Ben Carlson: CFA, Director of Institutional Asset Management at Ritholtz Wealth Management.

Hi, welcome. Great to be here.

I definitely wasn't one of the people that was like reading Barron's or the Wall Street Journal on the weekend. I was, you know, grew up playing sports and that was a big thing for me. I went to college and I went to a small, tiny liberal arts college and went away my senior year and did an internship, and that was when I realized like, I have no idea what I want to do.

And I know I'm an analytical person, I like spreadsheets, I like data, but this is the, you know, early to mid-2000s, didn't really know what I wanted to do. I got an internship working for an investment analyst team in Philadelphia my senior year of college and got to do that and understand it. And the guy I worked with said, 'You don't know anything. You need to read the Wall Street Journal like cover to cover every day and just start paying attention and follow our lead.' And so I kind of got to know the markets a little bit. I enjoyed that. It was my first taste into understanding incentives because these are the analysts that give like buy, sell, and hold calls on stocks.

Right? And I remember sitting there in one meeting, I'm kind of off on the side because I'm the, you know, the know-nothing intern, but the manager of the team comes in and said, 'Hey guys, we have like three sell ratings on all of our stocks. No one's saying sell. Can someone please place a sell rating?' And I would ask my boss, 'Why? I don't get that. Why are there no sell ratings?' He said, 'Because we need to go to these company management to get information. If we have a sell rating on their stock, they're not going to be as willing to give us information.' And I was like, 'Oh, that's interesting. It's career risk.' And so I learned a lot about that. Uh, didn't really know what I wanted to do from there, but just after school got a job working in the institutional side of things. So I was managing money for endowments and pension plans and really got a good background in the ideas of asset allocation and setting investment guidelines and creating a plan as opposed to just picking stocks. And I realized like, 'Oh, that makes more sense to me.' I at first thought I was going to be the next Warren Buffett, but realized I'm not a good stock picker. This makes more sense to me, and that's kind of how I got into the sort of nonprofit wealth management type of space.

So, I joined a new endowment in like July of 2007. I worked for a consulting firm first, we did a bunch of them, then I went to one investment office. And I joined right as like some of these credit hedge funds were blowing up in the summer of 2007. And you know, wasn't too much, you know, then Bear Stearns goes under, and then the fall of, you know, 2008, all the other turmoil happened. And the career risk that I learned there was just that when you're dealing with groupthink and politics, so it was, you know, everyone would have an investment committee, and then there's donors, and there's this, there's all these people that sort of have their hands in the pie, right? And trying to keep them all happy. And I remember, you know, the stock market was down almost 60% from the highs, right? From October 2007 to the lows in March of 2009. And me being this dumb naive kid in his 20s who's reading about Warren Buffett and being fearful when others are greedy and stuff, and greedy when others are fearful, I'm thinking like, this is okay, this is the time to like really go for it, right? Like these are the kind of crashes you see maybe once in a career, once or twice in a career.

And all these other investment funds were going, 'No, no, no, we have to like hedge the downside.' This is after the crash, right? 'We have to hedge the downside.' They're looking at like black swan funds and they're looking for ways to offload risk. And I remember a lot of the hedge funds that we were working with at the time, one of the guys said, 'Listen, all of my personal capital is tied up into this. If my hedge fund goes under, I go under. So, I'm taking a defensive posture.'

I realized like, 'Oh, okay.' It's like it was a career risk thing from that perspective of, listen, if this gets worse, you know, if the financial system really does implode, I'm not going to be the one to go down with the ship. Like I have to get, I have to... So all these people were investing from the fetal position, even though the crash had already happened. So all these people sort of missed the bull market that came out of that situation, because all they wanted to do was be conservative. And so I learned that people tend to fight the last war when it comes to these risks, like these big huge risks, right?

People want to fight the last war. It's like, 'What do I wish I would have done

before that crash?' And I didn't. And that was really eye-opening to me to be like, 'Oh, okay.' Even like these, and these were really smart people, you know, the people who run these funds. They're highly educated. They have, you know, good credentials. They went to really good schools. All these things. But even they're susceptible to this kind of thinking.

I guess my only thought there would be like there's always the herd mentality. And it feels better to do something if someone else is doing it with you, right? So that's why you get in these groups.

And yeah, it seems like, well, I don't know about this, it seems kind of risky, but if all these other people are doing it, then why wouldn't I do it, right? I think there is something to that. And that's what we see with a lot of these groups like the Reddit communities, right? Where they all kind of go from one stock to the next or one investment to the next. And I think that there is just, you know, when you get more numbers into something, but it's also interesting how that's impacting the markets, too. Where you see like the money shift from like one hot investment fad to the next and it happens really, really quickly. And I think in the information age it does happen faster than ever. So I think it's just like it's fascinating to watch how that herd mentality plays out in different pockets of the market.

Yeah, one of the interesting things, so I went kind of from just nonprofits only to now I'm in sort of the wealth management space. We still manage some money for nonprofits, but we also have individuals, and people always ask me like what's the biggest difference between those two pools of capital? One of course is a lot of the endowments have a lot more money, right? But I say it's also just a couple more zeros. Like the investment principles are still kind of similar. You have to still manage your risk profile, your time horizon, and think through what your goals are. But it's also there's more of a group decision, and I say managing money for one of these big institutional pools a lot of times is like turning a battleship because you have to get everyone on board, right? To make the pivot. Whereas you're dealing with a wealth management client, it could be an individual or it could be two people that are spouses, it could be a family, and they're more willing to make, you know, quicker decisions with their money. Whereas the institutions like have to have all these meetings and then we'll all decide it all together and if someone...

Yeah, so it just takes a lot longer to make decisions in that arena.

It's interesting because we just went through a big project in the last 18 to 24 months with our MFO group at Ritholtz where we decided, we've tried a million different providers for this and it's really hard because you're pulling in data from all these different providers, right? The custodian and the managers, and then maybe there's some outside capital that you, okay, so it's private investments or it's hard to, you know, get a valuation on. So we've been doing this and if you can do it, if you can aggregate in one place, it's great because people finally can see, 'Oh, I had all these disparate assets all over the place and now I can see them in one place and better understand what I'm doing and what I'm looking at.' And I think that's especially helpful for people in that sort of ultra high net worth group because for a lot of them it kind of shows them, you know, what exactly is the overall plan here? Because you got a little bit of this and you got a little bit of this and you got some of this over here. Like what's the overarching plan? It's almost like you went through the buffet and just grabbed one of everything, right? And now we can see everything. Maybe we can have more of a coherent strategy instead of just having these little buckets or these little side pockets all over the place. We can place some more constraints on it. So yeah, that technology, which, you know, I've been in the nonprofit space for 20 years now, it's always been a problem for institutions, for family offices. It's never been easy to have all the technology providers all talk to each other, have the performance flow through perfectly. It's not an easy lift to do. So finding a, you know, provider that can do that is worthwhile.

Yeah, yeah. I kind of work with nonprofits and then a lot of them are like family office level clients, I guess.

Yeah, and it doesn't always make sense. Like a lot of it depends on your asset level and for some people it might not make sense financially. Even though you, you know, yeah, you get the tax breaks, but for some people it's more about a legacy, right? They say, 'I don't care if I'm not going to get the huge tax benefits. I could give elsewhere and I get the same benefits, but if I set up a foundation and my name's on it, and people can see the money flowing through there to the causes that I'm giving, it can be a legacy.' And a lot of times it's a way to bring family in, right? To kind of run the operation. So for many people that is more important than any of the financial benefits. Yeah, and there's a lot of people who just decide it's not worth it, right? Or 'I'd rather have a donor advised fund,' or 'I'd rather just give to my organizations and get the tax break that way.' But I mean, taxes are a huge concern for everyone at every stage, almost, but that whole idea of like tax alpha is a really big thing in wealth management these days. People understand that like beating the market is very hard, right? Beating the market has always been difficult. It feels like it's getting harder by the year. So people decide like, 'Okay, if I can't get traditional alpha, or it's hard to come by, how do I get other ways of getting edges?' And one of them is like tax alpha, right? I'm sitting on these huge gains because we've been in this huge bull market. My business is worth a lot, I'm going to sell it. My real estate's worth a lot, I'm going to sell it. My stock portfolio's worth a lot, I'm going to sell it. Like, how do I do so in an intelligent, reasonable manner from a tax perspective, so my net after-tax returns are not impacted very, very much.

Yeah, again, I think it's just more organized. You can also have more of like a, like you can create your own investment policy statement just for the foundation, right? Again, you can bring your family in. It's a legacy situation. There's the tax breaks of it. It is kind of difficult, and like I said, it requires a certain threshold of assets. And there's also outsourced providers now who will kind of help you do that, too. Like that will do it for you because it's not that easy. You have to have a, you know, sort of a team of lawyers and professionals who will help you run it and see the operations. And there's rules behind it, too. Like you have to spend a certain amount, right? And then you have to get audited. So it's not all fun and games, but you know, for the people with the right level of assets, it can help. And it's a good way to funnel in some, you know, you have positions with low cost basis, high embedded gains that you can, you know, donate to the foundation. It offers a tax break as well.

Upfront, we have tax people on our team that know this stuff more than me, but I think the biggest benefit to a DAF is just you get the tax break upfront, but then you can invest the money and can kind of give it out of that fund structure over time and not have to give it all right away. So it can have some growth. And so yeah, it's a great vehicle for, like I said, let's say you put money in Nvidia 8 years ago. You have a huge gain, and you decide to give it away. That's the kind of structure you can give it away and potentially, you know, diversify and then give away. But you get the tax break upfront, don't have to pay the capital gains taxes on the stock.

Yeah, so basically, I was working for one specific nonprofit. Like, you know, we had a billion-dollar portfolio, and I decided like I would like to branch out a little bit, and I'd like to work with different types of clients, you know?

401k investors, and wealth management clients, and family offices, and the smaller nonprofits that need help because there's a, it's one of the cool things about working in that space is you realize how many of these charitable organizations there are out there, and a lot of them are smaller and community-based.

And don't really have that much help from Wall Street. Like a lot of them are overlooked because these banks and investment managers would rather work with larger clients.

So I started writing my blog to kind of get the word out there, and I ended up meeting up with Barry Ritholtz and Josh Brown in the early 2010s, and came to work for them at Ritholtz Wealth Management, and they said, 'Hey, come help build out the nonprofit sector of ours, and you can also, you know, produce content that's helpful for us, you know, to communicate with clients.' And so I've been doing that for about the last 10 or 11 years. So we produce a lot of content. Have a blog. Did the book, obviously, as you mentioned. We have Animal Spirits. We have a whole host of podcasts. And we have the YouTube channel. So we kind of go and talk to people where they are, and share our thoughts about the markets and people like what we're putting out there. It kind of builds some trust. And people come to us, and those are the kind of clients that we work with who kind of get to know us through these channels.

Yeah, it's funny. When I first set out to write, I didn't do it with the end... I think my blog started in 2013. I didn't have the idea like I'm going to start a brand and I'm going to build an audience. I just wanted to kind of, I felt like I had something to say. I wanted to explain the complexities of the financial world into, you know, plain English for people who are not in finance. And I realized it kind of resonated. I had a lot of financial advisors reaching out to me saying, 'Hey, I really like what you're saying here. Can I share with my clients?' And that wasn't even my goal at the time. And I thought, 'Oh, that makes a lot of sense because guess what? Most of the clients are just normal people, too. They don't work in finance.' And I think people in the finance world sometimes take that for granted that we're paying attention to the stuff all the time. But other people have a job and family and other responsibilities and they can't pay attention as much. So that was really interesting. And I think just financial services in general, being a service business, it's not like you're going through the manufacturing process and at the end you hand someone a finished product, right? Here's your widget or whatever. Take it, you're done. It's like a process, so there's a lot of trust involved. And what I think what we realized is that through these different channels, and especially like the live stream, the YouTube podcast and stuff, it's a really great way to build trust with people. And it's not like people just come to us and throw us their money and say, 'Hey, I love you guys. Take my money.' But it's a way to kind of break down the barrier of someone reaching out when they have a life event, right? They get some stock options from their company, they get an inheritance, they get married, they get divorced, whatever it is. They have a life event that causes them to seek financial advice. Who should I reach out to? 'Oh, I've been following these guys forever.' And so it's a way to build trust. And we decided to go that route as opposed to golf outings and, you know, town hall meetings and that sort of stuff. And the internet sort of allows you to unleash a lot of these things. And yeah, for us it's been a business model and it's worked really well.

Yeah, it's interesting. At that level of wealth, the funny thing is that that's like either the easiest client to work with or the hardest client to work with, right? Because it almost like, obviously there's a lot of things from the financial planning perspective you have to do, right? Estate planning and tax planning and insurance and there's a lot of things outside of managing the money that makes sense. But from just a portfolio management perspective, you have 50 million dollars. You can invest in just about anything and you'll probably be fine, right? You could put all of your money in T-bills and you'll be good. It's funny that there's the two billionaire families where I live in West Michigan that founded a company, and both, it's two founders, they went to high school together, they founded the company, they both became billionaires and they both have diametrically opposed ways of investing money. One of them would put all of his money into treasury bonds. He was very conservative. The other one would put all of his money into private equity deals, venture capital, right? They had, you know, they're coming from the same background, but they just both had two different risk profiles. And the thing is they were both fine with the way they invested, right? Because they had so much money. I think that when you have that much money, the hard part is actually putting limitations and guidelines on yourself, right? Because you can invest in any... you have people coming in your pocket all the time. 'Hey, why don't you invest in my startup? Why don't you invest in my fund? Why don't you do this?' And I think having some sort of limitations and buckets and things that will guide your actions, that's the hardest part because the world is your oyster when you have that much money. You can do whatever you want essentially and you'll probably be okay. So I think just kind of having some guidelines and placing some limitations on yourself is the most important thing. Of these are the areas that I'm going to focus on. This is what I'm going to invest in. These are the things I'm not going to invest in, right? Those investments may be good for someone else but not for me. I think that's the hardest part at that level of wealth.

Yes, and that's a big part of it, right? Because at that level of wealth, you're not just investing for yourself. You're investing for the next generation and possibly the generation after that. And so I think you have to think through it in terms of like multiple time horizon streams, right? I'm investing for myself and what I'm going to be spending the money, but also my kids, they have a way longer time horizon than me and the grandkids have an infinitely longer time horizon than me. So I think you have to think through that. And so the conversations have to involve the whole family, right? Because they're all part of it, too. And so the estate planning becomes really important. It's funny, a lot of people come to a wealth management firm and assume that they're coming because they want to get investment advice and that's certainly part of what any good wealth manager will do for you. They'll create a great portfolio, they'll invest the money for you, offer you good due diligence, all these things. That's important. We do that, too. I'm on our investment committee so I'm part of that process, but most of them realize fairly quickly that the biggest value add is on all the financial planning aspects. It's the estate planning. It's the insurance. It's the tax planning. And that's not just like doing tax returns. It's like tax forecasting in terms of like, do you talk about like giving away money? When to spend it? When to sell something? All of these sort of financial planning aspects of like your financial plan, which is a process and not an event. It's something that takes place over the course of many, many years. And so that's the thing I think people realize is like you have to have expertise in all these different areas. If you want to work with a client of that size and level of complexity, you better have expertise in all these different areas. Otherwise, you're not going to help fulfill everything they need to get done.

Yeah, that is part of it. I feel like a lot of the book is the stuff that I've been thinking about for the last 10 plus years, you know?

And it's then taking all of these ideas. Someone once told me that writing is figuring out what it is you really think about something. And that's part of the process that I like about it is just distilling all of these ideas I have in my head about the way the world works and how markets work and how to think about risk and then putting it down on paper. And yeah, then taking all those ideas I've created over the years and sort of putting them together in a coherent, you know, outline for the...

book. And that was, that was kind of the idea. And I just, I'm thinking through the idea of risk and reward, like all of that, it's just, I just think that investing for anyone is, comes down to trade-offs.

Right? It's like risk-reward, yin and yang. It's, it's, uh, if you want to have higher returns, you have to be willing to accept volatility or risk in some form. If you want to decrease your volatility and decrease the chance of loss, you have to probably have lower expected returns. And thinking through those types of trade-offs and how risk and reward are attached at the hip, that, that's kind of the way I, and I view it through the frame of, you know, the last 100 years or so of market history and looking at all the bad stuff that has happened, just to remind people that there are, there are these painful periods of discomfort that can and will happen, and you have to kind of prepare yourself for those just as much as you prepare yourself for the upside.

Yeah, we, we typically work with like smaller nonprofits. We work with a handful of larger clients, but the way that we work with all our clients is we say that like our philosophy is universal and the strategy for your individual circumstances has to be, you know, unique, right? So, that's kind of the way we think. We, so we have this sort of broad way we think about things. Like we think that the markets tend to work long term. Markets are hard to beat typically. We, we keep costs low. We're long-term investments, but we understand that you have to survive the short-term. So, yeah, you're right. We, we tend to skew more towards liquid markets, uh, because it, it's, they're simpler, they're less complex. There are certainly clients that we have that come to us with private equity investments, and we're happy to manage those. Um, but we, we keep things relatively simple. And so, we, we kind of say we're like the liquid side of your portfolio, right? And if you have these other private investments, the illiquid things, like we're a good complement to them.

Right? And so, especially if you have a, you're talking about the ultra-high-net-worth type of space, a lot of them will have outside investments. And they, again, that could be, you know, friends and family members that have startups that they've invested in. It could be private equity funds. It could be venture capital funds. Uh, we like to be that more liquid portion of the, of the portfolio for them. Um, and we, we just like to do that from a simplification perspective. And, and I learned early on when I worked in the endowment space, um, if you don't have the expertise to, to invest in private markets and private funds, uh, it's, it's going to, it's going to be really tough going because the range of outcomes in those spaces is very wide. So, if, if you took like the top quartile in, in a public equity market versus a bottom quartile,

uh, you're probably going to be doing fine either way, right? You're going to be within a ballpark. There, there's not a huge variation between the best public equity manager and the worst. But if you look at the best private equity managers and the worst, there is a huge variation. Same thing with the venture capital. If you're not invested in those top quartile type decile, your, your results can be really, really poor. And the problem is because of the illiquidity, illiquid nature of those strategies, you're stuck. Like, you, you can't, you can't get out. And, uh, there's operational headaches there. So, if you don't have a team, you know, a lot of these big huge endowments at, at Harvard and Yale, you know, these Stanford, these big huge endowments that have multi-billion, they have experts in all these, these areas, right?

Hedge, hedge fund investors. They have, they have, uh, people who invest in hard assets. They have the private equity people, the venture capitalists. If you have a smaller endowment or foundation and you don't have that level of expertise, it's really hard to understand what you're investing in and how it's working, and, and then it might take you 10 or 12 years to know what, whether one of these funds actually is doing well enough for you, right? Because it takes a while to draw the capital down and then to get the distributions to come back. So, it's a very challenging way to invest if you don't have the level of expertise that's needed.

Yeah, and, and you have to kind of diversify not only by like manager type, but also vintage year. If you just happen to put your money into a fund at the worst possible time because it's a bad time, like if you put your money into a venture fund in 2021,