SPRING 2 019

ETF
Perspectives
Vanguard insights for financial advisors™

Barry Ritholtz: Advisors are first

and foremost behavioral coaches
The greatest portfolio in the world is irrelevant if a client’s behavior
undercuts its strengths.

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Q&A with 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
based in
New York, NY
about
Ritholtz Wealth
Management LLC
assets at the end of 2013
$90 million
4
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 non
clients alike—that having a plan and
sticking to it is the height of wisdom.
founded in employees
2013 28
assets as of March 31, 2019
$1 billion
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.
1 Source: Vanguard.
Let me tell you, running a business How does an advisor add value
is a full-time job, separate from in 2019?
managing assets.
BR: Of all the different things that
That’s one of the reasons we created advisors do for clients, whether it’s
an ensemble practice. Rather than be asset allocation or building a financial
jacks-of-all-trades with each person plan, behavioral management is
doing everything, we wanted our first and foremost. The greatest
people to specialize. Specialization portfolio in the world is irrelevant
has allowed us all to grow in ways if a client’s behavior undercuts its
that we couldn’t have as individual strengths by responding emotionally
managers who had to do everything. to external events. If you can develop
the understanding in clients that
Was RWM ETF-centric from drawdowns are expected, and
the beginning? acting rashly is a surefire way to hurt
yourself rather than make things
BR: Absolutely! A very substantial better, then those clients are way
amount of the assets we manage ahead of most other investors.
are in ETFs. ETFs have all these
tremendous advantages: They’re Vanguard Advisor’s Alpha ® flywheel1
certainly very tax-efficient, and for a
very modest cost, you can get pretty
Personalized
much any type of exposure you want. financial
planning
I know some people have said ETFs Asset
Asset
wealth
encourage trading because they retention
and referrals
management
services
trade intraday. But that’s not how Highly
trusted
we operate. Typically, our clients advisor
are looking to us to make longer- Client loyalty Behavioral and
term investments for retirement or and trust life coaching
generational wealth transfers. We’re Personalized
financial
not active traders, so we regard the planning
knock that ETFs are tradable, as
simply a statement of fact. But only
if you trade them. And we don’t, so And from there, what else
it doesn’t make any difference to us. is important?
We just like all of the tremendous
BR: The second value-add is clear
advantages of ETFs, and we avoid
communication and explanations of
the disadvantages.
what’s really going on. We’ve had a
continued on next page >
5
 Q&A with Barry Ritholtz:
Advisors are first and foremost behavioral coaches
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
The greatest
portfolio in
the world is
irrelevant if a
client’s behavior
undercuts its
strengths by
responding
emotionally to
external events.
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.
6
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 different 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.
Note: Barry Ritholtz is not affiliated with Vanguard, and Vanguard does not make any representation regarding his views.
All ETFs are subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
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 webpage
at advisors.vanguard.com