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Integrating Advanced Risk and Tax Management in UMAs with Lee Chertavian

In this episode, Jack talks with Lee Chertavian, Operating Partner at Long Ridge Equity Partners.

Lee is one of the pioneers in the advisory space. He was the CEO of Placemark, a sophisticated asset management company, which was purchased by Envestnet seven years ago. Lee led its growth to nearly $16 billion in assets under management with more than 45,000 clients. Furthermore, Lee finished his MBA with distinction at Harvard Business School.

Lee and Jack discuss the improved tax management in UMAs, six key trends in fintech, and the role of tech in enabling advisors to make better decisions.

What Lee has to say

“Consider a client’s entire lifestream. We need to figure out planning. We need to integrate, not just the tax on the portfolio, but their whole tax situation. And fortunately, so much data is becoming more digitized that we have the ability to bring that in—to help the advisor make those better decisions for clients.”

– Lee Chertavian, Operating Partner, Long Ridge Equity Partners

Read the full transcript

Jack Sharry: Hello, and welcome to WealthTech on Deck. Our podcast is a series of conversations with industry leaders around the future of financial advice. And while we spend much of our time talking about how digital and human advice are coming together today and into the future, I’d like to speak with people who have a rich history in our business to gain some perspective on where we’ve come from, and to have a better view on where it all leads. So today, our guest is a real difference maker in our business. He’s a good friend, Lee Chertavian. Lee was an early leader in the advisory space, he was the CEO of Placemark, a very sophisticated asset manager that was purchased by Envestnet seven years ago. Lee, thanks for joining us today. And as you and I do, from time to time, I’m really looking forward to this conversation.

Lee Chertavian: As am I Jack, happy to be here.

Jack Sharry: So Lee, you’ve been around for a bit all around the advisory space, some interesting background, please share that with our, with our audience.

Lee Chertavian: I’d be happy to. So I got into the money management business right out of college. And then in between my two years at Harvard Business School, I was in the bond department of Fidelity. And I had a great experience. You know, fidelity was a much smaller, different company at that point. But they were really innovative, really forward looking. And it was a great experience. But I quickly realized I didn’t want to manage money. You know, 40 years ago was very different than today. You know, doctors ran hospitals and portfolio managers ran investment firms. And if you weren’t going to be a portfolio manager, there really wasn’t a place for you. I took a little segue from the wealth management, money management business, and I did what any good, newly minted MBA did back then I joined Bain and Company as a management consultant at Bain was a great experience. I often tell people, I learned more in my two years at Bain, and I did it like two years at Harvard Business School. But once again, I knew I didn’t want to be a consultant for my life, I wanted to run something. Well, one of my managers had left Bain and gone to a small private company called transnational group. And he pulled me over to work for him. And I had an excellent experience. I started companies in Canada, in the UK, in France and Germany for them, and finally came back to the US and started a mutual fund company. And that’s what really sort of brought me back to the wealth management business. And it was, again, a great experience. But I quickly learned that the fellow on that company was was not going to share equity. So I needed to find something else to do. In 1995, I became the fourth employee at a startup called affiliated managers group. Many of you may know it, now it’s a roll up of asset management firms. When I started, we had one affiliate, and about a billion dollars in assets under management. And when I left five and a half years later, we had 15 affiliates, 92 billion under management, and we had taken the company public. And it was a great experience.

Jack Sharry: That’s great. So but from there, Lee, how did you wind up with Placemark? I mean, how did that all get started?

Lee Chertavian: Well, I mean, it’s, again, a longer story, but I left affiliate managers group thinking I was going to start a company, and then the market cracked, so there was no capital to be raised. And it wasn’t gonna happen for quite some time. And I got recruited into what was basically a call i That’s what became Placemark Investments, sort of a cross between an asset manager and a FinTech firm. And then we course built that up and sold it to invest that in 2014. By that time, we had 16 billion in assets under management, nearly 50,000 clients, we were managing over 250,000 portfolios, making millions of trades every day through multiple clearing sources.

Jack Sharry: And a lot of what you did, as I recall, maybe explain for our audience, you were really an innovator around for taxes. And similar what parametric is today maybe make that compare and contrast.

Lee Chertavian: Yeah, so we really felt there was a an opportunity to provide a higher level of wealth management, really around the types of things that could be done for an institutional investor, green that to the retail level, making customized individualized decisions, and that was much of what the company was about.

Jack Sharry: So let’s talk a little bit more about Placemark. And the team that you assembled, you guys were real innovators. So talk about sort of the role you played because it was a pretty important role. As I recall, I lived through it and was a fan. We’ve had many conversations while you were building up place. Barbara talked a little bit if you would about Placemarks evolution.

Lee Chertavian: Sure. A little history. So again, it was a And when I first talked to the recruiter, I said, Well, that’s a it should explain it was a community of stock pickers and they had lots of eyeballs and no revenue. do. And so when I first talked to a recruiter, I said, No, that’s silly, I’m not interested in the suddenly Would you just go talk to them and tell them what you think and said, Okay, get longer story. But what I realized is that they had three things that were important. One was they had a strong technology team. And I’m not a technology guy, I’ve been more marketing, sales, product development, those sorts of things. Number two, they still had capital, they had raised their last round of capital, close three days before the NASDAQ cracked in March of 2000. And they raised $20 million, and an 80 million pre money valuation for a company that had no revenue, which, you know, and they still had a decent and about 13 million left when I joined. So, you know, we knew we were going to need capital to get through the next 234 years, we could raise money again. And finally, they had this little kernel of technology focused on managing taxes better. I’ve been in the wealth management business long enough to know, there was something we could do with that I didn’t quite know what yet, but I thought it was interesting.

Jack Sharry: So that brings us to, frankly, what you turned into a very solid business and you have those capabilities in place, capital and taxes and all the rest. But so you took it much further, I mean, play smart became a real innovator, a real leader in the space at a time for our audience who may not have been around at the time around turnkey asset management provider, you were at the sophisticated end of what that was, and what that became,

Lee Chertavian: You know, it’s funny, Jack, but I think that people look at a successful company. And so it wasn’t that obvious, it was obvious that was going to work for that. And I don’t believe that’s true. You know, I spend a lot of my time in the private equity space now looking at companies and evaluating deals, and all have trials and tribulations they go through, and it’s my firm belief that every successful company is part lucky, but part smart. So for us, the smart part was managing taxes better. Yeah, the lucky part was the rise of the Unified Managed Account. So all these firms were sitting there saying, I gotta offer a unified managed account, how do I take all these different separate account portfolios that managers trade on individually? How do I put them all in one custodial account? Yeah, we had solved all those issues in order to enable the higher levels of risk and tax management. So you know, we went to the market selling this great tax service, and we displayed it all excited, and the client or the prospect would come back to us and say, Well, all I need is a rebalance. Or can you do that? And we’d say, yeah, we can do that. That’s easy. And our business became enabling major, full service firms to provide a unified managed account for their advisors. And we’d start by doing the simpler stuff like you know, rebalancing and cash flow management, and then little by little, get them to understand more about what we could do with risk and taxes.

Jack Sharry: You know, I recall, you and I did a, an MMI conference panel thing, as we actually had to, we did many of them over time. I remember you and I talking about if you recall this, you and I talking about the UMH, this is probably shoot 20 years ago, something like that. And you guys were on the cutting edge of the UMA. And I’ve always contended, and we’ll talk a little bit about UMH in a bit. But the UMA was always what the industry could come up with, given its capabilities of at the time, always desirous of managing the household. Any common as you look back, and we’ll talk about looking forward to minute.

Lee Chertavian: One of our board members said to be a lot when we get excited about some of these great features. He said, Lee, remember, a lot of the pioneers get shot by the Indians. So you know, there’s, there’s a lot that still killed can be done. But at that point, you know, when we were doing this 15 years ago, just getting a unified management account was a challenge.

Jack Sharry: So let’s shift gears a little bit. Let’s talk about what you’re doing now. And well, first of all, when you describe what that is, because I know you have a front row seat on what the future looks like involved with a private equity firm, but when you describe that a little bit.

Lee Chertavian: Yeah, I’m very fortunate because most of my career, I was on the operating side. And now I’m on the investing side. And I joined a company called Long Ridge Equity Partners. They are a growth stage private equity firm, focused on fintech. Most of everything invest in is fintech. So I help them look at deals and evaluate deals. And they also always searching for deals, trying to understand what’s going on in the market. So I feel really fortunate at this point in my career to have a very different type of experience, and one that I’m doing quite a bit.

Jack Sharry: Yeah. So talk about that a little bit. What are you seeing what, what excites you? What concerns you probably doesn’t concern you so much is what’s the opportunity out there? What do you say?

Lee Chertavian: You know, valuations are high right now in the market. And that’s, you know, we go through these cycles. And, you know, I like listening to the folks that are doing this a lot longer than I have to hear about how these things go up and down, but we’re in that sort of frothy stage of the market now. And it’s interesting to watch how, you know, folks need to be disciplined if they’re going to get the right return for their for their clients. I think it’s also interesting to see the types of technology and the types of ideas people have, you know, I mean, just some of them are fascinating. And I think at the same time, there is a, you know, that same sort of hesitancy around, let’s not get too far ahead, you know, get, we can have a great, great product. But if it’s too far ahead, the advisors willing to take it on and the company’s willing to take it, you know, then then it’s not going to be a successful company.

Jack Sharry: So talk a little bit, if you’re worried about some of the issues, I’m sure you’re seeing around fee compression, around some of the trends in terms of FinTech and wealth management, as I call it, the confluence of human and digital advices, as FinTech comes together with asset management, because at the end of the day, you got to have something to show for your, whatever value you’re trying to add. So talk a little bit if you’re worried about what you’re seeing.

Lee Chertavian: So I’d say that we’re trying to get a view on where financial technology is going. And you have to think about what’s driving that. Okay. So I’ve sort of boiled this down to about six different things that really I think are driving with things are going. Number one is certainly fee compression advisors simply have to handle more clients in less time if they want to maintain their income. So that’s, that’s a very key and relevant point, I don’t think the profession is going away, it’ll continue to get worse, I think there’s been a paradigm shift in advice. It used to be you made a trade for the client that made him money. And then he went on to the next one in the next one, right? It was about making money. Now, I’d argue it’s about doing the best in the long term with the money the client has. And we have a group of advisors had grown up in that first model. And we’re trying to, you know, bring him along to the second model. Some are making that transition well, and some aren’t. Number three, it’s a rise of the robots. I mean, look at all these robots that have gone on, is that mean? It’s the end of advice? I don’t think so. But certainly that’s a big factor. Let’s talk about product proliferation. I mean, years ago, stocks and bonds, right? That was it, those are even pretty simple. Now, you’ve got ETFs, UITs, you know, structured notes, contingent deferred annuities, to say nothing about cryptocurrencies, I think it’s extremely hard for any advisor to really have a handle on all of those different things into to be able to advise clients across that expanse of different types of products. And finally, I would add, information has become ubiquitous and efficient. So you used to go to advisory because they had the information. Now you can get it anywhere online, go look up a Morningstar rating and all the information on a fun, it’s all there. And at the same time, the market has become so much more efficient. Because of information out there. If there’s a piece of information on a on a on a particular stock that comes out a new space, the price suggests within nanoseconds, you know, so it’s a very different marketplace for an advisor to be able to show the value.

Jack Sharry: So I know you have a point of view on trends that are driving FinTech and wealth management that this whole space, what do you share your point of view, particularly since you are talking to companies every day about where they’re going, what they’re trying to achieve? So fill us in.

Lee Chertavian: Probably isn’t everything, Jack. But three things that I think a lot about in the FinTech, wealth management space. One is about how do we enable advisors to make better decisions for their clients, we just talked about, you know, the product complexity they have to planning complexity is there. And you know, just like medicines changed, you know, if you need a dis surgery, you don’t go to a surgeon, you don’t go to an orthopedic surgeon, you go to spinal specialist today, well, how can a advisor be a spinal specialist, you know, all the different things that they need to think about and accomplish. But we can do that with technology, right? We can help that advisor make all those different types of decisions. So I think really enabling advisors to make better decisions is critical. You know, as I mentioned before, about Placemark you know, when we got into it, unified managed account was hot. Now everyone’s talking about unified managed household, I think some are doing a better job at that than others. But I believe we even need to go further. We need to consider a client’s entire life stream. We need to figure out planning, we need to integrate with tax, not just the tax on the portfolio, but their whole tax situation in their life. And to get tech is the answer. And fortunately, so much data is becoming more digitized, that we have the ability to bring that in to help the adviser make those better decisions for clients. And finally, I don’t want to think a lot about his financial fraud. And I’m not just talking about identity theft. I’m talking about ransomware elder financial abuse, things like that. I just spoke to a firm a couple of days ago claimed that you elder fraud families who’s seven times more money from elder fraud than they do from identity theft? It’s a big issue. And you know, as an industry, I don’t think we’re there yet. I call it Pardon me, but password. Hell, no all of us deal with password hell where you know, you’ve got all these passwords, you try to keep track of you forget them, they make you reset them every six months, or even worse. So use double authentication, you’re on an airplane, you need to get a code in your phone and over the phone doesn’t work, you can’t use it. So I think we need to do a much better job protecting our clients from that type of fraud. And again, I think technology is critical to enabling that.

Jack Sharry: Well, you have not disappointed with sharing your perspective on the rich history we happen to have shared as terms of being colleagues in the industry. What are three key takeaways that you you’d share with our audience some things they should maybe using their day to day of building strategy around wealthtech fintech.

Lee Chertavian: So I’ve probably hinted a little bit at these, Jack. But I’d start with don’t count out the importance of human interactions, that human advice. You know, you and I, or Jack are old enough to remember when no load funds were going to take over the world and don’t need an advisor anymore, right? Yep, absolutely happen. Yeah, and most of the research I’ve seen, says it’s 70 to 80% of people don’t want to make their own decisions. They want help. And I have two friends who were very high positions, CFO and CEO at prominent financial firms. They want to make their own decisions. They don’t feel they can do it. They’ve asked me, you know, who should they go to? So people still want to deal with people. And I don’t believe Millennials are different. I believe Millennials have people too. And they’re going to have the same predispositions and predilections that we all have, I’d say Secondly, life expectancy will continue to rise. When Franklin Roosevelt signed the social security legislation, average life expectancy was 64 years old. So he set the retirement age at 65. Well, what’s happened? Life expectancy today is 78 and a half years, and yet we’ve increased the retirement age, but one, maybe two years, if you’re really young today, what does that mean? You got a real chance of outliving your money, right. And that’s become even more important, more critical what than it was before. And in fact, I many of us are going to have to plan for Social Security just not being part of our retirement, that it just won’t be there. So planning is even more critical and complex than it’s been before. And I guess the last point, I would say is, I think trust and independence will be critical. What’s the fastest growing segment of the advisory market right now? Independent RIAs, and these folks are doing it without a name brand behind them? How are they doing it? They’re getting all this source of of new clients from referrals. Someone a person trusts is referring that person to an advisor that they trust, it’s all built on trust. Does that mean you know, it’s doom for the White House’s? I don’t believe so at all, I think they could be in the best position if they can combine trust, and brand. But they have to be very careful with their brand, and some have been tarnished over the years. But if they can truly show people that their advisors are independent, that they their advice can be trusted, they could be in the best position going forward.

Jack Sharry: Let me add another element. It’s trust and advice, for sure. But you also have to integrate the technology, particularly on the household level, and what you talked about earlier, going way beyond just cost and risk and tax. And those are all critical, of course, but much bigger than that. But it really comes down to how you integrate and then make the user experience of both the client and advisor level. So accessible, nothing like setting up a travel day or trip or what have you. It’s got to be that kind of intuitive and easy. I assume you agree.

Lee Chertavian: I totally agree. And, you know, I told you mentioned before, I think one of the difficulties and what we had a Placemark was, you know, an optimization engine makes decisions that are not always easy to understand. And some advisors were hesitant to use it because they couldn’t tell the client why a particular trade happen. I just viewed a a company’s website yesterday, a company we’re looking to invest in, and they now have like a little cheat sheet next to each state’s trades, of the type of reasons why the trades were made. Those are the type things we’re going to use technologists a small example of using technology to help advisors.

Jack Sharry: One of the things that’s been fun about this podcast is I have conversations with people like yourself that have different perspectives even who you deal with and so on. I had a it hasn’t released yet. It will by the time probably this this podcast comes up. But I talked to Dr. Daniel Crosby, who is a behavioral economist. And some of the work he’s doing is fascinating around talking about cheat sheet. It’s basically as people go to do the wrong thing. They’re designing into their software, suggesting that might not be the best thing to do and suggests See an alternative as to what they might might achieve. And I think we’re gonna see a lot more around the whole behavioral thing.

Lee Chertavian: I mean, when your client calls because the market has just dropped, you know, three weeks in a row, and you can instantly pursue some analysis about the last 10 times that happened, why that would have been a bad trade, you will be much more beneficial than just trying to talk them out on emotion.

Jack Sharry: Yeah, and I know you did this in your Placemark days, UMA, which at the time was what was available from a technology standpoint. And now as we move toward you, mh, and we have a lot more to go, certainly we’re early stage there, I think you’d agree. But the critical elements are risk and tax if you can get that right. And they impact each other. And so the whole idea is, how do you look at the whole thing, look at their bigger tax picture, look at their risk situation, where they are in terms of their age, and longevity and all that all that becomes and it gets, as you’ve mentioned a few times, it’s highly complex. It’s just not simple. It’s not something the human brain can get their head around, especially when the emotions are arising.

Lee Chertavian: For sure. Yeah, totally agree. Yep.

Jack Sharry: So as we like to do each week, we talk to our guests about something away from their day to day of FinTech, wealth tech, asset management, wealth management, all the rest. So what do you do outside of work that is, has nothing to do with what we just talked about, that you do for fun that you’re particularly passionate about?

Lee Chertavian: My daughter calls me the king of hobbies. So I do a lot of things I ski I golf, I hunt, I fish. But probably the thing people wouldn’t know about me is that my wife and I run a 16-horse boarding operation outside of Boston. And you know, it’s really funny because neither of us did anything with horses growing up. At about four years old, our daughter started with Mommy, I want to ride a pony. And she took a horse to Bowdoin, she took her horse to Harvard Business School, and she kept riding. She’s now 33. She fortunately lives about 50 minutes away from us, and she still ended has just had her first child. So thank you. So, you know, still rides very avidly. So we have this little horse operation. And before you ask Jack, I’ll get the answer. The question I usually get is Do you ride? And the answer is well, I used to I did learn to ride as an adult. But about six years ago, I saddled up my wife’s horse to the field. He dumped me and I broke a couple of ribs. So now I confine my riding to the John Deere.

Jack Sharry: And your I gather your wife and daughters. They’re there. They’re members of your little horse operation.

Lee Chertavian: Oh, yes. Yeah, yeah. Elizabeth, our daughter is here almost every day riding. My wife has a horse that fortunately very bomb police feed likes to, to hack around and they do a lot to get they go to shows and competitions and stuff.

Jack Sharry: So it’s great. Well, as always, the fun to talk with you really appreciate your perspective, not only historically speaking, because we lived through a lot of it together as friends and colleagues in the industry. But love what you’re doing now in terms of what’s next. I know you’re I think we share a passion for what’s next and how can we make it available to more and benefit from it for all concern.

Lee Chertavian: And Jack, I appreciate the opportunities to talk a little write a few views as you know, I I love what you guys are doing at LifeYield and, and wish you all the success.

Jack Sharry: Yeah, thanks. This has been a lot of fun to catch up and much appreciated and look forward to our next conversation. Thank you.