The transcript from this week’s, MiB: Steve Fradkin Northern Trust, is below.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.
RITHOLTZ: This week on the podcast I have a special guest. His name is Steve Fradkin, and he runs one of the larger pools of assets that you probably had no idea about. He is the President of Northern Trust Wealth Management. They run over $350 billion in client assets. They serve some of the wealthiest families in America. One in five wealthy families actually has assets with Northern Trust. They have something like 20 percent of the Forbes 400, just a very interesting perspective on how to manage through periods of uncertainty, changing tax laws, rising inflation.
Also, it’s really interesting perspectives. It’s less about predicting the future, Steve tells us, then thinking in terms of planning and probabilities. And I think that was really interesting advice. He — he is about as knowledgeable as anybody is going to get in the – both wealth management business and ultra-high net worth management business. I found the conversation really intriguing, and I think you will also.
So, with no further ado, my interview of Steve Fradkin of Northern Trust.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is Steve Fradkin. He is the President of Northern Trust Wealth Management. Running about $355 billion in assets, they serve about one in five of the wealthiest families in America. Previously, Steve ran the Corporate and Institutional Services. He was Head of International Business for Northern Trust, as well as the firm’s Chief Financial Officer.
Steve Fradkin, welcome to Bloomberg.
FIRRMA Thank you, Barry. Great to be here.
RITHOLTZ: So, you spent your entire career at Northern Trust having joined in — in 1985. How do you make the leap from really CFO to President which, to me, I think of President I think of someone who’s running like a CEO, running a — a division? What were the challenges of that transition?
FRADKIN: Well, it’s a great question and, you know, careers are mysterious experiences. The — the bigger mystery really, Barry, was the move to CFO.
So I joined Northern Trust as a youngster, didn’t know what I wanted to do, worked my way through a variety of entry-level jobs, ultimately culminating at that point in running our growing international business, and loving it, traveling the world to clients in Asia, Europe, the Middle East, Africa, South America, you know, really fun and interesting stuff, and was asked, at that point, to serve as CFO, which was the unnatural job. Was not a controller, was not a treasurer, and so serving as CFO of a large public company was — shall we say traumatic when they asked. But did that for six years, including through the global financial crisis. And it was, at that point, I went back to doing what I normally do, which is running businesses.
I ran our Corporate and Institutional Services business, and then after that Wealth Management. So — so it wasn’t so much going from CFO to wealth management as it was ending up as CFO, if you will, by accident from my point of view.
RITHOLTZ: Really interesting. So — so you guys had a pretty good year in 2020. How did that carry over to this year? Is it just more of the same? What were the big success stories relative to all those challenges we soar last year?
Well, you know, it’s — it’s really an interesting phenomenon, and it shows you the – in some ways, the unpredictability of what can happen. You know, if you think about COVID-19 and its impact in 2020, and if I said to you, you know, look here’s what’s going to happen, we’re — we’re going to go as a society not just Northern Trust from, you know, we all come in and we work and so forth and so on. And one day, on about the same day worldwide, everyone’s going to start working from home facetiously.
What — what do you think is going to happen to the markets? I think most people have said, well, first of all, it could never happen that way. It’s not going to be true that people in Sydney, and London, and New York, and Sao Paulo are all going to be, you know, as much as one can working from home. That’s just impossible.
And second of all is that where to happen on a sustained basis. Well, gee, you know, the economy is going to crater because no baseball games, no concerts, no – you know, less use of restaurants, et cetera, et cetera. I don’t think people would have said, you know, the markets would do as well as they’ve done.
So look, it’s been an incredible journey. Northern Trust has navigated exceptionally well through it last year and continues to perform well today. And there are a variety of factors in that. But each and every day has been a navigation because we’re still not out of the pandemic and we’re still operating in a hybrid mode. And, you know, balancing safety of our partners, our — our employees, and the needs of our clients is a — a daily — a juggling act that we’re still working through and I suspect will be working through for a while longer here.
RITHOLTZ: We’re going to talk a little more about how you guys manage doing the pandemic in a bit, but I want to stay with the success of Northern Trust. You’re one of the biggest ultra-high net worth investment managers. But relative to your size, you guys kind of fly under the radar. Why is that?
FRADKIN: Well, you know, it’s — it’s an interesting question, Barry. The – so in terms of size, we’re in the top 20 banks in the country as measured by our balance sheet. But really the — the better marker of our size is the assets that we manage and the assets that we administer for clients.
And we’re a very quiet company. We don’t do lots of big acquisitions. We do the same thing today that we’ve been doing since 1889, serving the same clientele, and so we’re a very focused institution.
A little over half our profits come from the provision of services to wealthy families in America and around the world. And the other half come from essentially providing the same services, but to large global institutional investors, serving wealth funds, pension funds and the like. And so, we’re a quiet company that has been extraordinarily successful and consistently so for many, many years. So, we’re proud of what we’ve got, but we — we — we — we fly under the radar scream — screen intentionally to just keep a low profile and stay focused on our clients.
RITHOLTZ: And — and that would make sense given the nature of your clients who are less Instagram stars and more quiet wealth. Is that a — is that a fair way to describe it?
FRADKIN: Yeah. Today, we serve little over 30 percent of the Forbes 400 wealthiest Americans and, obviously, many other affluent families. And interestingly, Barry, you know, sometimes people think of Northern Trust in its wealth management business as focusing on — or serving multigenerational well-healed, you know, families. And that’s true, we certainly serve many of those.
But there are many entrepreneurs in Silicon Valley, in New York, in Miami, in Dallas, in — all over the country and all over the world. And if there’s one thing I’ve learned in being here is that wealth is created in a lot of mysterious ways. And so, your — your reference to Instagram and so forth, I would say our clients are definitely low profile, but where they create their wealth emanates from every segment of the economy. It’s really a — a fascinating part of the privilege of being in this — this kind of role.
RITHOLTZ: Let’s stay with that because I was just involved in a conversation recently about the amount of wealth that has been created over the past couple of decades. Wherever you look, especially in the United States, it seems that people are coming up with new ideas, new technologies, new just even business processes that if you go back to the 90’s, I don’t think people could have imagined the sort of things that are generating the massive amounts of wealth that we’ve seen. And — and I’m not even talking about NFTs or things like that, I mean, businesses with clients that are just doing tens of millions of dollars of — of revenue a year.
FRADKIN: Well, I think the — the fascinating thing that I think we see is that wealth can be created in a lot of different ways. And I — and I think you’re right that as the world has sped up, the wealth creation has sped up, too. You know, to caricature it, it used to be you would start a business in your garage in Louisiana and, overtime, you would, you know, build a vacuum cleaner, whatever it happened to be. And you would start selling it from a store and, you know, it would — you know, you — you’d have a second store. And — and the next thing you know, you have a — a — a big business that you never envisioned having, and you could sell that company and — and create tremendous amount of wealth.
Today, that phenomenon still absolutely happens, but it also happens with the power of the Internet that the pace at which companies in some industries can grow and accelerate has — has really multiplied. So, wealth creation, in some instances, is still a slow laborious step-by-step process. But in others, I don’t want to say it’s overnight, but it happens a lot faster with digitalization in the — the pace at which the world moves today.
So, we — we see both phenomena, and that’s part of the fun and excitement of the American economy. And this certainly happens elsewhere in the world as well.
RITHOLTZ: Quite interesting. So, let’s talk about how you guys had to operate during the lockdown. You mentioned this earlier. What were you doing when, you know, it became clear the country was shutting down in March of 2020?
FRADKIN: It’s a great question, Barry. Well, we started like many other institutions with the safety of our clients and the safety of our employees. And it all happened relatively quickly in terms of shutting down offices to the bare minimum, getting people home, and making sure that they could function effectively from home.
And if you go back to — and — and, by the way, we have 20,000 employees worldwide, so we were doing the same thing in Manila, in the Philippines as we were doing in London, as we were doing in Dublin, as we were doing in Houston, as we were doing in Las Vegas. And so I want you to think about the operational, and logistical, and infrastructural needs of pretty much all at the same time trying to get people out of the office, enable them to function effectively from home, still be able to serve our clients, and all the family and other issues that people were wrestling with.
So, I would say the beginning of the pandemic was stressful. You know, we were working 24/7 trying to make sure that technology worked and people could still get cash and all those things. It has gotten to a much better, you know, I’ll call it normalcy in a strange sort of way. But the early days of the pandemic were — were challenging. We navigated through well, but it’s certainly not something that anyone had anticipated.
RITHOLTZ: Really quite interesting. So, I’m assuming you guys have your offices, more or less, reopened. What are you going to do going forward? Is it going to be a hybrid model or is everyone back in the office or people working from home?
FRADKIN: Our offices are open and — and really to different extents in different geographies, you know, which makes sense. The — the infection rates, hospitalization rates, all the metrics that we track are very different in different cities and countries around the globe. You know, in terms of where it goes in the future, I think the future of work and how people work is forever changed.
You know, we always had a pretty flexible workforce and the ability to work from home and, you know, people’s — people’s lives and — personal lives and business lives had crossed over long ago that, as an employer, we had to be flexible. I think that’s going to be even more so coming out of the pandemic.
People have gotten used to it. The technology has gotten better. Client expectations are different. And so, I think we will be in a — you know, what we — what we think of today as a hybrid model will be a normal model tomorrow. And that doesn’t mean everyone will work from home, but it certainly means a lot more flexibility for employees to inevitably juggle the — the conflicting needs of family and work life. And we’re well prepared for that.
RITHOLTZ: So as investors, COVID was pretty much an exogenous shock. It — it came out the left field. How did the whole COVID crash and recovery compare to past crises, whether it’s 9/11 or dot-com implosion or the great financial crisis? How do you — how do you wrap your head around this one compared to ones from — from recent past?
FRADKIN: You know, it’s — it’s a great question. And I think, Barry, my perspective would be that we often call events like the COVID-19 pandemic tail events or once in a lifetime events. And in some ways, they are and, in some ways, they aren’t.
If — if I think about it through the prism of my career experience, we had the crash of October 1987. We’ve seen the collapses of things like Enron and WorldCom. We’ve seen September 11th. We’ve seen Bear Stearns go down. We had the global financial crisis of 2008 and, of course, the pandemic. And each time we call it a tail event, but at some point, we have to admit that there are a lot of tails.
So, I want to take you back just to compare and contrast COVID-19 with 2008. I’ll give you this example. I want you to imagine it’s the end of 2007, and you’re presenting the 2008 plan for Northern Trust to our board. And you go to the board and you say, “Look, we expect our revenues to do this and our expenses to do that, and so forth and so on.”
And one of the board members raises his or her hand and he says — he or she says, “Barry, that’s — that’s terrific. Sounds like a great plan for 2008.” But I — I — I just want to get your perspective. What happens if Bear Stearns collapses, Freddie, Fannie, Washington Mutual, Wachovia, Merrill Lynch, you know, et cetera, et cetera, Lehman? You know, the whole thing collapses in 2008. How will we perform?
I think you’d — you know, I — I think if you had been CFO at that time, you would have said, “Well, you know, that’s just — that’s never going to happen,” but it did. And Northern Trust navigated through that exceptionally well. Not unscarred, but exceptionally well.
If you take — if you fast forward from that paradigm to COVID-19, it’s very similar. You know, if — if we had been talking to our board the year before and put forward our plan, I think our board would have said, “Well, okay, you know, that sounds like a great plan. What happens if there’s a global pandemic in every office from which we operate is going to be shut down or substantially shut down? Everyone’s got to work from home on the same day globally.”
And, by the way, it’s going to be for a year and a half or more. I’m quite confident you or we would have said, well, that — you know, that’s just not — you know, I don’t know what we’ll do. That’s not going to happen, but it did. And so, I think the — the lesson from these crises is that while they’re different every time, they happen a lot. And so, we have to think about our approach to business, our approach to research, our approach to preparing for the unanticipatable.
And as I say, each — each of your examples, September 11th, and COVID, and 2008 are different, but they were all — they all featured substantial disruption, substantial unanticipatable disruption. And at Northern Trust and every other company around the world, you have to be prepared to be agile and adapt quickly. And — and that’s what we’ve been able to do pretty consistently over our 130 plus years of experience.
RITHOLTZ: So, given that history and the fact that a big chunk of your clients are ultra-high net worth, how do you think about managing assets compared to what — I don’t know, let’s use the phrase “mass affluent,” that typical approach. Is this more about preserving wealth and it is striking at rich. These folks are, after all, already fairly wealthy. How does this specific demographic change and challenge the way you manage assets for them?
FRADKIN: Well, I think, look, wherever one sits on the spectrum of wealth, they generally want to optimize their returns over time. And people have different risk preferences as you would expect. So to caricature it, if you come from nothing and you’ve done exceptionally well financially, you may — not always, but you may have a predisposition to have a stronger defensive component to your portfolio because you don’t want to end up back where you were. You know what it’s like not to have money, you have it, and you want to be defensive.
On the other hand, there are people who whether they came from nothing or not, they’ve had tremendous success. They’ve seen the power of capitalism, and they want to not only do as well as they can, but keep going. So, we see things through the eyes of our clients across the continuum.
What I would say is people in the ultra net — ultra-high net worth space, at least from my point of view, it’s not so much about they’re more defensive or more offensive. They have more flexibility for choice. They can be defensive because they’ve, you know, so to speak, got more than enough or they can lean in and be more aggressive because they have a bigger cushion than the rest of us.
And our clientele is all ends of that spectrum. There’s no — the — the — the notion that some people have, well, once someone’s made a certain amount of money they’re — they’re just trying to preserve it. There are certainly clients that — that exhibit that behavior, but there are an equal number who want to optimize it and aren’t in a completely defensive mindset. So, it depends on the personality type.
RITHOLTZ: Very interesting. One of the clichés of the industry is three generations from, you know, short tales to short tales, referring that generational wealth very often gets — I don’t want to say wasted, but frittered away irresponsibly or recklessly. Some people take too much risk. How do you manage around that? Do you — do you ever have families coming to you and say, “Hey, we want to leave money to the next generation, but we want to make sure they get it and that it’s not just, you know, Ferraris and — and weekends in Vegas.”
FRADKIN: Yes, all the time. Again, every family is different. Every client is different but, you know, one thing to — one thing that I think is a little bit unfair in — in — not by you, but in the characterization that you refer to is this notion, well, you know, by the third generation it is, you know, frittered away.
I think you — you have to remember a couple things. First, when — when we say it’s frittered away, the comparison point is often to someone who did the extraordinary. So if I started from nothing and created $1 billion — $1 billion of wealth, it’s a little unfair to say my kids or my grandkids, you know, they’re not as smart as I am because, you know, they didn’t do it, too.
You know, People who have created extraordinary wealth have done so, by definition, it’s — it’s extraordinary, and it’s not reasonable. Even if you have bright, talented, you know, high-functioning kids, it’s not reasonable to assume that each generation is just going to — you know, mom made $1 billion. Mom’s kid made $2 billion and — and mom’s grandkid made — made $4 billion. You know, it’s — mathematically, that’s not a reasonable probability. That’s sad.
There is definitely an art to optimizing wealth through the generations. And, of course, it starts in the home and how you raise kids and values and, you know, what you demand of them or not. But a lot of our clients do a great job of trying to steward their wealth, trying to educate their kids, trying to make use of family governance to — to help everyone understand how things work for the family. And so, each client is different, but as with most things, the more you put into it, the more you’re likely to get out of it.
And for those who believe it’s an important responsibility to steward that wealth, pass it to future generations, educate those generations, make them or trying to help them be important members of society, they tend to get better outcomes than the rest of us. It’s a — it’s a very — it’s, you know, raising kids and money are two challenging vectors, but we see some great examples of people stewarding wealth through multiple generations not just the — the founder, so to speak.
RITHOLTZ: Quite interesting. Let’s talk a little bit about what you call Goals Driven Wealth Management. Start out with what — what exactly is that.
FRADKIN: Sure. Goals Driven Wealth Management at Northern Trust is the framework that — that we’ve devised to build personalized wealth plans for clients and it focuses on helping them achieve their individual goals with confidence. It provides a big picture of their wealth and transparent steps on how to manage and optimize wealth over time.
So, Barry, one way to think about it is — and I’m being a little bit facetious, but just to make the point, it used to be in this industry that the starting point for how money might be managed was a function of your outlook on the market. You think equities are going to go up, et cetera, so you allocate more to equities.
Goals Driven Wealth Management comes at investing through a different lens. The starting point is not so much our call on the markets though that will be important at some point. Our starting point in Goals Driven is what are you and your family trying to accomplish.
Once we understand what you’re trying to accomplish and the assets you need to accomplish it, we can, in effect, back in to how to deploy those assets — in stocks, bonds, other asset classes — to give you the best probability of achieving your life goals over time. So, it’s really just a different starting point for how to think about creating an asset allocation that is most effective for you and your family.
RITHOLTZ: So, let’s talk about that framework. And again, the question comes back, how different is it for the ultra-high net worth than for the merely wealthy or — or is there a lot of overlapping between the two different types of planning?
FRADKIN: The process is really the same no matter where you are on the wealth spectrum. You and your family have goals, and whether you have $1 million, $100 million, $1 billion, $10 billion or whatever the number is, you have something you want to achieve over time. You plan to live to age 90 or 100. This is what you need to live in the style to which you want to be accustomed, and we do a variety of work to figure out, first of all, are you asset-sufficient, meaning under reasonable scenarios, do I have enough if I steward it effectively to live my life the way I want to live it over time? And that happens whether you have, you know — again, whatever the number is, $500,000 or $10 million.
The difference, Barry, comes in with the flexibility and options that you have as you create more wealth. So, the starting point is the same: understand your goals, understand your needs, and let’s figure out an asset allocation to give you the best chance to get there.
What becomes different for people in the ultra-high net worth space relative to the rest of us is that they can take advantage of more planning techniques. They can take advantage of more techniques to optimize philanthropy. They can take advantage of gifting to future generations and so forth, and so the process is the same. But as you accumulate more money, in general, you have more flexibility on some other things you can do.
The ultra-high net worth also have more investment optionality. They have the ability to invest in asset classes like private equity hedge fund and so forth where they may have to trade off some liquidity for a period of time. Those of us who are lower on the spectrum may not be able to endure that in a down market. Those who have more wealth can — can oftentimes weather that storm more. So, the process is the same, but you get more flexibility as your wealth grows.
RITHOLTZ: We’re going to talk more of about alternative investments in a little bit. I want to stick with a couple of interesting things I read in some Northern Trust research. One of the things that I kind of knew, but I didn’t realize it was this intense was the number of clients you see relocating to new states. It’s been a record volume. Some of that is pandemic related, some of it predates the pandemic. How does that challenge the planning process? How different is it from state-to-state when it comes to things like tax planning? You mentioned trust. You mentioned philanthropic issues. What happens when somebody picks up from one state and relocates to another state?
FRADKIN: Yeah, it’s an interesting question. Look, clients relocating has always been with us. If you look at Northern Trust history, we are headquartered in Chicago in the middle of the United States. It’s cold here in the winter, lovely city, but it does get rather cold at wintertime. And often times, as people age and, you know, their kids finish school and so forth, they opt for better environments in the wintertime, so they may want to be in Florida or Arizona or Texas or California.
So, one phenomenon we’ve always seen is migration from state-to-state. That phenomenon is also impacted by state tax rates, by state tax considerations. And so, both, because of the pandemic and for tax reasons and lifestyle reasons, were continuing to see movement across state lines. And so, you know, I think the — the message to urban planners is taxes do matter to people. It’s not necessarily the only factor, but even affluent people will think through where do they want to be, where do they want to live, what environment to they want to be in, and what’s the tax impact for their clients. And that phenomenon is — is alive and well. It’s always been there, but it — it does seem to be important as different states consider different policies, if you will. People — residents make their choices, and so it’s — it’s — it’s a phenomenon that’s very much at the front of mind for many of our clients.
RITHOLTZ: Interesting. You mentioned taxes. There was a new administration came to town this year, and the expectations are there will be some sort of change in tax policy, potentially including increases in capital gains and increases in estate taxes and, in some cases, fairly substantial increases. How do you plan around that? And since nothing is known for certain in advance what an administration is — is going to do, how do you make decisions in — in the face of that uncertainty?
FRADKIN: Yeah, I think our starting point on behalf of our clients is to prepare rather than predict. So, let me give you an example that — that you referred to. The newly proposed tax law change would change the lifetime gift and estate tax exemption amount from $11.7 million down to $5 million. And what this means for people that built up substantial wealth is that if the proposal goes forward as — as offered, you have until the end of this year if you want to make a gift to your heirs of — if you can afford to and if you want to, make a gift of $11.7 million. And again, I can’t tell you whether this will happen.
But if we just think about the financial impact here, if you have enough capacity to do that and you choose to do it, you can take $11.7 million out of your estate today, get it to your kids, grandkids, whoever it happens to be tax-free as opposed to, on January 1st, if the law goes forward only as — as offered, you can only do $5 million. And what that means is the difference between — sorry to get, you know, numbers all over — but the difference between 11.7 and five, which is $6.7 million will be taxed, you know, when you die at a — at a high rate.
And so we have literally thousands of clients all across the country and each one we’re working with individually to evaluate what’s their financial circumstance, what do they want to do, do they want to make the gift. And by the way, this — this — this tax law change may or may not happen, so people have to make a choice without knowing for sure whether it’s going to happen.
I think the bottom line though is people are looking at this carefully. They’re studying it and they’re trying to prepare and make judgments about what might happen and what’s best for their individual circumstance. But tax law changes matter and — and we are in the business of helping our clients figure out what’s the best choice for them with the information that we have.
RITHOLTZ: Quite, quite interesting. So, we talked a little bit about alternatives earlier. Let’s address that a bit. There seems to be a growing appetite for all manner of — of alternative investments given that stocks and bonds are all a little bit pricey. Let’s start with private equity. What — what sort of demand is there from your clients for private equity. And — and how do you guys respond to the question of potentially better returns in exchange for far less liquidity?
FRADKIN: Sure. Look, investment has become much more granular over the decades and again, just to be facetious, you know, large-cap stocks versus high quality bonds, you know, 40 years ago. Today, clients think in terms of small-cap, mid-cap, large-cap, value, international, emerging markets, private equity, and thousands of flavors of private equity; hedge fund the same thing.
So, in the quest for optimizing returns, clients and their professional money managers, Northern Trust included, have searched for different asset classes to combine together to give people the best chance to — to achieve their objectives. Private equity clearly has been in the aggregate — there are winners and losers in private equity, but has been a asset class that has done well for many.
There are tradeoffs with private equity, particularly in terms of liquidity. But I would say amongst our clientele, the appetite for private equity and private equity, as a more normalized asset class, continues to grow. It’s not the right asset class for every client, but for clients who have the capacity, the risk tolerance and so forth, it — it definitely can play an important role in a client’s portfolio. And increasingly, we’re seeing more use of private equity today than we did say 10 years ago.
RITHOLTZ: What about venture capital or hedge funds, two totally different entities from both each other in private equity, what’s the demand like for those products?
FRADKIN: Demand exists for venture capital and for hedge funds as well. Again, the devil is in the detail, not all hedge funds are created equally. The — the — the fees that they charge, the performance that they’ve delivered can differ substantially, but there is again this same notion of I want to diversify my portfolio. I want a — a range of options and so-called alternative investments. Whether you call it private equity, venture capital, hedge funds seem to continue to be growing in appeal to our clientele.
RITHOLTZ: What about crypto and things like blockchain and Ethereum? There seems to be a lot of real interest in the space. Are — are you finding your client bases crypto-curious?
FRADKIN: I would say the demand for crypto is more muted amongst our clientele than some of what you read in the public press. And that doesn’t mean we have examples of clients who have invested in crypto and done exceptionally well in a right time. But I would say, in general, if I had to caricature it, I would say that crypto is still an evolving asset class that is misunderstood by many. And I think most are treating it carefully.
And the ones that are making crypto investments are viewing it more as a — more as a roll of the dice than a rational analytical view of what crypto is trading at today and what it’s going to trade it tomorrow. They view it as a bit of a roll the dice. They may jump in a little bit, but they understand that what goes up can also go down. So, I would say amongst our clientele overall, crypto is still not widely in use.
RITHOLTZ: So, we mentioned briefly the market is certainly pricier than it was five or 10 years ago. How do you manage around stocks and bonds neither of which are inexpensive?
FRADKIN: Yeah, look, I think for many of our clients, the market does go up, the market got does go down. And one of the great features of our — the goals-driven methodology that we use for clients is that we build a portfolio such that after a lot of analytical work to evaluate their goals and so forth that enables them to endure and not have to sell in a down market.
We — we create something that’s called a portfolio reserve. I would liken it to the moat around your castle. Some people like a wide deep moat, some people need a narrower and less deep mode, but think of that as a high-quality fixed income. If the stock market goes down, your — your bonds are still fine. You can still pay your mortgage. Life is good. You can wait until the market goes up or — or returns to normal.
So, the one thing we know on behalf of our clients is markets go up and down, and so you have to plan and prepare for that. And so, it’s very difficult to know. You know, again using the COVID-19 example, I think they’re a lot of people who might have argued the markets are going to crash, you know, everyone’s working from home and we can’t get the essentials, and people don’t want to go to the grocery store, and yet the market went up dramatically. So, we try and take a long-stewarded view and help our clients plan and prepare themselves so that when the market does go down, they can get through and — and not have to take adverse steps and sell in dire circumstance. And that’s been very helpful for our clients.
RITHOLTZ: So, in terms of forward return expectations, does that — and historically low-bond yields, high equity prices tend to suggest low returns going forward, does that work its way into the planning process or is that really more of an academic theory?
FRADKIN: No, it absolutely works its way into the planning process because our starting point is what needs does a client have over the near-term for financial resources. We — we got to make sure they can buy their groceries, and pay their mortgage, and we have to deploy assets against those goals. But once, in working with a client, we figured out the right mix of assets to — to enable them to — to afford those goals over a reasonable period of time, we then have to deploy the rest of the portfolio toward so-called risk assets, equities, private equity, hedge funds, venture — whatever the asset class. And in so doing, we have to bring our judgment about risk and return expectations for each of those asset classes. So, our view of asset classes and what they’re likely to bring over the relatively short-term is still an important part of the process.
RITHOLTZ: So, what do you tell investors who say, “You know, I’m really not happy with my muni bond portfolio. It’s barely thrown off two or 2.5 percent.” Investors are always seen to be looking for more yield. How do you respond to that group of clients?
FRADKIN: Yeah, I think it — my — our response is really you have to remember what you’re trying to do with that muni bond portfolio. No one is saying it’s a great high returning asset class, but that’s not its role. Its role is to be — I’m making this up, Barry, but generally, the role of that muni bond portfolio is to provide you with certainty, security, confidence, and not have to worry about the other part of your portfolio, let’s just call that equities gyrating up and down.
So, of course, people want their muni bonds or their high-quality fixed income to return as much as it can, and it’s our job to try and help people achieve that. But I think you always have to come back to what role is this trying to play. And for most clients, it’s trying to play a role of stability, and reliability, and consistency, and that’s the paramount feature. And in providing that consistency and — and stability and predictability, they give up a little bit of return on that asset class, but they’re trying to get that elsewhere with their equities, private equity, and so forth.
So, you had — you had discussed previously, hey, you know, it’s up to us to make the most of a low rate environment. What does that mean? Get — how does one make the most of a low rate environment?
FRADKIN: Well, I think, you know, low — low rates create — low interest rates create challenges and opportunities. Maybe two simple ways to think about it are, one, on the challenge side, if you’re living on a fixed income as assets reprice to — and you’re reliant on bonds — your bonds to provide income, the lower rates make the yield on those bonds lower, and so that’s bad from, you know, how much cash flow I have to — to fill my needs.
The flipside to that is that when rates are very low, if you want to, if it’s appropriate, if it’s thoughtfully done, you can use credit rather than liquidating stocks to — you know, if you want to buy a new toy, so to speak, a boat, whatever it happens to be, one way to do that is to sell stocks in your portfolio and buy the — you know, whatever it is you want to buy. Another way is to let those stocks keep working on your behalf and, because rates are so low, take advantage of credit. Take a loan, buy that boat and — or whatever it happens to be and pay it back over time. So low interest rates, you know, how can have different conflicting phenomenon, opportunities on the credit side and headwinds on the bond investment site.
RITHOLTZ: So — so how do you incorporate all this inflation chatter to — to your planning? We’ve started to see rates tick up the 10-year as — as recording this just about 1.5 percent. And I know there’s an irony in saying that rates are all the way up to 1.5 percent, which historically is incredibly low. How do you figure inflation into your modeling and — and thinking about the future?
FRADKIN: Yeah, well, we use multi-scenario modeling. The — the reality is no one knows and so you have to, you know, the — the prognosticators will — will have a view. Some — some believe inflation is here and is going to continue. Others argue it’s so-called transitory. And the truth is we don’t know. We’ll — we’ll find that out tomorrow, so to speak.
And so as we work through planning with our clients, we generally are running multiple scenarios, low inflation, medium inflation, high inflation. And we’re trying — as we — as we help clients make decisions, we’re trying to make the best judgment we can at a given point in time. But that’s why you — you really have to — be you have to plan for multiple scenarios and bring agility to your process because we don’t know whether the stock market is going up or down. We don’t know whether inflation will be higher or lower. We have a view. We can have probabilities.
But as we’ve seen, whether it was with 2008 or COVID, we — everyone can be wrong. And so, you have to plan and adapt and leave yourself a buffer for when you are wrong, and hopefully it’s not — not catastrophic.
RITHOLTZ: So, I know I only have you for a little bit of time. Let me jump to my favorite questions that I ask all of my guests, starting with tell us what you’re streaming these days, what’s keeping you entertained at home, either on Netflix or Amazon Prime or — or wherever.
FRADKIN: Well, I’ve — I’ve been working hard so I — I can’t say I’ve — I’ve made great use of Netflix. But what I have just started and this will show you, Barry, how far behind I am is I’ve just started Ted Lasso. So I’m behind the rest of the world, but that’s what I’m on right now.
RITHOLTZ: All right. Well, well, you’ll — I could tell you this much, you will enjoy it and — and enjoy catching up with us. What about mentors? Who helped to shape your career?
FRADKIN: You know, I’ve had a lot of mentors at Northern Trust over the years, people who were senior to me and people who weren’t, but I learned from everyone. I think when I think about mentors, for me, it’s less about people with whom I work and maybe it’s my interest in history. But I try and learn from people who have overcome insurmountable odds, the Mahatma Gandhis, the Martin Luther Kings, the Winston Churchills, the Vaclav Havels, the Abraham Lincoln.
And there’s so much wisdom that I see in people like that because they really faced incredible circumstances and worked through them generally to good outcomes. And so there — those great thinkers are probably the people I’ve learned the most from as I wouldn’t call them mentors to me, but I’ve certainly read about all of them and — and learned a lot from each of them.
RITHOLTZ: Let’s talk about books. What are you reading right now and what — what are some of your favorites?
FRADKIN: You know, I think in keeping with that theme of mentors over periods of time that interest me, I’ve really enjoyed “The Splendid and the Vile” by Eric Larson, which is about Churchill and the blitz of World War II. And — and again, it — it helps you — it helps me to see just how dire the circumstances were and what he and others had to navigate through.
The other book that I’ve dusted off recently, I read some time ago, but I think in view of the pandemic, it seemed interesting to me was “The Hot Zone” by Richard Preston, which has nothing to do with the pandemic, but there are parallels to what we’re dealing with, and it was sort of a gripping — a gripping book if you have time for a good read.
RITHOLTZ: Sounds interesting. What sort of advice would you give to a recent college grad who is interested in a career in either investment management or finance?
FRADKIN: Yeah, I think, Barry, I’d offer a — a — a couple of themes on this. And I — I don’t know that I narrowed these themes to an interest in investments or finance, although I think they do overlap. But I’d start by saying, it probably be easiest place to get my view there would be to go to YouTube and I — I gave a commencement address at the University of Illinois Chicago and tried to formulate those themes for — for young people.
But a — but a few that come to mind at least through my lens are comfort is the enemy of accomplishment. If you want to be the best you can be, you can never be satisfied with where you are. You’ve got to push, push, push and make yourself better each and every day in everything you touch.
I think a couple of the other themes that would come to me would be in — in the same vein, we see this in Northern Trust all the time. Excellence is not a part-time job. For people who want to be excellent, who want to do the best job for our clients and our shareholders, you can’t be excellent only when it’s convenient, only when you want to do it or only when you feel like it. You’ve — you’ve got to — excellence is an all-in phenomenon.
And then probably the — the — the last thing that comes to my mind is persevere beyond your accomplishments. It’s not what you did yesterday, it’s — you can be proud of what you’ve accomplished. But again, you want to be better going forward. And so be proud of who you are, be proud of your grades, and your — your school, and your degrees, and all that sort of stuff, but those are what you did, you know, two years ago, five years ago, 10 years ago whatever it happens to be, keep pushing forward to be the best you can be. So, persevere beyond your accomplishments.
RITHOLTZ: And our final question, what do you know about the world of investing today you wish you knew 35 years ago when you were first starting with Northern Trust?
FRADKIN: That is a long list, Barry, but I think what I would say is you don’t have to be right on everything and sometimes being right is more about luck and timing than it is about specific analytical acumen. Uninspiring choices in a bull market can turn out just fine, and well-reasoned ideas in a down market can turn out to be not so good. So, get the direction right more often than not and you’ll be just fine.
RITHOLTZ: Really good advice. Thank you, Steve, for being so generous with your time. We’ve been speaking with Steve Fradkin. He is the President of Northern Trust Wealth Management.
If you enjoy this conversation, well, be sure and check out any of the other 388 prior discussions we’ve had over the past seven years. You can find those wherever you normally find your favorite podcast, iTunes, Spotify, wherever.
We love your comments, feedback, and suggestions. Write to us at firstname.lastname@example.org. You can sign up for my daily suggested reading list at ritholtz.com. Check out my regular column at bloomberg.com/opinion. Follow me on Twitter @ritholtz.
I would be remiss if I did not thank the crack that helps put these conversations together each week. Paris Wald is my Producer. Michael Batnick is my Head of Research. Atika Valbrun is our Project Manager.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.