After a seven-year stint on the retail side with Schwab, Katharine Earhart worked at one of the original robo-advisors – mPower.com Inc., an online advisor to 401Ks , eventually purchased by Morningstar. She then spent 14 years at Blackrock before starting her practice with Alesco Advisors. Taking into account all of her experiences in retail investing, asset management and robo-advice, Katharine sees the value in person-to-person financial advice and education. I had the opportunity to sit down with her and chat about her views on the role of the personal touch in financial advice

“Robo-Advisor Pioneer”

You worked for one of the original robo-advisors, is that right?

Katharine C. Earhart, Principal
Katharine C. Earhart, Principal

I implemented customized online advice solutions at mPower Advisors,  a robo-advisor, between 1999-2002. We partnered with plan sponsors and 401k record-keepers from different types of blue chip businesses. They were concerned about making sure their employees had advice but as the plan sponsor they couldn’t give advice. So it was our job to come in and work with the HR team to market the service to the employees and get them invested. We ended up giving those firms higher participation rates in the retirement plan. That was my first experience working for a “dot com” if you will. We were a pretty small company, moving pretty quickly and the technology was rapidly changing as we were working on it.

Tell me a little bit about your business with Alesco Advisors

Maya (Katharine’s business partner) and I lead the west coast office for Alesco Advisors. We are an independent registered investment advisory firm (RIA) with a track record dating back 16 years. We work with a wide-variety of clients:  foundations, endowments, 401k / retirement plans, Trusts, IRAs and individual taxable accounts.

As women who bring more than 20 years of financial services experience to Alesco, we take a holistic approach to financial advice. We see the whole person, not just the wealth you’ve accumulated, but your future wealth accumulation as well. We call this “Directional Ambition.” We have differentiated ourselves as advisors by having our clients  call us for big life decisions such as making a big career change and how that might impact your retirement savings. Can a client leave their current, large-company role and join? Those are the kinds of conversations that we want our clients to call us about. I personally have my money professionally managed by Maya within Alesco because I want that level of personal and professional advice. I also want someone who understands that my relationship to money is emotional but who also takes the emotion out of the asset allocation and savings decision for me.

Along those lines, I understand that you really want to elevate the role of women in finance.  

Yes – whether it’s environmental, social justice, or actually changing the norms of our society, its been interesting to talk to women about their finances and their investments. But what has been surprising and yet, it shouldn’t have been, some of our early clients were men. It was interesting learning their thought process when it came to their finances.

One male client of ours is married and has four daughters under the age of twelve. In the normal course of gathering his information I asked if he had life insurance. He did not and felt he had other investments that could pay off his mortgage and other debts so that his wife wouldn’t have to sell their house, if something should happen to him. I asked how she would be able to live in the same manner that she was used to in terms of working part-time and being able take care of the kids. And he said,

 “Well I thought she’d re-marry.”

And I thought, ‘are you kidding me? That’s your strategy?’

So that’s the kind of advice that a robo-advisor can’t give.

Yes. Then he and I both laughed and I said “don’t you want your wife to have power? And be able to re-marry for love and not have to worry about money? If she’s in a situation where she has to re-marry for money, she’s not in a situation of power. And same with you, if anything should happen to your wife, you’re going to want to be able to take a step back in your career and be with your children.” 

And that’s the kind of conversation that is exciting for me because I’m changing people’s thinking about empowerment, women having their own money and making life decisions. Some of the men I know want their wives to get involved in the family investments. And you hear of women thinking they don’t have the time, that it’s over their heads and they don’t understand. But I’m finding that actually a lot of men feel they don’t have the time and it’s over their heads too. It might be that (a.) they’re really trusting the people they’re working with or (b.) maybe they do their research online or, more likely,  (c) they aren’t doing anything with their money.

Courtney – that was exactly why Deborah Fuhr said she wanted people to know that Women in ETFs is for men as well – it’s a safe place for both men and women to learn together.

You spend a lot of time on asset allocation, what are some of the current trends you’re seeing right now?

I read your interview with Jim Welsh and he actually said what I would’ve said – “30 years ago there were no alternative investment options for the average investor and today there are many.” For us we bucket alternatives as real return, and in that category, we’re going to have commodities and REITs. In addition, we now have the ability to be more precise in an allocation. We’ve broken it down into 17 different asset classes. And what is great about ETFs and index funds is they allow us to implement with precision, rather than having to stick with something that’s not quite right. If you just pick an S&P 500 product and pair it with a fixed income ETF, then you’re not getting that true diversification that comes with an optimal asset class allocation strategy. The ability to have that broad diversification, if something’s going really wrong in emerging markets, you’ve got 16 other asset classes that, are not all highly correlated and so make up for that.

I actually heard this at a Women in ETFs event, and I thought this is such a great way of looking at it:

 “If you’re doing your asset allocation right, there’s always going to be a part of your portfolio that you’re not happy with.”

And that makes sense. That’s the whole point of allocation. When an investor or advisor focuses on manger selection, you’re always trying to find the best performing manager and that’s nearly impossible to get right across a broad portfolio over a 5, 10 and 15 year period. So you’re constantly chasing returns. In my previous roles at asset management firms, I saw advisors who would pull up a screen in Morningstar and get excited about the ones with a five-star rating. And of course it was right after coming off a three or five-year track record where a manager had done really well and then in the next few years it would under-perform. I once heard a manager say,

“If only performance would follow flows, instead of flows following performance…”

Talk about the role of ETFs, robo-advisors and the quest for lower fees.  

I think being in a low cost product whether it’s Mutual Funds or an ETF is important. We’ve been singing that tune since the firm was founded back in 2000 – Jim Gould, Founder and President of Alesco said “there has to be a better way.”  He founded the firm on the premise that firms such as Barclays Global Investors, Vanguard and State Street would launch a series of low-cost ETF products. 16 years later the product category has exploded and continues to evolve. At Alesco, we, utilize investment products inside our portfolios that are at a low fee because just like you have compounded savings, you have compounded fees.

How does “index-centric” differ from ETFs?

We’re not a 100% ETFs across our 17 different asset classes.  In asset classes where we feel an ETF is not a good fit, we will choose either a low-cost active or an index fund, depending. Bank loans are a great example, we’re not as comfortable with the ETF product because of liquidity concerns, we’re in a mutual fund in that category.

For us it’s the opposite of an advisory firm who screens for active managers. We have this pyramid that shows most advisors spend very little time on asset allocation, spend a little bit more time on portfolio construction but spend the majority of their time on manager selection and due diligence. We think it should be flipped the other way and because we’re index-centric, we’re really concerned about choosing the right asset class and index and keeping fees low. If those decisions are implemented well, then performance will follow.

What do you think about the future of ETFs? Is Active dead? Is “Strategic Beta” a fad?

The ETF category will continue to grow and evolve in terms of product availability. The active managers who do not have a passive or multi-strategy product are under threat. We have already begun to see consolidation of active managers like the Janus / Henderson merger. As for Strategic Beta, there’s the consumer in me that’s skeptical that it’s a marketing strategy. Alesco has been focused on factor tilts and strategic beta since the beginning.

What does the future “Advisor” look like? A computer or a human?

I think there’s always going to be a need for that human touch at certain life stages. If you’ve got wealth or a big life decision, you’ll want to talk to an advisor. Sometimes what got you wealthy was a high concentration in a business you built or a huge investment risk that you took. To stay wealthy you need to diversify and have someone walk you through the levels of diversification. I think advisors are going to heavily rely on all the technology that is out there to engage their clients, but I think being able to have a person to talk to and advise you is important. In a bull market, many individuals think they can do well on their own. But even the most educated of people in the markets make mistakes (e.g., think emotions).

Where do you see the asset management industry in 5 years? Is it changing much? How so?

We’ll see consolidation among asset managers, further fee compression and significant changes in advisory practices as a result of the DOL fiduciary rule.

What are your views on traditional fund factsheets – crying out for disruption or still an essential tool for investors? 

The fund fact sheet is crying out for disruption. As both a consumer and advisor, I would like to see content that is a holistic solution and less focused on the product.  Stop selling me a product, or a specific strategy. What’s the overall service solution? My goal is to retire so that I’m comfortable, so how are we going to get me there? Don’t tell me to buy this mutual fund because that’s not a solution, that’s just a means to an end.

Additional comments?

I would love to see more women join portfolio management and the world of registered investment advisory – I think we tend to shy away from it because there are no female role models, its hard to even picture yourself doing the job because there is no one who looks like you. If we can get more women studying for the CFA, joining investment teams and advisory practices, that would be great. It’s interesting to think about how having a different viewpoint, having a different background, effects the asset allocation and portfolio process.  

Thank you, Katharine.

Katharine is responsible for client relations and new business development in Alesco’s San Francisco office. Previously, she was Head of the iShares Connect Program where she advised and consulted with iShares institutional clients at BlackRock. Katharine focused on asset managers, insurers, RIAs, and boutique investment managers totaling $350B in ETF assets. Katharine has spent over 20 years in financial services with BlackRock, Barclays Global Investors, mPower (robo-advisor acquired by Morningstar), and Charles Schwab & Co. She is a graduate of the University of California, Los Angeles and holds a bachelor of arts degree in English. You can follow her on Twitter.

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Courtney McQuade

Social Media Marketing & Technology Productivity Expert at Kurtosys Systems
Courtney McQuade is an expert in financial technology and social media, with specific focus on marketing and sales strategy. Over the past 18 years, she has worked at startups, hedge fund and private equity firms, and several of Wall Street’s largest banks. Courtney is recognized for her unique ability to train and coach financial professionals at all levels of technology literacy. She implements transformative solutions that optimize a firm’s usage and efficiency with social media, portfolio and order management software, CRMs, and web-based platforms.
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