Game-Changing Advisor Trends, With Cerulli and SMArtX

Jonathan Linstra: Well, hello everyone. Welcome to Simple But Not Easy, the podcast live here in Chicago at the Morningstar Investment Conference. We're really excited to be here. It's been a fantastic conference so far. And the topic we're going to be covering today, I can't think of two better people that have. So, what we're going to be discussing today is advisor trends in general, we're going to explore a little bit about big problems that advisors are attempting to solve, we're going to talk about trends in product and trends in technology and explore each one of those areas.

So, with me today, I'm really, really excited, we've got Evan Rapoport, who is the Founder and CEO of SMArtX, and we also have Matt Apkarian from Cerulli Associates. Matt is a member of Cerulli's Product Development Practice, which focuses on trends related to asset managers, product development and managed functions. He's also the lead author in a report that many in the room I would imagine have read already for Cerulli's U.S. product development and U.S. asset allocation model portfolio report. So, thanks for being here, Evan and Matt.

Matt Apkarian: Thank you for having us.

Linstra: Fantastic. So, before we get into it, we've got a lot to explore here in a limited amount of time and you've got so much great information. But we all know who Cerulli really is obviously. I think a lot of the advisors that are listening to us are already consuming their data and reports. But Evan, maybe for those that aren't as familiar with SMArtX, can you just give us a two-minute flyover, how did you start it, why did you start it and a little bit about – and also please mention as well full disclosure, we've got a very important strategic relationship with SMArtX and Morningstar. Tell us a little bit about that.

Evan Rapoport: Sure. So, let me start off by saying how I got started actually. So, I was working within the hedge fund industry, and I've been doing that for about 10-12 years or so. And what we started to see was that more of our clients were looking for separately managed accounts as opposed to being an investor in the fund structure. The inefficiencies of a hedge fund structure, the structural inefficiencies are quite obvious, but 2008 really brought those to the surface where investors recognized that they didn't have transparency, liquidity, security, they were subject to style drift and other problems that they couldn't really stay on top of. And so, the separately managed account cures those issues by giving the client their own account where they have the transparency, liquidity, security.

The problem, of course, is being able to administer both the hedge fund and the separately managed account at the same time. And so, we had a couple of technology that would allow our hedge fund managers to be able to operate their fund at the same time as us being able to manage the separately managed accounts that they were then commanding. And so, technology, of course that we developed allowed us to do that, and that's how we got started in this space. We did something that no one else had ever done, even to this day had never done in making strategies that are long-short, short-only, option-specific, market-neutral available in an SMA and an UMA construct.

Now after we did that, the long-only folks saw what we were doing, recognized that the technology was far more advanced, they said it humbly, than the legacy unified managed account architecture that was out there and we then retrofit our technology to service the long-only part of the industry, understanding that the way in which we transact, which was for example, real-time or near real-time. So, a lot of the TAMPs and the UMA technology, they trade twice a day. We don't do that. We don't batch trade. We trade all day, every day, no windows, no cut-offs. So, that type of trading had never been done in the UMA space. In addition, the breadth of product that had never been offered for UMA, sleeve-based architecture which we then put together for hedge funds, worked perfectly for long-only and open architecture. We had the benefit of coming later to the game and so, we were able to build with the most modern technology, API-first cloud micro services. And so, that's kind of how I got into this space, and the product continued to evolve as the use cases continued to present themselves.

Linstra: Great. That's an award-winning, by the way. Well, let's get into it. We're here to talk about trends in the advisory landscape, and Matt, maybe I'll start with you. You leave these reports, and we consume all that data, all the great insights that you and team are developing. What are the big problems right now that advisors are facing? We know there's a lot of opportunity, but what are some of those challenges that are material, and maybe share what's in the report and maybe if you have any insight what's maybe beyond the pages, that'd be interesting too?

Apkarian: Sure. Well, now is a great time to be having this conversation. I'm nearing the end of writing for our 2023 asset allocation models report. I've gotten the opportunity to talk to majority of the biggest model marketplaces and model technology providers as well as talk to the model delivery programs as well about what's going on. And really, we're continuing to hear the story of about customization, tax loss harvesting and then creating an opportunity for advisors to scale and grow their practice without sacrificing elements of their practice that are important to the client experience.

So, we hear that for asset managers, enabling customization for these advisors is a top three initiative. It was a top three initiative for like a third of asset managers last year and it jumped to 55% of asset managers who consider enabling customization in managed accounts and model portfolios to be a top three initiative.

I think it's important to have a conversation when we talk about the word customize or customizable that there's a difference between these two things. They both can enable certain things that happen within the industry. So, for example, we're seeing a lot of change in the model portfolio space right now, enabling customized solutions that are built for particular broker-dealer, home offices or large RIAs, for example, that come to the advisor, able to be deployed for a certain need for the client base of these larger firms. As opposed to what technology like SMArtX enables and Morningstar's model marketplace can enable another technology providers, customizable leaves a little bit of choice or a lot bit of choice still in the hands of the advisor and for their ability to be able to change what comes to them as maybe a set solution in a model portfolio construct and then being able to add tilts that meet the needs of their clients, whether it's for values-driven changes or for tax-driven changes there's a lot that's enabled by technology today. So, I think that those are the key trends that we're seeing in product development we focused on in the managed account space.

Linstra: It's a good distinction to make. I'm just kind of curious how you see – is there any danger in that? Like I think in the world we live in, we've said a number of times, everything is customized. I mean, our Starbucks orders take 3 minutes to actually place. So, in this world and seeing that trend and knowing what's behind that, do you see any concerns there?

Apkarian: Well, it could be, in some ways, a step in the wrong direction in some circumstances. And what I mean by that – I just mentioned, we're trying to create more time for advisors to have more effective conversations with their clients and meet the financial planning needs of their clients. And if you're handing over more of the investment process back to the advisor by enabling customization, then they could be customizing for the sake of customizing and they could be adding portfolio tilts that aren't necessarily adding value when they can be spending their time adding value to their clients' financial experiences in other ways. So, it could enable us step in the wrong direction, but I think that there are significant ways in which it can enable better outcomes for clients where it's appropriate.

Linstra: Evan, how are you seeing this play out on your platform?

Rapoport: Yeah. I think Matt is obviously dead on. So, we are continuing to see more demand for customized solutions and those come in different ways. So, we're seeing a good deal of demand for tax-optimized models. So, whether it'd be Parametric or Aperio or Canvas or the Morningstar Direct indexing platform, there are these models now that can be optimized again and managed to make sure that not only are you not taking all the gains or losses – or the gains mostly that you should, but you can also manage the tax budget. So, for example, if you have a certain amount of gains, you can manage those over a period of time, 5% a year, 10% a year and you can manage that through the technology platforms that hasn't been available before. So, that's probably one of the biggest demands that we see today is for either tax-optimized individual strategies, tax-optimized technology or technology to help to optimize those portfolios manually for the advisor and direct indexing solutions that are tax-optimized as well.

Linstra: So, how much work is this putting on the advisors now, I guess, and how do you balance that, or how are you seeing advisors balance that with client service needs? There's a growing demand that we've seen anyway from even our own advisor base as far as even COVID, when the crisis calls were coming in and they were still trying to optimize portfolios or make investment choices. How is customization going to play out long term? What do you think of that?

Rapoport: So, what's great for the advisor is that the providers have actually stepped up and made these products easily digestible. So, in the past there were only, for example, Parametric and Aperio. Now, we have a lot of…

Linstra: We don't know those names but go ahead. I'll learn more about them afterwards.

Rapoport: OK. So, there are a lot of other choices out there now and those products aren't ones where the advisor really has to do a lot of work. They're allocating those assets out, understanding the objective, both from a risk and return perspective and then getting those portfolios managed for them, and they can focus on revenue-producing activities. And that's really one of the biggest benefits, of course, of allocating your assets to third-party asset managers is that you don't have that responsibility of managing those assets on a day-to-day basis, and you can focus on all of the other things we have to do as advisors. And I say we because I'm a registered investment advisor as well. I don't practice any longer, but I am licensed, and that's what we've always done. It's hard to do both, both manage a book and grow a book and at the same time do all the servicing necessary that we have as advisors.

I would also add to that. When things go wrong, it's very difficult to fire yourself. Whereas it's very easy to go in and make adjustments to a portfolio and switch managers or strategies out to become or move the portfolio more in line with the current objectives of that advisor. So, I think those are some of the bigger benefits of outsourcing. I know we kind of transitioned to that. But both the ability to focus on revenue-producing activities and provide more service to the client in addition to being able to optimize portfolios for current demands both from risk return and from markets.

Linstra: Interesting point on that. So, we hear a lot that the higher-end producing advisors that we're engaging are spending a lot more time on their client service model versus their investment model. It seems to align Matt with your research. I think it's advisors with over $500 million if I'm incorrect. I think it's 62% spend far more time client engagement and only 17% on the investment actually. Is your most current report updating that stat, or tell me where I'm off?

Apkarian: Oh, I'm sure. Well, we don't quite have that stat. That should roll off the press in about a week or two here.

Linstra: Keeping it under wraps. I love it. Teasing us.

Apkarian: If I had it, I would share. Trust me. I have some points that I'll share today. But an advisor who outsources portfolio construction for at least the majority of their portfolio on average gets to save about 10% of their time that they would otherwise spend on investment management for client-facing activities, for run the business activities and for professional development activities. And it overall creates a much better client experience when you're leaving something that in many cases is done better in the hands of an asset manager that has more will, skill and time to be able to handle the investing and allows you to be able to focus on creating that client experience.

Linstra: And there's also that modifier group, right, that might outsource certain portions, right, and then build in their own alpha as far as part of that end solution their value prop, if you will, for an advisor?

Apkarian: Right. I mean, you don't necessarily have to use an outsourced investment solution for the entire portfolio. It depends on the advisor, depends on your book, depends on which asset classes you want to focus on. So, I heard a great quote recently that beta is free, and alpha is expensive, so why not focus on buying cheap beta in areas where you can't simply add a lot of value in the portfolio and then you can spend money and spend time on adding value in areas that are going to be less efficient and you're able to add more value to your clients' investment.

Linstra: Fantastic. Well, we've already started, but let's pivot fairly into product and in trends in product evolution, if you will. So, $30 trillion right now as per Cerulli in advisor-managed assets, of that 35% in managed accounts, two biggest drivers being unified managed accounts and direct indexing. So, let's unpack that a little bit. Matt, are those still the drivers of those managed assets that you're seeing now and maybe this is where you tip your head on that current report, I'm not sure?

Apkarian: Yeah, absolutely. So, we're seeing about a 10% projected growth rate in managed account assets over the next five years, about a 13% growth rate for UMA. So, slightly out edging other managed account constructs such as mutual fund, ETF, advisory. Rep as PM is still saying pretty high, but we're looking at these figures by assets. So, Rep as PM assets are still going to primarily remain as Rep as PM assets for those really large client segments that have dedicated investment teams. But we are seeing really strong growth in model portfolio assets as well. So, high-teens, low-20 year-over-year growth rate in model portfolio assets for asset managers and for third-party strategists. And we expect to be able to keep rates in the high-teens for quite some time. We're seeing assets shift over. We're seeing more advisors realize that they add value in other ways than investment management and are more willing to outsource.

And things like DI, for example, that's another area – I have a stat here. 90% of asset managers based on our 2022 survey were working on more DI products, 97% of asset managers. And there's a direct agreement with the value that managed account sponsors see in DI and the value that asset managers see in DI and that's around algorithmic tax loss harvesting, tax transition and then ESG factors. Those are the top three, like no question, across the board. So, for the sake of DI and the growth of DI and being able to see it used as a building block within portfolio construction inclusive and exclusive of model portfolios, the future is right there for the sake of those that are developing those products.

Linstra: Great update there. Evan, you built a firm that caters to that UMA growth. Tell us a little bit about the growth that you've seen even within your firm and what you see going forward?

Rapoport: Sure. So, we continue to see tremendous interest obviously in UMA. Just to back up, what Matt said, you know, it's interesting. I went to a Tiburon Conference recently, and the quote was UMA is eating the world. Because the ease of both managing the portfolios and for the client on the other side to be able to digest those as a single account versus multiple accounts, it's just a much better experience for everybody. But interestingly, you talked a little bit about Rep as a PM, and we talk about outsourcing and the benefits of outsourcing. And Matt has got a lot of data. I've got some data too. And what's interesting about our platform is that when I look at the managers or the advisors, rather, that are outsourcing investments versus those that are managing the investments by themselves, we've got one firm that has 93% of their advisors using Rep as a PM. They are by far the worst performing firm that I have in my entire roster of clients. And so, the data tells us that those that manage portfolios on their own versus outsourcing typically underperform not just a little, but by a substantial margin versus those that outsource in addition to those that are outsourcing being able to scale their practice. So, it really does solve both of these problems, right? It's a huge benefit for the advisor…

Linstra: Is that an outlier client, would you say, even from your view of the platform?

Rapoport: The ones that tend to be more Rep as a PM tend to be more brokerage as opposed to advisory. And so, the brokers have a hard time giving up stock selections sometimes, right?

Linstra: Got it.

Rapoport: And so, those are the folks that tend to do a little bit more of that. But I see that also on the advisory side, folks that are building their own models because they feel that that's more cost efficient or effective for their clients, when in actuality, the performance alpha that you're losing by managing the portfolios on your own far supersedes the cost. And so, what you do is you create – and this is what happens with high-priced models – there's some negative selection bias in a sense, right? And in this case, it's not necessarily negative selection, but it's that you want to use your own because it costs less. But it produces less, right? And that's the same attitude that you have when you look at a model and it's more expensive versus one that's free and use the free one because the client doesn't want to see the fees.

Linstra: Good stuff. Let's unpack the DI portion a little bit. We did cover UMA a decent amount. But everyone is – I think I've heard it maybe four times this week, Matt, at the conference about all the growth projections for DI at 12.4% from 2021 to 2026, outpacing everything including ETFs at 11% and change. So, are those still consistent and really still standing behind that? And if so, what are you seeing as far as adoption? Is it a crowded conversation right now? And where does implementation really come in?

Apkarian: Yeah, it's a great question. We also think with the tax transition, it's a huge focus, huge barrier for advisors to adopting model portfolios in the first place is the need to blow out a client's account and realize embedded capital gains that could be years, decades old to transition a client's investment strategy. However, if you can use DI to understand parts of the portfolio that you don't necessarily need to blow out, that you can conserve to convert into the new strategy, then you can avoid significant tax burden and plan that tax burden over a longer period of time or reduce it. So, I think there's great opportunity. We still stand by that we see this tremendous growth going forward and the asset managers that we're talking to see the same.

Rapoport: Can I just do one comment on that? It's interesting. So, as long as I've been doing this, I was asked about direct indexing maybe 5% to 10% of the time. This past year, it's probably 50% of the clients that I speak to that are interested in direct indexing. So, I think the message has gotten out there and the tools now are finally have come to the surface for folks to be able to utilize. Before, they were pretty hard to hard to access. They were for higher-net-worth individuals and for larger accounts. But today, with the technology, it's really democratized the usage and you can use them for accounts as low as $5,000 or $10,000, which is really great.

Linstra: Yeah. And again, as per Cerulli, 61% of advisors are either utilizing a direct indexing strategy now or service now or indicating that they will in the near future. So, sounds like, fingers crossed, those growth projections do pan out, we're banking on that as well. One thing we haven't talked about investment product is alternatives. Just kind of curious to both of your takes on the growth of alternatives here, and it's certainly having its day in the sun, especially in the year like '22. What are your takes on those? And where do they belong? Or do they belong in the 60/40 that some have declared as archaic?

Rapoport: Who do you want to take that first? Do you want me to take that?

Linstra: Go ahead.

Rapoport: So, I come from the alternatives field. I spent about 10-12 years specifically with hedge funds and private equity funds, and I run a big hedge fund database in addition. I can tell you that the interest in alternatives is certainly larger now than it's ever been because of the market gyrations and the volatility within. But most of the interest is really in private equity, not in hedge funds, because the hedge fund products can now be replicated, the similar risk/return, et cetera, through some of the managed account offerings. Because the managed account providers can now go to cash, for example. They can use inverse ETFs. So, they can replicate a lot of that performance without all of those costs and all the structural inefficiencies we talked about earlier. But the one area that they can't get access to is private equity. That lack of correlation and exposure to what could be asymmetric returns is hard to achieve outside of those private equity products. And so, we're seeing increased demand for those.

Linstra: Matt, do you see that lining up with the data as well as far as adoption and usage?

Apkarian: Yeah, absolutely. So, we've had advisors telling us for a long time that they are going to increase their portfolio allocation to alternatives. It's been much slower than they've told us that it's going to happen, but they still, without fail, we see over the next 24 months or so a 2% overall portfolio allocation increase to alternatives.

I think there's so many things to unpack when it comes to the conversation of alternatives. I have been getting so many questions as I've been going through my research at the beginning part of this year about alternatives, alternative use in managed accounts and model portfolios. And so far, the conversation is primarily around liquid alternatives, especially for use in model portfolios. There aren't really a ton of real great solutions to be able to incorporate illiquid alts in a manner other than having a section of the portfolio blocked off and just kind of letting it do its thing in the corner and not trade when the rest of the portfolio trades. But who knows? We may see technologies such as blockchain and tokenization be able to enable something like that in the future.

Another conversation that we've been having around alternatives is about whether the rise of fixed income yields, again, is going to affect the adoption of alternatives that was foreseen. So, basically, the conversation was, were alternatives being used as a fixed income replacement. And what I've been told so far is that, no, it wasn't really being used as a fixed income replacement. If anything, it was part of the equity sleeve that was being carved out and that alternatives were being used in place of it because it was being used as a portfolio diversifier rather than a fixed income replacement. So, I think those are overall the two good signs for alternatives used to increase going forward, and that's good news for all the asset managers here because like everyone is working on something in the alternatives space.

Linstra: Good update. So, let's pivot to technology. I think it's obvious that that's what's been driving a lot of this now as far as the evolution of DI and even UMA for that matter. What are you seeing that we may not be seeing as far as trends in technology? Maybe Evan, we'll start with you?

Rapoport: So, again – I mean, I'm continuing to look at – and there are three things that we're sort of focused on at SMArtX and that would be – first would be the tax. We talked about that continued increase of tax optimization tools within the system, tax-optimized strategies. And then, also, some of the firms are willing to do the work manually. So, they'll come in and they'll do the work at no cost if you use their strategy. So, it's really interesting there. But the other area that we're continuing to see a lot of interest in is unified managed households, so UMH. And within UMH what now we're seeing – so, UMA, most folks know what that is and there's a lot of usage as we've discussed. But what has not happened yet within the UMA effectively is the ability to give control of that UMA to third-party asset managers. So, today in an UMA, typically the UMA provider or the TAMP is trading that entire portfolio. What is now happening is, the clients, the advisor are looking for a fixed income sleeve to be managed within the UMA, an equity sleeve like tax-managed sleeve to manage within the UMA. Today, those sit outside in a separate account. And so, those two we're seeing pretty consistently – or those three – UMH and the need for those two manager sleeves within the UMA, and then one more I'll give you, which is even more difficult and that's asset location. So, taking an individual strategy and then breaking it up into three separate accounts, even though it's one single strategy and that has never been done before. So, we're seeing a lot of interest in the evolution of UMA.

Linstra: And how are home-offices that you're engaging, are they bringing you in for some advice? How are they handling this? How are they viewing the trends toward and the desire for the UMH approach?

Rapoport: Well, I mean, they want it.

Linstra: And what are the challenges to that? What are the obstacles?

Rapoport: Well, the challenge is that no one really provides it today. Everybody wants it, but no one has it. And so, everybody's got to build it, right? So, we've got a lot of firms that are working towards that goal. With SMArtX, we are innovators, and we like to do things a little bit different than some of the legacy providers because of the tools that we have at our disposal. And so, elegance is important and making sure that not only can the advisor digest these and use these properly, but also the asset manager can trade these. And I think that's been the part that most folks don't recognize is how hard it is for the asset manager to manage a sleeve of an UMA. So, anyway, handling all of that and producing that and delivering that to market is where we're focused.

Linstra: Matt, are you seeing that showing that the UMH, the unified managed households, show up as again another key initiative in the future that we should be paying attention to?

Apkarian: Yeah, absolutely, especially for the tax conversation, just like you brought up. I mean, I think there's several different ways to think about tax management, tax optimization. We talked about the word tax, and it gets thrown around with several trailing words after it in different conversations – so, tax loss harvesting, tax optimization where in tax optimization we define that as the primary objective being minimizing taxes versus tax sensitivity, which doesn't necessarily mean that the minimization of taxes is the primary objective there. And then, tax transition, tax loss harvesting, you know, we've thrown around so many different things. It's almost like, I mentioned earlier, with the customized versus customizable conversation needs to be defined and people need to understand what's available out there.

To touch on your question about technology, I think we're not very far off from a day where the incorporation of ETFs in model portfolios or the blending of ETFs and mutual funds in model portfolios was like a novel new technology. Like it wasn't that long ago. And so, we're still seeing incorporation of new investment vehicles like separate accounts and therefore direct indexing within model portfolios as a key focus for a lot of firms that are looking to develop these products. Also, even open architecture – a lot of these things kind of seem like a given nowadays, but a lot of firms are just starting to open up their architecture and use third-party managers and blend their strategies with third-party managers in order to better meet the unique needs of their clients and meet the demands of their advisor clientele. And so, I think technology is moving faster than the financial world can take hold of it, but there's still a lot of work being done around things that almost seem foundational nowadays.

Linstra: Well, I don't know. Did you meet Morningstar Mo yet? We're doing our own here.

Apkarian: I did. I asked him a great question earlier on – what the value is for advisors in using model portfolios. And I'm pretty sure he gave an answer that I'm going to need to license from you to use in my report.

Linstra: Yeah, he's the trusted source of all Morningstar data. Well, great. Well, let's get – change is inevitable, and I feel like for those who have been in the business for a while, it just feels like we've seen a lot in recent years. And harkening back to General Eric Ken Shinseki, the former U.S. Army Chief of Staff, where, if you don't like change, you're going to like irrelevancy even less.

Rapoport: Great quote.

Linstra: What do you see? Is this change really having a transformation and a transformative impact on actual client accounts? Is this improving investor outcomes?

Rapoport: I mean, I would say, absolutely. There's no question. And I think Matt will probably touch it. It all depends on how you use it. You can take any tool and you can misuse it and you can produce worse outcomes. So, sometimes that can create a problem. But very often these tools are pretty easy to use, and if you follow the instructions, if you will, and follow your guidance, you should improve returns for clients and you should help to address their specific risk/return objectives in a way that you could never do otherwise without the technology that you have today.

Linstra: So, I think we haven't addressed under technology banner yet that you think we should be aware of, Matt?

Apkarian: Well, I think that change is really necessary for stability nowadays. I think that we're starting to see some really good signs where there used to be some major demarcations in age and use of various technologies and even use of model portfolios, for example. And the old story of younger, less experienced advisors are more likely to use model portfolios is fading away. We're actually not really seeing a difference in our portfolio construction segments and personas that we break out to basically help asset managers figure out who's a potential model user and who's not, and using the age of the advisors is no longer a key indicator there. I think a lot of that's driven by a younger advisor population more willing to use model portfolios, but then also older advisors thinking about how they're going to transition their practices as they go to retire at some point in the near future, and then also just driven by the fact that these advisors need to scale their practice in the face of fee compression in order to continue running a profitable business. So, overall, good signs. I think that technology is really being adopted at a pretty good pace for the sake of the end client.

Linstra: Fantastic.

Rapoport: One thing Matt just said that I think is so important, and that's the succession planning. We've got advisors that are clients that have been managing a large portion of the book themselves. And unfortunately, one of them passed away recently, and the heirs, the children, et cetera, tried to salvage the business, but they couldn't because the clients ran because he was the guy. He was the one that made all the decisions. He allocated all of the assets versus if they were in model portfolios where there could have been easily transitioned, the new advisor could have picked that up and there would be no real loss in terms of management or difference in the way in which the portfolios were managed, because of that outsourcing. So, the succession planning is enormous in terms of the benefits as a result of the outsourcing.

Linstra: That came up in an earlier session even today, just about valuation of practices, and it's great to be unique, but at what cost and as far as…

Rapoport: Yeah. I mean, they try to sell the practice, they couldn't do it because the clients were fleeing. Whereas to your point, if they had the models, those can be easily passed on and the value of the practice would be substantially up.

Linstra: Let's pivot. This is just open forum now. So, I'm just really curious to pick your brains a little bit just on maybe from anything you've heard even this week or just what you've been thinking about in recent months, what is the industry not paying enough attention to right now in your opinion? Is there anything that's being missed?

Rapoport: I'll let Matt go first.

Apkarian: Great question. All right. I get put on the spot here. What's the industry not paying attention to? I think that advisors really need to think about the core needs of their clients. We hear advisors tell us through our surveys that the reason that they don't use things like model portfolios is they don't meet the unique needs of their clients, and that might have been true 5-10 years ago. There's new products nowadays that can meet the needs of their clients and they might need to do a better job at suitability and understanding the true needs of their clients and how you can use the products that are available in today's world to meet those needs.

The other half of that is, maybe you just need to educate your client more. Maybe you need to make them understand what you're doing to improve the outcome that they are successful in their goals. The picture has been painted to me several times by several different advisors that you're going to get those clients that are going to come to you and they're talking to their buddies in the golf course that are saying, my friend is getting 20%, why am I only getting 15%? But if you, as an advisor, can then show, well, I've got a 95% probability based on 10,000 simulations that you're going to meet all the goals that you told me about, then you're going to satisfy their needs there and going to maintain that client. You're going to tell your client that you really understand what their needs are, that you care about them and maybe they won't care about the fact that they own something that's not getting top tier or well above benchmark returns.

Linstra: So, again, focusing more on that service model as opposed to the actual investment.

Apkarian: Yeah, absolutely.

Linstra: Evan, what do you see?

Rapoport: I think it's accessibility. I mean, there's a lot of great solutions out there, but I don't think a lot of advisors, specifically the smaller ones, really know that they're out there and they don't have access to them because they don't have enough size. So, they're $25 million, they're not $100 million, so they can't get access to some of the better tools out there. And what I love now – and the industry is addressing this to an extent – is the democratization of a lot of these products, bringing them down to the level where even the startup could access them. And one step further in that would be the all-in-one sort of solution. So, we are very focused on UMA technology, and we provide that to Morningstar. But what we look forward to is a solution where, for example, Morningstar is providing an entire wealth solution. It's all in one place, very easy for the advisor to do their planning, go ahead and allocate, access the reporting, do the tax loss harvesting all in one easy-to-use solution. And that's one of the benefits, of course, that the API structure allows for and that's something that I know that you and others are building towards. So, I think it's really exciting for a lot of the advisors, specifically the smaller ones.

Linstra: Well, thanks for that insight, because there's a lot of conversations going around, but sometimes it's in those finer nooks and crannies that we find some real gems that could be the future trend going forward. Thank you for that. Appreciate it. All right. Listen, before we leave, we also always like to ask a little bit about our guests just personally. So, I'm going to ask you both what's the book that you've read that's had the biggest impact on your career and then maybe what you're currently reading now that might be of interest? I know Evan you're a listener here, but not a reader.

Rapoport: Well, on my career, I mean, that's a big one. We just talked about. I mean, I'm unfortunately not – fortunately or unfortunately not going to be telling you the most interesting books out there. I read a lot of business books. So, one of the ones that I'm reading right now is called Designed to Scale, and it talks about scaling an organization, the different teams, how you manage those teams, et cetera. That's been a really good one. Good to Great is another great book if you haven't read it and really tells you how to accelerate your business, move it from one to another and where you should be focused or not focused and such. And so, that's been a really instrumental easy-to-read book, but helped me focus on where the business should be headed.

Linstra: Fantastic. What's the book that's had the biggest impact on your career? You tried to escape that one? Is there anything that stands out?

Rapoport: Let me think about that for a second. That's a tough one.

Linstra: You can think about it. I'll shift to Matt.

Apkarian: I think the one that had the biggest impact on my career is probably the first investing book that I read. So, for some back story, I was a biology major at UNH before I entered naturally into the world of finance through the traditional path. I was working at Fidelity, and I read The Intelligent Investor and so, basic, staple of the investment industry. I could probably not count the number of investing mistakes that book has prevented me from making by hopping on momentum trains. I mentor students that do equity research for a student endowment fund, and I tell them they are really, really lucky to be learning how to invest right now versus anyone who learned how to invest over the past decade because that learned how to invest in a bull market when you might not know the skills that you need to be able to weather what's happening right now and what's happened over the past couple of years if you have a decade ago. So, I think that's how the biggest impact on my career and has really kept me interested and got me interested in finance in the first place.

A really interesting book that I've read recently I would say it would be the Bogle Effect. So, a great book about John Bogle, the impact that he has made on the finance world and the massive amounts of money that he has saved investors by what he did and the impact that he had on our industry. What he did might not have been the best for a lot of the people here as businesspeople, but as investors and the fees that he saved us all in our portfolio by doing what he did at Vanguard is astounding. So, a really good read that I would highly recommend.

Linstra: Fantastic.

Rapoport: All right. He gave me an idea. So, I'll give my first financial book.

Linstra: See, you got one. I saw you Googling, but OK.

Rapoport: I'm going to say Peter Lynch One Up On Wall Street. It's like the first book that I read. I was kind of dating myself a little bit. Maybe some of you in the room don't know who Peter Lynch is even, But certainly, I think that was the book that really got me started in understanding investing. And the old legs, if you guys were around long enough, sort of saw his wife buying it. Buy what you know. And so, I think that was a great book on getting me started.

Linstra: Still a lot of people walking in and out of malls trying to do the Peter Lynch.

Well, great. Well, listen, we never close an episode without the – it's usually a 10 second. I'm going to give you 30 seconds. 30 seconds takeaways. If people have tuned us out by now, give us the one nugget that they should all be walking away with. Matt, we'll start with you.

Apkarian: Yeah, I'd have to say, and I think I said this earlier, so I'm going to repeat it because how important it is that in a world where customization is being enabled to the max, customization for customization's sake is not a value add. Be sure that you're really understanding the needs of your clients and whether they need customization or whether they need education, and then the tools that you have available to you to be able to improve the probability that you're meeting the needs and the goals of your client.

Linstra: Fantastic. Evan?

Rapoport: Well, again, I said this earlier also. But I would say outsource, outsource, outsource. The amount of time that you will bring back into your life to be able to service those clients, the amount of time that you'll have to spend with your family, those things are important. And the stress that investing sometimes brings to an average advisor who is not an analyst but typically a planner is not necessary. And so, I think outsourcing to me and I think about all my largest clients who are some of the largest advisors in the world, they outsource the majority of their investments. And so, that's what's really helping scale.

Linstra: Great takeaways. Well, Evan, Matt, thank you again for being here. We really appreciate your time. You can find more information on Morningstar at mp.morningstar.com. Guys, thanks again and thanks everybody for your participation. Appreciate it.

Rapoport: Thanks, Jon.

Apkarian: Thanks everyone.

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