The transcript from this week’s, MiB: Catherine Keating, BNY Mellon Wealth Management, is below.
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This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest and once again, it was a tour de force, Catherine Keating has quite the storied history in the financial services world. She is not only the CEO of BNY Mellon’s Wealth Management Group, she is a regular on all of the most powerful women in finance list.
Previously, she was CEO — previously, she was Chief Executive Officer of Commonfund and Head of Investment Management and CEO of the U.S. Private Bank at JPMorgan. She has really a fascinating background. They are one of the larger asset managers. And so, what BNY Mellon does when it comes to generational wealth transfer and philanthropic planning and all these other areas related to the core of wealth management, they are very much a thought leader in the space and their actions have ripple effects throughout the industry. I found this to be just an absolutely fascinating conversation.
We definitely went deep into the weeds discussing things like certain types of retain interest, guarantor trust. But generally, everything was very accessible and quite fascinating.
If you’re remotely interested in the asset management business or financial planning, well, strap yourself in because this is going to be absolutely fascinating.
With no further ado, my conversation with Catherine Keating.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is Catherine Keating. She is the CEO of BNY Mellon’s Wealth Management Group which runs about $265 billion in assets. BNY Mellon manages $2 trillion and has over $38 trillion in assets custodied. The firm was founded in 1784 by Alexander Hamilton.
Keating previously was CEO at Commonfund and head of investment management at the U.S. Private Bank for JPMorgan. Catherine Keating, welcome to Bloomberg.
CATHERINE KEATING, CEO, WEALTH MANAGEMENT, BNY MELLON: Thank you, Barry. Great to be here.
RITHOLTZ: So, you have a fascinating background and I want to start out delving in to it. You were the first woman to be CEO at BNY Mellon Wealth Management and you were one of the only women running investment management or the private bank at JPMorgan. Tell us about your journey.
KEATING: Well, thank you for asking. It’s never about being the first, it’s always about not being the last, right, in anything that we do. So, let me start with that. Let me start with that.
Here at BNY Mellon, interestingly enough, you mentioned Alexander Hamilton, we work with strong women throughout our history. His widow, Eliza, was actually our first client. People don’t know that she was a powerhouse in her own right, founded the first orphanage here in New York City.
So, we’ve worked with strong women throughout our history. As far as my career, I guess like most people, I gravitated to what interests me, right? We work hard in this industry. We want to make a difference. I’ve had a tremendous passion for trying to help clients whether it’s individuals or institutions have better financial outcomes and that’s really our purpose.
This company, we log in everyday and we see on our computers, our purpose is to power individuals and institutions to succeed in the financial world. And so, that’s a large part of what has motivated me. I also think that I just had experiences in my life that have demonstrates how important sound financial advice is.
Again, whether you’re an institution or an individual, when I was a young — youngster, eight years old, my dad died very suddenly and I watch my mom, I was the oldest of three kids, I watched her have to go back to work and then go back to school, she was a school teacher and she decided she wanted to go back to school and become a librarian.
That was the career that she loved so much. She just retired a couple of years ago at 79. And so, I’ve kind of watched how important good financial advice is. Obviously, she had to do things like buy her own first car. She took us all to the Volvo dealer, had done her research, all the station wagons were the spacious cars back in the 1970s.
She took us all to the car dealer and I remember walking in and having the dealer look at her and say where is Mr. Kessler? And of course, there wasn’t a Mr. Kessler. So, again, I’ve just seen how important sound financial planning, investment planning and decisions are in people’s lives.
I’ve also seen it in institutions. I was lucky enough to go to the college who paid for everything. I served on the board for years including through the financial crisis and I know how important sound financial management is to institutions, too. It enables them to make it through cycles and continue to accomplish their mission.
So, a lot of it is just sort of the basics, what motivates you in the morning and how can you contribute to people’s lives through your career.
RITHOLTZ: So, let’s talk about institutions for a moment. You spent a good part of your career as CEO of Commonfund which was a nonprofit asset manager serving endowments, foundations, and other financial institutions. How has that experience colored how you view the world of institutions?
KEATING: So, a couple of things are important to know about institutional investors versus individual? The first one is that every institutional investor knows what its goal is.
So, if you think about a college endowment, the goal of the college endowment is to earn enough on its portfolio so that it can make distributions to support the mission. Typically, four, four and a half, maybe five percent a year, and still exceed (ph) inflation, right? So, call that if inflation is two percent and you want to distribute four and a half or five, you want to have returns of over seven percent. They know what their goal is.
The second thing about institutions that might be different than individuals is that they have governance and process, right? Boards and committees. And when you think about individuals, neither of those things is necessarily the case. Nobody tells an individual what their goal has to be, they have to figure that out for themselves and we spend a lot of time with clients about that.
And you don’t necessarily have the governance of a board and an investment committee standing in between you and making those decisions. So, I think the two things about institutions that are so different is very focused on goals, very well defined, and have governance and process in place to help support it.
RITHOLTZ: So, let’s do a compare and contrast with when you we’re working with an institution, you know who is the head of investing there and you know who’s managing a particular committee, what’s that like when you are working with a family where there might be very different group dynamics? There’s going to be often a husband and a wife, sometimes there’s an active second-generation or even third-generation, how different is working with individuals versus institutions?
KEATING: So, it’s very different. And in fact, one having worked in asset management with institutional and also in wealth management for individuals, one of the things that I try to do is to bridge that gap and take the best practices that institutions have and try to adapt them to families.
And so, let me give you some real-life examples, right, because 2008, a great example, and I’ll give you another one, 2011. So, what happened in 2008? We all know. The financial crisis.
And I was on the board of my college at that time and just by luck of the calendar, we happen to be having a board meeting and an investment committee meeting on Columbus Day, in October, which if you take your mind back to 2008, you might remember that was the day that all the CEOs from the banks went down to Washington to take the TARP money.
So, there we were, having our regular board meeting and our investment committee meeting and we have had — we had done an enormous amount of work on asset allocation and the strategy for our portfolio and we had done stress testing and all the things that you do as an institution. And so, here we were, in the depths of the financial crisis with bank CEOs taking TARP money and we had to decide as a board and an investment committee what we’ll be going to do? What we’re going to do, what our policy portfolio told us we ought to do, which is rebalance and continue to buy stocks as the market was going down because that’s what our policies had been testing for.
And sure enough, we had to lock arms and do something that was very hard which was to buy and rebalance when the market was done. And you tend to see institutions do exactly that because of all of the time that has been spent on the policy portfolio and because they know, time in market is one of their biggest advantages. It’s more important than timing the market.
On the other hand ..
KEATING: … when you look at individuals, they don’t necessarily have that governance and policy in place and that’s one of the things that we try to do with our client. We have all of our clients adopt an investment policy statement in wealth management just as if they were institutions and then we try to help them stick with it when it’s hardest.
And we can watch the industry funds close and we can see whether clients actually do it. And in fact, interestingly enough, what you saw this year as the market was going down and you watch the closes we do, right? You saw money flowing into cash, you saw record amounts of cash in money market funds. We saw money flowing into bond (ph) funds.
We really didn’t see a lot of money flowing into equity funds when the market was down in March. And so, we know how hard it is to stay with your portfolio through the cycle. We told our clients to do that and if they did, they participated as the market has come back to reach all-time highs.
RITHOLTZ: So, let me follow up with a question about exactly what you just described. When your investment committee and institution which has a perpetual time horizon is looking at a period like March ’09 or more recently this — this past downdraft in 2020, they’re precluded from doing something silly because they have an investment policy statement which prevents them from market timing or there’s no upside to a committee to say, sure, what the hell? Let’s jump in and out and see if we can pick up a couple extra basis points.
There’s no financial incentive. There’s no glory. It violates our own rules, so they sort of are forced to behave well. How do you translate that better behavior to an individual when you’re working with them and their nervous in a period like February or March 2020?
KEATING: Yes. So, it’s a great question, Barry. And again, what we really try to do here is we really try to court (ph) from the institutional asset management industry over into wealth management. The same institutional institutional processes and tools and help institutions for so long.
So, as I said, everyone of our wealth management clients, we spend a lot of time with them to actually develop an investment policy statement, just as an institution would have and how do we do that? We do that by first and foremost, having to figure out what our goal is.
Every family’s different. There’s an adage that when you see one wealthy family, you’ve seen wealthy family and that’s true. Every family is different. Every family is has a different near-term and long-term goal.
So, the first thing we try to do is really be clear on what that goal is and most of the time, we find that there’s two aspects to it. Aspect number one has to do with lifestyle. They want a certain amount of income to support a lifestyle particularly as they move into retirement. And then the second tends to be about legacy. What are things that you want to preserve in your family and they could be financial or they can be non-financial to preserve from one generation to the next because our clients has wealth that outlive them.
And so, we focus very, very hard on what is that goal and then we use a lot of modeling tool to show all the variables that will impact that goal. Some of them are obvious, right? The market and asset allocation, right? So, we’ll trigger back and forth between different asset allocations to show the impact of them overtime.
Some of them are uniquely in your control, spending rates. Every institutional investor has a policy on spending. Nobody requires an individual to have a policy or even a philosophy on spending and yet it has an enormous amount of impact on wealth that you’ve accumulate overtime.
Increasingly, we take into account borrowing, right? Our clients don’t have to borrow, but just like major companies, that might make sense from a capital allocation perspective.
Another thing that we have to take into account is after-tax returns. Institutions don’t pay taxes. Our clients pay taxes every year and every generation. So, you have to keep an eye on after-tax returns. And so, we built models that help us to integrate all of these things and allow us to kind of show clients respectively the impact of choices on asset allocation, on spending, on borrowing, on taxes to try to help them chart not only the goal but what are the things that I have to do to get there/
RITHOLTZ: Catherine, let’s talk a little bit about the clients of BNY. Who was the typical wealth management customer? Tell us about them.
KEATING: Sure, Barry. Our typical client is a wealthy family. It might also be entities that you of as being associated with wealthy families, foundations, endowments, family offices, family businesses, even retirement plans potentially related to families and family entities. So, think about whole ecosystem surrounding wealthy families, the people in the entities, and that’s really our client base.
RITHOLTZ: So, you guys have been around for quite a long time, 1784, is a is a fantastic run. Most of your current clients, are they legacies of BNY being around as long as it has been? Are they referrals? Generational transfers? Where does the typical client come from within the BNY Mellon family?
KEATING: So, great question, Barry. Roughly half of our clients are referred to us from other clients or advisers to clients. So, think about it as half. And then the other half comes from all sorts of sources, right? Just the dynamism of the market? Wealth of being created around us all the time. We’re obviously pursuing those opportunities.
And we do have a combination of clients that had been with us many years. We have a couple of families that have been with us six or seven generations now which is truly remarkable and something that we appreciate and try to earn every day and then we have clients that have just taken our companies public and are brand new clients this year.
So, it’s really all the sources that you would expect in a long tenured institution like ours.
RITHOLTZ: And how have client expectations changed over the years? In terms of what they’re looking for from you guys, in terms of communication, what they’re expecting in terms of performance, has that shifted over the past decade or two?
KEATING: So, that’s — yes. The answer to that, Barry, is yes. When I think about when I started my career in this industry back in the 1990s, the typical client might have been a CEO, a CFO with — a senior corporate executive. And when that client retires. Chances are, he or she and very often, it was a he retired with a corporate pension plan, right, an annuity for the rest of his life and his spouse’s life and als, anything else that they’ve accumulated in their savings.
So, when I think of the ’90s, I think of wealth management as kind of an and. You had your it, you had your pension plan, and you had any savings that you’ve accumulated on your own.
Well, fast forward to this decade that we’re in and what we see is that there are very few company provided pension plans anymore in corporate America. Corporate America has shifted from company-provided pension plans to employee fund and savings plans. So, today, everybody is responsible for their own financial futures and that’s a fundamental shift and that’s another reason, Barry, that we try to port over into wealth management all of the institutional asset management disciplines that you would have seen a chief financial officer or chief investment officer use when they were actually providing for people’s long-term retirement.
That’s much less common today. And so, our mantra for clients is you have to be your own CFO, you have to be your own CIO, and we’re here to help.
RITHOLTZ: Quite interesting. The past couple of decades have seen a big flow of capital into passive products and indexes, what do you see from your perspective? How was that changed in what’s going on in the ultra-high net worth investment family?
KEATING: So, before we look at active or passive, we look at the ecosystem that were investing in, right? What’s going on in the global economy because that’s really the ecosystem that we invest in. And in fact, at the beginning of this year, I sent a letter to all of our clients not knowing, of course, in the beginning of January, what 2020 was going to hold for us, but recognizing that we are starting a new decade.
And we start decade at this new decade, we looked at global economy, we looked at capital markets, and we had sort of a forecast for our clients. Now, what do we think market returns are going to be in the next decade?
And I actually quoted Bill Gates in that letter. He says we always overestimate what’s going to happen in the next two years and underestimate what’s going to happen in the next 10. And one of the things that we’ve said to our clients about the next 10 years is that we thought that market returns are going to be lower, incrementally lower not significantly lower, but incrementally lower going forward.
And there was one major reason for that and that is that all of the largest economies in the world are aging at the same time. China, Europe, Japan, the United States. And we know what happens when economy has aged. Inflation tends to go down, interest rates tend to go down, yield curves tend to flatten, GDP growth tends to go down, and eventually market returns tend to go down.
And we’ve pointed out to our clients that actually, we’ve been seeing that through this whole new 21st century we’re in. Think about it, right? Inflation has been coming down. Interest rates have been coming down. GDP growth has been coming down. And market returns have come down incrementally.
So, what we said to our clients is that’s the ecosystem that we think we’re going to be in over this next decade. We still do. We’ve had some really unexpected, very important events this year, obviously, with the global pandemic and the influence of Congress, the fiscal stimulus, and the Federal Reserve with monetary stimulus and we actually think that that monetary stimulus and the low interest rates for longer are very, very important to the outlook going forward.
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RITHOLTZ: Interesting. We’re going to talk more interest rates in a little bit. But I want to ask you something that I found fascinating in my research which was your description of five active wealth practices. Invest, spend, manage, borrow, protect. Tell us a little bit about what that group of five is and how does it manifests itself in a client’s portfolio and their relationship with the — their advisory at BNY Mellon?
KEATING: Thanks for asking, Barry. We have a lot of passion around this because, again, as I said, we believe that part of our job being one of the largest institutional firms out there is to help our client benefit from the best institutional practices around those five things.
We took — we have the great fortune of having a lot of experience working with wealthy families at this firm, all the way back to the Hamilton family, as I said.
And so, our brain trusted people have put their heads together and said, what have we learned over the years? What are the five things — and we didn’t know if there was going to five, it could have been three, it could have been four, it turns out it’s five — that we see allow families to sustain their success overtime?
First and foremost, investing. Your financial assets, your portfolio, having the right asset allocation, and most importantly, sticking to it when it’s hard.
Number two, spending. As I said, every institutional investor has a spending rate, a spending policy, understanding the impact of spending on long-term returns is very, very important.
Number three, borrowing. Our clients don’t typically have to borrow but they can and one of the things that we joke about is that we — you can date yourself by saying what the interest rate was on the first mortgage you took out on a house. If it was in the double digits, chances are, it was in the late ’80s or early ’90s. If it was in the mid-single digits, it was in the ’90s. If it dropped even lower, it was sometime in this new century we’re in and if it’s below 3 percent, you took it out this year.
So, our clients don’t have to borrow but they make capital allocation decisions just like any major company does. And so, thinking about their balance sheets and thinking about when it might make sense to borrow, particularly when rates are low for estate planning purposes, for liquidity purposes, for purchases, that’s become a more important discipline and that — that’s the third one.
So, investing, spending, borrowing. Managing for after-tax returns because our clients do pay taxes and part of that is related to your question about active and passive, right? Passive vehicles lower cost but also very tax efficient.
And what we say to our clients is again, with our investment outlook, you’ve got to eke out excess returns where ever you can. There are certain asset classes where that may be less likely. The U.S. large cap market is very, very efficient. We would say you can actually add tax alpha in the U.S. large cap market, perhaps more effectively and consistently than you can add investment alpha.
But then there are other classes, asset classes, where markets are much less efficient and we do encourage them to go for excess return.
And then the last discipline, protect what you have. And that’s everything from good cyber practices to state planning and trust and thing that protect assets to protecting an non-financial assets, what are the qualities and disciplines in your family that you want to see survive to the next generation?
So, it’s invest, spend, borrow, manage, protect, as you said.
RITHOLTZ: Quite — quite intriguing. Let’s talk a little bit about what a year we’ve been living through, 2020 sort of virus-induced economic shutdown, a 34 decline in the S&P, 500 tons of volatility, how has this mayhem this year affected clients? Were you guys forced to respond with new policies and procedures or how did you deal with 2020?
KEATING: Great question, Barry. I mean, how has this the pandemic not impacted our business this year in a way, I think is the question because if you go back to beginning of March, 98 percent of the people in my division worked in our offices. And we had to transition over a three-week period to 90 percent of them working at home.
So, first and foremost, kudos to the company for all of the work that it has done over the years in resiliency and then technology because it actually enabled us, we didn’t expect this to happen, but it actually enabled us to very, very rapidly shift 90 percent of our employees in wealth management from working full-time in the offices to working at home.
So, fortunately, it turns out in hindsight, we were more prepared than we thought. But apart from that, it meant we had to change our days. And so, at BNY Mellon, what that meant in March and April and May, when we were early in the thick of this, the executive committee, the senior leadership group of the company met early every single morning.
And in fact, some days we met more than once to kind of take a look across the markets, the landscape, what did we see what’s happening, then in wealth management, we start our mornings now every single morning together on a market call, kind of guiding our people to what we’re seeing in the market, what changes are we making in portfolios, what advice are we sharing with clients during the spring, when markets were changing.
So, rapidly, every single Monday at 4 o’clock, after the market close, we held a call for our — all of our clients, sharing with what we were verbing and what we were doing to help them.
On Tuesdays, at 4 o’clock, we close our days together with another meeting internally, just gathering people together and talking about some of the hew things that we have to learn and absorb this yes and whether it’s around low interest rates that we have, whether it’s around new planning techniques under the CARES Act or other things.
And on Fridays, for much of this year, we’ve actually closed our days together in wealth management, 4 o’clock, with a very short call, 15 minutes, just reflecting on what the week has meant to all of us personally and professionally.
So, we’ve really changed the way we spend our time because we’re going through this crisis in such a different way than any other crisis in our history which is we’re going through it together but we’re sitting separately. And so, we’re really trying to recreate occasions to come together.
RITHOLTZ: So, now we’ve gotten pretty close to FDA approvals on three separate vaccines that all look extremely promising. What do you think this is going to do, not just to reopening generally, but how has this experience changed what the future of the workplace is going to be? Are we going to back to 2019 or has 2020 left a lasting impression that will change how financial services firm are going to operate in the future?
KEATING: That’s a great question, Barry, and I think the answer is that this has fundamentally changed our working model for the future. And so, let me talk about the business model, first of all, how we work with client? I would have said that for many, many years, we had a two-legged business model. Part of it was physical, meeting with the client in person, and part of it was digital, the client interacting with us digitally, using our tools.
I would say that this year, we have permanently added a third leg to that business model which is virtual. So, there’ll be physical, there’ll digital, but they’ll also be virtual because what we found is it’s a very efficient way to meet with people. It’s an efficient way to get a family together that may not be living together. They might be living in different states.
It’s a very, very efficient way to get large groups of people together, right? Just for an hour of commuting time, we’ve actually done some virtual events for our clients, virtual tours of the Metropolitan Museum of Art, that people from all over the country are taking part in even without traveling to New York, same thing for the MoMA as our museums here in the city have reopened.
So, I think we have added virtual as the third leg of the business model permanently and I think that’s a really good thing.
RITHOLTZ: Quite interesting. So, it seemed 2020 was an election year and all clients wanted to ask about was what our thoughts were on the outcome of the election and what it might mean, what was your experience pre-election, how are you looking at possible changes and how curious and concerned was your client base?
KEATING: So, I would say the 2020 is certainly an election year, I would say it’s even bigger than that. 2020 is a year for the history books. I mean, if you think about what we’ve gone through, right, historic actions in the market, historic actions by central banks, historic global pandemic, historic election, it’s just been a year for the history books and we’re all going to look back on this and remember what it was like to go through it together.
I think, specifically, with respect to the election, our clients have had questions really about two things, leading into the election and after the first is, elections, are really about policies, right? What do we think the policies of the new , the new Congress might adopt?
And so, our clients are business people. They were concerned about policies, related to different industry segment and also about taxes because, of course, as I’ve said before, our clients pay taxes every year and every generation. So, those were really the two areas that we work spending time on with clients and with respected taxes, our clients have an understanding that really tax rates in this country has been declining since the 1970s, right?
And we look at federal tax rates, income tax rates, capital gains tax rates, corporate tax rates, they have been coming down. So, our clients an awareness that we are at sort of multi-decade lows on tax rates and they also have an awareness that we’ve got deficit spending and pressures on the budget, so their focuses very, very keenly on tax rates.
And I think we await to see what the outcome of the Georgia elections will be to see what’s the more likely outcome on passing some of the policies and related taxes and other things in the Biden-Harris administration. We will see. We will see.
RITHOLTZ: So, that raises questions. We’ve already seen the certification and the transition phase begin. That was sort of up in the air for a while, but as you referred, we don’t know what’s going to happen in the runoff election and whether or not there’ll be a change in control in the Senate.
But given that, what sort of things should investors be doing in 2020 to prepare for potential changes in 2021 or should they not? Are there — even if the Senate flips, does it matter what’s done now? Can’t it wait till 2021? How are you advising clients?
KEATING: So, what we would tell our clients is to take the step that makes sense for your long-term plan. If it makes sense to diversify many of our clients, their wealth is created in concentration, right, they found the company, they have a concentration and a single stock. That’s how wealth is created in this country. We can think of the wealthiest people in the country and we know how Jeff Bezos and everybody else created their wealth.
So, we tell them, if it makes sense for your long-term plan, to be making some changes to your investment portfolio, perhaps to diversify, and perhaps to taking some capital gains, then you should do that.
If it makes sense for the long term, you should stick with that long-term plan. In the meantime, market potential like divided government, markets have done very well with divided government and we’ve had divided government actually for much over the last 20 years.
So, and that’s what the market is tending to expect right now is divided government. You’ve had — you have a lower — you will have lower Democratic majorities in the House. The Senate will be very close. So, the market is expecting a relatively balanced outcome and what we say to our clients is, stick with that long-term plan and if there are decisions that you make, that you would make for the long-term, you should make them.
There are things that are highly tactical right now, right? Interest rates are the lowest that we’ve seen in our lifetimes and that includes for a safe planning, right? Intra-family gifts, split-interest trust, intra-family loans, lowest interest rates ever. So, there’s a very tactical aspect of that.
And the other thing that’s tactical is that the estate tax exemption is scheduled which is currently roughly 23 million approximately across the husband and a wife, that is handed to reduce in beyond to 20255. So, using things that are going to go away makes a lot of sense.
RITHOLTZ: Let’s talk a little bit about alternatives. They play a huge role in the institutional world, especially in the endowment space. We’re seeing more and more interest in that space especially private equity these days. How is this going to play out, what sort of interest are you seeing from your client group, and what do you think the future of alternatives are going to be in the investment management space?
KEATING: Good question. Our clients are business people. And so, as a baseline, they’re very comfortable with private business in private markets because that tends to be how many of them have become successful. So, they understand that as business people.
When we think about portfolios, and again, trying to have individual investors achieve the kinds of long-term returns in institution path, alternative is very much a part of that. And capital market structure has changed a lot over the last 20 years. If we think about capital markets and what’s happened, you’ve seen a steady decline in the number of public companies in this country.
We now have fewer than 5,000 public companies. At one time, that was as many of 8,000. And at the same time, you’ve seen a very large increase in the number of private companies that are backed by private equity and venture capital funds to the point where you now have more of those private companies that are backed by private equity funds and venture capital funds, then you have public companies.
So, you have a much bigger investment universe in the private equity space and you — we also see that companies tend to be staying public longer, particularly the venture-backed companies. And so, there’s a very large alternative universe out there where a lot of value is being created and we think it’s very important for our clients to have exposure to that for the long term because what you’ve seen overtime is that when you give up the daily liquidity of public markets, you tend to earn a liquidity premium and private markets and that liquidity premium could be as much as three, four, five percent a year.
And so, if I go back to kind of our outlook for markets for the next decade and the fact that we think public market returns are probably going to be incrementally lower, eking out those excess returns that you can get in private markets are going to be even more important for wealthy clients.
RITHOLTZ: Let’s talk a little bit about the traditional 60-40 portfolio, 60 percent stocks, 40 percent bonds, you have called it a, quote, “relic of the past.” Tell us why.
KEATING: So, the 60-40 portfolio for many, many decades gave clients the combination of good returns and equity markets, call it high-single digit returns in equity markets and good returns and fixed income markets. Call it mid-single digit returns in the fixed income market.
As we look ahead for the reasons that we’ve been discussing, we see modestly lower returns in public equity markets, and now, particularly this year, after the actions of the Federal Reserve and reducing interest rates, we see lower returns in fixed income markets as well.
And so, the question is what is that 60-40 portfolio becomes? In it — and the answer is it really depends upon you, in your long-term objective, your needs for liquidity, by at a minimum, it probably isn’t a 60-40 for almost anybody anymore, right? it might become a 65-35, it might be a 70-30, it could even be an 80-20, depending on your age, your Outlook, your needs, your objectives, and those are the — that’s the modeling that we’re going through with every client right now because we even look at that 60-40 portfolio that might’ve fairly reliably delivered, call it a seven percent annualized return over the last couple of decades, and we would say our outlook right now is probably but that’s more like five percent.
KEATING: If you leave — left to its own devices, it’s probably more like five percent, it could even be a little lower, how do we help you capture those additional returns? And it will be some of the things that we’ve talked about, right? It will be things like diversifying into private markets.
It will also be about diversifying a bit away from the United States. The United States equity markets have led the world since the financial crisis. We actually think that we might see a bit of a rotation there going forward. So, diversifying away from the United States.
In your bond portfolio, it probably means having a smaller allocation to bonds because the yield will be lower, but it also means finding some other things that you can sort of reliably sleep at night with, maybe it’s more like absolute return hedge funds, for example.
So, it’s a tweaking of that portfolio. It’s not a huge rewrite, it’s a tweak and it’s being tweaked everyday slightly differently for every client.
RITHOLTZ: What do you think in the fixed income space of things like high quality corporates, muni bonds, and we are occasionally getting questions about preferreds? What are your thoughts there?
KEATING: For us, the fixed income portfolio is the balance, right, to the risk that you take in the rest of your portfolio. So, we do tend to focus a lot on quality, right? Higher quality. We actually focus very much right now on duration because duration is actually extended, meaning that there’s more duration risk in portfolios.
KEATING: So, we — those are the two things that we’re most focused on in fixed income right now.
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RITHOLTZ: I have to ask you a couple of questions about of philanthropy and your clients. I know you’re on the investment committee of the Howard Hughes Medical Institute and the Helmsley Charitable Trust and you are on a couple of your alma maters on the investment committees, how are clients thinking about philanthropy these days? What — what issues seem to be dominated?
KEATING: So, I would make two point about philanthropy. One is that we are a very, very generous country and culture and we’ve seen that this year. We’ve seen that across our client base. We’ve seen charitable giving going up and donor-advised funds and in outright gives and trust gifts and plan giving.
So, we are very, very generous country and culture and that’s very inspiring. The other thing that I think has been just amazing to watch and to a certain extent to be part of this year is to watch how philanthropic resources have gotten together and just attack where the needs are, right?
So, you mentioned Howard Hughes, you mentioned Helmsley. They both focus on healthcare and they have dived in to opportunities and challenges created in healthcare, related to the virus.
I think about our company. We have been — we’re headquartered here in New York City and we we’ve sort of dived into the needs that we’ve seen here in the city. We provided iPads to a hospital system, for patients, to be able to communicate with family members when they couldn’t visit.
We helped homeless shelters get Wi-Fi for students that might be living in shelters that needs to do remote learning. So, I think one of the things about this year had just been seeing philanthropists dive in to meet the needs that were created so unexpectedly.
RITHOLTZ: You mentioned that some of the nontraditional gifting techniques are, quote-unquote, on sale, things like charitable lead trusts or grantor retained annuity trusts, tell us about some of these are mechanisms that allow families to very advantageously make donations to their favorite philanthropies?
KEATING: So, it really depends, Barry, on the type of a gift. If you make an outright gift, you value it on the day of the gift, you know what that is, and you’ve made an absolute transfer of it.
But sometimes, gifts are split-interest gifts. You might keep an interest and give away the remainder. You do that with a charitable lead trust or a charitable remainder trust, you do that with a grand, sort of retained annuity trust.
And the interesting thing about split-interest gifts is that you have to value what you’re keeping because that’s not a gift, you don’t make a gift to yourself. And the gift, really, is the remainder, what you’re not — what you haven’t kept. And the reason that there’s such a compelling opportunity right now is that the value of what you kept is discounted at very, very, very low interest rates.
And so, that means that, potentially, there could be a large gift that markets exceed low interest rates, it could be a large gift at the end to the beneficiary whether that’s the charity or family members. So, it’s a pretty technical estate planning environment, but lots of opportunities for clients.
RITHOLTZ: One of the areas we did not get into was environmental, social, and governance, ESG investing. Tell us a little bit about that space, what are your clients thinking there?
KEATING: So, when it comes to environmental, social, and governance matters, we view those considerations as just basic considerations that you should employ as an investor and as an active manager. So, we look at those consideration when we make decisions as investors.
I think that in a — in a big scheme of things, ESG environmental, social, governance considerations, interestingly enough, there was a time when people were concerned that if you took those into account, you might be limiting your investment universe, and therefore, you might potentially limit your returns because you’re investing in a smaller universe of companies.
In fact, what we’ve seen happen over the last 10 years or so, is investors have come to realize that these are factors that should be taken into account. And if you don’t into account, you might actually increase your risk. So, in our view, the whole — the whole rubric of ESG has now become just a fundamental part of investing.
Now, when it comes to any particular family, they might have particular passion or concerns related to E or S or G and we could take those into account and tailor that, in general, as investors, we just look at those factors as things that any analytical investor should take into account.
RITHOLTZ: So, let’s stay with the governance side of that. There was a 2019 Deloitte study. They found that women in leadership roles in the financial services industry was a rather paltry 22 percent.
At your firm, 40 percent of the leadership group are women. That is quite a success story compared to the industry. How was BNY Mellon capable of achieving such success in that space?
KEATING: Well, look, in the wealth management industry, we understand how important diversity is. Our clients are diverse. We represent families.
So, we know how important it is to our business. But apart from that, the data is really clear. Diverse leadership teams have lower cost of capital, diverse investment teams have better investment returns, diverse sales teams have better sales performance.
The data is really clear. The diversity is good for business and it’s good for investment businesses. So, there’s simply no question about that.
You asked about why is it that the industry maybe haven’t been as diverse as we are and as we want it to be and I think there are really two reasons, Barry.
The first one is visibility. When I was growing up, I’m from Washington D.C. and when I was growing up, I didn’t really see finance or investing or financial services as a career. In fact, (inaudible) in the 19070s, 1980s in Washington and I saw lots of great careers. Public service and medicine and law, may dad was a lawyer, real estate, all sorts of things. Media.
So, I didn’t necessarily see financial services. It wasn’t until I was a professional that I realize that that was a career, that I could pursue. And so, one thing that’s happened since then is that markets have democratized, right, that shift from pension plans to 401(k) and personal savings markets had democratized.
And so, I think the industry is much visible and I try to do things to make it as visible as I can for women, part of what we’re doing today, because I just think it’s really important. It’s a wonderful industry and a wonderful career.
So, visibility is the first. But then the second thing is process, right? We are an industry that is challenged by markets to change all day, every day, right? We are an industry that tends to have to absorb information and move very quickly.
And sometimes when it comes to diversity, moving too quickly is not the best thing to do. Sometimes you need to slow down, you need to have a good process, and you need to cast your net widely when you’re thinking about recruiting and promoting. And that does take a little longer but the result tend to be much better if you can just slow down a little and have a great process that’s is very inclusive.
RITHOLTZ: Quite interesting. We’re recording this on a day when BlackRock bought a direct indexing fund for about $1 billion. What are your thoughts given what you said about tax-advantaged alpha of direct indexing and its ability to generate better after tax returns versus traditional indexing?
KEATING: Well, I think when it comes to wealth management, there’s a role to play for broad market indexes but there’s also a role to play for customizing those indexes, right?
So, you might be customizing them for particular tax outcomes, right? You can tax harvest losses and customize for the kind of tax outcome you want. You might be customizing them for other reasons, right, to perform an index that is a little bit different in the market but helps to accomplish a particular passion or goal with your client.
So, I think there are more — there are roles for broad market indexes, but increasingly, I think, there are roles for customizing those indexes to after tax returns or other goal that a client has and we really see that as the future and a way that we spend a lot of our time.
RITHOLTZ: Let me — let me throw a curveball at you. I know BNY Mellon’s founder was Alexander Hamilton. How did the play resonate within BNY Mellon? What was the response within the firm?
KEATING: So, obviously, we’re very proud of our history of Alexander Hamilton and Eliza, as I said, and Eliza. His widow. She was actually our first client in wealth management. We love the musical. We love the musical. We love the way it makes our history come to life. We actually enjoyed watching the streaming versions over the summer, one of the fun things that we did as a group in wealth management.
But when I think about the musical, one of the things that keeps that is always top of mind is — happens to be my favorite song in the musical is the “Room Where it Happens” and that’s the one about the compromise between the northern states and the southern states to move the capital from New York City to Washington D.C.
I obviously live in New York right now. I’m from Washington D.C. but I think that that whole process of compromise and give-and-take is something that we do every single day as we debate investment portfolios and decisions and things like that with clients. And I think increasingly, it’s something that we’re all looking to our governments to do, right, in Washington.
So, we love the — we love the show. We love the history and that lifts us all the time. And thank you for asking.
RITHOLTZ: Tell us what you’re streaming these days. You mentioned Disney+ version of “Hamilton” which was spectacular. What else are you watching on either Netflix or Amazon Prime or whatever?
KEATING: So, I’m streaming a couple of things. One is “The Crown.” I think it’s hard to be an American and not have an affinity for the special relationship we’ve always had with the U.K. I actually even tuned in in the spring when Queen Elizabeth addressed the United Kingdom for only the fifth or sixth time in her whole life, about the pandemic, and I found it very inspirational and moving.
The other thing that I’m streaming right now, it remains very hard for independent films to get funded in Hollywood and that can be particularly the case when they are films about women, written by women, stories about women.
And so, a couple of years ago, I actually invested a wonderful film that’s called the “A Call to Spy” and it is a true story. It is out on Hulu and Amazon right now. It is about three women spies in World War II, true story, who trained as spies under the Churchill Foreign Office and went into Nazi-occupied territory as part of a war and it’s a wonderful, wonderful story about real women heroes.
RITHOLTZ: That’s the film, “A Call to Spy” and you could find that on Amazon Prime.
Tell us about your early mentors, who helped to shape your career?
KEATING: So, one of my mentors in my career and it’s just an example of serendipity in this industry, was actually Jack Bogle who was the founder Vanguard Group and I’ve never worked at the Vanguard Group, and yet in this industry, I had the chance to meet Jack and work with him and cover him as an industry — industry group, industry peer.
And I watched him really change the investment industry. I watched — he had lost his dad at a young age and he was very, very committed to the success of individual investors. And I remember Vanguard when it was still a small company and celebrating the billions versus trillions and I watched his passion and his conviction really build the company that changed the industry.
And it — I have — it has always stayed with me. I was — I was fortunate to stay in touch with him for his whole life. So, Jack Bogle unexpectedly, a big mentor of mine, even though I never worked for him, I just had the great good fortune of working with him.
And another one I mentioned earlier, my mom. My mom who became unexpectedly a widow at 32 years old with three little kids who went back to work and back to school and back to work and learn how to manage your own little pot of life insurance proceeds and stayed with her career till she was 79 years old because she loved books and she loved the library. She was a librarian.
And she’s been an incredible, incredible mentor for me. So, Jack Bogle and my mom, two of my mentors.
RITHOLTZ: Quite — quite fascinating. Tell us about your favorite books. What are you reading these days?
KEATING: So, I love to read. I love to read. I actually majored in English in college. And this year, I’ve read recently Erik Larson, “The Splendid and the Vile” which, again, a great story of Churchill and World War II and the Battle of Britain. Really, really good and not a story, by the way, nonfiction.
I enjoyed Michelle Obama’s “Becoming.” I haven’t read the last (ph) book yet, but I will — I will get to that, too. And I enjoyed a fiction book that’s called “The Vanishing Half,” which is about two sisters that ended up living very different lives in very — twin sisters, very different lives in very different communities. One in a white community, one in black community. Enjoyed it very much.
RITHOLTZ: Quite interesting. What sort of advice would you give to a recent college graduate who was interested in a career in investment management?
KEATING: So, the first thing I would do is I would congratulate them for picking a good industry, a segment, the wealth and investment management industries are dynamic and growing and they will be a good career for the rest of your career. So, congratulations. You picked a great area.
And then I would tell them two things. The first one is that we’re a knowledge industry. And so, whether you realize or not, those early years in your career, you have the luxury of being very selfish, focusing on yourself, and trying to learn as much as you can and get as much knowledge as you can because as career progress and you tend to have more responsibility, responsibility from projects at work, more people at work, maybe people at home, so these early years, whether you know it or not are years that you can be really selfish and focused on yourself and try to learn as much as you can.
And then the second thing that I would tell them is we’re a knowledge industry but knowledge isn’t enough. We’re also an empathy industry because we really work with people and we have to — the first thing you have to do if you want to be empathetic is that you have to listen.
And sometimes, in our industry, the tendency is to tell people everything we know. In fact, what we ought to do first and foremost is be really good listeners because we’re going to learn about what’s important to our clients.
And I just learned overtime that you get great success when you combine what you know with what people care about and what you care about. People don’t really care about what you know until they know that you care. And so, that combination of learning, learning, learning early in your career, but also building empathy and listening skills, that’s the perfect combination in this industry and that’s what I would encourage them to focus on.
RITHOLTZ: And our final question, what do you know about the world of investment management today that you wish you knew back in the 1990s when you were first getting started?
KEATING: So, what I know about the world of investment management today that I wish I knew back in the 1990s is that success is about a lot more than beating the market. Beating the market is one of those disciplines and absolutely, you want to beat the market or at least meet the market overtime.
But real success comes from knowing what your goal is, charting a course to get there, staying with it, and it’s a lot more than the market as we talked about. Yes, investing is part of long-term success, but so is managing your balance sheet and deciding how much and whether to borrow. So, is spending and deciding what’s the appropriate spend rate to help you achieve your goals.
So, is managing taxes and managing for after-tax returns and so is protecting what you have. So, those five disciplines invest, borrow, spend, manage, protect, when I started my career, I was laser-focused on investing and I would tell everybody to broaden your horizons because success is about a lot more than beating the market.
RITHOLTZ: Thank you, Catherine, for being so generous with your time. We have been speaking with Catherine Keating. She is the CEO of BNY Mellon’s Wealth Management Division.
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I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.