CFA Society Chicago Book Club:

Bullsh*t Jobs by David Graeber

We’ve all had jobs that at times felt unnecessary, redundant, or even harmful.  David Graeber’s Bullshit Jobs (2018) provides numerous examples of such jobs such as “flunkies” who exist only to make others feel important and whose examples include some receptionists and chiefs of staff, “goons” who exist only to aggressively manipulate and whose examples include several public relations and marketing functions, “duct tapers” who exist to fix defective or inferior processes or work produced by others, “box tickers” who exist only so that organizations can claim that they’re doing work that they are not and whose examples include many compliance functions, and finally “taskmasters” who exist only to create unnecessary work for the previous BS job types and then to ensure that it is (or isn’t) completed.  There’s little controversy in claiming that those jobs exist and are often unnecessary or even harmful, but Graeber takes it a step farther by arguing that the political-capitalist class conspires to create and maintain these jobs to pacify the masses rather than re-distributing wealth more equitably and thereby freeing people to pursue their passions.

Graeber’s argument suffers from the fatal flaw that John Hulsman terms “the promised land fallacy” in his 2018 book To Dare More Boldly: The Audacious Story of Political Risk.  That fallacy describes the human tendency to seek over-arching single theories to explain complex phenomenon.  Compounding the damage is Graeber’s scant empirical support for his argument, save the unscientific collection of blog comments and email responses to his previous article on the same topic, his lack of policy responses to the problem except for a brief discussion of a Universal Basic Income (UBI), a solution with little political or empirical support, and in the fact that the one “promised land” explanation that he chose to go with is largely untestable and ignores myriad simpler and more mundane explanations, two of which I’ll highlight below.

The first explanation has particular relevance to the “flunkie” class in Graeber’s taxonomy of BS Jobs.  Fredrick Brooks Jr.’s The Mythical Man-Month (1995) is about computer programmers but the lessons apply to diverse professions.  The genesis of the book was the observation that top computer programmers were orders of magnitude more efficient than marginal, average, or even above average programmers.  What’s more, programming often isn’t amenable to multiple programmers because of the inter-relatedness of the parts, and communication between multiple programmers adds time both for the act itself and in the training so that it can be done effectively.  The question then becomes: does a firm hire several programmers of varying quality and then try to integrate their work of varying quality—or should firms focus on hiring the best programmers and then hire support staff to make those fewer programmers as efficient and productive as possible?  The book justifiably argues for the latter, and the concept can be scaled to any profession that has the following attributes: (1) the task can’t be easily divided, such as in trading, surgery, or being a nuclear submarine captain, (2) the consequences of sub-optimal performance are high, and (3) the overall need for the task is limited.  When those conditions are met, it makes the most sense for firms focus on hiring the best performers for the primary task and then focusing the remaining workers on making those workers performing the primary task as efficient as possible.  Picking up dry cleaning, replying to email, and keeping the mint bowl full aren’t necessarily glamourous roles, but they’re not the result of a bourgeoisie conspiracy either.

The second low-hanging fruit explanation for many of the phenomenon that Graeber describes, particularly those of what he terms the “box ticker” type of BS job, is what Nobel Prize winner Herbert Simon termed “the logic of consequences” and the “logic of appropriateness,” which has been used to explain numerous sub-optimal behaviors in complex organizations and even some of the events of the Cuban Missile Crisis (Graham Allison and Philip Zelikow, Essence of Decision [1999]).  Organizations are created to perform one or more tasks.  Processes are created to perform those tasks, including interim processes to ensure those tasks are completed and to measure the degree to which those processes are or aren’t being completed satisfactorily.  Over time, those interim processes become divorced from the primary processes that they were created to help facilitate and even become the object of firms efforts, hence performance measurement and compensation schemes that measure and reward performance based on  how many reports are completed versus whatever it is that the employee and the firm are ostensibly trying to accomplish.

Smaller and less complex firms are less susceptible to the logic of appropriateness.  Management consultants–another BS Job, according to Graeber–can also be useful in identifying outmoded processes or those that have otherwise become divorced from their original purpose.  Another solution is temporary organizations that sunset after whatever they were created to accomplish is accomplished. President Ronald Reagan said that a government program is the closest thing to perpetual life on this side of heaven.  Examples abound, including the Tennessee Valley Authority (TVA), an organization created to accomplish the long-since resolved task of electrifying the Tennessee Valley, which is approaching its centennial.  The corporation is a relatively modern form of organization.  Early corporations were most often created for a single purpose, such as building a canal, and were sunsetted after the project was completed.  Deviations from a firm’s original purpose required shareholder approval.  The modern perpetual corporation, such as the industrial conglomerate GE that transformed into a financial services firm, dabbled in television, and then came to its senses and got back to manufacturing were not possible.  Given GE stock’s recent performance and demotion from its place on the Dow Jones Index, the market seems sufficient to discipline such economic misadventurism.  The same, unfortunately, can’t be said for the TVA.

Perhaps Graeber fails more simply in that he sees lives half-unfulfilled rather than the other way around.  To paraphrase Sir Winston Churchill’s description of democracy, capitalism is the worst economic system that’s ever been created—except for all the other ones that’ve been tried.  The world has done at least three controlled experiments to determine the relative efficacy of market economies versus centrally planned ones by dividing countries in two and making one economy market-based and the other centrally planned: (1) Hong Kong and the Chinese mainland, (2) East and West Germany, and (3) North and South Korea.  Graeber makes the outlandish claim that the Soviet Union’s centrally-planned economy failed “because they were never able to develop computer technology efficient enough to coordinate such large amounts of data automatically.”  Now that computing power isn’t an issue, I wonder what Graeber’s excuse for North Korea is.  Those economies aren’t immune to BS jobs either.  The Soviet Union spawned the king of all BS jobs, waiting in lines on behalf of others.  It was one of the few black market jobs to earn extra cash in the Soviet Union and given the massive shortages of everything there were ample opportunities to ply the trade.

Graeber succeeds briefly in entertaining the reader with examples of BS jobs–most of which those of us who’ve had to earn a living are already familiar with—but in terms of identifying the causes and providing solutions he falls miserably short.

Vault Series: Ted Reilly, Chicago Media Angels

CFA Society Chicago hosted its first Vault Series event of the year on July 16th featuring Chicago Media Angels (CMA) Founder and Executive Director Ted Reilly. Chicago Media Angels is an investment group seeking attractive returns through financing content in the media and entertainment industries. Reilly spoke about media as an asset class and shared interesting insights into the group’s sourcing, funding and development of such content in Chicago.

Reilly ended up in the Midwest by way of Notre Dame and began his career with Goldman Sachs Private Wealth Management where he held various positions over seven years. During this time, he discovered that his passion was helping entrepreneurs develop their businesses yet his job was convincing them to sell their companies and invest the proceeds.

Reilly left Goldman in 2011 and over the next three years produced a documentary in Uganda about a young medical student. He truly loved the experience and wanted to continue this work but didn’t know how to make a living doing so. With his interest piqued, he immersed himself in the local start up scene and joined Notre Dame’s Angel Fund, Irish Angels, in 2012 to deepen his knowledge about angel investing.

During this period he was searching for mentors when he read an article in Forbes about Steve Jobs. Following his firing from Apple, he sold his shares for $100 million. After his first $50 million investment in another tech company failed, he took his last $50 million to a small startup named Pixar, where he became a billionaire as a film producer. This proved to Reilly there was definitely money to be made in media.

A few years later he presented the notion of investing in movies to Irish Angels and when they weren’t open to the idea, he created Chicago Media Angels. Reilly shared that the biggest realization of angel investing is that you’re looking for Unicorns: Angel Investor = Unicorn Hunter! He said a lot of angel investors just keep trying to make deals work, when in fact they won’t.

There are a number of reasons movie investing is desirable. One of the biggest is the defined negative costs – once financed there isn’t a reliance on future rounds of financing. Adding to that, once a film is made, it can be monetized into perpetuity through various revenue streams. Reilly used Napoleon Dynamite as an example – it was made for $400,000 in 2004 and brought in 48 million at the box office and continues to bring in residuals to this day. In fact, a Napoleon Dynamite doll is being released this summer, some 15 years later.

Chicago Media Angels has grown to 50+ investors and is targeting 100 total. To join it requires a $2,500 annual fee and a $5,000 minimum investment in a deal(s) of your choice. Since hanging their shingle, they have received 3,500 submissions for financing and presented 30 deals to investors. The group views two times budget as an attractive valuation and invests between $250,000 and $1.2 million per deal in low budget independent films.  With the change in technology from film to digital, production costs have come way down.  They prefer movies that are as ready to produce as possible and don’t provide funding until filming starts and distribute the investment throughout filming.  Equity is split 50/50 between producers and investors, and investors receive their money back first.

The cash flow of a film breaks down as follows:

Negative Costs: 1-6 months

Marketing: 6-8 months

Recoupment: 18 months to perpetuity

  • Blue Ray and DVD
  • Theatrical
  • Foreign Release
  • Television
  • TVOD (transactional video on demand) i.e. Apple, Amazon
  • SVOD (subscription video on demand) i.e. Netflix, Hulu

Current CMA investments comprise nine equity financings including six feature films, one episodic pilot (Public Housing Unit), one web series, and one content/technology company. To date CMA Digital Studios has vetted over 300 submissions and whittled those down to five that they will be producing next year.

Reasons to join CMA include: leveraging your network/experience, participation in guest speaker series, access to 12 well-curated investment opportunities annually, full transparency, ability to allocate your own capital, and syndicated risk. Besides Reilly’s assurances of 100% guaranteed fun, there’s the opportunity to impact society – following Hunger Games, there was a 44% increase in female involvement in archery!

Following the presentation, CFA Society Chicago interviewed Reilly for its first ever podcast which will be posted on the CFA Society Chicago website in the coming weeks!

Annual Business Meeting and Networking Reception 2018

Shannon Curley, CFA, chief executive office of CFA Society Chicago, said it best during cocktails following the Annual Business Meeting, “This was by far the most engaged audience we’ve had in years with several great questions from our audience.”  Held on June 21st, the Annual Business Meeting was attended by approximately 60 members and took place at The Library, an old law-library feel conference room at the top of 190 S. LaSalle.

After a welcoming from Shannon Curley, the event started with Marie Winters, chair (2017-2018 of CFA Society Chicago, who gave an overview of the successes over the past year. To level set the scale of the Society, CFA Society Chicago continues its climb towards 5,000 members, with 4,800 members at the end of May making Chicago the sixth largest society in the world. Perhaps even more importantly, 367 members, or 7.5% of the membership base, was actively engaged on various Advisory Groups, a testament to the involvement amongst the Chicago Society members.

Over the last fiscal year ending June 30, the Society hosted over 130 events. Major highlights include the CFA Annual Dinner with over 1,000 registered attendees and 64 sponsors all actively engaged by the keynote speaker David Rubenstein, CEO and founder of the Carlyle Group after the recognition of 163 new charterholders. The Advisory Groups, or sub-committees functioning through volunteer members, also had a number of successes. The Education Advisory Group introduced a new fin-tech series with a special well-attended event discussing blockchain technologies. The Professional Development Advisory Group hosted a Starting your own RIA series and continues to grow its mentorship program.  The CFA Women’s Network hosted two events – Patricia Halper, CFA, on Factor Investing and a second event on taking control of your career.  The Social Advisory Group hosted a sold-out golf outing in Kohler, Wisconsin in partnership with the CFA Societies of Madison and Milwaukee. The Distinguished Speaker Series hosted several sold out lunches including prominent speakers such as Don Wilson, Myron Scholes, and Jeremy Grantham to name a few. Finally to wrap up the past years’ successes, the Society launched its new, mobile friendly, website used to distribute news announcements, host webinars and podcasts, and offer new ways to engage the membership base.

Tanya Williams, CFA, the secretary treasurer of CFA Society Chicago (2017-2018), shared with us the financial position of the Society over the prior fiscal year.  Overall the Society’s operating results were positive with a small operating gain primarily attributable to higher than anticipated proceeds from the Annual Dinner as a result of higher corporate sponsorship and minimal speaker fees. Alan Meder, CFA, chief risk officer at Duff and Phelps Investment Management also received an award for his dedication to the Society, which included a monetary portion of the award that he generously donated back to the Society. We then turned to Q&A where statistics surrounding female involvement in the Society was the most topical.

Currently, female membership has gone from 20% ten years ago to 12.5% today. Part of the reason of the decrease is due to the decline of women in the investment professional pipeline. With fewer women taking finance courses in their undergraduate and graduate programs, it is making it more difficult to have a more balanced gender base in the Society. To target the issue, CFA Society Chicago is actively working on making a commitment to increase female membership starting by working with the academic institutions to educate women on careers in finance. The CFA Women’s Network has also strengthened its events specifically geared towards women in the society. After Q&A, the current board introduced the new directors for the next upcoming year and recognized the outgoing leadership for all of their efforts and dedication over their prior term.

The event concluded with commentary from the incoming chair of the Society, Tom Digenan, CFA, who has served on the board for the prior two years and currently heads the US Intrinsic Value Team at UBS Asset Management. Tom shared his vision that with nearly 5,000 members and the best programs of any CFA Society in the world, it is our responsibility to carry our past successes forward and expand to an even brighter future. Tom recollected while he was studying for the CFA exam, “Make no small plans, they have no magic in them to stir men’s blood.  Make big plans; aim high in hope and work.”  CFA Society Chicago, he assured us, has no small plans. Continuing to improve membership involvement, providing the best programs and engaging with industry leaders, regulators, civil, political and local academic leaders will take the Society to the next level. An actively involved Society will make its CFA members indispensable to their employers and attract the best of the best talent to our organization.

 

CFA Society Chicago Executive Committee (2018-2019):

Chair: Thomas Digenan, CFA

Vice Chair: Dan Kastholm, CFA

Secretary/Treasurer: Kristan Rowland, CFA

Immediate Past Chair: Marie Winters, CFA

CEO: Shannon Curley, CFA

 

CFA Society Chicago Directors (2018-2019):

Jenifer Aronson, CFA Doug Laskowski, CFA Dave Smith, CFA
Michelle Beck Cosmin Lucaci, CFA Mark Toledo, CFA
William Fitzpatrick, CFA Levoyd Robinson, CFA Tanya Williams, CFA
Garrett Glawe, CFA Linda Ruegsegger, CFA
Michael Holt, CFA Dhvani Shah, CFA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distinguished Speaker Series: Dean Harrison, Northwestern Memorial HealthCare (NMHC)

On June 14th at The Chicago Club, Dean Harrison, president and CEO of Northwestern Memorial HealthCare (NMHC) shared his story of leading a local organization from good to great. Since taking the helm in 2006, he has led a powerful transformation. Already boasting the top-rated Northwestern Memorial Hospital in Chicago, NMHC has significantly expanded its health system to include over 100 diagnostic and ambulatory sites and seven hospitals across Northern Illinois.

The full story, however, is much broader than just the growth of the hospital system. It is about doing so for the right reasons. It is about providing state of the art care to serve patients better. It is about research, a better academic health system, a relentless pursuit of better medicine. It reflects a vision of transforming healthcare, integrating the many parts of the system. It involves the creation and success of Northwestern Medicine. The full story reveals how to achieve spectacular results through properly applying strategy with financial discipline on top of solid fundamentals of the right culture, people and resources.

Northwestern Medicine (NM) reflects the shared strategic vision and collaboration of NMHC and Northwestern University Feinberg School of Medicine to develop a premier, integrated academic health system. NM employs 33,800 across the interconnected spectrum of healthcare, education and research with notable honors and accomplishments including:

  • Northwestern Memorial Hospital is currently the only Leapfrog A, CMS 4 Star, U.S. News & World Report Honor Roll Hospital and AA+ Rated Hospital in the United States.
  • Northwestern Memorial Hospital is consistently ranked 1st in Illinois with 11 of its specialties nationally ranked in 2017.
  • NM has the highest-ranked cardiology and heart surgery program in Illinois, (10 years running)
  • NM has the highest-ranked neurology and neurosurgery program in Illinois (11 years running).
  • Conducted 4,488 clinical trials and studies offering patients access to groundbreaking new treatment options
  • Treated nearly 1,000,000 unique patients in the past year and handled 4.7 million calls in the patient service center.

NM has over 20 years of AA-rated financial performance. This is most impressive considering the financial success occurred coincident to a tremendous period of expansion: the large investments in research, rapid growth of the health system, and consequent integration of diverse medical practices as well as alignment with academia. Never losing sight of its mission, none of the above would matter had NM not first and foremost maintained its ability to uphold its standard of exceptional care for patients.

As Harrison took us through the journey from good to great, it became clear that a focus on excellence resonated every step of the way. However, while the path was not necessarily straight, there was never any wavering on the criteria of patients first. How to deliver exceptional care where patients want to receive it was at the core of all of NM’s strategic priorities.

Staying true to the long-term strategy, supported by shorter term business plans responsive to the evolving market were fundamental to the journey. For example, the importance of having medical information available in all locations required installing an integrated electronic health record system. Doing so in the same year as opening a hospital was a particular challenge, but one that was not optional as it was imperative to introduce the new system quickly to satisfy the expectations of both patients and providers.

Throughout NM’s growth, applying a disciplined approach to expansion, while implementing a rigorous and consistent integration process was essential to achieving success. Of course, a large part of NM’s success comes from people, both within the organization and outside in its partnerships with donors and others in the community. NM instills a single culture across all of its locations and partnerships. They have made a large investment in people. Harrison commented how NMHC management is strengthened by frequent exposures to new roles and assignments within other parts of the organization as evidenced by an average of 14 years of service across senior leadership with an average of 3 years’ service in a current role. Developing people, the right culture, and nurturing resources are very important to the NM success journey.  Their upcoming priorities include:

  • Investing in fellowships and creating endowed professorships for the most promising physicians and scientists,
  • Establishing endowed and expendable innovation grants for breakthrough research and,
  • Funding scholarships for exceptional medical, PhD, physical therapy students, and nurses.

Philanthropy has been a key part of the good to great story. Areas in which achievement of NM’s strategic vision has been supported by donations while also giving back to the community in terms of jobs, improved care and outcomes in recent years include:

  • Louis A. Simpson and Kimberly K. Querrey Biomedical Research Center (scheduled for completion in 2019)
  • Lavin Family Pavilion, a new state-of-the-art outpatient facility on the downtown campus (2014)
  • New Prentice Women’s Hospital (2007)
  • Donations from longtime benefactors Suzanne S. and Wesley M. Dixon to support emerging clinical translation research initiatives, and the William Wirtz family supporting cancer research
  • New Northwestern Medicine Lake Forest Hospital just opened in March with new medical office facilities underway.

To bring it all together before taking questions,  Harrison showed a brief video about a patient with a successful outcome to a spinal injury that demonstrated the positive impact the integrated system is having on the community.

In conclusion, the good to great story of Northwestern Medicine is a collaboration of employees, students, physicians, scientists, and the community all the while keeping the interests of the patient front and center. Although the journey is continuous, NMHC has achieved tremendous recognition becoming both a local and national center for healthcare, research, education and community service.

Progressive Networking Luncheon Spring 2018

On May 22nd, thirty-six members of the CFA Society Chicago gathered at Petterino’s to enjoy a progressive networking luncheon. Participants mingled casually prior to taking their seats for the salad course and first round of networking. The sound level rose as individuals each introduced themselves and conversations flowed easily around a myriad of industry related topics. Attendees held a wide range of job titles. Beyond traditional investment management roles, there was a transactional actuary and another whose advisory firm assists small businesses with financial planning and analysis.

Moving tables to the entrée course, I was greeted with another diverse group, this time in terms of nationality (Uruguayan and Israeli) and firm focus (Japanese value stocks). The other individuals were from local firms William Blair and Northern Trust but the discussion was globally-oriented and provided interesting insights around international investing.

The third round of networking took place over a slice of key lime pie and a shared interest in making new connections while exchanging thought provoking ideas and advice. At this point I was feeling pretty good about the new connections I had made and what I had gained from the discussions over the last hour and a half. Suddenly that seemed inconsequential when I met tablemate Haoen, who had graduated from University of Illinois on Saturday with four majors (Mathematics, Statistics, Finance and Accounting) and started an internship on Monday (this was Tuesday).  I was in complete awe, but that wasn’t all, he had already passed all three levels of the CFA exam and was halfway through the 10 CPA exams!! Wow.

The key benefit of the luncheon was having the opportunity to meet and interact with over a dozen fellow financial professionals with experience ranging from entry level to senior executives. The goal of any successful networking event is walking away with new connections and mingling throughout the group. That objective was certainly achieved in a comfortable environment for all, including those who are a bit more apprehensive about working their way through a room to meet and build rapport with others.

China Opens Its Doors to Foreign Investors

On May 17th, 2018, CFA Society Chicago hosted a program to address challenges and opportunities for the US and China. Patrick Chovanec, managing director and chief strategist, of Silvercrest Asset Management, presented his thoughts about the relationship between China and the US. His comments focused on the trade deficit and the effect of General Secretary Xi Jinping and President Donald Trump.

Chovanec noted that trade imbalances are not inherently good or bad. He stated that competitive advantages only address part of the reason for these imbalances.  Trade deficits and surpluses also result from differences in savings rates. In the 19th Century, the US borrowed from the UK to invest in plant and equipment, which resulted in a win for both parties. In contrast, Germany used its trade imbalance and relatively high savings rates to lend money to Greece, which used the funds for consumption, hurting both entities.

The trade imbalance between China and the US represents a significant challenge for both parties. The genesis for the trade deficit began with China’s desire to support capital investments with foreign demand for the goods it produced. This strategy can work for small and emerging economies. However, this plan does not work as well for the world’s second-largest economy.

The US supplied demand for goods produced in China until the 2008 financial crisis. China reacted to the decline in US demand with an investment boom to continue economic growth. China recognizes that it cannot rely on foreign demand and domestic investments. Growth in domestic consumption represents the long term path to sustainable growth.

Chovanec believes that higher trade barriers do not represent the solution for the US trade deficit. President Trump has focused on an unfair playing field, which presents a profound problem for the US. China should be open to a fairer system and continue its efforts to increase domestic consumption. However, lower trade barriers and increased consumption in China would cause the US to consume less and/or produce more. The biggest US problem is over consumption. The Federal budget deficit supports entitlement payments, which crowds out borrowing for investment. Borrowing for consumption versus investment underlies the US challenge.

In 2013, the third plenum of China’s Central Committee established a goal of opening capital markets. Xi has committed to this goal. The challenge for foreign investors has been a lack of economic reform and assessing valuation levels for assets. The Chinese stock market collapse in 2016 slowed foreign interest. The Chinese government heavily intervened to establish a floor of 3,000 for the Shanghai Composite by essentially ordering domestic owners not to sell.

China accounts for about 15% of global GDP, but just over 3% of global equity market capitalization. The world’s second-largest economy has long kept most foreign investors out of its capital markets. But as the country’s economic model undergoes a transition from export and investment-led growth, to one powered by consumer spending it is simultaneously opening its doors to foreign capital.

Nick Ronalds, CFA, founder and president of RhoFinancial, LLC, led a panel discussion about the opportunity for foreign capital investments in China. The panel included Christopher Balding, professor of economics at Peking University, Craig Feldman, global head of index management research at MSCI, and Sandy Li, senior vice president at Loop Capital Market, who discussed some of the more promising areas for investing in China’s future.

Distinguished Speaker Series: Kunal Kapoor, CFA, Morningstar

Kunal Kapoor, CFA, chief executive officer of Morningstar, addressed a full house at the University Club on May 16. His address reviewing the current business lines at Morningstar can be summed up in his title–Serving Investors of the Future: Ratings, ESG, and Research Innovations. Most would know Morningstar as a leader in research on mutual funds, the firm’s original product, but Kapoor defined the firm more broadly as a data gatherer and analytics firm. It seeks to deliver innovative data and research to benefit investors by leveraging technology which Kapoor described as an “enabler”.  He provided the following key metrics for the firm:

  • 24 million participants in retirement plans that use Morningstar products or services
  • 12 million individual clients
  • 80% of financial advisors touch Morningstar in some way

Kapoor went on to describe in summary Morningstar’s newer services that many people would not associate with the name. The first was research in individual equities. This began following the tech bubble when institutional investors began to question the objectivity of research from broker-dealers. The environment presented an opportunity for independent research analysis that Morningstar capitalized on. It now employs over 300 equity analysts making it one of the largest independent research providers. Philosophically, the firm takes a very long-term approach a la Warren Buffet. They have even adopted his moat concept to identify companies with defensive characteristics, and as a determinant in Morningstar’s fair value calculation. To judge macro-market conditions, they have developed their proprietary Global Market Barometer (which currently reads as very slightly overvalued).

More recently the firm has expanded into credit research. This was also a response to market upheaval when, after the crisis in housing-related securities, investors viewed research from dealers, as well as the major ratings firms, with skepticism. Kapoor expects credit research to be a growth driver in the future.

Morningstar uses its data and analytics in equity research to provide indices as well. The Wide Moat Focus Index selects for firms with the widest moats in their universe and weights them according to the scale of undervaluation relative to fair value.

Morningstar recently purchased the remaining equity in Pitchbook, a data analytics firm focused on the private equity and venture capital markets, in which it previously had a minority interest. This is a response to the shrinking public equity market that is encouraging more investors to look to the private markets for new investment ideas. Data gathering and analysis is more difficult in this arena, but Morningstar intends to make it an area of focus.

ESG (Environmental, Social, and Governance) investing is yet another new product area for Morningstar. Kapoor noted that this is more than the SRI (socially responsible investing) of the past which sought to eliminate certain out-of–favor companies or sectors (e.g., gamboling, tobacco, or alcohol). Rather, Morningstar scores companies on various ESG-related metrics to identify those more likely to succeed because of their adherence to responsible policies regarding their impact on the environment and their communities. The market for ESG investing is estimated at $23 trillion and covering 26% of retail investments. Additionally, we are at the beginning of a huge wealth transfer from older to younger investors with more women making investment decisions. Both groups demonstrate a preference for investment products with an ESG focus. To address this opportunity, Morningstar has partnered with Sustainalytics, a leader in ESG research and ratings, to score mutual funds and ETFs.

Finally, Kapoor spoke to Morningstar’s processes by describing their Robotic Process Automation (RPA) effort which seeks to automate rote tasks as much as possible to improve the timeliness and reliability of products and services.  He believes there’s no activity that can’t be automated to some degree which offers the benefits of lower cost, increased scale, and improved compliance, all of which contribute to better outcomes for investors who use Morningstar’s products.

Fintech Part 2: Rise of Robo-Advisors

David Koenig, CFA

CFA Society Chicago hosted Rise of Robo-Advisors, the second fintech event of a three-part series. The event was held at The Standard Club on April 19, 2018, commanding a crowd of over 120 people. The event started with a keynote address and was followed by a panel discussion with thought leaders in “Robo-Advisory.” Those in attendance were able to participate in a Q&A session at the end of the event.

David Koenig, CFA, the keynote speaker, is chief investment strategist for Charles Schwab’s digital advice solutions. He helps oversee Schwab Intelligent Portfolios and provides research and analysis about automated investment advisor services. He opened with an introduction to what “Robo-Advisory” really means and provided some background on the topic as well as the agenda for the evening:

  • How technology is changing investment advice
  • Robo-Advice Landscape
  • The rise of technology in investing
  • Where the industry is going
  • Panel Discussion
  • Q&A session

Koenig continued to give a breakdown of how today’s clients interact with technology and how technology is developing in business. He explained that clients are using a variety of devices throughout the day for a variety of tasks from utilizing GPS to ordering lunch online. This attachment to technology has also become pervasive in the business environment from digitizing paperwork and payment systems to hosting virtual meetings. After highlighting the breadth of technology in our lives, he continued to discuss the types of technology we use today—such as social media, mobile processing, and automated payment processing—and what kind of technology we can expect to see in the future through machine learning algorithms and artificial intelligence.

Once the audience had an understanding of the current and prospective technology landscape, Koenig proceeded to discuss the current client experience in financial services. He brought attention to how little time the average investor spends contemplating investment decisions. For reference, he highlighted that, on average, people will spend more time deciding whether or not to take a vacation than make an investment decision. This appears to be due to customer’s lack of satisfaction with the advisory process. Customers tend to classify investment advisory as tedious, intimidating, and inconvenient. However, robo-advisory is shifting that mindset.

Koenig opened the discussion of the current robo-advice landscape by emphasizing that current models typically do not work directly with customers of investment advice. Instead, they work through traditional advisors to empower their decision making and automate redundant technical tasks. This technology has led to more sophisticated advice and asset management being delivered at a significantly lower cost. He went on highlight that this business model was developed by corporate fintech innovators such as Betterment and Covestor and validated by advisory incumbents such as Charles Schwab and Vanguard.

The discussion continued to present the different business models that have emerged over the years: the fully automated robo-only model, virtual advice using both robo and a traditional investment advisor, and institutional services. The robo-only model’s greatest advantage is the extremely low or non-existent investment minimums. The virtual advice model takes all the power of robo model and leverages the skills and experience of a financial advisor. These two models make up the current retail landscape of robo-advice. Koenig also briefly discussed institutional robo-advice in the business-to-business landscape. He highlighted the streamlined client communication and onboarding processes, automated risk profiling and account aggregation, intelligent portfolio construction and rebalancing, and the attractive interface of the modern advisor dashboard. All of these advantages have led to significant growth over the past four years alone—145% compounded annual growth to be specific.

After familiarizing the audience with current landscape, Koenig went into detail about what makes digital advice so appealing. He began by introducing many of the common myths associated with robo-advice and proceeded to break each one. First, he introduced the myth that “robo-advisors are only for millennials.” This was followed by a chart showing that, in fact, baby boomers and Gen X clients are actually the biggest consumers of robo-advisory taking up 44% and 34% of the market, respectively. Next he addressed the myths that “robo-advisors are only for less sophisticated investors” and “robo-advisors are only for small accounts.” These myths were met with examples from Koenig’s personal experience in robo-advisory where he has aided with the direction of several high-net worth and sophisticated accounts. Finally, he addressed the myth of “robo-advisors are going to replace humans” where he once again drew on his own experience to once again explain how the technology is actually used. He emphasized once again that robo-advisory is not replacing traditional advisory, but rather empowering it. His discussion of these myths was closed out by a series of metrics that displayed current investor interest in robo-advisory and highlighted opportunities to educate.

To conclude the keynote presentation, Koenig covered where robo-advisory is going. He drew attention to the fact that it is growing rapidly and differentiating across various financial service functions. He discussed how the implementation of newer technology such as artificial intelligence, chatbots, and machine learning algorithms will continue to empower and change the landscape of financial advisory by adding a heightened level of personalization to the technology. Additionally, he emphasized that he expects consumers will demand both digital and human advice; further perpetuating his message that robo-advisory will empower traditional advisory rather than replace it. He closed out his presentation with a quote from a recent Morningstar editor’s letter stating “Maybe [robo-advisory] automation will make the advisory experience more human.”

The second half of the evening featured a panel discussion moderated by Sunitha C. Thomas, CFA, regional portfolio advisor at Northern Trust, and included speakers Joel Dickson, Sylvia Kwan, and Dan Egan. Each of the panelists introduced themselves and discussed how they leverage robo-advisory for their clients.

Joel Dickson is Vanguard’s global head of advice methodology. As one of the first widely-recognized incumbents to enter the robo-advisory space, Dickson and Vanguard have focused on maximizing their advisors’ alpha, managing global portfolios, and maximizing short and long term goals for clients. They accomplish this through lowering incremental costs to attract clients and automating rules-based tasks as well as implementing continuous risk-profiling of their clients. This continuous risk-profiling is starting to replace more traditional portfolio “bucket” assignments. He also emphasized that robo-advisory has allowed Vanguard’s advisors to focus more on the advisory services by catering more to individual client preferences and goal-focused information.

Sylvia Kwan is the chief investment officer at Ellevest, a technology-enabled investment platform redefining investing for women. In her role, she is responsible for developing investment portfolios and proprietary algorithms that drive Ellevest’s investment recommendations. Ellevest is trying to bridge the investment gap between men and women as current data shows that women are substantially under invested when compared to their male counterparts. Kwan explained that portfolios are assigned through the use of a goals-based questionnaire and client engagement is maintained through a variety of communication channels including their “What the Elle” newsletter. They initially engage their clients through social media and their current community of female investors.

Dan Egan is the managing director of behavioral finance and investing at Betterment, one of the first-movers in the robo-advisory space. Betterment’s value proposition is to “connect common investors to quality advice.” They don’t assign portfolios as much as they allow customization coupled with quality education. With their current product they are working to automate as much as possible and allow their advisors to focus more time on the human element of the business. They use social media to engage clients but their primary source of engagement has been word of mouth and they maintain engagement through precise communication catered to individual clients. This communication includes sharing education on investment planning as well as market news. Machine learning is becoming an increasingly integral part of this communication process.

All of the panelists explained that their current business models are built on advisory fees and a focus on goals-based investing. Additionally, as technology continues to develop and automate the more mundane elements of financial advisory, they are increasingly seeking advisors with greater communication and people skills. The event concluded with a Q&A session.

Q&A

As investing tasks become more automated will investment managers continue to be held accountable for performance? Yes, but accountability will be less focused on short-term and investment philosophy performance and more focused on goal achievement and catering to client engagement.

What has been the conversion rate from traditional to robo-advisory? While nobody could provide an exact metric, the general consensus was that it has been high, especially in more recent years.

Can behavioral coaching be coded? With enough time, yes. However, that technology appears to be in the far future and will likely not be a major impact in the next decade.

How satisfied are people with robo-advisory and how is satisfaction gauged? The success of robo-advisory platforms are measured through client surveys and the current data shows satisfaction rates are high. However, each of the events’ presenters were quick to point out that robo-advisors have yet to endure a recession.

Starting Your Own RIA Firm (Part 3): Infrastructure and Regulatory Requirements

The final event of this three-part series was to explore the infrastructure and regulatory requirements new RIA’s need to satisfy. The two previous events focused on the initial personal challenges of starting your own firm and the marketing and business development challenges.

The four speakers featured for this event included:

Carson BoorasMr. Booras is vice president of Institutional Sales for TD Ameritrade. Booras has over 20 years of experience working within the Financial Industry and has been working directly with Financial Advisors for over nine years. Prior to joining TD Ameritrade, Booras built a fee based advisory practice working with Charles Schwab.

GJ KingMr. King is President of RIA in a Box. RIA in a Box currently helps nearly 1,500 RIA’s overcome the compliance and technical challenges of starting a firm. Prior to RIA in a Box, Mr. King held positions at Goldman Sachs serving advisors to high net worth entrepreneurs, families and foundations.

Joseph Mannon Mr. Mannon is an attorney with Vedder Price Investment Services Group, a legal firm with 35 attorneys serving independent advisors. He focuses his practice on legal and compliance matters for investment advisors, mutual funds and vehicles such as hedge funds.

Ravi Wadhwani – Mr. Wadhwani is the Illinois regional sales director for Morningstar’s Advisor Solutions Group, responsible for building relationships with startup and established RIA’s. His focus is on helping advisors build their practices by leveraging research, data aggregation and practice management technology.

Shannon Curley, CFA, began the event with a brief introduction of the speakers followed by a short presentation from each addressing how their firm helps newly formed RIA’s. King provided event participants with a presentation entitled “RIA Registration 101”, which outlined the steps needed for registration and licensing of an RIA. Wadhwani provided a questionnaire entitled “Taming Your Technologies” which helps evaluate the effectiveness of technology.  Carson stated that TD Ameritrade is a fast growing custodian with dedicated transition teams for RIA’s. As an attorney in his firm’s Investment Advisory group, Mannon has a wide range of experience aiding both new, and experienced, RIAs.

The four speakers spent the remainder of the event responding to questions from the audience, summarized below:

What is the biggest mistake new RIA’s make?

  • Mismatch between the advisory contract and the services you provide to clients.
  • Failure to make clear how your new firm will provide a better experience for clients and result in a better outcome.
  • Unexpected delays due to the ramifications of non-compete clauses with a previous employer. You may not be able to take data with you.
  • Technology does not provide the support envisioned resulting in “biting off more than you can chew”.
  • Using an attorney not experienced with this type of work, or not experienced in working with custodians.
  • Neglecting to create a detailed balance sheet for your new business.

 

What registration is required for trading in alternative assets such as real estate, bitcoin or private equity?

  • Real Estate is not a security, so registration is not a requirement.
  • Private Equity is usually done deal by deal using Special Purpose Vehicles (SPV’s) for each. Registration is not required until the aggregate value exceeds $150 million.
  • Educating clients about bitcoin, does not require registration, but participation in an ICO would require registration.

 

What would be the typical cost of setting up an RIA?

  • If there are no prior employment issues, a bare bones cost could be as low as $2,000.
  • Cost increases dramatically if there are prior employment issues concerning non-solicit and non-compete. In the extreme, costs could exceed $300,000.

 

What are the basics for effective cyber-security?

  • It is important to recognize that typically you are the owner of the data, not the custodian.
  • Ownership of professional business level security software is critical.
  • Stay on top of your vendor’s security practices.
  • If your data center goes down, where do you go? Log on to back-up sites.
  • Consider cyber security insurance and know what is specifically covered.
  • Quick reaction is critical if you suspect the worst. Train staff to deal with situations promptly.
  • Payment of ransom is not recommended, reputational issues may result.

 

What is the most effective way to calculate performance?

  • Use one system to generate ad-hoc reports and fees.
  • Reliance on custodial statements is more common.
  • Clients should have access to all their reports at any time.
  • The trend is for fewer reports (less is more). RIA’s are now involved in more holistic tasks for clients that typically do not require performance reporting.

The brief questions at the end focused on the different requirements for short-only RIA’s or those RIA’s that specialize in hedging or options. These activities are acceptable as long as they are spelled out in the advisory contract.

Volunteer of the Month: May 2018

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Richard Schiller, CFA, CPA

Thank you to all the dedicated CFA Society Chicago volunteers who give selflessly of their time and talents! This month the Communications Advisory Group is recognizing Richard Schiller, CFA, CPA.

Dick has been a member of the Society for two years and joined the Communications Advisory Group. His role as an equity research associate with Robert W. Baird has made him a great fit for the committee. Dick has been an active member of the group since he joined, volunteering to attend various Society events and contributing to the CFA Society Chicago blog. Events he has written about include the Distinguished Speaker Series luncheons featuring Donald Wilson (DRW) and Gary P. Brinson, CFA (The Brinson Foundation) along with the Society’s 31st Annual Dinner which featured David Rubenstein, founder of The Carlyle Group, as the keynote speaker.

He regularly attends advisory group meetings and has been a great source of ideas for both the blog and the new website. Thank you for all your work!