“The upcoming transfer of wealth will make it difficult for a client to put their money into a mutual fund when they have embedded capital gains from the huge run-up in stocks like Apple, Google and Amazon. The advancement of UMA technology, combined with the transfer of wealth and increased volatility that we’ve seen over the past three months are all meeting at almost the perfect time.”
— Jeff Gitterman, Co-Founder, Gitterman Wealth Management
Jeff Gitterman is a co-founding partner of Gitterman Wealth Management, LLC, and a thought leader in the field of Sustainable, Impact, and ESG (Environmental, Social, and Governance) Investing. He is the creator of his firm’s SMART (Sustainability Metrics Applied to Risk Tolerance)® Investing Services, which offer investment opportunities for individual clients, as well as research and investing services for other financial professionals in the Sustainable, ESG, and Impact arenas.
Jeff deeply believes that the migration of investor capital towards more Sustainable, Impact, and ESG investments is one of, if not the most effective way to help realize the United Nations’ Sustainable Development Goals (SDGs), and he is committed to helping both investors and other financial professionals navigate the rapidly growing Sustainable, Impact, and ESG Investing landscape.
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This episode of Wealth Management Today is brought to you by Ezra Group Consulting. If your firm is evaluating new technology or looking to improve your current wealth platform, you need to contact Ezra Group. Don’t spend another day using technology that doesn’t offer an elegant user experience. Your advisors and clients deserve better and you can deliver it to them with the help of Ezra Group.
- Advent Software [31:54]
- AllianceBernstein [29:45]
- Apple [15:45]
- Amazon [15:47]
- Black Diamond [31:53]
- Carbon Delta [24:13]
- Cerulli [13:59]
- Envestnet [20:42]
- Federated Hermes [29:38]
- Fidelity Investments [07:20]
- First Affirmative [20:40]
- Four Twenty Seven [24:12]
- Google [15:46]
- Green Alpha Advisors [27:25]
- KBI Global Investors [27:08]
- Moody’s [24:06]
- Natixis Investment Managers [07:46]
- Parametric [07:46]
- SEI Investments Company [08:39]
- Water Asset Management [27:10]
- Wellington Management [25:42]
- Woods Hole Research Center [25:44]
- Zoom [28:04]
Topics Covered in this Episode
- Why More RIAs Don’t Use UMAs? [5:36]
- Bringing SMAs Down Market [11:23]
- ESG Investing [20:59]
- Smart Climate-Focused UMAs [25:21]
- Sustainable UMA Summit [35:35]
- 3 Trends Helping UMAs Break Through $1 Trillion in Assets
- 47 Portfolio Management Systems Can’t Possibly Survive
- #ItzOnWealthTech Ep. 50: Why Advisors Should Love Regulation with Ian McKenna
Complete Episode Transcript
Craig: My guest on this episode of the Wealth Management Today podcast, I’m happy to introduce Jeff Gitterman co-founder of Gitterman Wealth Management, hey Jeff.
Jeff: Hey, how’s it going Craig?
Craig: Wonderful, wonderful. Thanks for being on the program, Jeff.
Jeff: Thanks for having me.
Craig: And I just want to also introduce, throw out some of your other accomplishments. You’re the co-host of the Impact TV show, which airs on Bloomberg TV. You’re the author “Beyond Success: Redefining the Meaning of Prosperity” and an associate producer of the feature documentary film, Planetary. A lot of good stuff.
Jeff: That’s all my accomplishments, I’m done.
Craig: That’s a lot of stuff. like we were saying before, not everyone has all these accomplishments. It takes a lot of effort to get stuff done. A lot of people start things and they never finish, so.
Jeff: Thank you.
Craig: What made you want to do all this other stuff besides just being running your own advisory firm?
Jeff: I’ve been an active meditator since I was 13 years old and just traveled in circles where I wanted to have more of an impact. Frankly, I think the bigger question is how come I didn’t do more of this stuff in my financial firms sooner because I was doing all these things on the side. And then finally realized that I’d be more fulfilled if I was doing this stuff within my day to day job. So that’s been the effort the last five or six years, how to bring more of that focus into the financial.
Craig: Speaking of the financial part, why don’t you give us a quick overview of Gitterman Wealth Management?
Jeff: Sure. We’re about $1.3B in assets under management. We serve mostly college faculty. We’ve been working in this market in other forms of the firm since 1999. So we work in the New Jersey College Pension Plan, and also direct with clients as well. And then for the last four or five years, we also outsourced our CIO services around ESG and sustainable investing, so we do both. We hosted the United Nations Sustainable Investment Conference the last couple of years, that’s grown to be probably the largest conference around ESG and sustainable investing in the advisor marketplace.
Why More RIAs Don’t Use UMAs?
Craig: We can talk about sustainable investing in ESG, that’s a whole program in itself, but what I wanted to discuss today is unified managed accounts. And I was surprised when we were talking, how much you use UMAs because most RIAs don’t use them. Why did you decide to go the UMA route?
Jeff: Yeah, it all really started about two years ago. It started first with looking at market growth and where we had come on a capital gains exposure basis, especially in a lot of tech stocks. And I just started thinking back to ’99 and early 2000. And I remembered what happened after that, that period is that clients were calling up and freaking out and complaining about the fact that they were getting hit with these huge tax bills and they were losing money in their accounts and they couldn’t comprehend that. They couldn’t comprehend that they were down 15-20% in 2000, 2001, 2002, and still, in some of almost every one of those years, were still getting hit with capital gains. That really led me to start really thinking about the fact that we were right back in that position two years ago. And how was I going to address that with clients? We were starting to do a little bit in dabbling with separately managed accounts, but the problem with separately managed accounts, at least from our vantage point, maybe other people have solved it better, is that because each one may be billing differently and our billing and the manager’s billing, we had to put each separately managed account in a different custodial account on Fidelity. Clients couldn’t see comprehensive, good performance reporting. There was overlap in security, clients wanted to know why was I losing money in Apple or both, and making money in Apple and both. And it just was missing a lot of features that made it easy to do. So we started investigating and really at that point met with Parametric and Natixis and started evaluating what it would look like to create our own UMA models independently.
Craig: So you chose Natixis, why did you choose Natixis over Parametric?
Jeff: We were already outsourcing our mutual fund models, and what we realized pretty quickly is that if we were going to build UMAs for our own firm, they were probably going to be attractive to other firms as well. And Natixis really had an edge on billing services and the technology of billing. They both do tax loss harvesting well, they both have a lot of features that if you’re an advisory firm, just looking to build it for yourself, probably both are equal. But in our case, because we were outsourcing it, Parametric has not really built out the technology because they work through SEI and SEI does a lot of that outsource model delivery. So Parametric, I would imagine, I don’t know if this is the reason for fact, probably doesn’t want to compete with SEI since they’re a huge client of Parametric’s.
Craig: Could be.
Jeff: But Natixis, we were to utilize the services and also do much more seamless billing for ourselves, the managers, the other advisor, you had all these pieces that we were going to outsource, deliver, that had to be seamless to the end client and to the advisor.
Craig: So there’s tax advantages that you’re bringing to the plate here.
Jeff: Yeah. That’s the other big thing to work with Natixis, because Natixis can do tax loss harvesting and tax overlay strategies on these models. So it really starts with the client. Let’s say you have a client coming in with a basket of securities. The first thing you could do is run those basket of securities through Natixis before you do anything, and make sure that if there are securities that are held already, that are being held in the model that we’re delivering, that those securities don’t need to be sold, they can be transferred right into the portfolio. So that’s the first step. Second step is they’re going to make sure since we’re using nine managers in our models, that there isn’t an overlap on securities, especially when they start being traded, because he could have an instance where a growth manager is selling a security on the same day that a value manager is buying it, or probably the other way around, probably have the value managers selling it, the growth manager, buying it. But still you want to eliminate that, you don’t want to trigger short term trading, you don’t want to trigger capital gains. So they manage that process as well. They also manage the liquidation process. They can do tax loss harvesting on short term positions by swapping in ETFs that mirror the indexes. And that was another big thing with Natixis is that because we’re running ESG strategies, we had to work with a company that had built out ESG tracking indexes that can be substituted for those security positions to avoid the 30 day wash sale. So it’s a lot of moving pieces. And also, look, they’re a trillion dollar manager, and if I’m going to an advisor and saying, we’re delivering this great capability, for me to do it, it’s $1.3B RIA, and be holding all your money and managing all your trading, probably a scary proposition. But if it’s Natixis with a trillion in assets, it makes that conversation a lot easier and they just have a phenomenal team and platform that’s been superior in delivering service for us and the outsourced advisors that we’re working with.
Bringing SMAs Down Market
Craig: One of the reasons why you were doing this was to bring SMAs down market. Can you explain why you were doing that and how far down market you’re going?
Jeff: Yeah. So, when you’re dealing with an SMA, it’s getting better, but two years ago, a lot of SMA managers, and especially on the fixed income side, I mean, you can have fixed income managers that have $25 million minimums on some of their bean bond and muni bond issues. And we were wrestling with how do we deal with an unbelievably low interest rate environment, start moving out of bond funds and more into individual bonds. So how do we bring that down to clients that are sub million dollar accounts and also on the equity side, how do you deliver a comprehensive blend of SMA managers? Let’s say it’s a moderate portfolio where you have 50% in digital bonds and 50% in equity. So you’re only delivering 500,000 to eight managers. It’s really difficult to do that direct on an SMA platform, almost impossible, but because in this instance, the SMA managers deliver their trades to Natixis and don’t manage them themselves, they’re willing to go much further down scale in size, some down to 40,000-50,000 where they might be, 250 minimums direct because they’re not managing those smaller individual trading lots and it’s being done in a basket by Natixis. I want to reduce expenses for the end client. We’re obviously in a battle with low cost ETFs and that’s certainly over the last two years been one of the biggest sales engines for asset management companies. So how do we deliver that kind of cost proposition or get closer to those price points, but deliver more value. And to me, the UMA can do that. A mutual fund, you have to believe really in active management over passive at this point, which I do firmly, but you can deliver much more quality of investment themes and tax overlay strategies with a UMA model.
Jeff: And now it’s easy to use. It used to be difficult. And also look, if you do seven or eight managers, that’s a separate agreement with each manager for each client to sign off on and a UMA it’s a master agreement that covers all managers. And because we’re running the models, if we move a manager in or out of the model that does not require additional paperwork for the client. So it just literally makes life much simpler. I know you’ve probably seen this, but I think Cerulli cited UMAs as the fastest growing product segment of the RIA marketplace over the next few years.
Craig: That may be a projection. The problem is that they’ve been promising the UMAs are going to be exploding and growth and taking over for the last 10 years and they really haven’t grown. So why do you think more RIAs aren’t using SMAs with all these advantages?
Jeff: I mean, it’s definitely that difficulty of moving a manager in and out. When you want to sell a mutual fund, in a model it’s easy, it’s seamless. If you have your own trading system and you’re trading on your mutual fund models, it’s just one press of a button if you have any of the decent trading software programs. But all of a sudden you’re in an SMA. How do you deal with that difficulty of going to the client, explaining to the client that you’ve got to get rid of this manager who manages the sale of those securities. What do you do with the tax positions in that account that you don’t want to sell because you’re trying to do tax loss harvesting? Now you’ve got to put them in another account and then open a new account for the new separate account manager that comes in.
Jeff: And that level of complexity, if you’re managing a firm with a few hundred clients and trying to face to face meet those clients, or now virtually meet those clients regularly, it’s just a huge task for a small advisor to do that. Oddly though we find $5 billion and $10 billion advisory firms still using mutual fund models. That has been a little shocking to me. I do though think that the transfer of wealth will make it very difficult to take somebody that just avoided all the capital gains on their run-up in Apple and Google and Amazon, and tell that person they should now go into a mutual fund account with that inheritance. So I think, the ease of technology or the advancement of technology of the UMA and the transfer of wealth and the volatility that we’ve had over the past three months, I think they’re all meeting almost the perfect time.
Jeff: And one other thing, if you’re doing ESG investing, you can be exclusionary on themes in a UMA. We can manage that at the Natixis level. So you can say no tobacco, no firearms, no nuclear as an individual. You could even go as far as saying, you know what? I checked all these boxes, but you’re still holding this company that I just have a huge problem with, whatever the reason, and you can then also exclude on the individual security level and with the desire of the end investor, to be more and more in control of who they support and don’t support as a company, that’s not going away. I mean, that’s going to get bigger and bigger through both of the crises we’re dealing with, climate change that we’ll deal with. So giving that end client that last bit of exercise of control in an actively managed UMA platform, I’ve been pitching it to clients. Clients always ask me after I present switching from mutual fund model to a UMA model that they say, okay, what’s the downside. And there is no downside to a UMA model, except if you’re trying to get into an account, under 250, really then you really have to use mutual fund models.
Unified Managed Accounts
Craig: Wouldn’t the layers multiple layers of manager fees be a problem?
Jeff: Yeah. In this case, we’ve been able to bundle it at about 70 basis points and that’s the underlying manager, Natixis, and their tax overlay strategy and their trading platform and our manager delivery platform. So you’re getting, all of that at 70 basis points. Our mutual fund models right now runs 70 basis points, so it’s not comparable when you add all the features in to be able to get that pricing. And the larger we can grow, the more we could push that pricing down, which is something we really can’t do in the mutual fund world. So there are break points built into that, but we’re entering in at the first break points at 70 basis points.
Craig: That is reasonable.
Jeff: We’ve had people shocked, basically, because if they’re using separately managed accounts on platforms, whether it be a First Affirmative or an Envestnet or wherever, it might be, a lot of them, are paying close to that. Now without the due diligence piece brought in on the manager side, or the ability to really deliver it across a model in one account for a client.
Craig: So you’re talking a lot about ESG. I just wanted to diverge a little bit. Can you talk about why you focused your business around ESG investing?
Jeff: Yeah, I mean, it really started with climate change. I got introduced on the film Planetary to Bill McKibben and Paul Hawkin, a group of astronauts and biologists, and they convinced me to go on my own journey. I honestly, can say I did not accept at face value what they were saying, but I’m a really curious human being. And I spent the last six years going as deep as I could with the time that I have on climate risk and specifically physical climate risk. When I initially started thinking about all this, the only way to really address my concerns around that and the social issues facing humanity was through ESG. So we started with ESG as our filter, and then we moved over the last four years into looking at physical climate risks and believing prior to the pandemic that physical climate risks was going to be the single biggest economic threat to the capital markets that humanity has had to face.
Jeff: We’ve spent, I don’t know if you’ve read “Sapiens“, which is a phenomenal book, but he articulates I think incredibly well that humanity built civilization starting 10,000 years ago because the climate became temperate and right around 33 degrees latitude, North latitude. So that’s where all the civilization started because that’s the first place that climates became stable enough for us to stop being nomadic and start settling down. And 10,000 years in a 14 billion year history of the Earth is a short time, and yet I think a lot of people are convinced that that will just stay that way forever, but the signs are not there, unfortunately that our climate is going to remain that stable. And when you think about climate change, it’s just four things really that we address around physical climate change. It’s more floods and droughts, more extreme heat, and more extreme weather.
Jeff: And when you think about those four things, the models are actually the best models that you can look at for the capital markets. People look at political instability and try to build political models. People try to build economic models. People try to forecast the economy. There’s nothing in the last 30 or 40 years that’s as predictive as climate models. So if they’re that predictive and we’re not using them to assess our capital markets assumptions, it’s just foolish at this point. And the biggest thing I would say that happened to us last year at our 2019 SustainableInvestment Conference is that a lot of the ratings agencies, including Moody’s at the conference, said that they’ve acquired physical data companies Four Twenty Seven, Carbon Delta, a couple of others, so that they can start rating mortgages, municipal bonds, real estate around their exposure to physical climate change.
Jeff: So right now it’s not priced in at all. It’s a free risk that you can get out of your portfolio. the simplest explanation or example is you could own municipal bonds in Buffalo and Rochester and Vermont and Colorado, or you could own them in downtown Miami, Houston, and Northern California, where you’re dealing with fires, floods, tidal flooding, and just city flooding for every storm. And there’s no price differentiation right now. So if we could bring that lens in and we can start carving out real estate, mortgage, municipal bond exposures that are going to be not only going to be, are already being affected by physical climate change. And it’s free to price that risk out, to me it makes no sense not to be, filtering for that.
Smart Climate-Focused UMA
Craig: Let’s go onto your specific UMA that you’re offering, which is the Smart Climate Focused UMA. Can you talk about how that is delivered and what type of securities or SMAs make up the Smart Climate Focused UMA?
Jeff: So the first thing we did is we started talking to Wellington, and Wellington has a partnership with Woods Hole, which is the top climate focused science, nonprofit, or NGO in the world. They’ve got about 40 something climate scientists working for them. And they’ve been doing research because of a guy named Spencer Glendon, who really originally started out as, probably one of the smartest people I’ve ever talked to, around physical climate risk and the capital markets assumptions. And Ben McKenzie picked it up, and McKenzie and Mercer have both now written papers and worked with Woods Hole, McKenzie specifically just last year, put out a 300 page, nine case study document around physical climate risk. So Wellington was the first company that was really digging in on this. And we said, what would it look like to deliver that to the retail client, and Wellington does not relate to retail client delivery, but somehow, thankfully lucky stars, whatever, we convinced Wellington to offer this strategy, which only exists at $50 million minimum institutionally, into a retail SMA model. And that really was the anchor piece that started it. And then we realized we couldn’t solve every problem, but we could bring in sustainable infrastructure with KBI out of Ireland. We could bring in Water Asset Management out of New York, which has been doing water delivery and addressing issues around loss of water accessibility for, I think since ’92, they’ve been doing that. And then Green Alpha, who has been calling themselves kind of the next economy manager for years now. Also, at least eight years on their next generation funds who are looking at the dangers and risks of climate change. So all four of these companies really address in one way or another one or both of these issues.
Jeff: Whenever you have an issue like climate change or a pandemic is a perfect example, you’re going to have companies that are gonna do horribly, and you’re gonna have companies that are gonna do great, and you need to look at it through both lenses. Zoom is a great example of a company that tremendously benefited. I think they hit 200 this week, so that I think they’re up a few hundred percent from when the pandemic started, versus the airline industry, which got decimated because of the pandemic. You’re going to have the same winners and losers in the world of climate risk. So we started with those four companies, then we had to build comprehensive models so we brought in at least ESG managers who were doing diligence around TCFD, adherence to physical climate risk assumptions.
Craig: So Jeff, what is TCFD?
Jeff: The taskforce for climate financial disclosure, the acronym does not exactly match the words. And that came out at the end of 2018 and partnership through the UN around what does a world look like with one and a half or two degree up to four degree warming scenarios and how should companies self-report around that? And companies actually compared to any other thing that they’ve been asked to report about, companies have voluntarily reported on climate risks quicker and better than any historical thing. Whether it’s gender disparity or CO2 emissions or whatever you might want to think about. So the disclosures have been great and it’s allowed all these physical climate risk companies to really dig in and look at what companies have exposure and what companies don’t. So we’ve brought in other managers, Federated Hermes, which does an incredible job around shareholder engagement around climate issues. AllianceBernstein, which has really the top municipal bond impact fund, and looks at adherence to physical climate risk data points when they are buying municipal bonds. That’s the other great thing too, the fact that we have a municipal bond delivery through AllianceBernstein that is client specific, it’s not model specific. So we bring the state specific exposure of the client to AllianceBernstein before the portfolio is invested, and AllianceBernstein will try to adhere to as much of that state exposure, assuming there’s a state income tax need there, that they can. Obviously if you’re in North Dakota, that’s difficult to do, but if you’re in Connecticut or California, it’s fairly easy to do that.
Craig: And is AllianceBernstein, when they’re building these clients specific portfolios, how do they know what kind of information are you providing them?
Jeff: Specific client tax data directly to AllianceBernstein, there’s a questionnaire that is completed by the advisor with their client that is submitted to AllianceBernstein, and they review that before they purchase the bonds. And I like to set expectations, that means that if you have a million dollar bond portfolio you’re purchasing, but you have a $2 million account that’s moderate, you’re not going to get a million dollars in bonds tomorrow. It might take weeks to ladder in a portfolio like that or a month or more to get it fully invested. But it’s definitely worth it.
Craig: And what about reporting? How do you handle that when Natixis is involved and with these different SMA managers, how do you report this to your clients? What do they see on their payments?
Jeff: The best way, and we’re an RIA getting the same delivery of this, the advisor can look at Natixis for sleeve level reporting. So they can see the performance of each manager, but because this is all being delivered in one custodial account, even though it’s nine managers and all the holdings are being listed, that advisor, whatever their performance reporting tool is, whether it’s Black Diamond or Advent or whatever they might be using, they’re literally running the performance reporting for the individual off of their custodial performance report. But we can sit with the advisor and show the advisor, look, this has been the attribution of each manager, and this is why we might be firing a manager and adding a manager. So we can dig into all of the sleeve level reporting for the advisor.
Craig: Did you believe in doing sleeve level reporting? Cause isn’t there an overlay component of this where you’re saying, well, this client maybe doesn’t want this or doesn’t want that. Maybe they already have a position in a particular stock and don’t want anymore, or they have some tax loss requirements that change the holdings. So doesn’t that change the model and to give you dispersion from the model?
Jeff: Yeah, but Natixis can still dig down into the sleeve level reporting on an account basis, so not on a generic. We get quarterly reporting on the whole model delivery, so that is generic. But then for an individual client, they could still dig down on the sleeve level reporting. But I think what a client wants to see is their model delivery performance, I don’t think a client wants to sit there. I mean, even when you’re delivering mutual fund models, you might spend a little bit of time on each mutual fund, but at the end of the day, the client’s most interested in their performance.
Craig: Indeed, and that should be cheaper. It should give them more benefits. It should give them tax loss harvesting. As far as you know, is this the first climate focused UMA product on the market?
Jeff: As far as we know, it definitely is. There are ESG-UMAs, First Affirmative was probably the first to do that. But the specific climate focus, this is definitely the first that is available. And to have something available on every custodial platform, because Natixis is available at this level, we haven’t seen anything that is ESG and climate focused.
Craig: So how does an advisor open this account? How do they just call you and say, Hey, I want this and how does it get set up? What’s the logistics of setting up an account?
Jeff: It’s as simple as a subadvisor-manager agreement, it’s a tri-party agreement with Natixis and Gitterman, and the advisor. And then once that’s set up, we walk the advisor through the paperwork process of opening single accounts. It’s a little more extensive than opening up a mutual fund model with the client, but that’s because you’re trying to get individual tax information. You’re trying to get the tax bracket of the client on a municipal bond side. So it’s a little bit more extensive when you first open it, but then manager changes are done behind the scenes. So it doesn’t require additional paperwork. So once you’ve got the account open, it’s pretty seamless from there.
Craig: And this is fully discretionary, there’s no client approvals?
Craig: And are you actively marketing as to other advisors?
Jeff: We are starting Monday, it is available. We have met with other advisors already, but Monday the 15th. And then on June 18th at RIA channel, if you go on their website, we are running a webinar with a couple of the managers and Natixis on how the program works. And that’s our first kind of unveiling, except for your podcast.
Craig: Yes. I wanted to be first.
Jeff: You have the scoop Craig.
Sustainable UMA Summit
Craig: So let’s talk about the sustainable UMA Summit. Can you describe that and why you started that?
Jeff: Yeah, so we’ve been doing that for four years. This year would have been the fifth year. We might still do it virtually in October, but we’ve been doing it for four years. It really started because we wanted to bring all the managers that were doing ESG into one place and then invite a bunch of our friends, other advisors, and learn because we didn’t start out doing this as an outsource CIO business. We just started initially doing it for our own clients. So we just wanted a local event in New York. There were a lot of events in Colorado and California around ESG, but really not much happening in New York back in 2016. Now you can’t throw a rock and not hit an ESG event, but back then it was the first. And then we did it for two years and the United Nations came along and said, Hey, would you want to do this at the UN? And we jumped at the chance and started working with UNCDF and UN office of partnerships and-
Jeff: UN community development fund. The UN offered us some partnerships, met Elliot Harris, the chief economist at the UN. We started bringing this whole idea of the NGO nonprofit side at the same time that the sustainable development goals were becoming a really big thing. They’d been passed in 2015, and we have these goals that are set for 2030. So this kind of short window of accomplishing a lot of major initiatives and goals around creating more equality for everyone on the planet and reducing risks around climate and other things. So it was just a great partnership and that has been really a wonderful experience. And we’re looking more into the public private partnership market about how do we generate money to solve problems across both the public market and the private sector, because you need both to get the capital required to address a lot of these bigger problems.
Craig: And on that note, I wanted to wrap things up. Where can people find you and find you and your firm online?
Craig: And we will put all this in the show notes and Jeff Gitterman, thank you so much for being on the program.
Jeff: Thanks, Craig. Really appreciate it.