The Role of Model Portfolios in Modern Advisory Practices with Ryan Krystopowicz

Doug Heikkinen: Let's start by having you tell us a little bit about yourself and your journey to WisdomTree. I think your story is quite interesting..

Ryan Krystopowicz: Yeah well I entered the workforce in 2011 what a time to be an invstor. I thought, uh, picking stocks was pretty easy cause it was after the great financial crises so everything was pretty much going up I uh joined a registered investment advisor out of Manhattan We had a research team. I was covering stocks. I was the youngest one so they put the athleisure, the cybersecurity stocks, all the high flying ones and- It was great. But over that [00:01:00] time, I realized two things. Number one, not all stocks go up all the time. And then number two we would cover like the banking sector and things like that.

I'm like, we should just get a sector ETF would be so much easier than going through all the earnings transcripts and things like that. So the firm was looking into ETFs. I went to a lunch for RIAs hosted by WisdomTree and our global CIO, Jeremy Schwartz. And I just fell in love with the company. I mean, I was super impressed by the smart people.

They were pioneers in the factor based investing. They'd been around since 2006. But then I joined the firm in 2016. I left that RIA, I joined WisdomTree three years into working there. I had the opportunity to work on the model portfolio team doing operations as an, a product specialist.

And it made all the sense in the world to me. In 2011, when I joined that RIA, we had 600 million assets under management. So that was a large, that'd be like a billion dollar firm today, right? That was a large firm. We had four people on a research [00:02:00] team, a lot more, than the average RIA, but we couldn't keep up intellectually with the resources of an asset manager like WisdomTree.

And, we also saw that through the time advisors starting to be able to implement models with a click of a button on their custodian. As I said, I joined WisdomTree on the models. We barely went from any money invested in our models. When I first joined to over three and a half billion today, and then the industry has just exploded.

I mean, we've seen projections of AUM related to model portfolios could surpass 10 trillion by 2028. So it's just been a great journey so far.

Doug Heikkinen: That's great experience. Through that, what common misconceptions did you find advisors have about stock picking verses model based approaches?

Ryan Krystopowicz: It might be a little controversial, but I've done both. I've picked stocks and then I've helped advisors use models. And I'd say one misconception is that picking stocks is worth the time and energy. It's not. And this [00:03:00] is just the fact because. If most active managers come up short in outperforming benchmarks.

And we know this from the semiannual standard and poors. They have like the SPIVA US scorecards. When you think about it, if most of them underperform active managers, then how realistic is it an advisor who, according to morningstar typically spends like 20 percent of their capacity on investment management.

How realistic is it that they're going to be able to outperform when most active managers can't? And I'm a big fan of Jason Zweig he's actually touched upon this in a podcast, like 80 percent of wall street's best and brightest. He says are outperformed by the S and P 500 year in and year out. And they have all this quantitative and qualitative resources that smaller areas don't have.

So the competing on a playing field, that's completely skewed. And even if you steal man, his argument, and if you don't believe me and you say, you know what, there are advisors that are talented enough to consistently pick stocks and outperform, I would say lucky enough, but let's just say they're talented enough.

Why [00:04:00] would you want to be an advisor then? Why would you want to choose you know the route of a one percent assets under management fee that most few only advisors charge when you could start a hedge fund company right or you could start a investment newsletter with seemingly infinite return on investment like why be an advisor if you're that good at picking stocks and then so that's one misconception i'd say the second and last one i'll say is and this is a very popular one is that advisors believe that they lose their value proposition or their credibility as an advisor to their clients, if they outsource, the investments.

 We've seen research by TD Ameritrade and FA insight that did a really cool study. They asked advisors, do they think that their clients prefer them to manage investments in-house and over 70 percent said, Oh yeah, my clients absolutely want me to do it in-house. And then they surveyed the actual clients of those advisors and less than 20 percent said that they prefer their advisors to manage the money in-house.

So in other [00:05:00] words, a vast majority of advisors thought they needed to do in-house where a vast minority of clients actually thought it was necessary. And so, I kind of reject the premise that you lose your value proposition if you outsource investments. But even if you want to take the other side of it, nothing really has changed if you start picking managers versus picking investments, right? Michael Kitsix talks about the evolution of financial advisors, where they once were stock pickers, then they were picking mutual fund managers. Now they're picking ETFs, right? And that curation of investments evolved where now people, instead of like an advisor as a portfolio manager advisors, the PM model, they're an advisor as a curator, right? They're not just doing investments. They're doing financial planning, estate planning, budgeting, being a therapist to their clients. So I don't think models hurts that. I think actually models enhance that. And once again, I've done this, I've done stock picking and I've helped with models.

I feel pretty passionate about it.

Doug Heikkinen: Let's dig a [00:06:00] little deeper there. Why do you think clients perceive advisors positively when they use a third-party model portfolio and how do you think it impacts client relationships?

Ryan Krystopowicz: Yeah it's a great question.,

So, you know, one of your podcast episodes you had you had Mike Nessim and John Goodson on there and they were talking about how it's really tough to be a holistic wealth manager and manage money at the same time like you need to offer more than investments. They were talking about the keys to be a quarterback and look for opportunities to outsource. Well instead of the quarterback analogy, I like to use the analogy of a financial MD. So just like how a doctor takes care of the client's physical health advisors who help their clients achieve their outcomes for their financial health, right?

That's the financial MD part and when you look at it through that lens whether it's an advisor's clients or a doctor's patients. What people want from their providers is the right diagnosis [00:07:00] regardless of you know who develops it, right? So Doug let me ask you a question here I'll turn the uh, script on you.

Are you familiar with who Dr. Robin Combs is? I'm hoping not but are you familiar with who he is?

Doug Heikkinen: I am not.

Ryan Krystopowicz: Yeah, um totally fine. Let's just imagine that he's my general practitioner. What do I value in a general practitioner? I value my trust in him. I value his expertise to make the right diagnosis. Do I care if my general practitioner was the actual person who invented the blood test?

Of course not, right? I just care that the doctor knows how to perform that the test or someone on their staff does. So no offense to Dr. Combs, he's the actual inventor of the blood test, but we just want the right diagnosis regardless of how it's developed. And as I was saying before, clients just want the right portfolios regardless of how it's developed.

So you don't have to take my word for it, WisdomTree completed a research study, over 2000 individuals participated in this study regarding model portfolios and their [00:08:00] preferences. And what we found was that they really value the financial expertise that advisory firms provide.

And that's pretty obvious, right? That's why they hire advisor, but they also believe in leveraged expertise. And so there's a lot of ways that advisors can leverage outside expertise, but one that was obvious to clients. And so one of the things that we were able to do with this uh, was using third-party models, especially when we use analogies.

And so we use the analogy, most clients actually related a doctor making a diagnosis to an advisor applying a third-party model. And what was super interesting of what we found in the research study was that not only do clients welcome models, but actually a lot of them embrace it. So our study found that nine out of 10 clients found it acceptable for their advisor to use third-party models.

That number is so much higher like 90 percentage. That's so much higher than what I would hear from advisors when I speak with them. And then seven out of 10 clients of [00:09:00] advisors thought that if their advisor used a third-party model, it actually improved their portfolio's performance. So that's pretty interesting. Cause we were, just talking about performance, but I just said the last thing is you, and you had asked about the impact on client relationships, I actually think that using models not only enhances the relationship, but it increases the number of relationships because you can have more time focusing on, prospecting and things like that, outsourcing to models.

Doug Heikkinen: Let's get into your wheelhouse. Give us an overview of the WisdomTree Portfolio Solutions Program and its three main pillars.

Ryan Krystopowicz: Yeah. So we're super excited about the portfolio solutions platform we have. And really our goal with it is to be the strongest partner for advisors and helping them deliver and then manage the portfolios effectively, and then also allow time, so they can grow their business and things like that.

Depending on the source, there's about 300, 000 give or take financial advisors in the U S. So there's a lot of different ways that they like to manage money and run their business. So what we want to do is we want to [00:10:00] meet advisors with where they're at and provide a lot of different ways to leverage our investment expertise.

So that's what portfolio solution is all about. As you had mentioned, three distinct pillars, all tailored to meet the diverse needs of our advisors and help them manage money. So the first pillar is portfolio consultations. It's just like it sounds, we're providing one on one personalized in depth evaluations of advisor built portfolios, meaning that advisors who actually build models in-house. So it's perfect for those, advisors that they didn't like what I just said about outsourcing, right? You can think of it as like a wellness check these consultations because they include portfolio construction suggestions, individual fund analysis. We can provide some WisdomTree ETF ideas and stress testing. So that's the first pillar.

Now let's just say that you don't want to manage money in-house and you want to outsource. You were positive on what I was just talking about with the benefits. We have CIO managed model portfolios. That's the second [00:11:00] pillar. And it's just like it sounds, we have a model portfolio investment committee. They design model portfolios and they run it in-house. And it's really for a wide array of client investments. We have in there, like their goals, right? We have over 34 models on our website currently. Advisors can go to our website. They can even access them on model market centers, like Schwab by Rebao, Merrill adhesion, Investnet, so many others. And it's just a great solution for those that totally want to outsource. That's the second pillar.

The last pillar is for those that don't want to completely outsource. But they want to co -source or you think about oh, CIO, we call it now shared CEO, because they want to seat at the table for making investment decisions. So this is a custom model offering, allowing advisors to collaborate with our investment committee to build and manage custom portfolios. We're going to, you know, help the advisor design the model. We'll implement it across their client accounts. We'll provide all this content and collateral [00:12:00] that they can white label. And then we'll meet quarterly to discuss the exposures and the potential changes or potential trades. And so those are, just to recap, the three pillars are portfolio consultations, our CIO managed models, and then this custom model offering that we have.

Doug Heikkinen: Have you had any unexpected insights from advisors when you're doing these regular portfolio evaluations from WisdomTree?

Ryan Krystopowicz: Oh absolutely. I mean, these consultations, you know, once again We're we're looking at the advisor's portfolio We might offer suggestions on portfolio construction, fund analysis, stress testing, all that stuff. And one big observation that we're seeing is the investor is overweight to the magnificent seven or the growth names, right?

They're not as diversified as they might think. And everyone knows about market cap, concentration, things like that. A lot of people do that's fine. But what we're seeing when you go under the hood is actually like repeating or duplicating exposures. So that's one great insight that people, advisors realize that they're just, they have a lot of [00:13:00] overlap in the funds that they have.

The second thing that's on the equity side, I'd say the second insights related to the fixed income side. And a lot of clients that we work with use active bond strategies for their bond exposure. And it's difficult when you're using an active manager to really know what you own across an entire fixed-income sleeve.

So we have tools that bring light any, substantial credit or exposure risks that you have. And it's very popular because once again, we have these resources that not every advisor can have access to. And then I would just say, the last thing, and it's just back to the basics. A lot of firms are transitioning from mutual funds to ETFs.

And that could mean that they're going from from mutual funds to more cheaper and more tax-efficient the structure of the ETF, because the difference in tax drag between mutual funds and ETFs could be substantial. And for the audience tax drag, what that refers to is essentially the reduction in your investment returns due to taxes and that could be [00:14:00] on distributions and capital gains. Now, this isn't tax advice. I'm making general statements here that ETFs are on average more tax-efficient than mutual funds. You have to do your own homework on that. But if you're asking well, how is that possible? I mean, think about it, mutual funds started in 1924, ETFs, at least in the U. S. started in 1993. That's 70 years of innovation, better structure. A lot of advisors are trying to go in that cheaper, more tax-efficient route, so that's another way that we've been working with advisors.

Doug Heikkinen: And the CIO managed portfolios help advisors save time and improve client satisfaction?

Ryan Krystopowicz: Exactly. So what we found in our research is about 9 out of 10 advisors thought third-party models can improve the efficiency of their practice, as well as help scale their business. All right. When it comes to time and not just to quote WisdomTree's research, at Asset Mark, they did their own research and they said that you can save about eight and a half [00:15:00] hours a week. I mean, that's practically a day's worth of work by outsourcing the investment management. And so I like to say, models can potentially help you save time and money. The client satisfaction now that's a big deal.

So what we've said, seen in our study is that almost 90 percent of advisors said that models improve the services they provide to clients. So it's better client satisfaction. And Asset Mark found that advisors that outsource most of their investments reported stronger client relationships, more referral and higher client retention.

And I think, I want to spend just a quick minute on client retention, because I think it's one of the most underrated benefits of using model portfolios. I'll ask you to one more quick question just to guess this percentage. What percentage do you think of clients at any given time are open to the idea of leaving their advisor for someone else?

Doug Heikkinen: I think it's much higher than people think. I think it's around 70.[00:16:00]

Ryan Krystopowicz: Yes, there's been new studies, but like definitively what we've found, this is years ago, so the numbers probably risen was about 40%. That's what we found years ago. But I've also seen other ones that have been higher towards 60. But even four out of 10 that are thinking of switching to a new advisor. That's a large number.

So then the question is, where are these investors likely to go if they do decide to leave their advisor? And what our research found is that almost 60 percent of all investors would favor the new advisor using third-party models. So in other words, the odds are that the individuals would go to advisors who are using models.

And that was that 60 percent was of all the investors in our study. If you just look at the millennial population, it was actually around 85%. So what's the point of these stats? Leveraged expertise and that strong partnerships really resonates with clients, right? Just like how I don't want my general practitioner to be the one performing surgery on my shoulder, if I have an issue, I value his [00:17:00] partnerships and his referrals, same thing with clients and their network of advisors.

Doug Heikkinen: Last one for you. Why might an advisor choose a custom model portfolio over a fully managed CIO model portfolio?

Ryan Krystopowicz: Yeah. So a great question. As I said before, we want to meet advisors where they are at, and we just want to provide various ways for them to leverage our investment expertise. So some advisors are totally okay with what the industry refers to as off-the-shelf models, right? So they're just going to use our CIO managed models.

Some of them want more of a say or seat at the table. And so they'll go the custom route. And just so we're clear on like what these definitions are, what it means to go like the CIO manage route is, and there's thousands of advisors that we currently serve that do this, is that they're using our models on one of dozens of third-party platforms or model market centers that you can access WisdomTree models on. So what are the benefits of that? It's easy to implement [00:18:00] because, it might be in your existing workflow or your custodian. You could just literally click a button and access a WisdomTree model. Second benefits, low cost. Our models around 20 to 35 basis points, give or take. And then, and no strategist fee, which is awesome. And then the third benefit is that you have all this access to content and collateral when you're using our CIO managed model. Now, generally speaking, what are some of the cons? I said the pros. The cons of the CIO model route is that some of our competition is closed architecture, meaning that they use all of their own proprietary ETF.

So optically, advisors don't like to show their end clients a statement that just has all of one fun family. That's not an issue with WisdomTree, but that just is an issue, sometimes that people face when they go to the off-the-shelf route. But then the second potential con or issue is that you do give up control. So you can't really, some platforms you can alter the models, but some of them, you just have to accept all the traits. So if we compare that to the custom model route or the shared CIO route, what [00:19:00] advisors can do is they can collaborate with our investment team to build and to manage these models for their clients.

And so with the custom model route, you essentially have all the benefits of the CIO managed route. It's easy to implement, it's low cost, and you have all the access to collateral and content that you can white label. But you also have this generally without the cons because it's open architecture, right? You're using our WisdomTree funds. We're using some of your legacy funds and you have control over what you say because you have a seat at the table. And then that goes to what the control, right? A lot of advisors enter the business to still do investments they want to seat at the table.

So these custom model offerings allows advisors to incorporate their insights and their preferences. But then also still benefit from the research, the support and the time efficiency and things like that, that a firm like WisdomTree can offer to clients. So at the end of the day, to summarize it, just, it comes down to the advisor's preference and the [00:20:00] level of involvement that they want in making investment decisions, whether they go the CIO manage route or the shared CIO route that the custom model route.

But look, I'm not here to tell advisors how to run their practice. I'm just here to, you know, offer them solutions to build better portfolios. Hence what we say with portfolio solutions.

Doug Heikkinen: Ryan, that's really interesting and an incredible opportunity for advisors and their clients. Thanks so much for joining us today.

Ryan Krystopowicz: Thank you for having me. Appreciate it.

Doug Heikkinen: To learn more about WisdomTree. Please visit wisdomtree. com. Please follow us for timely updates on X, LinkedIn, and Facebook, all @Advisorpedia. For everyone at Advisorpedia, our producer, Julia Smollen, our engineer, Tory Miller, and the Power of Your Advice podcast team. This is Doug Heikkinen.