Host: You're listening to WealthTech on Deck, a podcast about the future of wealth management technology brought to you by SEI. Here's your host, Jack Sharry.
Jack Sharry: Hello everyone, it's great to have you aboard for this week's edition of WealthTech on Deck. Thanks for joining the conversation. For today's discussion, we'll be speaking with a seasoned pro. In fact, you get two seasoned pros in this episode. As our guest, Tony Davidow, and I have known each other and have been around for a while. We're being generous here. I've admired Tony and his work for more than 30 years. Tony has worn many hats around the advisory space and he continues to advance and contribute to making our business better every day. He has been supporting advisors on best practices and advisory and alternative investments for many years as he held senior leadership roles with Morgan Stanley, Guggenheim, Schwab, among others. Tony joined the Franklin Templeton Institute as senior alternatives investment strategist a few years back. He is responsible for developing and delivering Franklin's insights on the role and use of alternatives. Tony is a frequent writer, speaker, and has deep expertise in the use of alternative investments, asset allocation, portfolio construction, as well as goals based investing. In fact, he got an award for some of this. It's a prestigious award from the Investments & Wealth Institute. It's the Wealth Management Impact Award. He got that in 2020. He has a podcast on alts. He is the author of two books on investing, the latest of which I'm sure we'll cover. Tony, I'm out of breath. All that stuff. Good to have you on WealthTech on Deck. Thank you. Thanks for joining us.
Tony Davidow: Jack, thanks so much for having me. I'm excited to talk about the journey we've been on together.
Jack Sharry: Yes, we've been in and out of each other's lives professionally for dare I say decades. So Tony, so you've been in the forefront of change. It's one of the things I've always admired as I observed you and as you joined me as a colleague, or we joined each other as colleagues over time. You were early in advisory, you were early in ETFs, you were early in portfolio construction and asset allocation, decades help here, and early in alts. So fill us in on your career journey at a high level. I think it'll be useful for our audience to know the path you've well worn.
Tony Davidow: Yeah, and it's not a traditional sort of path. I actually began my career working for a family office and my first exposure to alternatives was as a young lad learning about how family offices allocated capital from one generation to the next and private equity and private real estate were big parts of our allocation. We recognized the long-term attributes of holding that patient capital and that's the way that we thought about, patient capital. I'll skip over some of the spots along the way, but I think again, where you and I got to know each other was when I was at Morgan Stanley, where I had three primary roles. I built and managed our institutional consulting business. I later moved on and managed a business called Graystone, which was in our private wealth management business. And then at the end of my tenure, I ran sales and training across all three client segments, retail, institutional, and private wealth. And I think my time at Morgan really helped shape a lot of the way that I was thinking about alternatives as they were just starting to become available to a broader group of investors. The institutions clearly had exposure to alternatives. They understood the value. And it's at that point in time I began following the work of David Swensen, of course, the famous CIO of Yale, God rest his soul. And then later when I moved to Morgan in the private wealth management business, I had the opportunity to work with a lot of our banking clients. And what was interesting there is most of those clients were entrepreneurs. Most of those clients really made their mark by taking an idea or a service, starting a business, and then ultimately reaping the benefits when those companies went public, either via an IPO or M&A activity. So I saw the vantage point of those founders and those entrepreneurs of building something special and then reaping the benefits over the long run. And then at the end of my tenure at Morgan, I had the opportunity to run sales and training. And I think part of the reason they tasked me with that is they wanted me to share some of my experience working with high net worth and ultra high net worth families. And, Jack, as you know, at that point in time, the menu of options available weren't quite the same that they were now. So as much as we could talk about private equity and private real estate, it generally wasn't available on the wealth channel. And that's really a phenomena that is relatively new. And it's, I think, probably the biggest impetus for the discussion here today.
Jack Sharry: Yeah, so thanks for walking us through that. You have worked at a few other places along the way. So Morgan Stanley was kind of a cornerstone, it sounds like, or I know so, to your career. What's interesting now is how you started at a family office and now the world seems to be kind of trying to figure out how to make family offices writ large, not only in terms of including alts as part of the offering, but also how to connect the dots around all that sort of stuff. So we'll get into that. So you find yourself now at Franklin. I want to hear about your podcast, want to hear about your book, I want to hear about your role, because in many ways you're really an advocate for where this stuff fits, how it works, and so I'd love to hear how that all comes together in terms of the work you're doing down at Franklin.
Tony Davidow: Yeah, and it all does tie together. So I'll try to put a bow on it. After many, many years working at a lot of really great firms, like you, Jack, I felt like I wanted to be my own boss. I thought later in my career and I felt like I wanted to run my own business. So I had a consulting business where I'd helped, I had done some consulting work for family offices. And I really spent a fair amount of time developing alternative education training programs. I think people kind of gravitated, it was the time and the place where everyone was trying to get up to speed and they were looking for people who had domain knowledge who could develop the content. So Franklin originally hired me to develop all the alternative education for the wealth channel. And I think originally we had talked about a one-year assignment at which time I thought I would walk off into the sunset and do something else. But about halfway through the assignment, I think the firm recognized that this is a journey, not a sprint. This is something that we have to have that constant drip of content. We need to engage advisors wherever they are in their journey. So they created a role for me in the Franklin Templeton Institute, kind of an independent think tank within Franklin Templeton, where my mandate is helping advisors make better informed decisions about allocating capital to alternatives. And I do that by writing white papers. As you mentioned, I have a podcast series, which has just been great for us because it allows us to reach a broader audience. In market all the time, on an airplane meeting with advisors because my conversations with the advisors actually typically informs what I write about and speak about. So I'm definitely pretty engaged with how advisors are reacting to it, what are some of the challenges, what are some of the opportunities. And everything I do, whether it's the podcast or the white papers or even my book is really written for and all about helping advisors have better informed decisions. And then ultimately helping clients to understand this jargon that we all fall into far too easily.
Jack Sharry: Sure, sure. Fill me in on your book, because I know it's out recently. You've been, at least as I observe on LinkedIn, it sounds like you're making the rounds, it sounds like it's getting a very good reception, so fill us in.
Tony Davidow: Yeah, it's been very humbling to say the least. So in my travels, it became abundantly clear to me that there was a need for a book written specifically for the wealth channel. And when I did my competitive research, I was surprised not to find anything specifically focused on how advisors should use these valuable tools. So I was pretty excited about the opportunity and wrote a book and it came out on February the 11th. I was surprised in my first month that I made my first bestseller list. So that was quite a surprise.
Jack Sharry: Wow, so our audience might want to pick it up. What's the name of the book?
Tony Davidow: Yeah, so the book is called Private Markets: Building Better Portfolios of Private Equity, Private Credit, and Private Real Estate. Very descriptive of what the book is about. And it has been fun. I've been on the conference circuit speaking anyway, so I've just kind of built book signings into a lot of my travel. And it's so great to see the reception. And Jack, it's interesting. You and I have been doing this for a long time. When you go to conference, you feel like you know everyone. But I now see a new generation of advisors coming up and saying, you know, gee, I don't, I haven't met you before, but I've been following your podcast and I read your book. And to me, that really speaks to the point that there's such a need for something that is really objective and focused on what's happening in the private markets. Again, I think the intellectual argument of why you want to have exposure to private equity makes sense. But since they are relatively new investments, and there's different sort of product structures that advisors need to get comfortable with, there's new language they need to get comfortable with. There clearly is a need for something. And again, our view is it's not one thing fits all. We have advisors who want to read a white paper. We have a lot of advisors who like to listen to the podcast as they're going to work or they're at the gym. And then for those who want to take the time and really read a comprehensive guide, we've got the book. So we wanted to create things depending on where you were in the journey and how you want to consume information.
Jack Sharry: Yeah, so what's the name of the podcast again for our audience that may want to check it out?
Tony Davidow: Alternative Allocations with Tony Davidow.
Jack Sharry: I love the explicitness with which you speak. It's clear what you're talking about, what you're doing. And earlier, just while we're plugging books, and this is not about plugging books so much as just making it available to our listenership, what was the original book? I think was on asset allocation, was it?
Tony Davidow: It's Goals-Based Investing: A Visionary Framework. Jack, it's kind of similar to our journey, right? I really use that to kind of talk about the evolution of the wealth management business from transactional to consultative to really being a true wealth advisor, how the expectations have changed. In the book, I did tease out a little bit about the growth of alternatives and the importance they play in client portfolios. But that was always designed to be my foundational book with the expectation that I would write at least one more book. And I kind of feel like maybe I've got one more left in me.
Jack Sharry: I have a hunch we'll talk about that too. So a story you'll get a kick out of it. I'm sure you know Frank Campanale.
Tony Davidow: Well.
Jack Sharry: Yes, you guys probably worked together at some point or other when Smith Barney and Morgan Stanley got together. Frank ran the consulting group way back when and a good friend and a wonderful contributor to our industry in so many ways. And so I happened to be at a MMI meeting. This is a few years ago. And Frank, as he does, you've been to many conferences, Frank sits in the very front row center of any conference he attends. And he takes great notes and great, is fully engaged, and asks really good questions. That's Frank, right? And so there I was speaking at an MMI on a panel on retirement and technology, shocking. And this young guy came up to me and I had cited references to the industry, much like you do, just that evolution, just understanding it. I would guess he was probably in his mid-30s. He said, how can I learn more? And that actually was a big part of how we started this podcast. And our listenership, at least as I get around to conferences and talk with folks around the industry, we have a big audience of people that are younger, newer to the business. And what they love listening to are people like you. And I've been trying to get Frank on the horn. He's a little concerned about compliance issues, just because he can't say what he wants to say, you know Frank. But bottom line is, I said, but if you really want to know in the meantime, this is before we did our podcast, I said, talk to that guy, and I pointed to Frank. And I said, he's one of the founders of the industry.
Tony Davidow: Absolutely.
Jack Sharry: I get that. I'm sure you get that from the younger folks in our audience, in our universe, our business that are trying to figure it out and how it evolves. So does that ring a bell? Does that make sense in terms of your experience?
Tony Davidow: Yeah, and like you, I think, Frank, again, I think for the people who were there early, people like Frank, people like you and I, we need to remember where we've been to appreciate where we're going. And if we bring that discussion back to alternatives, we need to recognize that five years ago, 10 years ago, advisors were saying, well, why do I need to understand complex tools when I can do just fine with a 60-40 portfolio? But like everything, things evolve over time. You have better tools at your disposal and the market environment is demanding a more robust and reliable toolbox. So as an industry, we need to continue to evolve and the successful advisors would be the ones who embrace evolving their practice and the way they do business and the way they serve the clients. And those who don't embrace it, you know, risk being left behind because this industry will always evolve. And that's what makes it so exciting. And it's why people of your generation and my generation or our generation are still excited about the industry every day.
Jack Sharry: Yep. So another one, another person you may know, Neil Bathon from FUSE. Do you know Neil?
Tony Davidow: Sure.
Jack Sharry: So Neil, we had him on the podcast.
Tony Davidow: Good guy.
Jack Sharry: Knows his stuff. Another one who's vintage like you and I…
Tony Davidow: And very opinionated.
Jack Sharry: Very opinionated. So he and I were catching up as we do from time to time. And just, it's one of the things I love about this industry, talking to people that are working on the same kind of stuff we're talking about today. And he made a, as Neil does, he made a wisecrack about alts and how it's the latest greatest and it's the most recent hot dot, because I was inviting him to be on the podcast to talk about it and he said but you may not want me because I'm not sure I'm gonna say, I may be politically incorrect, which I said, Neil, that's of course why I invited you because I knew you would be and we had a good conversation. His caution, I'd like to get your opinion on this. His caution is that as an industry, we have a history of chasing the hot dot, the latest and greatest product and all that. And his concern, frankly my concern, but I'm feeling more comfortable this time around, but I'm on guard, I'd love to get your thoughts on this, is how do we make sure we sell alts right? As more naive investors, less experienced investors, people that don't fully understand maybe what they're getting into, I'm sure this is an important part of what you do as you work with advisors who are putting together portfolios.
Tony Davidow: Yeah. And I think there's a couple of things in there to unpack. And you know, I know Neil well, and he and I have had the discussion. I think what he has at least shared with me is his concern were liquid alternatives. Liquid alternatives sounded like a good idea, right? We wanted to provide hedge fund type strategies and mutual funds, except when you start to dissect it and you understand that you take away what make a hedge fund strategy special, right? You take away the ability to use leverage, or at least the leverage that they typically use. You take away the transparency or the lack of transparency which allows them to put on positions that are little out of character and take advantage of mispricings in the marketplace. So I think the experiment with liquid alternatives had clearly mixed results. And what I would argue, first of all, most of our focus is on the private markets. I think that's where advisors are interested in now. But what I like about the private market sort of evolution is we have learned our lessons about trying to take something that's illiquid in nature and force it into a liquid structure. And that's why I hesitate when I hear people talking about trying to take private credit or private equity and put it into an ETF structure, I wonder what it is we're really trying to solve for. I think the smarter thing is to recognize that interval tender, offer private BDCs, non-traded reach all of those registered fund structures or I like to call them evergreen, evergreen or perpetual are probably better descriptors, actually provides benefits to the individual investor with lower minimums, greater flexibility, quarterly liquidity, 1099 tax reporting, but also provides protections for the managers. So the managers can actually do what they do best, which is buy and hold illiquid investments in their portfolio. If we force it into a daily liquid structure, you start to take away what's special. You don't capture that long-term illiquidity premium. So to me, I like the evergreen structure. I think there's probably some minor things that you could do to improve it from a client perspective and there's definitely some improvements from the operational side, but I wouldn't want to take something that's special and illiquid and force it into a structure that doesn't really make sense. That was the experience with liquid alternatives. And I think that's where, at least to me, Neil has been very skeptical of going down that path.
Jack Sharry: Interesting. What else are you learning as you go around? Because you're talking to all sorts of people. Neil has a strong opinion about just about everything, which always makes me think. That's the role he plays and I think contributes to the industry accordingly. But what other issues, concerns are you hearing? Obviously, everyone and his brother is now in the alts business. And how do you counsel? How do you advise in terms of how they be in the business, how do they operate in the business so it's a win for all, as intended.
Tony Davidow: Yeah, it's interesting. I think that most advisors, and there's lot of surveys on this, most advisors would say they recognize they need to increase their allocation to alternatives broadly. And I think generally advisors are saying, I need to increase my exposure to private markets. That's really where the interest is. But everyone's at different stages of the journey. So as an industry, look at the Cerulli data or… there's not really finite sort of data on this. A lot of it is self-reporting, which I think those numbers tend to be higher. But let's just imagine that the industry is a 5 to 6 percent allocation. If you do the math on it, the right number to impact client portfolios, probably 15%, 20%, 25%. We have a long ways to go. And within that 5% overall industry allocation, we know that there are people sitting on the sidelines who are putting up the highs, but then saying, not for me. And then there are people who are power users. So in writing my book, one of the things I thought about is we define those segments and those segments are the skeptics. Those are the ones on the sidelines. The dabblers, are those who are using a smattering of alternatives across their book of business, but haven't really scaled it efficiently. And then there are the power users and the power users have been using it for a while. They see the benefits. It's an easy discussion with clients because the clients have had good experiences. As an industry, we need to recognize everyone's on a different path. And we can't assume that everyone is going to go at the same speed to get where they need to be. So a lot of my travels, you know, just kind of solidifies that, that I need to develop content and I need to find an opportunity to speak to people where they are in their journey and help them get a little farther along. The other sort of dynamic, which I think is an interesting one in all of my travels, I think one of the biggest challenges for advisors is that next level discussion. Having the discussion with the client because this is complicated stuff. We easily fall into our jargon and Jack, you and I know this for doing it for years and years and years that when clients hear things they don't understand, it feels riskier. It's this behavioral sort of switch that goes on. If it's complicated, it's got to be riskier. So I think more and more of what I'm hearing from advisors is they want more content that can be shared directly with their clients, whether it's by podcast or the blogs or… the book really was written in a way that I think it works for the advisor, but I'm hoping that they can then share it with their clients so the clients understand this is the intellectual argument. This is where we are as an industry. It's written in a speakeasy sort of voice. I try to avoid the jargon as much as I can. And when I do, I provide a glossary in the back to kind of explain some of the terminology. But I think at the end of the day, we need to make sure we can get clients comfortable with what these strategies are designed to do. To your point earlier about using them the right way, if we use them the right way, clients have a good experience, advisors have a good experience, the overall industry flourishes. If we use them the wrong way and sell them the wrong way, then we know how that story ends.
Jack Sharry: Sure, and that's the fear because we've been down that road before too many times and too many product of the month kind of, that's frankly our history as really the industry was sort of formed on that way back in the mutual fund days of the 80s and then it moved into advisory but even that became product of the month. SMAs, you know, it was the hot dot at the time and on and on I could go through all the stuff we lived through but and I know you were early in this and you played an important role, as did many others, around the asset allocation, about how you pull it together. And as I understand, it's clear where you are now, is now how do you include alternatives? It's not like you just buy an alternative investment and hope it works out. You're really buying as part of a portfolio. So talk about that portfolio aspect, because that seems to be fundamental to what you're talking about.
Tony Davidow: Yeah, and I think that's the most important thing. It's not buying it like a product. It's really understanding what role it plays in client portfolio. So we've created kind of a building better portfolio series. And those are a series of white papers that I've written and in market presentations. And it's probably the in market presentation that I got the most demand for in part because I'm focusing on the biggest challenge, right? Where do I source the capital? And what happens when I add it to the portfolio? And the way that I kind of tease out that information is I typically create a series of case studies and those case studies take your typical sort of diversified portfolio. I go through, I create kind of balance sheets for each family and I actually go through how I would allocate capital. So it's not just making a singular decision. And I think the beauty today with these strategies and structures that are available at lower minimums is I can actually get diversified portfolio exposure. And typically the way that I'll do it is I'll create a family unit that maybe has a personal account, a retirement account, and maybe trust for the kids because I want the advisor to start to think about the easy button is just to hit an optimizer and then all of a sudden you allocate capital, the more difficult but the correct thing to do is think what goals am I solving for for each one of those family units, right? In the personal portfolio, maybe I'm going to have more private equity because I want to generate more growth over the long run. In the retirement portfolio, unlike the early years with you and I were, we were told, know, get conservative live to retirement, not through retirement. I'd argue in the distribution phase, we should be thinking about increasing exposure to private credit and private real estate because I want to generate more income through retirement because I know in my retirement years, I'm going to live 20 to 30 years and I'm going to be traveling and spending money and doing things. And then maybe with the trust portfolios, we think about allocating capital where we're unconstrained because that's money that's thought of as generation to generation. So what I'm trying to do is teach them there's not one size fits all, but if they know the factors they should consider for each family unit and they know the role that each one of those underlying alternatives play, it allows them to be a little bit more precise as they build portfolios. And my hope is, and the feedback I get is they then can take that back to their book of business and say, I have clients that look like this. I have clients that look like that.
Jack Sharry: Where does all this lead? Where are we headed? What's coming? Talk about how you see over the next, I fear saying five years, the next couple of years. Let's talk about that. What does your crystal ball tell you?
Tony Davidow: Yeah, I would say that clearly we're going to see adoption increase. It's not going to go from 5% to 20% in one fell swoop. It's going to go from 5% to 10% and 10% to 15%. We're going to start to see more products coming to the market by institutional quality managers, which is so exciting. The quality of the managers bringing product to the market we've never seen before. We're going to start to see different types of structure. So I think one of the big trends in the industry now is a lot of firms are looking at model portfolios, right? Can we help advisors in that portfolio construction? Can we create either paper portfolios or create a completion portfolio that has all those pieces put together? You're starting to see a lot of interest in public and private funds together. And I think that's an interesting way of getting exposure. But I think we're clearly in the early innings. And I think the next five to 10 years are perhaps the most exciting time in our industry. Certainly, it's going to be for me as I see so much change going on and I see an industry kind of coalescing around the fact that we understand the value of the tools, but we understand that they've got to be used appropriately to have the best outcome for individual investors and the advisors. And, Jack, in our history, you know, sometimes there's one firm versus the other and all of that. I don't sense that today. I think that we all collectively understand that if the pie moves from 5% to 10 % to 15%, all of the players can win. And all of the players can win if we do it the right way because that will continue to grow over time.
Jack Sharry: So we've covered a lot of ground. This has been fascinating. Anything you want to make sure we cover that we have yet to speak about?
Tony Davidow: I would just say these are the early innings. I love your podcast. I love the fact that you're visiting a lot of the things that are happening in the industry from other industry experts. For the advisors who are listening to this, I would say take advantage of all the resources at your disposal, whether it's stuff that you're producing, Jack, or any of your guests, or visit the Franklin Templeton Institute. We have a Alts by FT Knowledge Hub, which just has all the stuff that I write. And again, I never talk about product. Mine is all geared towards how advisors should consume this information. There's a lot of information available in the industry. Start on the journey and wherever you are on the journey, keep on challenging yourself because at the end of the day, I think that you'll have a higher likelihood of achieving your client goals by using alternative investments.
Jack Sharry: Well, I have so many friends at Franklin Templeton, really admire what the firm is up to. I think Jenny Johnson's leadership has been remarkable and then all the players, friends, colleagues of yours that you work with, they're doing smart stuff and maybe one of the smarter things they've done, among many smart things, is making sure you're out in front on the topic of alternatives and how to include them as part of a larger allocation. So thanks for all that. I'm gonna close with one last question. Normally I say to summarize, but you've done such a good job in terms of articulating really everything I think you need to know and there's more. And I'd recommend checking out the book and the podcast and the white papers. All that said, one last question, a personal question, always my favorite. What do you do outside of work for fun or that people might find interesting or surprising, something you're passionate about or something you just do to relax? Fill us in.
Tony Davidow: Yeah. And Jack, you know this, I, in the middle of COVID, I moved from Connecticut to Punta Cana, the Dominican Republic. And part of the reason I moved here is I'm a golfer. I love golf. It doesn't always love me back, but, one of the things about golf is I've always thought that it's a great way to spend time with people, to get to know people. You see their temperament, the way that they react to good things and bad things. So I love golfing. I golf with my family. I golf with my friends. And I happen to live in a really just a beautiful area with great golf courses here. I spent too much time on airplanes in America, but I know when I get home, I've got a pretty special place that I live.
Jack Sharry: Yeah, good for you. Very smart. Not surprising. Although, yeah, surprising and cool. I like it. I love, when you first told me, I go, wow, I didn't think you could do that. But in this day and age, why not? So Tony, thanks so much. This has been a great conversation. Really appreciate it. Really appreciate your advocacy and leadership around investing in general and certainly of late in the alt space. So thanks for all that. For our audience, thank you for tuning in. If you've enjoyed our podcast, please rate, review, subscribe, and share what we're doing here at WealthTech on Deck. We're available wherever you get your podcasts. You should also check us out on our dedicated website, wealthtechondeck.com. All of our episodes are there, along with articles, perspectives, and curated content from many leaders around the industry. Tony, thanks again. It's been a real pleasure.
Tony Davidow: Jack, thanks so much for having me.
Host: Thanks for listening to this episode of WealthTech on Deck, our ongoing conversation about improving financial outcomes for all. This podcast is brought to you by SEI and produced by Turncast. Subscribe to future episodes in Apple podcasts, Spotify, or wherever you listen to podcasts. You can connect with our host, Jack Sharry, on LinkedIn. For more information about our perspective on the future of financial advice, visit our website at wealthtechondeck.com
