“What We Love is Transparency” – Casey Smith, Principal, Wiser Wealth Management

ActiveETFs | InFocus had a conversation with Casey Smith, who is the Principal and President of Wiser Wealth Management, a registered investment advisor based out of Marietta, Georgia. Wiser Wealth Management is a fee-only wealth management firm offering portfolio management, tax preparation, and estate planning. Wiser Wealth has been utilizing ETFs in client portfolios since 2004 and follows a passive management philosophy. Casey chats with us about how ETFs fit into his investment framework, where he’s considered utilizing Active ETFs and his take on transparency in Active ETFs.

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Shishir Nigam – ActiveETFs | InFocus: Casey, tell us a little about yourself and how you got into the money management business?

Casey Smith – Wiser Wealth Management: I actually invested in my first mutual fund when I was 13 years old, so I guess I’ve always been interested in this aspect of the business. Growing up I always thought I wanted to be a mutual fund manager and as I got closer to picking a career path, I found that personal finance probably more suited towards me. I was a finance major in college and coming out of college I entered into the brokerage business. I eventually broke away from that into a fee-only investment advisory firm which is now called Wiser Wealth Management.

Shishir: What kind of clients do you target and how much money is Wiser Wealth currently managing?

Casey: We have 110 clients right now, most of our clients have net worth of $1 million plus. We have three focus groups and that’s just how the business has developed. We have a lot of airline pilots that are a part of our firm. We also seem to have a lot of widowed clients which include several clients from my predecessor. And the third group is our regular, everyday, blue-collared workers who did a great job saving. A lot of them have approached a little over $800,000 in their IRAs and then they get very nice pensions when they leave the firm. And so with those three service groups, even through 2007 and 2008, we have continued to grow.

Shishir: What is your portfolio management philosophy and how do ETFs fit into that framework?

Casey: Ever since my years as an undergrad, I really latched onto a Professor that was really adamant about passively managing assets. Obviously, the brokerage business is very anti-passive, they really push active products. So when I broke off on my own, I really started doing my own research and we are a passively-managed firm. We’ve been using index funds since 2001. In the beginning we used index mutual funds. We’ve developed our portfolios over the years to take a global view of the world, not just large, mid, small and international. A “traditional” passive portfolio today – I just don’t know that it can survive long term. We currently have, what we consider 12 long term healthy asset classes that we want in our portfolios and we just simply change allocation based on risk tolerance and in some cases we may only run with 8-10 asset classes in our aggressive portfolios. Like our conservative portfolios, we use a lot more fixed-income type ETFs. We do make up most of our portfolios with passively-managed ETFs and one ETN for commodities. We do have one actively-managed ETF as well.

Shishir: Have you considered the use of actively-managed ETFs in client portfolios?

Casey: We are using MINT. As any advisor would know, we are having issues with yield right now, with new money that’s coming in. There’s a portion of our portfolios that we keep in cash because people are making withdrawals. They’re basically monthly pay checks. Keeping 10% of your money in cash is almost painful these days because even inside a TD Ameritrade brokerage account, you’re only getting maybe 0.25% – 0.5% in yield. MINT allows us to lower our cash holdings, put it in MINT and you at least get a higher yield, versus sitting in cash.

Shishir: And have you considered utilizing Active ETFs for asset classes other than cash?

Casey: No, we haven’t. Certainly, we’ve looked at them, especially when some of the first ones were rolled out though MINT’s philosophy made a lot more sense to me – being actively-managed in that asset class versus being passively-managed. Once a year, we do a large portfolio review where we basically break down everything we know and understand and rebuild from the beginning. And most years, the portfolios come up about where they are right now, as far as how we allocate. But in some years, new things come to light, like for instance MINT this last year.

Shishir: What advantages or disadvantages do you see from an investor’s standpoint when you compare actively-managed ETFs to active mutual funds?

Casey: First of all, what we love is transparency. It’s a joke, but we have windows in every room in our office and even the rooms that don’t go to the outside have a window on the inside. It’s because we want to send a signal that we are transparent, there’s no smoke and mirrors. So obviously, being able to see what’s inside the portfolios is important. One of the big negatives with active mutual funds is the tax consequences. We’ve seen separate managed accounts from clients’ assets coming in – they often have to pay $20,000 in federal estimated quarterly taxes. But when you break down the option strategies, all the active trading, after you look at their tax return, deduct that from their actual rate of return, they actually matched the S&P 500. So obviously, mutual funds wouldn’t be quite as bad as some of these boutique firms with their managed accounts. That’s a plus for actively-managed ETFs versus a mutual fund.

The other part is liquidity.  At Wiser Wealth Management, we’re not buying and selling on a constant basis. We rode out the financial crisis just fine, yes some days it was a little painful, but we didn’t have any withdrawals, we didn’t lose any clients and in the end they’re fully recovered from the losses of 2007-08. But it’s always nice to know that you can hit a button and know that you’re out and you don’t have to wait until close of business – that’s a big advantage.

A big thing for me, obviously, is lower expenses. I just did some work for the airline pilots association, with one of the airlines based in Atlanta. Their employer refused to allow ETFs inside a brokerage link. Due to a lack of ETF education, they didn’t understand the benefits of ETFs. We showed them that the ETFs are 60% cheaper than their mutual fund options and that over a 20-year period, the indexes basically tracked all their premier managers with the mutual funds. If a person came to work at the airline and retired 30 years later, they would have 11% more money in their account because of the reduction in cost.

Wiser is an independent registered investment advisory firm, we’re not stock brokers, we don’t pitch any products, we don’t work for a commission. We continuously search for what’s in the best interest of our clients and our toolbox is built by us, not by a corporation. Somewhere on your site, I think you referred to this too, which you don’t see a whole lot – mutual funds are sold. I could name 3 brokerage houses right now and I can almost guarantee you your funds will be 90% American funds. You’re telling me that that’s the best for you in every single category, in every single asset class? No, they’re just getting sold products. Obviously, if you’re using actively-managed ETFs, you’ve got an advisor who’s thinking outside the box at least, whether you agree with active or passive or not.

One of the negative issues that I see with Active ETFs is the talent side. I think you’ve got to get some big players on the active management side to bring over assets to make actively managed ETFs more competitive.

Shishir: Do you see the transparency required of actively-managed ETFs in the US being beneficial or detrimental to investors?

Casey: To me and to the client, I think it’s beneficial. Now, if an asset manager is worried about giving away his plays then I can sympathize with that side of the argument. Part of the problem in the whole mutual fund business is compensation. Fund managers get paid on a quarterly basis because their performance is directly tied to where they’re ranking within Morningstar and other rating agencies. Nobody says, “Hey, these quarterly rankings are fine, but we really want to see where you can take us in 10 years”, nobody does that. If you can be in the top 10 in Money Magazine, then your fund get a tremendous inflow of money, which causes new problems for current investors. This compensation model creates “window-dressing,” where managers are trying to cover up the additional risk that they took to get their returns. So, I guess there are two answers. Obviously, if I have to pick sides, I’m going to pick the consumer’s and fund managers probably need to clean up their act a little bit anyway.

Shishir: What kind of improvements do you think are necessary before the use of actively-managed ETFs become more widespread among advisors?

Casey: You have to look at where all the money is. The majority of the money is not in small independent firms like mine. It’s growing—we have a huge upwards trend in assets that we’re pulling from large brokerage houses. Wire houses and banks are doing everything to look just like us without the fiduciary responsibility, but they’re not. Now, if the fiduciary standard is made industry wide where brokerage houses have to act as fiduciaries, just like individuals like myself running independent practices, then that could open up an avenue to active management through ETFs. Because at that point, you’ll have to be able to show why you’re different and what fiduciary really means. Transparency may be the new marketing catch phrase. The problem is compensation, I just don’t know how advisors are going to be able to sell these things, who don’t get paid a flat fee or a percentage of assets under management. Our firm does either flat hourly billing or charge a percentage of assets under management, which is traditional in most firms like mine. I think it comes down to compensation, who’s working for whom.

Shishir: Are there any sectors or strategies in particular where you see actively-managed ETFs being more relevant than their passive counterparts?

Casey: That’s a good point. I think that there could be an avenue into that. There’s a new ETN right now from UBS. Essentially, the ETN (TRND) is tracking the S&P 500 unless it drops below its 200-day moving average. If it drops below the 200-day moving average, then it buys treasuries. But there’s really no trading per se. I could see some more main stream strategies like that being employed with the Active ETF. You have to take on the tax consequences of that but that might catch more speed than an ETN with a promissory note from a company that had a $45 billion bailout. Obviously, in bigger sectors, that could possibly take hold but it depends on what the cost is. I don’t know that it will take away money from the passive sector, I could see it taking money away from the active manager who’s picking his own stocks. So instead he picks an outside manager to handle a sector that maybe he’s not as familiar with.

Shishir: That’s great. Thanks a lot for joining us Casey and we wish you all the best.

Casey: Thank you very much.