Striving to Build Wealth with Portfolios That Endure with Paul Ma

This episode, we'll explore how portfolio construction, analysis tools, and innovative review strategies help financial advisors enhance client engagement, improve accuracy, And balance technology. Welcome to the podcast, Paul.

[00:00:36] Paul Ma: Great to see you, Doug.

[00:00:38] Doug Heikkinen: You know, we all start someplace. So how did you get involved in financial services and what led you to Fidelity?

[00:00:45] Paul Ma: Yeah. So I got in financial services, just because of my personal interest in investing when I was, still working for, environmental groups, et cetera. Very idealistic when I was graduating out of college. but then the interest in finance investing just took hold of me and I really, I went to MIT for some financial engineering work and I got my first job at Putnam investment.

And then, I had various jobs in different firms like Blackrock, etc. And then one day my wife told me. Yeah, Paul, go find a job in Boston because, I'm gonna have some, babies now. I plan for that, right? 10 years ago she told me that. go find a job in Boston where my mom is, right?

I'm gonna have a baby with you, without you, all right? So go find a job. So I found a job at Fidelity where I used to be portfolio manager for mutual funds. Managing stocks of my own portfolio, but now I'm here to help advisors build better portfolios, a portfolio strategist.

[00:01:41] Doug Heikkinen: Well, that's great.

I'm glad you, um, followed your, your wife's advice to have them with her.

[00:01:46] Paul Ma: No choice at all.

[00:01:48] Doug Heikkinen: tell me a little bit about your role at Fidelity. What do you do there?

[00:01:51] Paul Ma: when I first got my job, the lead portfolio strategist, I wasn't sure exactly about strategery or something like that. but now that I've been 10 years into it, so we can engage about 7, 000 advisors a year, our team, right?

And we basically are there on the ground, Help advisors build better portfolio. That's what we do. we take advantage of, Fidelity's brand investing. we do a lot in, asset allocation, a whole team called AART asset allocation research team. They do really good research on asset allocation.

We take their latest thoughts. We take the latest thoughts from FIWA, Fidelity Institutional Wealth Advisor that does managed research. on, different products, right? External and internal. So we can be an open architecture fund. That's a great product for advisors in different asset category. And I know that, SAI strategic advisor at Fidelity, they're really good at taxes, thinking about tax strategies and.

short term to long term deferrals and highest cost basis and loss harvesting, things like that. So we, take a lot of, thought leadership from there in our work as well. So, but the end goal is to help advisors build better portfolio.

[00:02:58] Doug Heikkinen: All right. So let's talk about portfolio construction. How can portfolio construction analysis tools help an advisor with their portfolio construction approach?

[00:03:08] Paul Ma: the first thing that Portfolio Construction Analysis can help advisors is to diagnose intentional versus unintentional bets.

I mean, do you know your portfolio is very short duration when, when the Federal Reserve is telling you that, hey, they're cutting rates, right? That you need to elongate duration to lock in the current rate. Or one of my favorite is an advisor thinks that he is underway international equity because his equity breakdown is 70 percent US and 30 percent international.

I'll bet what's on his mind is the MSCI AQUI benchmark, which is about 60 percent US and 40 percent international. So he's. He's thinking that he's underweight international versus that benchmark. But does he know that his peers is actually 80 percent U. S. and 20 percent international based on our, 20, 000 portfolio engagement?

That he really actually is overweight international versus the average advisor across the street. So you better hope international finally outperform after a decade of underperformance. So portfolio construction analysis can help advisor figure out these very basic. diagnosis.

[00:04:17] Doug Heikkinen: How do you feel advisors can effectively conduct portfolio reviews to ensure clients are on track with their financial goals?

[00:04:25] Paul Ma: So, first of all, the advisor should have a financial plan in place, right? That incorporates a client's goals like retirement goals or saving goals for college. If not, then try using one of the financial planning software like eMoney or MoneyGuy Pro to do so. We find that end client really appreciate this goal focused approach that answer how am I doing versus goal question.

Then the advisor should put together a portfolio with the right asset allocation and product selection to achieve that goal with the risk that match client's risk profile. If a client doesn't call you up every time there's a pullback, then perhaps you can handle a higher degree of risk and take a 80 20 stock bond portfolio versus the Warrinelli, who probably should have a 50 50 stock bond portfolio.

Then your annual portfolio review show the probability of achieving that goal is improving or not. Are they on track? Right? Those financial planning software tools I talked about all have Monte Carlo simulations that talk about. the probability of success in achieving their long term goal. And don't forget to rebalance the portfolio to that strategic allocation.

before the annual review, we often find that a 60 40 stock bond portfolio drift to 70 30 over time because stock market appreciation or something like that. You need to rebalance your client's risk profile so that when bad time comes, And they always do. Clients don't panic and sell because the bigger than expected drawdown.

Panic sell has been shown to be the biggest detractor to achieving clients wealth goals.

[00:06:06] Doug Heikkinen: Portfolio construction is always really popular on our site in terms of content. Are there innovative approaches advisors can take to make these reviews more engaging and insightful for clients?

[00:06:20] Paul Ma: Yes, before going to AI, artificial intelligence for innovation immediately, right, we think the advisor should start with asking what's on your client's mind.

Then you can apply the latest innovation in products or technology to that problem. So for example, is your client more worried about election, inflation, recession, war, or are they more worried about funding their kid's college education or leaving behind their legacy, right? If it is the former, right, use Fidelity's famous business cycle, innovation we have, right, that summarizes economic data in nice friendly bubbles.

through early cycle, mid cycle, late cycle, and recession. Show them how those headline risks are scary, but the market is driven by economic fundamentals more often than not. That's captured by the business cycle. if we are in the late cycle, and possible recession next, You know, tilting toward quality names based on our research rate could, could help somewhat.

And you want to show them that there is a discipline process so that when they are panicking during a drawdown, that you have it covered. If what's on their mind is financial planning topics like, like education or estate planning, use a financial planning software to show them how to save taxes on those goals.

They are 529, Donor Advised Fund, Latest Technology on Tech Strategies, and alts that might help them out.

[00:07:52] Doug Heikkinen: It seems like a portfolio review is a great time for advisors to have meaningful conversations with their clients. Would you agree with that?

[00:07:59] Paul Ma: I agree with 100%. In fact, before review, really, I think it's to help their client educate their client on risk.

Now, how would this portfolio do during a COVID crisis or 2008 crisis? the focus on risk helps prepare the clients for downside. The fact is that clients hate losing money more than they like making money. Based on research by Kahneman and Tversky in behavioral finance, by focusing on downside risk, you help prepare clients for those panic moments to act rationally.

[00:08:32] Doug Heikkinen: What role do these tools play in improving the accuracy and efficiency of portfolio reviews? And doesn't Fidelity have something that plays in here?

[00:08:42] Paul Ma: Yeah, so we have something called a portfolio quick check. Portfolio QuickCheck, aka PQC, is a software tool the advisor can access. So you can, Google Fidelity Portfolio QuickCheck and you put in your advisor CRD code, you can literally sign up for free and start using it. It's a quick way for advisors to put in their portfolio, take care of some ways, right, and get an immediate analysis.

About where were there are intentional bets or intentional bets. Did their portfolio fit into this particular business cycle as fidelity sees it right? And then how do they compare to some benchmark? And actually, it's a tool that often the advisor use to see how. a client portfolio that they can help improve better to their own model, right?

How can that migration look like? The current portfolio and the target portfolio the advisor has. So it's a great tool, free to use, uh, you just have to be an advisor. It lives on, i. fidelity. com, it's an institutional website for fidelity advisors. I often find advisor allocated to have to growth funds and have to value funds in their equity holding, thinking that sheet is balanced.

But PQC will show you that a benchmark like the S& P 500 is actually, 40 percent or so in growth and 27 percent in value. So by having equal weight to growth and value, the advisors quickly shown that sheet is underway growth versus the benchmark. Uh, S& P 500 had double digit return in 2023. if the client cares about.

You're not keeping up with the market, by which they mean the S& P 500, you may very well want to be aware what is the composition of S& P 500, which PQC can help you diagnose.

[00:10:32] Doug Heikkinen: It seems like all we ever talk about and hear about is technology, but there has to be a balance. How can advisors balance the use of technology with the need for personalized human centric advice in their practice?

[00:10:46] Paul Ma: Let's start with the old technology like TV and radio, okay?

Marketing used to be one to many with this technology, TV and radio. With Google and Facebook technology, the ads are tailored specifically to the end client. Similarly, advisors need to use technology to mass customize a portfolio to a specific client's wants and goals. They may want, you know, tax loss harvesting for upcoming liquidity event, and they might want their portfolio to reflect their Catholic value, right?

Uh, yeah, sounds like latte with extra shot of vanilla and skim milk. Yes, they get that from Starbucks coffee, and they expect it from your portfolio as well. Fortunately, there are a mass customization platform like FMAX, Fidelity's Managed Account Exchange, F max that allows you to mask customize a client's portfolio that match their risk profile Catholic value or tax loss harvesting for the liquidity event and more to their portfolio. If you're interested in f max Please reach out to me and my Fidelity teammates.

I manage the FMAX investment consulting team to help advisors mass customize with technology.

[00:12:03] Doug Heikkinen: Paul, where are advisors finding big changes or opportunities they want to make within their portfolios?

[00:12:08] Paul Ma: So we find that tax is an area that clients care more and more about. especially if the government decides to tax unrealized capital gain for taxable accounts, active ETF, for example, could be more tax efficient than mutual funds, in the active form, right?

And then for higher net worth clients who could qualify possibly for separately managed account. Which is a portfolio of individual stocks, right? that could be even more tax efficient vehicle. We have seen stocks In years where even with positive overall returns in the market individual stocks can have losses that the advisor can harvest losses for the client's benefit, and then advisor could consider using Unified Managed Account, UMA, which is the fastest growing, program on FMAX to wrap them all together, ETF, mutual fund, SMA together, and apply tax overlay on top of that. At the very least, you should consider putting dividend paying stocks or funds in qualified accounts and growth stocks and funds in taxable accounts. So it can go from, asset allocation to asset location.

[00:13:23] Doug Heikkinen: So Paul, Fidelity has a ton of content around portfolio construction. Why don't you give me some examples of that and where people can go to find it?

[00:13:32] Paul Ma: Well, we're going to have a portfolio construction docuseries coming up and, it's not on Netflix. I understand, but you can find it, just Google it, we'll have available to you on our websites.

but we really just gather all the latest insights from a client's question like, is 6040 dead? Can alts help? All those questions, we have experts within Fidelity to, talk about them and, whether they're 6040 is dead or not, what kind of alts, how do you get started with that and things like that.

so definitely it's a series that I recommend people grab some popcorn. So I want to watch a series.

[00:14:06] Doug Heikkinen: you mentioned it earlier and I'd be remiss if I didn't ask you, what's the role of AI going to play in all of this?

[00:14:12] Paul Ma: in all of it and portfolio, I think artificial intelligence can make better commentary for you. I know that clients want them explain what happened in macro, how it's affecting their portfolio.

AI can help with that. I'm seeing, some of my, colleagues in firms in portfolio construction using that to do that, right? That's very effective. I think AI is going to help in general with productivity gains. for a long time, the long term GDP, if you remember back in Economics 101, the long term GDP really is, how productive people are and how many people are working.

That's it. So how many people are working are based on how many babies are born today, the birth rate. But how productive people are depends on how much we implement technology like AI to help us just describe, right? Maybe make better economic commentary for clients or, make some things more efficient, more productive, right?

so I think that's just a preliminarily how AI can impact us. Of course, there are a lot of investment into AI, so we don't know what a killer app will be that can really transform how we do, portfolio construction, how we engage clients and build portfolio. Yet to come.

[00:15:23] Doug Heikkinen: Yeah, really interesting. Paul, thank you so much for joining us.

[00:15:26] Paul Ma: Thank you, Doug.

[00:15:27] Doug Heikkinen: To learn more about Fidelity's portfolio quick check, please visit i. fidelity. com. Please follow us for timely updates on X, LinkedIn, and Facebook, all at Advisorpedia. For everyone at Advisorpedia, our producer, Julia Smollen, our engineer, Tory Miller, and the Power Your Advice podcast team, this is Doug Heikkinen.