But thanks for being here. I know it's an early call, but I'm excited to have this conversation with everyone. And I said conversation. I actually don't care if I don't get through the slides. I say that often, and I usually still do get through all my slides. But please interrupt me throughout, ask questions, clarifications. I want to draw on all of your experiences. Show of hands, who has experience directly or indirectly such that your firm uses separately managed accounts of some size, shape, or form? OK, so those are going to be your participants, at least to get us going. Awesome. Well, my name is Sean Jabrazada. I am a vice president and regional manager of Dimensional Fund Advisors, also fondly known as DFA. And my role at the firm is, on one side, I actually work with some of the largest national acquirers in the RAA space. And on the other side, for my side gig, I guess, I actually am one of our key client engagement facilitators at Dimensional as it relates to our separately managed account solutions. Well, why me? I had the good fortune when I started at Dimensional 16 years ago to actually be on, it wasn't called this, but the person who was manually running all of the reports for our ultra high net worth separate account offering, which we've had for a little over 20 years. And so I painstakingly understand the nuances of separate accounts. And now we get reports out really quickly with no one like me doing any of it for months on end. So anyways, separate accounts have come a long way, but they're not new. And so what I'm here to try to get across to folks today are what are separate accounts, what are some of the use cases for separate accounts, such as you reflect on your own client base, or you even reflect on client or prospects that you didn't win, you might consider the fact that there are means to improve the connection point to clients serving their financial needs a little bit better, given the flexibility a separate account provides to you. So Dimensional, for our part, is definitely not out there in the marketplace saying, every one of your clients must have a separate account. Because that's actually not true. There is a trade-off that you make once you step into a separate account. And I'll be able to go through some of those trade-offs today with you, so that you understand it's definitely not a one size fits all. But I do believe, through my experiences over 15 years and hundreds of calls over the last several years, as we've expanded our solution ourselves, that there are more use cases than you're probably thinking about. Does that sound good? Yes, please. How much directly indexing is is simply a connection point. Yes. And I'm going to elaborate on that. Thank you for bringing it up. Because just even the way you asked, right? I have no idea what directly indexing was. And that's why I'm here to be talking about it. You know what directly indexing is? It's a marketing term. It is. It really is. So separate accounts have been around since the 70s. That's the marketing machine, right? There's going to be a repackaging, repositioning of things that have always been around. But there are nuances about the evolution in separately managed accounts that I think is relevant. So maybe actually with that question, and thank you, I can maybe go through a little bit of a history lesson that all of you are going to be aware of, but not in the separate account realm. So let's talk about investment or asset management. So in the early days, and I know it's still around, the only way that you could actually invest was conventional active management, right? No judgment. We're not a fan of it at Dimensional. But generally speaking, you had managers that felt like they had a information edge, and they wanted to use it to their advantage to try to deliver outsized investment returns to their clients. Then around the 60s and 70s, there was kind of the beginning of what at the time was not called index funds. Our founders at Dimensional were actually a part of the true first index funds back at Wells Fargo in the 50s. And it was called compartmentalized investments. Interesting, but not a good marketing term, right? And then we all know the history of Vanguard, right? Where they said, wow, we can actually improve on the investment outcomes of our clients by just investing in these indexes that were created and kind of leaving them alone and not trying to purport that we can time the markets or select securities. And then there's been more evolution, certainly one that Dimensional is proud of being a part of, you can call a lot of things, but factor investing, systematic investing, something that says, let's take everything that people seem to really like from index investing, such as transparency, low cost, being well-diversified, knowing what you're getting, but try to improve on the investment outcomes. So that history arc is on the investment side. And I'd say what you've seen over the years is different vehicle types that can deliver any one of those investment solutions to you, whether they be mutual funds, ETFs, or separately managed accounts. And now, to your point, index funds are called enhanced indexing, smart beta. There's a lot of names to call it, but separately managed accounts, unified managed accounts, direct indexing, custom indexing, they're all one and the same. So thanks for the question. All right. The other thing I want to get across today, so I'm just trying to prime you to think about your questions, is there are a lot of things that you can customize an investment experience around. Customized tax management, things under the moniker of environmental, social, and governance, such as ESG, individual security restrictions, sector-related, country-related, it kind of runs the gamut. But the primary reason why financial professionals are continuing to step into separate accounts relative to mutual funds and ETFs does remain custom tax management. I'll be able to show you some information there. And so I'm going to spend a lot more time on that idea of custom tax management, what it can mean, and what it doesn't mean. Because, maybe to the point that the lady got me going off of earlier, tax management in separate accounts is also hyper-pumped from a marketing perspective. Who's heard the phrase tax alpha? Everyone in the room. And we'll get into what that does mean and doesn't mean. OK, everyone kind of warmed up and ready to go? I'm obviously very energized about this topic, so you're going to have to slow me down. All right, let's get going. If I can turn this on. All right, we'll talk about the growth, talk about elements of customization. We're going to get into tax management. And if I've got some time, I'd like to go through some client examples, bringing this to life so you can consider and see this type of solution for your own client base. All right. You have this deck through the NAPFA app, so I'm not going to belabor all of the points. I'm just going to give you the punch line so we can get into the interesting stuff. Separately managed account usage is increasing at a pretty decent clip. And I think it's because advisors are recognizing that consumers, which your clients are, of a lot of things, not just your services, are interested in tailored experiences. And now their investment portfolios are no different for them. They're considering their investments another tool for them to be able to feel a little bit more tied to versus a one-size-fits-all that they might get from a mutual fund or ETF. When we, a dimensional, ask for feedback from our advisor community that we serve, we often collect quite a bit of data, and we try to tease insights out related to what are some interesting things that make some firms seem to be growing persistently faster than their peer groups. And we often normalize for size and revenue. We try to just get closer. You don't want to have a false sense of precision, but the financial professional community is often looking for top practices. What are others doing to be successful so that you can either accelerate your own firm's growth or make sure you don't have a blind spot that you have had you not considered some perspective from your peers out there in the industry? And so what we see quickly is that top quartile growing firms through a 2021 survey that we ran at dimensional through our community of advisors actually do use separately managed accounts at roughly twice the pace as low growth firms or lower growth firms. Well, correlation causation. We want to be careful. Let's dig into that a little bit more. Well, what do higher growth firms tend to also offer more of or to more of their clients relative to low growth firms? And you see a number of services here. The number one thing I want to get across to you, because I'm not saying your firms must be providing these services or not, but what is pretty consistent across the majority of the services that are here is that the more flexibility you have in the investment vehicle you're using, the more you can do with these types of services for your clients. And a separately managed account, given that it is not a one size fits all, directionally does give you the most amount of flexibility. I'm not saying that you always want it, but it is a fact that it is the most flexible investment solution. Let's stop here, because not everyone raised their hands earlier when I asked if you use separately managed accounts. So let's maybe define it a little bit more beyond just a marketing term. A separately managed account is the ability for an investor to invest directly in the individual securities. You get to identify the individual lots of all of those securities that are owned, because you're often going to purchase a security multiple times over, over the course of their investment journey. And you can exclude, as I mentioned, securities that are bad actors. From the client's perspective on preferences, you could exclude things that are related to competitive covenants and employment contracts, them being an insider in a public company, so they have trading windows. There are very legitimate reasons why you might want to take things out of a particular universe that otherwise your client's going to get when they invest in, fill in the blank, whatever index or universe you'd like to invest for your clients. So flexibility is really the key here. And again, stop me at any time. Yes? I'm wondering, so the question is, a lot of the value proposition that DFA has regarding trading, so what I'm thinking of directly is being able to just add alpha through the way you trade. Is a lot of that eroded when you're trading in a separate account? Great question. So what he's alluding to, and I'll repeat the question, is one pillar of the mental model that we're able to offer value across the investment design part of the overall process, the daily management, our trade execution, relatively well-considered out there in the marketplace. So what we've done, the answer is a little bit of both. And I'll elaborate now. So in a separately-managed account, what you want to do, because you're trying to go for scale, because we at least, and minimums are all over the place, but from our perspective, that legacy program for ultra high net worth that I've been a part of, at least when I started at Dimensional 16 years ago, it remains at a $20 million investment minimum. The investment solution that we've expanded to last year brought that minimum down to $500,000. And there's others that go even lower than that, by the way. And so the name of the game is to be able to deliver whatever you believe your value proposition is, but at scale, given that you're doing it for a far lower minimum. So what we were able to do is actually take a lot of the things that our portfolio managers were doing on the back end of the qualification and criteria for what's going to the market, and algorithmically do it on the front end. So that now, as opposed to one portfolio manager only being able to run 10 mutual funds or ETFs, they can actually run hundreds of separate accounts with that same level of efficiency. And then we run, ourselves, weekly trade cost analysis to identify whether the trading is well-executed or not. And we're basically at the midpoint on average, week in and week out, which is a good result for us. Thanks for the question. All right. We ran our own survey back in 2020. Do you use separate accounts? Why? What do you like about them? What don't you like about them? If you don't use separate accounts, why? Because it's very important, in general, but especially a dimensional, for us to understand what the needs and challenges are. Because if we come out with a solution and it doesn't meet the needs of your clients, well, then we've kind of failed, right? So feedback's very important. So I pulled out a piece that I thought was important here, which is why are folks stepping into separate accounts? And it tends to be everything we talked about. Customization, dealing with the baggage that your clients come to you with or inherit while they're a client of yours. Often, what we hear from advisors is you're going to have to set those things aside, those concentrated securities with embedded gains. And you might be able to do some stuff with them at year end for gift planning purposes, but not really pay attention to them week in and week out, month in and month out. Are you able to gift with a mutual fund and ETF? Not a trick question. You can. Going back to the flexibility directionally of a separate account, why would a separate account give you a little bit better execution on the gifting? I'll give you an example. If you have a year where the overall index fund, we'll say the S&P 500 index fund, is at a loss, does that mean every security in the S&P 500 is at a loss? No. There could be some constituents inside of the S&P 500 universe that you would actually be able to otherwise gift as low-cost basis securities and get that tax benefit. You can't do that in a mutual fund or ETF. You can do it at the individual security and lot level in a separate account. So it's not that you can't gift in the commingled space, it's just directionally you get a little bit better of an outcome by virtue of the flexibility in a separate account. Yes, sir. So before we wander too far away from the charitable giving side, so operationally, how do I give whatever? So I've got some component that's up for this year, which like, you know, there's... Everything's... Hello, there we are. Anyway, so when, like operationally, how do I gift that most highly appreciated stuff out of your separate account? Is that relatively, it's like one of the gifts and... Sorry, the mic's... Yeah. Is mine off as well, sir? Okay, thank you. Operationally, there's always a mechanism where you can go to your manager and say, my client needs to give $25,000 in December, and they will furnish to you a list of securities that are candidates to get you there. Same thing with dimensional. Ours is done through a digital interface on our advisor site, but pretty streamlined. Yeah, thanks for the question. Why are folks not using separate accounts? To sum it up, folks say, it's operationally clunky. I don't want to break down the operational processes and efficiencies that I've built over time at my firm just by virtue of wanting to deploy a separate account. And let me be very clear, that does not mean the financial professional is abdicating their fiduciary responsibility. Sometimes, and you don't have to admit this if you don't want, but financial professionals will make decisions because they're also taking into consideration the behavioral aspects of their clients, right? And so all else equal, if it's no harm, no foul, you might deploy things in a certain way if you think that means your client will be able to stick with the plan, which is the most important thing. All of you are essentially pseudo-psychologists, right, without the license. All right, I kept talking about customizing your portfolio. I'm not going to talk about every single one of these, but a few. Specific tax management, personal preferences, and human capital consideration. So I want to start here. So you have a trade-off to make. With tax management, what you're essentially trying to achieve is doing tax loss harvesting at the lot level, the securities you own, such that then those can be used to offset gains in other parts of your client's investment portfolio. And then anything that's left over, you want to carry forward after using the 3,000 that the IRS allows you to offset every year. So tax loss harvesting is a very important component for tax management, but it is not the only one. And we'll go into what I mean in a moment. One thing that often happens is financial professionals believe that they have to sacrifice the investment return and risk profile of what they want to deliver to their clients, right? You build a financial plan, you come up with an IRR, what they require over some 10, 20, 30 plus period of time, and you need to build an asset allocation that gives you and your client a higher degree of confidence that you'll be able to actually meet that level, given everything that you do through your Monte Carlo risk assessments and so forth. Well, just because you want tax management to be better than what you get in a commingled solution for a part of the client's portfolio doesn't mean you have to give up on the return and risk profile. The reason I say that is because often you have choices in the asset management space. There are those that will do what is called stratified sampling, which is you give them, my client needs a Russell 1000 type exposure, and they will give you a sampling of that universe. And let's say it's two, three, 400 names of that overall universe, and they're trying to ultimately build something that on expectation has a high tracking, I'm sorry, very low tracking to the overall Russell 1000. But there's a lot of different shades of how much you can sample. The fewer names you sample of any universe, the lower your coverage of that universe is, and conversely, the more names you have, the more coverage you have. Why would coverage be important relative to the asset allocation piece you're trying to build into your client's portfolio? Just call it out. You don't have to wait for the mic. Tracking, what was that? Correlation, tilts, increased probability that you're going to earn or hold the subset of securities in that universe that actually drive that universe's return. Because academically, and actually in practical empirical studies, we know that it's often 10 to 20% of any universe that you're looking at, asset class, sector, country, it really doesn't matter, that are driving that overall universe's return. So the fewer names that you have, the less likely it is that you'll hold that subset of securities that are actually driving it. So coverage is an important thing for you to consider as you decide what your overall asset allocation might be with a separate account provider. Harvesting losses, I said it's important. You have options. You can harvest losses once a year, semi-annually, quarterly, monthly, or daily. What's the difference, just directionally, between fewer times you have the ability to look at and manage around losses versus more frequently? Missed opportunities, exactly right. So once again, you have options. So really all I want to get across today is as you continue to use separate accounts or look or endeavor to begin to consider them on behalf of your clients, know that you have options. And the great thing, by the way, is you probably could not have gone the last year or two without reading about one or any other pretty large asset manager buying a fintech-type solution out there, right? Everyone's bought someone you've never heard of and they're standing up what they consider to be a robust separate account solution. That's great news for you, because that means more competition amongst Dimensional and all of them, which means that we should all be pushing to give you more value at a competitive cost. So I think it's a really good time actually to be an investor in separate accounts given all the attention and competition that's going in the backdrop, which ultimately benefits your clients when they can get something better for less cost. I'm going to jump down to personal preferences. Do you have clients that have brought, whether you care about these topics or not, do you have clients that bring up things along the lines of environmental, social concerns? I see some nodding. Never. You've told them that if they do, you're going to fire them. We've stopped presenting. There you go. We're tired of people telling us, I don't care about that, give me a thought. Yeah. Maybe that's just an answer to our client. Maybe, yeah. I think having the tool at your disposal to meet a client where they want to be met is really just, it's optionality, and there's benefits in optionality. So having the ability, so I'll give you an example, and this is just a reflection of my experience having hundreds of these kinds of conversations and running a lot of analytics. I can't tell you how often, I'm not judging these clients, it just is what it is. They come to their financial professional and say, I'm really upset with, fill in the blank, the company, the sector, or movement, whatever it might be. The advisor comes to us and says, all right, this client seems to be ready to walk out the door. Can you build a portfolio that meets them where they need to be met? We build a proposal, we send it to them. A part of what we send, and other managers do this as well, is considered a tax transition analysis. What is the cost in realized gains for making a decision like that? Eight out of 10 times, the clients seem to back off of those previously very strong-held beliefs. But the importance there is, is you're still demonstrating that you're open for business, you're empathetic to hearing them out, but as always, you're going to educate them on the trade-offs. Because I feel for you financial advisors, it is an asymmetrical relationship. When things are going poorly, you're getting a bunch of calls, emails, texts, and when things are going really, really well, so positive tracking error, seems like no one gets a pat on their back, right? That sucks, but you guys do a lot of great work for them. And I just think being able to show them that you're competent and confident about a topic that I guarantee you they are hearing or reading about, may be the most important thing. So that you don't, I have heard advisors tell me they have lost clients because they haven't proactively brought up that they're able to assess trade-offs for them, which doesn't mean they're going to do it for them, necessarily, but they want to be the source of that information, knowledge, and education on an ongoing basis. Company I went through, human capital. I really love this one, and I'll tell you why. I think it adds one small notch of asset allocation sophistication for planners, frankly. Is if, well, think of a client, I know you've got one, where their financial capital, so their compensation through the company they work for, or maybe own themselves, and combined with their restricted stock units, stock options, when you put those together, actually make up a pretty considerable amount of their overall financial picture. At least one client with that situation in your books? Yeah, more or less? Well, when you invest in the Russell 1000, let's just say, or Russell 3000, globally diversified portfolio, the likelihood that you're going to just arbitrarily be adding more to that concentration that you otherwise would like to mitigate is there. And so if the numbers are meaningful enough, right, then you have the ability to actually carve out the company they work for, the sub-industry that they play in, so that you don't arbitrarily continue to add to that. And that has actually created, I think, an opportunity for advisors to, relative to wherever you may be, move up market. Because you can begin to have slightly different conversations that maybe you haven't had in the past using the flexibility of the tool. And again, you'll assess at the end of the day whether you need to step into a separate account or not, but having the conversation alone can demonstrate to your client that you're very thoughtful about everything you do, which I know you already are, but adding more notches to that can never hurt. All right, any questions, any comments? And you need the mic. If you're gonna get into this, then please don't divert, but in terms of the logistical side of it, are you gonna get a little bit less existential from clunky and stuff and say, okay, so if I'm trying to capture US stock versus international stock and I have to rebalance and how this would actually be practical to apply as an advisor, at least from a macro level? I'll try to get into it at the very end. Because I think, because I want this to be very educational, that probably veers a little bit too much into what we offer, so probably an offline discussion, but I can kind of give you generalities. I think it's really practical in the sense that if it's not scalable, if I can't actually implement it, then it's completely useless for me to understand it. Yeah, so let me address that part. And you'll have to clarify if I'm not hitting the mark. So you're absolutely right, when I said folks said it's clunky, so they weren't stepping into it, generally what that meant was additional paperwork of the custodian, right? Excel sheets going back and forth between the separate account provider and the financial professional, such that sometimes business days were turning into business weeks, when it turned into, okay, run this proposal, okay, no, my client needs a little bit, or I want a little bit of a tweak here, and that turnaround, and things being in the inbox, that's what generally people considered, man, now I have to start paying attention to a whole nother process that I never had to, right? And so they said, okay, I might need to step into another process, but it can't make me really inefficient, because I've got my regular side of the business, right? Because if you remember, and these numbers are going to go up, and just to show you at least one proxy, sorry, I mean, that's percentage of assets, right? That's only a subset of your overall client base, so you wouldn't want a small subset of your overall business to start dragging the efficiency down. So I'd say there are managers out there that are making the process a lot more streamlined, whether it be investment manager agreements not needing to be signed by your clients, that removes one hurdle, making sure there's oversight on the custodial settings, so that you're doing it too, but you've got kind of a backup, so that things like your clients receiving a bunch of paper confirmations or statements don't happen at their front doorstep, or the tax lot relief methodology being inaccurate. So there's that, and then being able to interface online, just like you would with your financial planning tools, right? People are trying to generally move away from the Microsoft suite of tools that they used to kind of grow their business on. So that's 30,000 foot view, but happy to give you more information later. All right. Go ahead. Absolutely, please. So when we're talking about, sorry, I don't know how loud this is. Loud enough. Okay, perfect. But basically when we're talking about the use cases, I think it's pretty easy to kind of understand some of the advantages, but when we're looking at the- That was a compliment to me, thank you. Crystal clear presentation. I'm very interested in direct indexing, but I think one question I've had is, one, the type of net worth of a client or size of the portfolio, where this is really creating some either increased expected returns relative to that standard deviation or decreasing the standard deviation, as well as what percentage, if you have any research from a recommended kind of range of the percentage of assets that should be going into these type of SMAs. Those were just some questions I haven't really seen much on just from other firms as well with direct indexing and was curious if you guys had some research on that or just some ideas for best practices with the use of them. Great question. I'll have one perspective, but from your peers. So a number of you raise your hands. So I mean, I can run around if you don't want, but can we hear from folks? At what asset level or asset allocation level, I can help out, do you deploy a separate account and what have you learned over the years? Anyone willing to share with their peers? Yeah. Yeah, I'd say once it's, once they're able to get a diversified exposure to all of the names, like so, I mean, if you've got some of the really expensive stocks in there, you kind of have to do the maths, like how much does it take to just get one share of that? So once you kind of overcome that hurdle, I think everyone can benefit to the extent that even if it only generates $3,000 in losses, like you should do that all day long, every day, forever. And then, but as they get richer, there's obviously, there's more complexity, so there's more opportunities, but I think everyone can benefit from it once you kind of overcome, it's probably, I don't know what it is for you guys. I'd say it's probably somewhere around $150,000 exposure. Apparently, the dimensional is 500,000. Ours is, yeah. Yeah, which makes sense, because you've got a fairly large. Yeah, so our perspective, we surveyed advisors and when we asked them, okay, so you use separate accounts, at what point do you use them? The bulk of the answers came back at half a million, so that's where we started, but that's just the perspective on our community. Yes, sir, oh, with a mic, so the not-for-camera picks you up. I think I look at it more, you have to have the, clearly the liquidity and the asset, but also looking at the client's tax, you know, where their marginal tax rate is, because otherwise, if they're in the 20% range, 25, you know, depending on their 1040 or effective rate, it's an exercise in futility, right? So I like that perspective. One perspective I have read about, which I think is relevant, is when we talk about tax management, what about gains management? So for someone in the lower bracket, you actually can get pretty creative in how you use gains management to their benefit when they're lower. So just food for thought, but I agree with your kind of high-level perspective for sure. I think the gentleman in the back was gonna contribute as well, am I right, sir? Yeah, my question was more about the transition. So if you bring in a client who has a million dollars and has never done this stuff and they've got a few mutual funds or whatever the case may be, or maybe even some DFA funds, and we're interested in doing this, but we don't have 500,000 cash, because it's all invested. How's that transition work from the tax efficiency? I'm not worried about the complexity of running the business and your operations. I'm purely about how do you get out of those investments and dollar cost average into the index, or is it just 500,000 and nothing? Yeah, great question. So you can actually, and this is pretty true for any manager, you can fund with existing securities. Now, individual securities. I'm happy to talk offline, but there are, I'd say, improvements being made where you can actually hold commingled and then create a tax management plan where you're weaning off of those positions over time because they're a part of the funding source, but not a part of the target. So that would be a benefit where then the manager is helping make that transition for you over time. Now, let's be clear, and you guys have all been in this business long enough. When I say for the years to come, depending on the embedded gain situation, it might be a journey that actually doesn't end until the client passes away, actually, frankly. But it's can you give them a benefit through time even if you don't get to the end point you wanted, and then they ultimately end up bequeathing, right, donating their holdings. So it's a transition over time depending on the situation. Yep. You said individual securities. They told me I have to give you the mic. Sorry, it's not my rule. I'm just a rule follower. So you said individual securities. Yes, sir. Does it go on to ETFs, can commingle with ETFs or not? Yeah, you guys are putting me in a really tough spot. Our solution will include that I can't speak about others. I'm happy to speak offline. Yeah. No, thank you for the questions. I just want to ensure this is hyper educational and not a dimensional advertisement, to be clear. So I'll try to keep steering away from that stuff, but giving you high level perspective. All right. Kind of went through this, right? You can regionally decide on separate account exposure. A buyer beware comment. Have trade commissions and custodians gone to zero? Thank you. Not exactly. And this is not, make sure that if you step into a separate account, you ask your custodian if they charge for ADRs. We are aware that there are custodians that will charge upwards of $7 a trade for over-the-counter ADRs. That can be a, I was at a lunch in Denver earlier this week, and the advisor told me that their client year to date has accumulated $5,000 in commission fees, because unbeknownst to the advisor, they were getting pinged with $7 a trade. And now the advisor is trying to unwind it from the manager they're at, because it's not the thing your clients want to see. No matter how much wealth they have, they don't want to see debits often. So just be aware that you ask about ADR or trade fees in general, and you obviously probably know this, but at your custodians, you can move your account from transaction-based pricing to asset-based pricing, to also hopefully eliminate or mitigate that potential issue. All right, another thing for you to consider. The way you get exposure to non-US markets in a separate account are through American and global depository receipts, which is going to generally mean that you're going to get far fewer names to try to represent that non-US space than you would in a well-diversified mutual fund or ETF. I'll just give you this as a data point. A dimensional international and emerging market solution will give you somewhere in the realm of nine to 10,000 securities across 45 countries. In our own, so we are huge believers in diversification. In our non-US separate accounts, you're getting 350 names. That is a dramatic difference. So I would submit to you that you probably should have a higher hurdle for deciding to step into a non-US separate account than you would stepping into a US account. So these are just some of the very practical considerations that I think are important for advisors to consider when they're deciding whether the trade-offs make sense for their clients or not. There's a lot of different ways that you can get access. Asset class or component-based, full market exposure, things that are factor-tilted. That's the good news. You got a lot more options to deploy. And what I think is really important, because we hear this from clients all the time, the advisor says, I want my investment experience on expectation for my client base to be very similar, no matter whether I want to deploy a mutual fund, an ETF, or a separate account. And I think that's the important part, is you don't want a very divergent investment experience just because there's a vehicle type that potentially can better serve your client. So certainly consider that. And that kind of ripples into your marketing materials, the way you present things, nuances you have to bring up. And so perhaps the more consistent you can have your overall investment exposure and experience across all three, perhaps the better. And then you've got to assess what a manager can do for you, right? They got to stick to meeting the objectives. Hopefully they're managing it more frequently than less and having some form of risk management. We don't need to go into any of these, unless folks want to call me out, because I do want to get to tax management. But we just kind of gave you high-level perspective on the elements that fall under these customization categories. And now imagine I started breaking these up. Well, it's not here, actually. That's further down the line. You're getting into hundreds of potential permutations, right? So one thing I've heard from advisors is they don't want to feel like they're starting from scratch every time they decide the separate account vehicle is right for their client. And so you can actually work with managers to build, I don't know what they might call it, but what we call templates, right? Where you build a starting point template that is very unique to your client base, the way you like to invest, and that way you're kind of stamping them out with very few tweaks afterwards, relative to the client, such that you don't feel like you're starting from scratch every time, which can be a part of that operational efficiency that sometimes advisors are trying to stay away from. So this is perspective, just to give you use cases. So we expanded our separate account program and lowered our minimum a year ago, and so we can look at a lot of cool data. So this is just high level data, so you can see how are your peers using them, and I think there's some interesting points. So I just took 300 at random. Half of them are not even customized beyond tax management, which I think supports the fact that tax management still remains to be a key reason why financial professionals are choosing as a separate account to use in conjunction with mutual funds and ETFs. About a quarter of them are what I'm just calling minimally customized, so we can see that they have fewer than five customizations beyond tax management in their clients' portfolios, and the other quarter are what I'm just calling highly customized, six or more customizations, right? So it just gives you a sense of how much people are stepping into this, and it doesn't have to be an all or none deal. You can choose, we have literally accounts that they select their tax management, they're excluding one public company, Amazon, because their client is a big, highly compensated employee, and that's the only reason they needed it, and it worked for their financial plan, they got the communication to their client, and they're off to the races, and they feel like they're doing better for their clients with better tax management, and not continuously adding to Amazon when there's already so much Amazon in the client's financial and human capital picture. And I just want to give you some perspective, when I say ESG, here are the top five that folks are using on average. Child labor, weapons, controversial and civilian, and then greenhouse gas emission related, so more of that environmental, right? Just thought that'd be interesting to share. All right, tax management, really, really exciting. This leads to the marketing that happens, right? And I will say, I'm gonna, a really minor plug for our firm. You know, like, we want information to be objective, and there's a reason we just don't like that tax alpha has been proliferated out there, because often the devils are in the footnote details. And so I'm gonna bring out some of the devils in the details for you, such that when you see a big marketing slide with a X percentage tax alpha number, you have a sense of what may have gone into that number. Which, to be clear, there is absolutely value to be had from good tax management on behalf of your clients. I'm sure all of you get that. But we want to be sure that it's not something that's being overinflated, and that you kind of understand what the research is showing you. When you step into separate accounts, often you have options. It's not enough from our perspective for you to say, I want tax management, and then it'd be a black box, right? We want you, as a financial professional, to have an ability to control the amount the manager may lean into tax management activity, or lean away from it. One reason we want to ensure that you have that control in your hands is because, who can tell me, the more tax management, or more specifically, the more tax-less harvesting you do in an account, assuming no new cash is added ever to that account, which I'm going to suggest is usually the case, what can that do to your portfolio as it relates to the exposure that you wanted it to have in the first place? Does this stay closer to the intended strategy, or does it begin to move away the more and more you have taxless harvesting activity moves away is there a point in time when it can move too far away in your mind as an asset allocator and then on US space yeah yeah yeah I saw some nodding but if there's a the center I'd love to hear it by the way generally speaking I'd say advisors have a threshold right they want to be careful because asset allocation is paramount right your stock bond mix how you're deploying it that's your decision you are the master chef you want to ensure that the ingredients are not getting too far away from when you attended doesn't mean they shouldn't get away but it's the trade off of what you're getting and so that gentleman mentioned about tax circumstances you might have a different perspective on the client in a lower marginal tax situation than one at the highest situation you have a different perspective on the client that is in a lower no income tax state versus one who lives in California with me or New York for some of the folks that came from the East Coast those are different situations and you want to be able to customize them you also don't want them to be a set it and forget it you need to from our perspective be able to adjust the emphasis or lack thereof on tax management as your client circumstances change one example you have a business owner they take little income reinvesting all of into the business really trying to grow it over the years I'm gonna call that individual a low marginal tax profile right not taking much putting it all back into business a light approach to tax management might make sense where you can do something like have at least at $3,000 of the IRS lets you upset right but not much more because the integrity of the investment portfolio is really important because they're not really hyper sensitive they sell their business liquidity event likely that their tax situation changes yes it's going up you being able to go from light and move it towards something that's more aggressive that's what I mean having a separate account be flexible to continue to meet your clients needs as those needs change across taxes how often have you been in situations where the patriarchs or even one of the partners had a particular set of viewpoints on ESG and the other partner or the children had a very different perspective on ESG that happens we hear about it all the time having a portfolio that's flexible to allow you to continue to customize as your constituents perspectives change or you know in their lives or in their heirs just another flexibility that you have at your disposal we do a lot of research on this I'm gonna bring some of it to life here all meant to be really educational and I think just digging into this idea is important such that you never oversell the promise of tax alpha to a client but you can set proper expectations which I think is a really big part of a financial professional job is to set clear and reasonable expectations and continue to reinforce them right such that your client can stay in their seats all right I'm not gonna do this whole setup so what I'm telling you here more or less is we built a research study that is trying to be very objective and realistic relative to tax management the way we did that is by doing it across three strategies so a market neutral strategy one that's tilted or overweighted to some degree to some elements of the market and one that's tilted a little bit more across three decades 1990s 2000 2010s different market environments fair to say in those decades across two different disposal methods do you liquidate or donate at the end across three different scenarios of external gain circumstances your client only has long-term gains to manage against outside of that portfolio they only have short-term gains or they have no gains at all which one of those situations on average is the most likely for your clients no gains outside long-term only short-term only long-term only some nods do you have clients that seem to perpetually have short-term capital gains outside their investment portfolio no unless they're in hedge funds and other stuff short-term gains not not all the time why do I bring that up if you're running a study and you are trying to assume a value associated with the tax loss harvesting activity do you think offsetting a short-term capital gain increases your simulated tax alpha or lowers it increases it exactly but we just heard you guys don't really have that situation with your clients all the time long-term only or no gains at all is going to be a lot more in the realm so we we gave you all three and so you combine it up and you get 216 kind of permutations of the results such that we're just giving you a range of expectations so you can see the low end the midpoint and the high end relative to your own client base so that you don't anchor I know it's hard not to you don't anchor to the highest tax number but tax benefit number you see but you see that it can vary quite a bit we also took out some assumptions do you guys have clients on offer that are just contributing cash to a portfolio all the time I saw one nod and then maybe maybe not is that all is that common clients adding cash no so we're not assuming it why would if you assume a client is adding cash to a portfolio every quarter every six months every year even do you think that increases your tax benefit assumptions or decreases them why increases them why exactly new cash you get to buy new lots but then at some point themselves will be at losses you don't have a bunch of clients doing that we're not assuming it so these are the things that I mean when I say devils in the details in some other publications you'll read and so now when you read one the next time it's marketed you have a sense to kind of quickly go to page 27 and look at the paragraph at the bottom and kind of highlight the pieces that I'm bringing up to you let's get to the the lessons I'll just bring them all up the disposal method matters right look way to donate taxes harvesting is not the only source of tax alpha the pre-tax return that is designed for what you want to invest for your client is very important you don't want a lower pre-tax return investment solution that then does really good tax management you'd ideally want a high pre-tax return solution designed and a really good tax management you have options that's important this was really interesting for us more aggressive tax management doesn't always mean the best result can you tell me why you just nodded if you don't mind can we get that can we get her a mic if you don't mind oh just oh okay good I love kids this stuff I didn't read it but I will now thank you for mentioning that I'll look it up the reason is is because this goes back to kind of like don't let the tax tail wag the ass allocation dog if you've designed a particular level of exposure right pick whatever you want I'll just say small caps and you start having tracking our routes of that because you're the managers really pushing hard on taxes harvesting small cap has a positive premium over some period of time you're not gonna get all that premium and if that premium is large enough it can actually outweigh the tax benefit the manager gave you in the first place trade-offs I'm not saying one is right or wrong just things for all of you to consider so that when you step into it you can be really confident about what you're ultimately delivering your clients we talked about this you can work on a really solid tax management minimizing those costs while also delivering the investment experience that you're hoping for and tax alpha can last a long time one thing that you read often which I think is true generally is assuming no new cash in the portfolio at a meaningful magnitude your separate account can get to a point of ossification that means the accounts kind of frozen because any activity in the account will basically have a gain realized and you're telling me your client is sensitive to gain realization so after a few years you can't do anything in the portfolio right and that's kind of a tough place for you to be in as a financial professional if that is one piece of the overall puzzle so I think that leads to two things one make sure a separate account is in an outsized position relative to that reality that will happen unless your client is adding in new cash at some period of time through that investment journey and two you can actually extend the lifetime if you will of the benefits of tax management with the more diversification you have the more coverage you have the reason for that what is more coverage or more diversification give you more opportunities for tax harvesting more opportunities to get out of one position not trip to wash so rule go into another position but maintain a similar level of exposure gives you benefits this is out of our study this is average monthly returns on size value and profitability premium so these are things that like somebody's advisor like to step into beyond the market and you can see that pretty strong relative to the other two decades that we're comparing and then a kind of Russell 3000 like something that invests and tilts into these things a little bit and one that goes a little bit more what we're showing you here is that as you're going from the market neutral to something tilted towards these things that perform well there's something tilted even more to these elements that perform well for these periods we were able to still deliver the premiums while managing the tax cost so it's one of those where you can actually have your cake and eat it too if designed right that simulations about a case study of actual cash only funded accounts for the first half of this year why is cash only funded an important nuance for me to have brought up what if I had accounts in here that came in with positions there's baggage easier to deal with right do you guys like low turnover generally speaking or high turnover in your index funds or solutions that you invest in low low means generally more tax efficient has this been a volatile or not volatile year so far yes yes a little too much right light tax management 11% let's go down aggressive nearly 90% turnover that's crazy I heard some like whispers that's a big number admittedly it's because it was a very volatile year so if you have a manager that is doing their tax management semi-annually they'll pick up some of the opportunities to the volatility and the associated tax was obviously if you have a manager that does it quarterly they'll pick up a little bit more of it imagine I can do a monthly they'll pick up a little bit more of it a manager that can do it daily they'll pick up all of it far fewer missed opportunities if taxless harvesting and better tax management is an objective for the client right and as I said you might have clients where it's not do you actually want something that's like because your taxes are kind of important not super but it's another reason a company restriction that you needed to apply right having options and making sure they're actually being deployed well all right this is I mean a gimme you don't raise your hand it just means you don't like me you guys have these personas in your client base yeah anyone that like any any other persona I could update the slide for the next time but like I'm not representing here to you're like hey this persona represents quite a meaningful amount of my client base anyone anything I'm missing yes please yeah okay Cincinnati's not weird that's not what you're saying I try to give you now oh can we give him the mic gamble mid-level employees a partner in gambling a prize Procter & Gamble so they aren't highly compensated but they're wildly concentrated yes yes so what could you do in the context I gave you but I'm just saying that may be a different persona there aren't many companies out there that do that but there are still a few that so if you those so maybe yeah you know what I can change that from highly to just an executive to just fairly compensated you know concentrated client base fair like tax management maybe standard and you exclude either Procter & Gamble or the sub industry Procter & Gamble plays in because you don't want to keep adding to that exposure right just it gives you an example of something that you could do Brian let me get you the mic Brian waited to the end it's an easy question I mean contrary to what he said ESG is a very relatively large percentage of our overall practice and it's only growing especially we deal with a lot of nonprofits okay and so that's that's becoming something that is very sought-after yeah I can go but this is just showing you like if you have a tax sensitive client base you want tools and reporting that can allow you to talk about the trade-offs that they're gonna need to make as you transition them to a portfolio so there's a lot of that here's just a sense right of being able to step into things that your clients really strongly care about right and that's just becoming a big thing right and there's there's no judgment on it you have to make a decision as a financial professional all the time is my client better off with me or without me and look you guys are the practitioners you're the experts in the room so feel free to disagree but I've been privileged to be around the financial community for 15 plus years I'm going to say advisors will often make marginal decisions that are different than what they do for the average client to ensure that they can keep a client that has been a longtime client so there's some loyalty there they helped you to get to where you are they're an important client and a lowercase I that can mean high revenue you might do something a little bit different for them than the average client important because revenue aside there's such a big fan of yours they refer clients to you all the time I think they're often situations where you're doing things for clients and if the decision is you lose a client because of their preferences or meet them where they need to be although it's kind of a on your organizational processes it's going down a new Avenue that you don't usually decision for you to make but I think one that you need to make nonetheless I know that gentleman had his hand up first and it will go and there right after thank you so if you have a client that wants ESG for whatever reason and they identify these are the things I want excluded generically can you expect the company that's providing that separately managed account to do the research and identify which company should be excluded that is an interesting question I don't think you're gonna see companies doing the research in the way that you framed it so I'll speak about what we do just as an example is our investments and analytics data team have curated this goes back okay so here are the options we've curated so far and what they do is I'll give you an example they look into the universes and under social alcohol we have a 20% revenue hurdle associated with that screen why if we didn't and it was lower we'd be including the likes of Amazon and Walmart in the exclusion I'm not saying you don't want to exclude those companies but those are some pretty big companies right so we're trying to find the science and art of meeting the client the spirit of what they want with being sure that we don't surprise the financial professional with what ultimately is getting excluded but you always have the ability to go and exclude an individual company if a client doesn't want it now that's different than gambling which is at a 15% revenue hurdle why so I guess we do some research and we say there's a difference between a real estate operating company who has a tenant who's in the business of gambling versus a gambling company who's in the primary business of gambling related revenues so there's certainly research behind the scenes but not one where then we give you a list and tell you pick and choose we continue to create these month over month on you and your clients behalf and I know you had a question that will take us home I didn't and I don't maybe I missed this but let's say I have a Cincinnati client who has is highly compensated has a lot of P&G stock right so I'm like I come to you and I say I want an S&P index that doesn't have P&G in it and we also don't want child labor and we want to have it tax managed what does that portfolio look like three years down the road in other words do I have to come back to you and say hey we need we've gotten off track here and we're no longer representing the S&P 500 minus P&G and child labor because we've made three years worth of tax managed iterations do you guys kind of make sure that that kind of goes back to where it should be or do I have the responsibility as the advisor to tell you to bring that back to a you know the starting point like great question I understand the idea of creating a customized index but then who's responsible for making sure you're staying at that index I've got some good news and I've got some bad news okay the good news is managers like us will provide you with monthly reporting that shows you the full perspective of the separate account characteristics gains losses realize unrealized you've got all that at your disposal month in a month out that's the good news you have information at your disposal all the time you have managers that will do analytics the the bad news is well it's not that way of course of course you're always responsible because you're the financial professional but get with the comment like getting them back getting a client back to where you want the investment exposure integrity to be doesn't come without a cost and that's going to be a cost related to trading and the trading is going to almost certainly mean realized gains which you're going to have to basically figure out if your client has an appetite or not I would suggest a top practice we never say best because every business is different I think a top practice that I've seen is advisors that are able to get their clients to be okay with a little bit of gain realization every year or every other year because they're just being really practical their clients look this is a ticking time bomb not even for separate counts for any sort of investors to do if we just leave it alone yeah right yeah yeah yeah and I agree and that goes back to being sure that you can extend the lifetime of the tax benefit I am at time you guys have been great I really appreciate your time if you have any questions my team is around today and on email we can answer stuff but really appreciate your time thank you

separately managed accounts

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tax management

ESG factors

trade-offs

tax alpha

investment returns

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financial professionals