Beacon Flash: Using Technology to Create a Safe Haven for Investments – A Conversation with Matt Radgowski, Halo Investing

 

Matt

What keeps me up at night is pace of innovation, outpacing the ability to harness, and I’ll say control. I don’t mean that from a smothering perspective, but like just controlling, right? How that advisor uses these powerful tools, how they end up in the client’s portfolio, the impacts that we have, we really wanna make sure that the outcome that we’re driving towards is what the investor experiences, and they do it again with the best outcome, least cost, least, risk that comes along with it.

Welcome to the Beacon Flash, the go-to podcast for enterprise wealth management professionals looking to stay ahead of the curve. Hosted by Chip Kispert, managing director of Beacon Strategies, this podcast explores the future of the industry and the most pressing issues facing today’s top leaders join us each week as we sit down with industry experts to discuss the opportunities and strategies for success.

Chip

Matt, welcome. I am so excited to finally have you on the Beacon Flash Podcast. Welcome.

Matt

Thank you very much. Yeah, share the excitement and definitely appreciate the opportunity to take some time to talk today. So thank you as well.

Chp

Awesome. So Matt, I’d look at you as one of the foremost experts and understanding, what the advisory world is doing today, the trends they’re going through.You and I have known each other for a number of years starting it with Morningstar when you’re at Morningstar. And now I’m excited to see what you’re doing with Halo. So I think that is, is super exciting and I think the opportunity is a great one.

Matt

Absolutely, super excited just about the impact. I know we’re gonna dig into protective investments and why and how, and, where they work. But that was really the draw, had an incredible run there with my teammates there at Morningstar. Great organization, but happy to turn to a new chapter here and see if we can help advisors do what they do better.

Chip

So as I said, you and I have known each other a long time. I think we’re just gonna get to it and get to the discussion we were talking about. So first and foremost, one of the things that when I was doing some background work on Halo, I saw this term protective investing, right?

Why should wealth firms and advisors care about protective investing? And maybe we even need to start by defining it.

Matt

For sure. Yeah, that obviously makes sense, right? From a nomenclature perspective, make sure we’re thinking and talking about the same things. And when we talk about what it is that we do here at Halo, or just in general, engaging advisors in the marketplace, protective investment we actually really chose that, that term with purpose and that really it covers in our eyes any investment that’s designed to help both generate returns within that client’s portfolio, but also provides an element of downside risk mitigation, right? Whether that’s protecting against downward market movements and volatility or securing income. And so when we think about protective investments, that would include things like buffer ETFs.

It would include things like annuity products but it also includes things like structured notes. And that’s been a very big focus of Halos trying to again educate the market on those products, what they can offer to that advisor, and more importantly, the clients and the outcomes that they can try.

The reason we talk about those things generally is we are always on the lookout for a better mousetrap. And so for us, while those are the products that we focus on today, I’ll say, annuity structure notes in particular, buffer ETFs as well. We’re always looking for another way to protect the investments of advisors and their clients.

And so we’re again, constantly on this journey engaging with solution providers to see what’s next. But we have what we have now, and we’re super excited about it.

Chip

Yeah. It’s really interesting. We have some, what I’ll call large RIAs that are our canary in the coal mine firms.

And both good and bad, right? Yes. And it’s interesting to see how they use the structured notes that you were talking about earlier, really as risk mitigation and to look at their portfolios and then how they use the structured notes. So you helping to define that protective investing is super helpful.

I’m curious because, you and I have talked about this for years, as you are talking to lots of advisors, you’re talking to lots of wealth firms. How is the relationship between the advisor and the investor changing when it comes to the product? That is going into their portfolios, right?

Because hey, it used to be, hey, buy me some mu, buy a mutual fund, right? Or Yes. And then it kinda moved to, Hey, I’m gonna manage a portfolio, but it’s gonna be equities and fixed income. It’s gonna be the traditional 60-40. Yes. What’s that relationship starting to look like and how’s it changing?

Matt

Yeah, for sure. And I think the big trend and then we’ll dig into some of the specifics, right? So how can we actually illustrate that this is really happening today. So I think, at the top level, if we think about the way that relationship is changing, we’re seeing a shift and it’s one of those secular, slower moving, you’ll see pockets of acceleration.

But this move from generating performance that beats the market right to this shift in a high degree of focus on. What is the impact I’m looking to make with this investment? What is the outcome that I’m driving towards? How do I actually personalize the investment for myself? So how do I make this portfolio look like me, right?

And so you’re seeing it in terms of things like alternative investments representing about 11% of client portfolios in aggregate today. To me that’s a response to, “I didn’t like what happened to me in the market” through periods of volatility. I wanna see if there’s a way to change that outcome.

You’re seeing, direct indexing, right? About a hundred billion flows into direct indexing solutions. And again, I look at that as an indication that individuals are looking for experiences that are tailored more towards them. And so we look at protective investing and say, wow, what could be more important than aligning The, the motivations for growth, income, and protection that individual has. I’d say we’re lagging, right? There was only about a hundred billion in issuance in the US last year in structured notes. If we zoom out globally just to give some data, I always, I think data helps paint the picture.

If you think about global markets, you have about 125. Or so trillion in, in global equity markets, only about a half a percent of those investments were actually protected. And so again, I know these are somewhat similar, but it’s like driving without car insurance.

It’s like having a home without homeowner’s insurance, operating without health insurance. It just seems foreign to have a portfolio that doesn’t have some level of protection integrated right. To drive towards that specific outcome that investors are looking for.

Chip

Early in my career when I worked for Alliance, we used to call it a hedge.

Matt

There you go. That’s right. And it’s in there. It’s funny we, not to take us too far off track, but you open the door, right? So like we do we talk about that, right? Should we describe this as a hedge equity strategy?

Does it, it’s connotations in the hedge fund world, does that scare some folks off? But we’re really trying, that’s why we call it protective investing. Really trying to boil it down into its basics. What are your motivations around appreciation, income and protection? And we want that vehicle to really align heavily.

There’s complexity underneath. We’re trying to really make sure that outcome, that’s really the focus, quite frankly, as we talked about, the investor, that outcome comes through and it comes through.

Chip

It’s interesting. I find it fascinating. We’ve had a couple of our Beacon roundtables so far.

We’ve had compliance, we’ve had operational excellence. And you mentioned alternatives before. You mentioned some of those things that used to be a four letter word and in many ways, right? Yet, yes. The interesting thing is we’re hearing, we’re seeing greater transparency, greater interest in the alt world because folks Have more information, more access, they’re generally accepted.

And quite frankly, from a relevant standpoint what we’re hearing is that firms that within their product shelf that aren’t utilizing some way, shape, or form of alts, whether they’re public or private are potentially losing their ability to be relevant.

Matt

For sure. Absolutely. I mentioned that about 11% of portfolio allocations there, we expect that to grow.

I totally agree. I think it’s you if you can get the client on board with the notion that the outcome is most important, right? That opens up this vehicle set, right? So if they begin to trust, That managed solution by the advisor, again, we would, we expect that 11% to continue to grow as well.

And I would share that we find ourselves in a really interesting spot. If you think about structured notes in particular, I’d say we see ourselves in an interesting spot. I think most alts providers see themselves in a similar spot. There’s this catchall, right? And what I do think is really important in terms of change to the industry is that we need to better categorize, right?

The transparency is there, right? I love tons of information and data around alternative investments. One of the things we’re really interested in is making sure that we begin to more finally deconstruct what that alternative landscape is. Always with a focus on what is that investment’s role within the portfolio.

Is it driving appreciation? Is it driving protection on the downside in terms of risk mitigation? Is it driving income? And really then making sure that the advisor is armed with the data and information and transparency they need, but also just from an integration perspective that they can easily end up in a managed portfolio or a portfolio solution.

So administration, operation, and ongoing management is easier as well.

Chip

And I think that drives us right into the next question I have, right? So when we look at pro, everybody likes to, if we look at the human race they wanna go one step farther, one step farther, right? So when we’re looking at the kind of the evolution of product that ultimately is impacting wealth firms and their advisors, and ultimately the end customer, where do we see trends going in terms of product evolution?

Matt

For sure. I think there’s two, right? So side by side I think you have technology and investment products living hand in hand. And I know that’s, again, well-traveled as well, but it’s, it is the reality, especially as you begin to think about how these more complex instruments can make their way into a portfolio.

You know that 11% we talked about today in the alternative space. Still pretty difficult, right? So I think where we’re seeing acceleration in terms of trending is operational and due diligence infrastructure to Yes. To make subscribing to these vehicles easier. Halo, one of them, but plenty of platforms, again, focused on creating that workflow.

Chip

Or doing the due diligence. So due diligence, that’s exactly first, as an example.

Matt

That’s exactly right. Now you’re seeing as well, from a due diligence perspective, acceleration there. Why is that due diligence needed? What you’re seeing from a product evolution is more finally parsing those alternatives.

So private equity, right? Venture capital, real estate of course, has always been in that space. But what you’re seeing though is the access to even Sub-sectors of, so a focus on more, industry specific things. I’ll take it to a crazy extreme, sitting on a panel recently with a fund that is focused on wine and spirits.

So at that level, I know I’m going to an extreme, but I think those are always good examples, right? So A fund that is designed to create alternative participation in wine and spirits. And so that’s an extreme example, but it is parsing up the category more finely. And what does that require? Does require technology to support due diligence and subscribing to these vehicles.

And then, but we always like to forget the day two challenges, which are, how do I monitor? To make sure this investment’s actually doing what I said it should do, and how do I track its performance, right? And how do I illustrate that performance, again, in a portfolio context for the advisor? It can’t, it can’t be hanging off the desk, right?

It can’t be a sidebar side gig. And so we are seeing a lot of work developing the tools, but also then integration. We’ve talked a lot about integration in the industry as a whole, but It is absolutely critical as we think about the alt space. Again, I know bumping around a little bit, but one thing you know, statistically I mentioned a hundred billion in assets, in structured notes, there’s, you can debate different, anywhere from 10 to 15 trillion in assets in managed portfolio solutions.

We want protective investments, we want alternatives to be embedded right in those assets. That’s our journey we’re on. And for us, it’s not about us bullying, right? Those current systems into, adopting our platform. It’s us meeting them where they work and integrating it into their world.

Chip

It is interesting cuz you brought, A really good point that I think that we haven’t really touched on yet. So you talked a little bit about the evolution of the product, the acceptance of the product, right? About it being small, but being more relevant in terms of how investors wanna structure their portfolios with their advisors.

But technology. So if we look traditionally at technology, these were one-offs they were hard to get to. Maybe you could get to ’em at a wirehouse or Yep. And then you look in the alt world and that’s the wild we used to be the wild west, right? So yes. Now we’re seeing firms like yourselves who are bundling these things.

They’re creating the framework. To enable advisors to, to more easily get these and having the due diligence work done, et cetera, et cetera. Yes. Can you talk to that a little bit?

Matt

Absolutely. And then that is one of the things where, quite frankly it’s a big part of the reason I believe I, I ended up where I am right now, with Halo in that the I mentioned, like making sure we meet the advisor and the enterprise in which they operate, where and how they work is critical. And so from a technology perspective, it requires us, anything we build, right? We operate our own platform today.

And just to give you a sense of. What we thought we needed to do there in order to create accessibility for these products was first and foremost, create a marketplace, right? So connect the advisor that wants to use the protective investment, the structured node with issuers of those notes, create an environment in which the advisor gets the best experience in terms of product features, right?

So the best protection, the best income, the best growth opportunity at the lowest cost. And the marketplace does that, right? It is basically, Open architecture, auction based technology. So the issuers will provide their best price for the solution and they compete for that business, which is great.

But the underpinnings of that, that are critical are a few things. One is data, right? We recognized early that, alright, if we’re going to be a participant, you, we need to have a very robust set of data and information that we can provide. Now it lives on our platform, but one of the things again, brought to the table to say, look, if we’re gonna, if we’re gonna play right in the, in, in the space in a big way to become more part of the core portfolio, we need to open up that data.

We need to make it available too, the pre-execution and post-trade technologies. And so we’re very amenable to opening up that data, so it’s interesting cuz you also used to see greater fees built into these, right? Yes. So mutual funds, before them and annuities, things like, The greater transparency is also bringing these down, right?

And sure, you guys gotta be paid, right? We get that, no problem. Sure. But it’s interesting, that balance and hey, tech costs, right? The bottom line tech costs. You guys gotta make a little bit. But all in all, I think what we’re seeing is we’re seeing price compression in a good way that’s gonna help the end investor.

Absolutely. Yeah. So we’re seeing that the price comes down tremendously right in, in two dimensions. One. Just the way the pricing is structured. And so one of the things we were very interested in is making sure that these products became readily accessible in advisory accounts. So again, from a fiduciary perspective, it enters into that.

So we were really excited about that. You can still buy ’em in both brokerage and advisory settings, but we do think it’s important to make them available in that fiduciary. Which again changes the pricing dynamics. But then just in general, to your point, significantly reducing, the cost of delivery is on our minds as well.

And that takes a couple forms. One is through the auction capability where there’s the competition. Yep. But the other thing we’re very interested in is, I mentioned this marketplace is two-sided, right? Where you have the issuers of the notes as well as the advisor using the capability.

And so we’re heavily focused on. Ways we can make the issuer’s life easier from an operational perspective, right? With the idea that if they can issue notes more effectively and efficiently, their cost of operations obviously come down. The characteristics of the note, the offering itself should in fact improve while its cost comes down as well.

That’s the motivation of our engagement with both sides of the market there. Yeah, I think it’s fascinating. Yeah I was just gonna say as well, like from a platform perspective, right? So two things, smartly, really built everything, in an API first type approach.

Recognizing that, yes, of course we’d love everyone to take our Halo platform as it is fully integrated into their world. We do recognize, again, some may want pieces and parts of that capability embedded into their own work. Okay, just fine. The other thing we did recognize is that you mentioned compliance earlier, right?

In terms of the other, sessions you host, which are hugely impactful, helpful. We do recognize that it’s not just about the advisor. Advisors are key and core, the investors they serve, but we look across investments platform and product. Risk management, compliance and risk.

The configurability we, we really designed a platform recognizing that and in general, application developers are doing this with an incredible amount of flexibility in terms of guardrails. So in two aspects, guardrails, right? Only make the products that you as an organization feel comfortable available to your advisor base.

We can help you set those guidelines very rigidly, very loosely, however you decide you want, might want to. The second is reporting. So you can literally get every data point you want. What happened, who clicked where, when did they click? What was the outcome? And so just making that tracking those in those interactions and then making that data a avail, available is super important to us and key to the success long term.

Got it. That’s great. I always like to ask this question as we’re starting to wrap up, what keeps you up at night specific to the well space and as it relates to Halo? I’m. Yeah. I’ve often heard the analogy, which I’d love, is financial services, wealth management. It can find itself in, play at times, like growing like a teenager, right?

Where they have arms outgrowing the legs, right? Torsos. And so it’s like this disproportionate growth. And so I, my, what keeps me up at night the most is the actual innovation that drives our growth. And so when you see, technologies get out ahead of themselves or products get out ahead of themselves, the concern is around, whether it’s inability to connect things together, right?

So from a technology integration workflow, but also just product use, these are, products are complex, right? And they, if I reflect upon our space in particular, there were some, in back, in, in the days there were some instruments that may have been put out to market that were less than ideal, right?

Let’s just say it from an investor’s perspective. These are powerful tools that can deliver powerful outcomes, and protective investments as well as other alternatives, as well as even just traditional investments. And so what keeps me up at night is the pace of innovation, outpacing the ability to harness.

And I’ll say control. I don’t mean that from a smothering perspective, but like just controlling, right? How that advisor uses these powerful tools, how they end up in the client’s portfolio, the impacts that we have. We really wanna make sure that the outcome that we’re driving towards is what the investor experiences and they do it again with the best outcome.

Lease cost, lease risk, that comes along with it. And so I do worry about that. Very cool, complex, straightforward and simple outcomes, but maybe very complex underlays and you just wanna make sure right, that they’re used appropriately, priced appropriately and that’s, the end investor is always on my mind.

But that I would say is what’s keeping me up at night. Super exciting pace of innovation. But you just have to be careful with it. It’s interesting how innovation is really the foot’s been on a gas pedal and Covid really was a driver of a lot of that innovation.

So I love that. You think about they always, they quote just the exponential growth of technology use and financial services. I do think it was obviously it’s a, it. Little silver lining in what was a terrible time, right? Just that adoption of technology.

So I, yeah, totally agree there. So Matt, one of the things we like to do is, after we’ve gone through this dialogue, give you 60 seconds to share your thoughts on an aspect of the business that’s passionate to you. So here’s your sixties. I appreciate that. And I mentioned the end investor, and that is really where my interests lie.

And I look at the, again, the great amount of innovation that’s happened. Obviously I have a passionate focus around protective investments and our mission really is to protect the world’s investments. And so I want to make sure that we basically align ourselves with the core capabilities today that the advisor has.

We use them too, I. Integrate protective investments into the core portfolio solutions that they’re offering. That’s where we’re focused. We don’t wanna, again, be hanging off the side of the desk. We don’t wanna be an afterthought. We wanna make sure that we’re very intelligently right and very, in a sophisticated way, aligning with the outcomes that the investor desires.

We’re integrating our protective investments, annuities, structure notes in particular, into those clients’ portfolios. And again, driving without car insurance, home without home insurance, operating without health insurance. We hope we quickly get to the point where we can’t imagine portfolios without some level of protection associated with them.

Matt, thank you for joining us on the Beacon Flash Podcast. I loved your comment. Team, thank you very much, chip. Appreciate it as. Until next time, we hope you enjoyed the latest episode of the Beacon Flash Podcast. We’re always working to bring you the latest insights and trends in the industry. To stay up to date, subscribe to our podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts.

And don’t forget to visit our website at www.beaconstrategiesllc.com to learn more about our consulting services and the Beacon roundtable offerings.