‘Wall Street is a giant bullshit machine. It’s not just Wall Street, it’s everything. The entire corporate firmament is trying to sell shit to the public,’ says Barry Ritholtz as he sits in his office on a sun-soaked afternoon in Manhattan.
‘It’s helpful for investors to have a group of people saying: “That is bullshit, you should ignore it. This matters, pay attention to this.” I know it’s a cliché, but it’s true. We want people to focus on what is true and what matters and to ignore the stuff that’s provably false, distracting and nonsensical.’
Ritholtz has built up quite a client base – and a social media presence – by shouting that message to the heavens on any online platform that he and his partners can find, whether it’s Twitter, YouTube, Bloomberg or one of their numerous blogs.
The RIA that he co-founded just five years ago, Ritholtz Wealth Management, has already pulled in more than $908 million in assets, due largely to the people it has hired and their ability to fight the good fight anywhere and everywhere.
The firm’s CEO and co-founder, Josh Brown, boasts more than 1 million followers on Twitter, is a regular guest on CNBC and writes a wildly popular blog, The Reformed Broker. Ritholtz, who is the firm’s CIO and chairman, has his own well-followed blog, Masters in Business podcast with Bloomberg. Meanwhile, director of research Michael Batnick writes The Irrelevant Investor blog and has just published his first book on top investors’ worst mistakes. New recruit Blair DuQuesnay, who only joined the firm over the summer, has already launched her own blog, The Belle Curve.
Brown and Ritholtz’s success and massive social media following can be attributed in part to their prolific blogging. In 2008, the stress of the financial crisis and a flare-up of Crohn’s disease had combined to put Brown in hospital. Inspired by Ritholtz’s writing though, he had a lightbulb moment and started up The Reformed Broker. Back then, he was still working for the now-closed brokerage firm Westrock Advisors. His irreverent style of writing quickly helped Brown to gain a readership and a massive social media following.
‘I had an acute moment where I said “Everything I’ve been doing all this time has not really been helping anyone,”’ Brown recalls. ‘I began a blog where I was just venting my frustrations with the markets in general, and people started reading it. I was talking about Lehman Brothers, Bernie Madoff, Bear Stearns and all the stuff I was hearing and seeing just being in the industry. I built an audience.’
But nobody wants to take their life’s savings and hear their spouse say “You gave it to a blogger?'
Ritholtz insists that social media isn’t the be-all and end-all when it comes to attracting assets today though. ‘People understand who we are through our public statements, so the process of evaluating us might be abbreviated a little bit,’ Ritholtz says. ‘But nobody wants to take their life’s savings and hear their spouse say “You gave it to a blogger?” [Social media] specifically provides color to who we are.’
Despite sharing roots on Long Island, Ritholtz and Brown first met at a conference for financial bloggers in San Diego in 2010. The two chatted poolside and within a matter of weeks, Ritholtz had hired Brown to join his quantitative research firm, FusionIQ.
‘It was apparent that he was skilled, that he was unappreciated by his current employers and that he brought something to the table,’ Ritholtz recalls. ‘It was obvious to me that he was more than just a retail stockbroker – this was someone who had a very specific set of skills that was very much in tune with what I believe.’
The two broke away from FusionIQ in 2013 to launch Ritholtz Wealth Management and quickly found that there was a lot more to building up a business than just racking up followers and gathering client assets. They had a hard time grappling with the more quotidian issues that business owners face, such as finding real estate, choosing a health insurer and picking a custodian.
‘I don’t think we thought much about the entrepreneurial side,’ Brown says. ‘I don’t think we were afraid of it, but the first year was a lot of figuring out things – just like any other business. There were things that had to take place other than writing a blog or calling a client. A huge percentage of our clients are business owners. To a certain extent, I don’t think you can ever completely put yourself into the shoes of a business owner until you’ve been in the same position as them. It gave us a better understanding of the challenges that our clients deal with. ’
Ritholtz Wealth Management’s clients are generally business owners and wealthy households with between $3 million and $7 million in assets, although some of its top-end clients have more than $25 million. The firm has a few legacy clients with six-figure accounts, but it maintains a $1 million minimum to open an account. It also runs its own robo advisor – Liftoff, aimed at millennials – which has a $5,000 minimum.
Brown and the team preach simplicity, decrying Wall Street’s love of jargon and needlessly complicated products. They put their money where their collective mouth is too when it comes to investing.
The firm siloes most of its clients into three core stock/bond portfolios: one at roughly 60/40, another at roughly 70/30 and a third at 80/20. These are labeled on a spectrum from conservative to aggressive. Around 5% of the firm’s clients occupy a fourth, lower-risk portfolio, which is a 50/50 split between stocks and bonds. The three core portfolios also have variations tailored for Liftoff – with higher equity exposures for the younger clients – and for investors who are looking for ESG options. The 50/50 portfolio has an ESG variation but is not available for Liftoff.
‘The concept is that we want to provide exposure to value, exposure to small caps, exposure to global diversification – and then at that point, we get out of the way,’ Ritholtz says.
The core portfolios are populated with low-cost funds sourced from Vanguard, DFA, BlackRock’s iShares, WisdomTree and State Street. The firm declined to comment on specific funds and would not reveal how many funds populate each core portfolio.
Know the math
Ritholtz and Brown are by no means purists about index investing over active management, nor would they regard the debate as being quite that black and white, but they do stress how difficult it is for active equity managers to beat the market.
‘Picking stocks is really, really hard,’ Ritholtz says. ‘[And] people don’t realize how hard it is to do it consistently over time.
‘Someone may beat the market in year one, but how many are still beating it in year three or year five? And once you get to year 10, it’s almost zero and once you account for fees it’s almost nothing. So the people we all know, love and admire for their stock picking prowess are an asterisk.
‘Jim Chanos had a wonderful line. He said that when he launched his hedge fund 25 or 30 years ago, there were 200 or 300 hedge funds, all of them creating alpha. Now there are 11,000 hedge funds, and it is the same 200 or 300 that are the ones creating alpha. So the proportion is a rounding error. That’s hedge funds – mutual funds are even worse.’
Brown adds: ‘At this point, you are either pretending you don’t know the math, or you know what’s up. By the way, I love active management. I have an IRA, I play with stocks on my own, it’s fun. But my real money is in the same models that my customers are in. My retirement account is invested along a belief system, just like my clients. It’s not as though I sell low-fee products but believe in high fees.
‘Our ethos is that less is more. It doesn’t mean doing nothing and just letting your market cap drift. It means trying to find ways to reduce the impact of fees, tax, human decision making and frequent decision making. Trying to limit that is how we answer that debate. We don’t get caught up in doctrinaire purity tests.’
This conceit that you have hundreds of clients and each one of them needs a different portfolio – I think the people doing that are just making shit up
Keeping it in-house
The firm generally avoids individual client portfolio customization except in cases of complex tax or estate planning problems.
‘Every client is different, obviously, but their needs aren’t that different,’ Brown says. ‘If they fall within a 10- or 20-year period of when they’ll be retiring, they’ll have a certain level of income and they’ll have a certain level of expenses. That does not require us to build 5,000 custom tailored portfolios just so we can say that we do.’
Advisors that do follow the path of customization for the sake of customization are selling their clients short, Brown argues. ‘I actually find that approach offensive,’ he says. ‘This conceit that you have hundreds of clients and each one of them needs a different portfolio – I think the people doing that are just making shit up.’
Customization for clients comes at the household level. For example, a client living in high-tax states will be get a portfolio with more exposure to municipal bonds to minimize tax, while a client living in Florida who wants to pass down money to their children will have a sleeve of their portfolio dedicated to maximizing income.
Ritholtz explains that the firm eschews alternative investments such as hedge funds, private equity and reinsurance. While the portfolios are in the main part populated by low-cost funds, the firm does also use some active managers, including some running municipal bond and quantitative strategies.
One thing the firm aims to do for all its clients is to help them avoid the biggest mistake they can make: panicking. ‘Investors focus on all the wrong things: stock selection, timing the market… Their own behavior is the single biggest contributor to performance, to how well their portfolios do,’ Ritholtz says. ‘Look at Apple, Amazon or Google. Look at their history and realize how many times they have been down 80% and then recovered. Most people can’t live with that. So their own behavior forces them to do something they regret later. Even with indexing and asset allocation, it’s the same thing.’