Disrupt Your Thinking About ETFs with Rob Isbitts and Samita Thephasit

ETFPortfolios.com is an investment advisory service that offers a contemporary, common-sense, analytical approach to navigating modern investment markets.  In this episode of Power Your Advice, Doug Heikkinen speaks with chief investment officer Rob Isbitts and financial advisor, Samita Thephasit, from ETFPortfolios.com and Sungarden Investment Management about how the nature of investing has changed, and what advisors need to do to keep up.

  • How advisors need to adjust to today’s investment environment
  • How ETF investing has changed over the last few years
  • What the proprietary analytical tools created by Rob & his team do and how they help advisors make investment decisions
  • Rob & Samita’s advice to advisors who leverage ETFs to achieve their clients’ goals

Resources: ETFPortfolios.com | Sungarden Investment Management


How to Put Alternative ETFs to Work for Clients

Use Technical Analysis to Make Investing Decisions

This commentary is provided for informational and educational purposes only. The information expressed herein reflects our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to investment advice or a recommended course of action in any given situation. The risk associated with utilizing hedging strategies; Hedging instruments such as options and certain ETFs are typically intended to limit or reduce investment risk, but can also be expected to limit or reduce the potential for profit or result in losses. No assurance can be given that any particular hedging strategy will be successful and achieve its desired objective, or will make any profit, or will be able to avoid incurring losses. Certain hedging transactions may involve the use of leverage, which could result in losses exceeding the amount committed in the transaction. Rob Isbitts is an Investment Advisor Representative of Dynamic Wealth Advisor dba Sungarden Investment Management. All advisory services are offered through Dynamic Wealth Advisors. Rob Isbitts is a Senior Contributor at Forbes.com, as well as a contributor with U.S. News and World Report, these are considered outside business activities and are separate and apart from his activities as an investment advisor representative with Dynamic Wealth Advisors.



Rob Isbitts, Douglas Heikkinen, Samita Thephasit

Douglas Heikkinen  00:01

Hello, and welcome to the power your advice podcast. The power your advice podcast is designed to bring financial advisors new ideas, why those ideas should be considered and how to implement them into your business. This podcast is brought to you by advisorpedia, the best place advisors can come to to grow their minds and businesses. . .

This is your host, Doug Heikkinen. And we're here today with Rob Isbitts and Samita Thephasit of ETF portfolios, which is an advisory service for financial advisors. Welcome.

Rob Isbitts  00:34

Well, hi, Doug. And thanks for having us.

Douglas Heikkinen  00:38

Rob, you and I have been around for a bit, but the nature of investing has changed a lot. Tell us how,

Rob Isbitts  00:46

oh, dog, you are absolutely right about that. And when it comes to the nature of investing, and how it's changed, as they say, let me count the ways. Let's start with the stock market. It used to be a place where savers would accumulate a portfolio of blue chip stocks or mutual funds. And human financial advisors were there to help them do it right. The markets would ebb and flow, but you would focus on the long term. And you'd be confident that the market would go up enough over a period of years to make for solid long term returns, the advisor was happy, and they were happy because their clients were happy. And their practice would grow, they'd get a gradual increase from the client assets appreciating and they would get a steady stream of referrals from their mostly local marketing efforts. And you could buy bonds to complement your stock portfolio, those bonds would pay you four or five, maybe up to 8% a year even for fairly high quality stuff. And the prices didn't change much. In fact, I suspect many advisor clients didn't even realize that bond prices could change at all for a while. And so I started my career in Wall Street in New York City back in 1986. And I moved to South Florida at 97. And I co founded an RA in 98. And had a couple stops since then, obviously culminating in Sun garden about a decade ago that my wife and I started. So back then, in the 80s and early 90s, an advisor was more likely a broker at a big brokerage firm. And if you heard someone say ri a, you assumed they were talking about retirement accounts, and they were just mixing up the letters in IRA. So that's the way it was back then you fast forward to today. And of course the RA business has boomed. That's phenomenal. A lot of great things have come with it. The greatest thing is that advisors can distinguish between what a fiduciary stands for and what it means if your advisor isn't a fiduciary. But there is a major relentless force working against even those fiduciary advisors, the age of technology and digital communication, instant mass social interactions, social media, the financial market information that used to be a little bit more difficult to find it went global many years ago, and the market started to act global interconnected an instant. And then what's happened the last few years is that seemingly everyone is investment expert. And everyone's opinions thrown out there except for we fiduciaries who play by a very specific and controlled set of rules for good reason. We can't go out there and just say something that's speculative, or whatever it happens to be on our mind that day. And I think there's good reason for that. So I'd like to say we've never had more information at our fingertips, and we've never used less of it. And advisors have to deal with this creeping public view that what they do is a commodity or it can be learned on youtube for free. And so Doug, when I think of how investing has changed, and I put it through the filter of today's financial advisor, I'm reminded of a scene from one of my favorite movies. I'm a baseball fan, and the movies Bull Durham, and the pitching coach, played by by a hilarious fella by the name of Robert wall. He goes out to the mound in the whole infield gathers around and they start talking about everything except baseball want to get one of the guys for his wedding gift, how to remove a curse that a player thinks was put on his bat. Then the umpire comes out and tells him Hey, get back to playing and the pitching coach lists all the things that we're talking about. And he says so you see we're dealing with a lot of stuff here. And that's kind of what's changed about investing Doug. Investors now have a lot more stuff to deal with than they did 10 years ago or even five years ago. And that impacts how the financial advisors particularly those that are focused in part on the investing for their clients, they have to look at a stock market is near an all time high, but so much of its been driven by the Fang stocks. So if you're a dividend or a value focused investor, those aren't even on your radar. But advisors try to explain that to clients. And they often get what we call the Heisman, that pose where the client is pushing them away, essentially saying, Hey, I don't want to hear it, you know, the markets going up. And the stock market is not even where the greatest changes occurred. That's been in the bond market. Because here we are. 13 years after the old treasury secretary, Hank Paulson was famously reportedly literally on his knees, pleading Congress to bail out the US economy. So he didn't just completely go into the tank. 13 years of modest but positive economic growth later, interest rates are still a neighborhood of zero, except outside the US where you have trillions of dollars worth of bonds that are priced with negative yields. So that's created not a blip in history, but an entire era that forces a major rethinking about how to invest for client objectives, and what tools to equip yourself with. So to summarize, stocks are high bonds or low investor expectations are likely unreasonable. And the financial advisor has to sort all that out. Like they said, in Bull Durham, we're dealing with a lot of stuff here.

Douglas Heikkinen  06:30

So what do advisors need to do to change with it?

Rob Isbitts  06:36

I think that depends on who the advisor is. I've interacted with 1000s of financial advisors in my now 35 year career to the industry, it's the only industry I've ever been in. And the quantum me considers that I guess, a big enough random sample to identify a few broad types within the industry, the ones who had the longest careers, maybe thinking about retiring, maybe not this year, next year, but within the next decade. And for those folks, they're starting to do something that they may not have thought much about until recently transitioning and selling their practice. Well, if that's on their mind, the one thing they absolutely have to do, other than keep their clients happy, is to determine what investment philosophy process and strategy their clients will be getting. And even if retirement is far off for the advisor, they have to realize that are all time highs for equities, and near all time lows and bonds, this asset, and now I'm talking about their practice, not a stock or a bond, their practice is an asset. And they built it with their sweat and their energy for so many years. And now it's more at the whim of the markets at these extremes than at any time in their career. And so yeah, they do need to change, they need to change the way that they think about what fills a client portfolio over the next decade. And it's not as simple as finding a few ETFs and sticking them in a portfolio. It's not really about the product at all. It's about the process. It's the investment process. And one of the things I'm proudest about with the ETF portfolios comm service that we created is that we've literally taken 10s of 1000s of hours, I've spent researching ETFs, and constructing portfolios and setting investment strategy to fit a wide variety of client investment objectives. And we've dropped that cumulative knowledge into an easy to use process driven system that allows the adviser to be as independent or reliant on us as they wish. And they have that research to fall back on. But they can also just use it in whatever form they want to use it and kind of make it their own. So they also have direct access to the people, including the two year interviewing on this call, who create and sustain that research. And that hopefully relieves some of the product hunting pressure. And it allows them to make the investment process a real asset and differentiator in their practice. This is true for all advisors, but especially for the boutique financial advisor, the type that my firm and I have interacted with primarily over the years to set the scene for these folks. Their practice is big enough to earn a nice living, or it's on the way to doing so if they're newer in the business, but they need to wear a lot of hats to make that happen. And in recent years, this competitive pressure is building up around them. And in large part it's because of the investment environment having changed like I described earlier, and so that puts this boutique advisor in a precarious position. They can either adapt or they risk being that proverbial frog in the boiling water. They don't really know what's wrong until it's too late. And if that happens, they risk having to Take a job at a big firm lose their independence. And I've heard enough stories about this. And for well, meaning fiduciaries, we don't ever want to see that happen. independence is a big part of what makes us get up in the morning. So for that advisor to solidify their future, I think it starts with them deciding what ground rules and guardrails they're going to impose on their own practice. Specifically, I'm talking about the range and intention of every decision they make in the investment portfolio. And so for many experienced advisors, that 6040 era, medicine, none of this mattered, they got away with not having to think too much about the client portfolios and just let the market and some big fund companies take care of it for them. And over the next decade, advisors are going to be tested in a way that kind of reminds me of that famous Warren Buffett quote, when the tide goes out, you can see who is swimming naked. And so pardon the pun, but I guess my bottom line advice would be check your shorts and check them now. And Doug, that last reference to the buffet, quote, probably makes for one of the worst transitions back to a host in podcast history. But I think if you ask the Mita, her take on what advisors need to do to change their investment approach, you will get an additional perspective and I think a very intriguing answer.

Douglas Heikkinen  11:25

That's a great idea. Rob, Samita, you have a very interesting and unique background in this industry. And you're a generation younger than Rob and me. As Rob described it, you really drive the business plan for ETF portfolios calm. So in that role, give us your take on this question of how advisors need to adjust to how investing works today.

Samita Thephasit  11:48

Thank you, Rob suddenly covered the challenges facing the more experienced advisor. As someone who came to the US 10 years ago from Thailand, I've been immersed in what Gen X and millennials think of the advisory business and what they think they want from it. While our industry is pushing a lot of marketing dollars to try to create another generation of the 6040 buy and hold type of investor, I see differently. Younger investors want freedom of choice, they want to be educated. And thanks to growing up as a digital native, they are much quicker to identify when they're being sold and not advice. This is important to advisors of all ages for one particular reason. These folks have gone to inherit a massive amount of wealth. Whereas what that wealth right now, it's the AU m that the advisors are getting paid on every year by the parents and grandparents of these younger investors. As an example, the modern portfolio theory or the MPT, it's 40 years old now. I mean, I wasn't around yet. A lot has come along since then. So to assume that the next generation is going to, you know, endorse whatever work in the past, and do the same thing that the generation before them seems like a big gamble to me.

Douglas Heikkinen  13:09

So how has ETF investing evolved over the last few years?

Rob Isbitts  13:15

Well, Doug, I think the funny thing about ETFs is that they're like this overnight success in the eyes of investors. That's despite the fact they've been around for nearly 30 years. The great news for financial advisors using ETFs, or considering using them as part of the portfolio management process now is that there's been a lot more innovation and advancement than there has been acceptance and adoption of ETFs by their clients. So in other words, it's kind of all there for them already. It's just being underused. So some advisors will hear that and say, Well, what do you mean Robbie, ETF inflows are massive, and they're getting bigger by the month. And that's true. But if you look deeper, you see that this whole ETF craze on the part of advisors and investors has a lot more to do with two things than anything else, getting access to the headline indexes like the s&p 500, where so much of the flows go and getting the lowest cost investment they can. That's why so many of the robo advisors are using and I quote, low cost ETFs to lure in younger investors. And it's like a big brainwashing. The message is just invest in the best known market index, keep your costs down and you'll be fine. Even john Bogle, the iconic founder of Vanguard late and great. He worried in his later years that creation index investing might get over simplified and I would add to it and I've written about this a lot over the years. The cost of an ETF or a fund or even a management fee. Those are not your biggest costs of investing. Taxes aren't even The biggest cause of investing from my experience, the biggest cause for investing is really lousy performance in bear markets and bear market cycles. Probably another story for another day. But the on ETFs. The reality is that they're a fantastic tool. But there's so much more than a cheap way to track an index. It's especially the s&p 500, which is selling at a higher valuation than at any point in history except for the.com bubble. And that's no coincidence, because not a day goes by when I don't read or hear something that reminds me of investing through that.com era.

Douglas Heikkinen  15:41

So from what I understand ETF, portfolios.com analyzes ETFs differently. Let's start with your investment climate indicator. What does it evaluate? And how is it calculated? And how does it help you and ultimately, the advisor?

Rob Isbitts  15:58

Well, to put it in context, I think any advisor that has clients pay them based on a u m assets under management owes it to the client to determine a few things that will be part of their firm's brand and their identity. They need three things and investment philosophy, an investment process and an investment strategy. This essentially puts you in the arena so that whatever market conditions come up, you can communicate clearly to clients, how your approach to their money is going to deal with it. Your philosophy, your process and your strategy. These are the prerequisites for effectively processing and analyzing markets and market cycles as they play out. So the sun garden investment climate indicator ici, which we've had around in various forms for well over a decade, is an alternative to relying on market forecasts and guessing instead of having clients pull you down that well of predicting what stocks or rates are going to do. The ici is unemotional, it's quantitatively based. And we've tested it back over decades. And we conducted a ton of trial and error analysis, so we have confidence in it. So it's an ongoing assessment of the market climate, it doesn't guess it assesses. So what is it assess? It assesses and this is very important. The current balance between potential investment reward and risk of major loss, I'm going to repeat that, because it might be the most important thing that people hear this entire discussion, please in this ici discussion, the current balance between potential investment reward and the risk of major loss at any point in time, that can imply a portfolio risk position that's either neutral compared to whatever a client's normal level is, or it can be one or two notches above or below that level. Now, why do it that way? Well, because in 35 years of doing this, if I've learned one thing is that on a risk tolerance scale, where 10 is the most aggressive and zero is put it under your mattress, someone might be a seven, but when the market gets really rough, for more than a few weeks, just about every seven wants to know that their advisor can temporarily shift them toward a six, five, a four, a three, based on some consistent discipline they follow, not reacting and panicking to what the market just did. That's the kind of thing I think that breeds confidence between an advisor and a client. You see, we think our entire industry has it wrong in this respect. They're all about predicting the future. We approach it this way, every investment has the potential to increase in value at any time, every investment. But what's different about every investment is how much major loss is inherent with making that investment or holding that investment. So over the years, I've seen this different angle helps to promote some really meaningful educational conversations with clients, and they remember it. So the ici becomes a sort of Northstar for the rest of our investment process. After all, what the most well heeled investors want to know at the end of the day is that their odds of keeping what they have are strong, and that their advisor is prioritizing that and that is very different from the 6040 be a long term investor garbage that we rebel against at our place.

Samita Thephasit  19:31

And we don't keep the ici a secret I just you know want to make sure that we bring that up. It's updated on a free section of ETF portfolios.com once a week, and advices don't need to go to the site each week we deliver newsletters to advices for free. It takes about one minute to read, but it gets them the key talking points from Rob latest thinking and for advisors who subscribe to the free section of the site. They will get our upcoming white paper that goes into more in depth on the ici and shows its full history. I also want to mention that the ici is not intended to be used in isolation. It is yet one helpful input to a holistic contemporary investment process and portfolio design strategy. The ici is number one role is to make advisor and client think, and specifically to consider that the markets go up and down based on a wide variety of factors like economic valuation, emotional and political factors.

Douglas Heikkinen  20:37

Rob, tell us about the yarp score score you and your son developed, what does it measure? And how does it help you create your models and portfolio adjustments?

Rob Isbitts  20:48

Well, thanks for asking about yarp, Doug, because you see, while a lot of my investment work is currently focused around helping advisors to create portfolios comprised of ETFs when it comes to equity ETFs there's something our industry tends to forget, equity ETFs are just premeditated sets of individual stocks, right? I say premeditated because they're typically based on an index methodology for equity ETFs that prioritize investing in stocks that pay dividends, or stocks that have above average dividend yields are growing their dividends at an above average rate, your dividend growth, there's an additional level of analysis needed versus the stocks that don't pay out any of their earnings as dividends. So in addition to my ETF work over the decades, I also include individual stocks. And so my strategies I have for a very long time. And when it comes to equity investing, I have tended to work with folks who prioritize given and yield quality, stability and fundamental value. I've never been one of those. Let's find the next superstock type of investors never. In particular, I guess because I'm a Chartist by nature, a technician, I noticed certain tendencies in the value and trend in the stocks dividend history. This was several years ago. And I started to apply that analysis as one of several inputs in my stock selection process, the more I worked at it, the higher level of confidence that I developed in that technique. And it helped me to better distinguish between attractive value stocks that pay decent dividends, and the proverbial value traps as we call them. And I also realized after exhaustive Google searching that no one had yet devoted much time to analyzing stocks in this way that I had developed. So I trademarked it. And we named it the statistic we created to analyze the dividend data. After ourselves. It's called the obits ratio. And when you take that is this ratio and then you apply our proprietary trend indicator system to it for dividend stocks, or dividend ETFs is what we call yarp. Yield at a reasonable price. And we trademarked that too. But Doug, things got really interesting about two years ago. So let me explain and digress here for a second, if you don't mind. At our firm, we have a long tradition of taking on summer interns, and we don't baby them, we throw them right in. I designed a summer investment analyst training program that decade ago, and we still use it each summer. A few years ago, a young college kid attending Indiana University's Kelley School of Business, who had developed a keen interest in equity and analysis and portfolio management approached me about being one of our summer interns. And that kid also happened to be my son, Tyler. And so after a couple of internship rounds, where we have doing grunt work, and just kind of learning the basics of investing in the summer of 2019, and I needed help with something, I wanted to take that yarp approach to value stock investing, and I wanted to tighten it up, quantify stress, test it and add some automation to it. So I gave my son the opportunity. Many kids his age, hope to have the opportunity to do to tell their father everything you'd be doing wrong and provide evidence of it through hard data. What kid wouldn't want that, right? So, Tyler spent about three months at summer drilling through our past trades, testing a wide variety of methods, and essentially brainstorming with me every day until summer of 19 was over and he went back to school for his junior year. But by that time, we had attracted the interest of s network, an index creation company now owned by alerion. The rest as they say is history. And in partnership with s network, we created a index which is on their site called the yard, the yard large cap value 50 index. We're just scratching the surface on how we think we can Fly yarp to help advisors and their clients and through this emerging partnership now with the folks that alerion and s network, we expect to have a lot more to say about all things you are as 2021 continues. But one key area right now, as you might expect, is applying that yarp methodology to ETFs. And we're doing so from both a top down and a bottom up standpoint, that is we measure your ratings on the ETF itself. But we also drill down to the underlying components and the weightings of the ETF and calculate a yarp rating that way, sort of from the ground up. So when it comes to yarp It's a piece of the ETF portfolios comm service, but it's just one of several analytical inputs we share with our clients.

Douglas Heikkinen  25:47

ETF portfolios comm also has a technical analysis system to help you in your management. How does that add value to your models?

Rob Isbitts  25:57

Well, as we point out on the ETF portfolios comm website. My late father, Carl is bits, who was one of my greatest mentors passed away in 2013. He taught me to chart stocks when I was 16 years old. And so I've been to charters for 40 years. It's what drove me to want a career in Wall Street when I was a kid growing up in New Jersey. I truly believe that the charts Tell us more than any other single form of analysis if you know how to read them. That is because today more than ever, the most powerful market forces incorporate price patterns into their decisions the algos etc. So if you don't have a clue as to what they're looking at, when they're swinging around the value of your clients portfolios that you get paid on, you're a distinct disadvantage. And I'm not talking about a day trading timeframe here we studied charts that evaluate that reward risk trade off over several timeframes anywhere from a couple of weeks out to several years out. And similarly to what my son and I did with yarp. I wanted to find a way to keep myself honest with my chart reading. When you have put all the time in to this industry like I have. You can't help but develop biases. So between Sunita and then another young quantitative analyst named Jonathan and a little help from my son Tyler. We converted my chart reading from kind of what Rob sees with his own eyes to what would rob see if he were here looking at the chart, but he's not. In other words, we automated it. And so we sort of created this automated version of Rob is his 40 year old stock Chartist. We jokingly call it not the robot but the robot. And all the clients of ETF portfolios comm get daily access that chart rating system applied to the ETFs, we've researched, or any other ETF or stock that they want to track, it's their service, and they get to talk to us about it whenever they want. So they can determine how to best use it in their practice, or so they can explain it to their clients, if they're following our house models, as we call them on the platform.

Douglas Heikkinen  28:15

So what advice do you have for advisors who leveraged ETFs to achieve their client's investment goals?

Samita Thephasit  28:23

Well, if by leverage, you mean investment with more money than you actually have? My advice is simple. Don't do it. But I think you mean leverage I said using ETFs in their practice, correct? Correct. In that case, my top suggestion would be put prices over product ETFs are not some magic bullet, but they are the last step of the well constructed, thought out investment process. And any advisor can go through that learning curve. And if they need help, we are here for them.

Rob Isbitts  28:55

Yeah, and dog I would add to what Sunita just said, I would advise advisors to use the kiss method, not the usual kiss method. To me Kiss stands for keep investment solutions simple. Keep investment solutions simple. That doesn't mean 6040 it and then go grab dinner and drinks because you're done. That worked for a while don't think it's going to work for the next decade. It means understanding that within the universe of 1000s of ETFs and beyond the same 10 or 20 that everybody seems to us. There is an effective pliable tool set at your disposal through the ETF universe and frankly, we think through ETF portfolios calm and people just need to learn how to use that. Your clients will thank you and you'll build tangible value for your practice because you will control the investment process instead of having others control it for you. I am living proof that if you do that, you can one day transition your practice to the next generation of professionals continue to focus more every day on the parts of the business that you love the most. For me, it's investing and coaching advisors, and be in better position to do for people what we all entered this business to do to make a difference in their financial situation, which in turn makes a difference in their lives.

Douglas Heikkinen  30:21

And I'm sure everybody can find you at where ...

Rob Isbitts  30:27

ETF portfolios.com for sure. You can also find us on some social media but you can email us directly as well Rob at Sun garden investment.com Sun garden is the parent company of all this. Robison garden investment, calm sumita at Sun garden investment calm for her, or if you simply Google my name, Rob his bits you'll see hundreds of articles and such that I've written over the years.

Douglas Heikkinen  30:57

Great. Rob. Samita. We really appreciate you joining us today.

Rob Isbitts  31:02

Thank you so much, Doug.

Douglas Heikkinen  31:05

For everybody at advisorpedia, our producer jakie beard and the power advice podcast team. Please follow us for all the latest updates on Twitter, LinkedIn, and Facebook all advisorpedia. This is Doug Heikkinen


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