GREG LAURENCE: Hi everyone. I’m Greg Laurence, I’m a Managing Director of Charles Schwab Investment Advisory. I lead the talented and dedicated team of sales and service people across the country who support RIAs with our investment offerings. I’m here today with Jake Gilliam, who heads up our Wealth Management Solutions at Schwab Asset Management. We’re going to talk about some really exciting end work he’s doing in the area of portfolio analytics. So, Jake, welcome and thanks for joining us today.
JAKE GILLIAM: Hey, great to be here, Greg. Thank you.
GREG: Hey, Jake, I want to start out with a couple of top-line observations about the demand we’re seeing from advisors for the kind of analysis that you and your team are providing. There seems to be a real need for this type of help out there. So let’s talk exactly about what that is. I know I’ve heard you explain portfolio analytics as being kind of like an x-ray of an advisory firm’s portfolio, but can you explain a little bit what you mean by that?
JAKE: Yeah, happy to. Just like when you go in and get an x-ray, see what’s inside your body, when we talk with advisors, we take a look in a full, detailed review using analytics of what’s in an advisor’s model portfolio. And using analytics, we can show them exactly where inefficiencies exist, identifying overlap, over-diversification, gaps in portfolios, and often significant cost savings opportunities.
From there, it becomes a very consultative process. We want to understand the firm’s goals, of course, the clients that they’re serving, and how we can really help them streamline the portfolio management process, so they can spend more time focusing on their clients’ success, the success of their business, and less time trading and doing the day-to-day business of portfolio management.
GREG: Thanks for that. Going back to the point I made about demand we’re seeing for this kind of help, it’s pretty clear just how common and easy it can be for RIAs to find themselves in situations where maybe a costly portfolio or inefficiencies may exist. What do you see most often, Jake?
JAKE: Yeah, thanks, Greg. Some of the things we see across the board almost is portfolios that have been built and over-diversified and many, many models that have been created to serve custom client needs across a firm’s business. We encountered one firm where they had over 50 different customized models that they were using across different client segments. As we went through this process with them, helped them identify the different portfolios they were using, the overlap, and the over-complication that they had, we helped them go down to about a dozen different models from over 50. And then, most importantly, we helped them take their costs from about 60 to 80 basis points, all the way down to 20 to 30 basis points. So a win for them and a win for their clients.
GREG: Wow, that’s significant. Can you talk a little bit about how firms sometimes wind up with such unwieldy portfolios like that?
JAKE: Yeah, absolutely. I think a lot of times, they add strategies without replacing others. It’s an example where the advisor is doing their best to solve a specific client need. They have a great idea, maybe it’s an active manager that they want to incorporate. They add them to the portfolio, without necessarily replacing other positions in the portfolio. So that can lead to multiple different strategies in the same asset class, asset category, where you get a lot of overlap in the different managers owning the same names, perhaps.
GREG: Okay, that’s really helpful, Jake. And, you know, thinking about practice management, you know, how does that fit into all this?
JAKE: It’s core to this, Greg. A lot of what we’re talking about is helping advisors tailor down and streamline their processes for portfolio management, so they can focus on serving their clients. We’ve had some examples where in order for the advisory firm to grow, they offered for each of the advisors to be able to be their own portfolio manager, a representative as PM-type of process. What that leads to is great control by the advisor, and a great relationship with them and each of their clients. But at a firm-wide level, there’s a lot of different portfolio positions, a lot of things to monitor, and very disparate outcomes for different clients, based on who is serving them.
So we can help with identifying a more common approach that they can use in a simple portfolio across all advisors, and, of course, help them to make tweaks, in terms of what would it look like if you added this position or that position, and rerun the x-ray process with them, take that burden off of them and their staff, they can leverage Schwab Asset Management for that, and, again, focus on serving the clients on a day-to-day basis.
GREG: Well, let’s dig in a little bit on the consultative part. What are some of the outcomes you’re looking for when developing a solution, and what are some of the specific steps that you would most often prescribe? And I guess I’ll stick with a medical metaphor there.
JAKE: Yeah, so when they come to see our medical practice, so to speak, one of the main things we help them do is to reduce fees. So there are many advisors that have a legacy active business, and, you know, in terms of using active strategies. That can work well, it can also have some challenges at times, but, generally, active managers cost more. And the more that you use, the more of a diversification you have, and potentially overlap. So reducing fees, eliminating that overlap, streamlining the firm’s models for efficiency. And all of this, generally, with the outcome of a portfolio that’s designed to have a similar risk and return and downside protection pattern, but much easier to manage and potentially even better results for the clients.
So often we help them simplify, complement the portfolio with some passive components, to get to the earlier example If they’re coming in with all active, generally, there’s an opportunity to pick your most convicted active managers, and then diversify that with lower-cost market exposure.
GREG: Okay. And I imagine that can lead to a lot of broader discussions and action in areas about, you know, maybe succession planning, firm philosophy, and maybe even strategic management.
JAKE: That’s right. And I could share another real-life example for you, Greg. There was a firm, very successful, that launched many years ago by the father, it’s a family business. And when he first started it, it was exclusively actively managed mutual fund portfolios in their models and what they designed for clients. As we had the conversation, it quickly tilted towards the succession planning as we are speaking with his son. And his son was looking for ways to diversify that mix that was already built within the firm, lower costs, appeal to a new generation of investors that are seeking ETFs, broad market exposure, and then still allow him to use their best ideas and complement that, the passive exposure, with their most convicted active strategies.
And we can also help them think through different ways to get what we call strategic beta, or fundamental index, where it’s, you know, passively managed, but it’s managed differently than your traditional market cap-weighted indices. Walking through the nuances of those different types of strategies and helping them with an explicit recipe for how they might approach blending those different styles helps to, you know, not only with a succession planning and that type of example, but it can help build a more diversified and lower-cost portfolio.
GREG: All right, fascinating stuff. Great work, Jake. I know our advisors out there really appreciate it and I know they’re benefiting greatly from it. So, Jake, thanks for joining us today.
For those of you who want more information on this, please visit us at schwabassetmanagement.com. And, again, I’m Greg Laurence, and this has been another edition at Schwab @Home.