral management is first and foremost. The greatest portfolio in the world is irrelevant if a client's behavior undercuts its strengths by responding emotionally to external events. If you can develop the understanding in clients that drawdowns are expected, and acting rashly is a surefire way to hurt yourself rather than make things better, then those clients are way ahead of most other investors.

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And from there, what else is important?

BR: The second value-add is clear communication and explanations of what's really going on. We've had a number of 15% pullbacks since we've moved off the lows in March 2009, and we get emails and questions from clients who say things like, "Hey, this bull market is ten years old; it's long in the tooth; it's ready to die." Of course, bull markets don't die with old age. What kills bull markets is excess investor sentiment and/or growing concerns about inflation by a central bank that overtightens.

A big part of our job is to debunk the nonsense that investors are being fed every day—whether it's by social networks or the mainstream media or something else, it doesn't matter. There's so much noise, it affects the way people think. That has potentially huge negative ramifications.

And there's asset allocation and financial planning as well?

BR: Definitely. We think everyone needs to marry a financial plan with their assets. You can't have an asset without a goal. It's not just about sticking clients in a hedge fund and trying to generate the most returns, regardless of risk and regardless of whether they'll ever achieve those returns. That's a pointless exercise; the past decade has revealed that investors are warming up to this truism.

Instead, investors need to be reminded of their future liabilities: They'll need X dollars to retire, Y dollars for kids' college, and Z dollars for the next generation or philanthropy.

That's the point of having an investment portfolio. You can apply the appropriate amount of risk to that portfolio—risk and reward are two sides of the same coin. If you want more reward—more upside—you have to assume more risk, but there is a possibility—a probability—that you will not get your expected returns.

What else needs to be part of an advisor's value proposition?

BR: The last part of the value chain relates to spending in retirement. People often overlook that aspect of financial planning because they've spent their whole lives saving and their whole lives trying to accumulate money, so it is very hard to pivot to not saving anymore.

That requires a little behavioral counseling to teach people to change.

How would you say technological changes have affected the advisory business?

BR: The ETF is definitely one of the most important financial innovations of the past 30 years.

But more generally, what used to take days and days can now be done with the click of a button. It was only ten years ago that most investors got quarterly updates as to how well they were doing, relative to their goals and relative to their benchmark. I remember the days of the office being full of envelopes and stamps and the rush to mail out hard copies of quarterly performance statements. It created an unhealthy focus on quarterly numbers.

Now, we use technology that gives every client an app on their phone with all of their account details—monthly, quarterly, year-to-date performance figures—whenever they want. You can always see how you're doing relative to your goals and relative to your benchmark. Just push a button and there it is! The joke is, you have 24/7 access to your returns tick by tick, but please don't. We say that to clients all the time. A lot of this comes back to what we talked about at the beginning—the behavioral aspect of managing clients' thinking and what they do in a panic or a moment of greed.

How does a focus on behavioral coaching affect the overall client experience?

BR: Well, you could be the greatest stock picker in the world and own the most optimal portfolio in the world, but it's all for naught if it gets a little scary in the markets and you panic out.

It's not a question of if there will be another recession or if there'll be another crash—the proper way to look at it is when there will be another crash. We know it's going to happen eventually, so your portfolio has to be robust enough to withstand it, and you have to be informed enough to recognize this.

There are some people who recommend a 100% equity portfolio and, hey, that's probably going to generate better returns than a 60%/40% allocation. But I doubt anyone is going to tolerate being down 50% like in '08–'09. And so the best portfolio isn't the one with the highest returns. The best portfolio is the one that clients can actually live with. And that's a hugely important concept that I think a lot of people don't understand.

Vanguard produces extensive research about the various ways advisors can bring value to their clients through the Vanguard Advisor's Alpha® framework. For more information, please visit our Vanguard Advisor's Alpha page.


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