Animal Spirits Podcast - Talk Your Book: Advisor Solutions with Helios

Episode Date: June 19, 2020

On today's show we talk with Chris Shuba, founder and CEO of Helios Quantitative Research. Helios partners with financial advisors to create a unique and compelling asset management experience for their clients. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

On today's Animal Spirits Talk Your Book, Ben and I sat down with Chris Shuba, founder and CEO of Helios Quantitative Research. Helios partners with financial advisors to create a unique and compelling asset management experience for their clients. Please enjoy our conversation with Chris Shuba. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Batnik and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Rit Holt's wealth management.

This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rit Holt's wealth management may maintain positions in the securities discussed in this podcast. We're sitting here with Chris Schuber, CEO and founder of Helios. Chris, thank you so much for coming on today. That's awesome to be here. All right, first things first. Who is Helios? When did you get started? And what do you do?

I always like to joke that we're the world's most accidental company. So the short version of a very long story is I had spent my career mostly in the institutional space. So I met an advisor back in my days when I was at Columbia Threadneedle. Well, back then it was Columbia Management, but now it's called Columbia Threadneedle. And I was on their quant desk. And he came to me and said, well, how do you take all these institutional approaches, these algorithms and make retail versions of them so that we can have more of a competitive advantage. And that was in 2010 where fee compression was just starting to come around. So by then it really wasn't possible, but by 2013 it was. So I left Columbia, went to work at the advisory space. And I was going to have a great life, man. I was just

going to manage a couple billion in assets and just live the dream. And then other advisors started hearing what we were doing and wanted to plug in. So by 2016, it made sense to open up Helios. Back then, it didn't really have a name. But in our industry now, we tend to think of it more of an outsource CIO or as we call it an insource CIO. Then we started growing just really by word of mouth. So four years later here in 2020, we influence right around 30 billion in assets. You know, we just kind of make it up as we go. But our main goal is to kind of disrupt a lot of the previously closely held notions of what asset management is and how financial advisors use that as a competitive advantage going forward. So quick answer, but long story. So you're effectively

being the outsource investment team for an advisory firm. More or less. Yeah. I mean, we write all the models that we provided their investment committee as research so that they can double check and bless everything. We write their client emails. We build their presentations. We do all their data and analytics to support what they're doing. So we really see ourselves as an extension of their world. Wait, hold on. Sorry, question. You write their emails? Yeah. So when they talk about activity they may or may not take in their portfolios, we have to explain that to their clients. So we write a detailed level of analytics that will be documented by their investment committee because ultimately the investment committee is what decides actually what happens in the

portfolio. We don't trade the assets for them. And that's part of how we drive a lot of cost reduction and more revenue to advisors. But at the same point in time, they have to explain it to their clients at kind of an eighth rate level. So we do both. We write the emails that they'll then go ahead and bless through compliance or whatnot and then send on out to explain why they did what they did. All right. So I'm not exactly clear on. You said the advisors have the investment committee internally. So then what exactly are you doing for them? Yeah. So we do a all the research and analytics behind the scene. So if you go back to the very beginning of how we existed, one of the things that we realize is that advisors have an incredible amount of technology

in front of them that they didn't know how to use. And a lot of advisors don't have the confidence around asset management. And so when we first started, the vast majority of advisors that we came across said, how do we drive more value to our clients and make more money as a firm? How do we overcome fee compression? And the simple answer is, well, you add scale and efficiency to your practice and you use the technology in front of you. So what we found is that advisors were spending a lot of money, 20, 30, 50, 80 basis points on tamps or other ways of getting money managed when all they were really doing is paying all that money to hit a button a few times a year. So what we did is we trained advisors to say, look, you can have your own models

and most everyone knows this now, but back in 2016 it was kind of new for whatever reason. We said, look, we'll do all the research, we'll do all the analytics, we'll give you exact tickers, exact percentages and everything. You review that in your investment committee to make sure you agree. And then you take that and you put it on your existing trading platform, just like any other advisor created model. We'll let you know when any changes happen. You make the updates and hit the button and go. And so what we found is that advisors were now able to, as an example, keep this 20, 30, 40, 50 basis points in-house and give the client a better solution. That's how we got a little bit of reputation early on, is that hire Helios and all of a

sudden you're going to ramp up all your net profit. And we like to get away from that. We're not here to make advisors a lot more money, but it does happen quite a bit. So how does the advisor explain your relationship with their clients? Or is that just something that most of the time, it's kind of sight unseen and they don't even know that you all work together? Most of the time, we get white labeled. So a lot of advisors that you may even know the names of, we work with them very, very closely, but they rebrand everything into their world. We do that on purpose. So we like it when we get white labeled. We want to be the company behind the companies. But for smaller advisors, and I don't mean to use the word small in any sort of a derogatory way, it's just up

incoming advisors, a lot of times they do benefit co-branding with us. And so we will be a little bit more front and center. So that's a decision that the advisor goes ahead and makes on their own. And we support either one of them. So it's nice to be flexible in that regard, for sure. So what makes Helios unique versus some of the other people that are playing in the space? In a lot of ways, we do have similarities with folks. I mean, it is a similar environment. What makes us unique is that number one, we're fully quantitative. All of our models are also indices with S&P Dow Jones. And I believe we are S&P's largest client now in the custom index space. We do a lot of TV stuff with them and everything as a great partnership. So we went through the extraordinary step of having all of our

results kind of independently audited on a daily basis by S&P because they're the ones doing all of our reporting. So we're a very hyper-transparent firm. We have a series of models, 17 right now, soon to be 19, what we call an ecosystem, that we train advisors how to mix and match those together to create hyper-custom solutions for their clients. But on a scale, operations perspective on the back end, they're just managing 17, 18, 19 models. And so that gets them very much in line with what the new needs of clients are when again, you think about hypercustomization. What's interesting is that all of the models, all the algorithms we write are designed to be

integrated. And this is one of our big unique points is most advisors can go back in time and say, I thought I was building portfolios that were not cross-correlated. I would pick out all these mutual funds or ETFs or SMAs and then suddenly everything became cross-correlated right when I didn't want it to. That's because those holdings didn't know they were being combined with each other. They're only looking out for themselves. In an integrated ecosystem, what you can have is a bit of different strategies that are all designed with our own strengths and weaknesses and they won't deviate from those. So that as times get tough, different things can happen at different times to create that lower correlation event. We're the only integrated ecosystem we're aware of that's available on the retail side. So that our pricing structure is different than everyone else's and so on and so forth. So we have a lot of things that make us unique. And we have a very, very, very low turnover of advisors. In fact, I can count on just a couple of fingers, the number of advisors that over the four years that don't work with it anymore. The vast, vast majority of

everyone we work with still works with us. You talked about helping out communication with the clients. How much education and communication is there up front for you to get the advisors on board and understand what you guys are doing? Unlike a TAMP, we think that every strategy out there has goods and bads to it. But one of the things I don't like about TAMP's that it's just like a mutual fund marketplace or a model marketplace. It's just screening for performance and jumping around. And we don't believe in that world. It's why we're not part of any TAMP's at the moment. We require all of our advisors to go through a six-week implementation with us. The first week is about training and education and getting operationally ready to go.

The next five weeks are about regular check-ins and specific conversations as they climb the learning curve. It's not a ton of time on their end, but we just make sure that we stay with them all the way through their training. So not only do we teach them about the models. We're also not a black box. We show everyone how we calculate everything because we want them to have confidence. We found that confidence comes in two ways. Number one, you have to be educated about something. You have to know what it's theoretically supposed to do. And then number two, you have to experience it. And in the lack of experience, you have to get data. And so we focus really heavily on making sure that advisors are confident, even when times aren't good because there's no such thing as perfect math,

and then making sure that their clients are confident as well. And that's how we try to evolve this idea of asset management at the retail level. Instead of advisors playing general contractor, we want them to look and feel a lot like an asset manager because that's the only way their clients are going to be comfortable as well. You're talking a lot about math and quantitative research. Maybe we could just at a high level. Why is quantitative investment management better than say discretionary? Like what are some of the benefits there? I'll say it a little differently. I'll say so oftentimes quant and discretion are combined to execute more scalably and efficiently. But I think that the question is quant or not quant. So there's lots of different quant.

There's high speed trading, high frequency trading. We don't do any of that. We're a long-only retail-friendly type of an approach. And the way I tend to explain it to folks is every portfolio management strategy starts in the same way. It starts with a smart person or a smart group of people. They come up with a way of doing something. And then they go through a heavy testing process. They beat it up and try and break it. And only a few of the good ideas, out and be real models and real strategies. That's where the bifurcation exists. So either you can take that highly researched strategy and you can give it back to the smart people. But when you do that, you introduce a whole new level of risk called the human risk, stress, fear, anxiety, greed.

And ultimately, when humans get a hold of something, no matter how great it is, that risk will manifest itself and you have a whole new layer you have to deal with. And so especially when things get stressful, humans are going to always be unreliable. The alternative is instead of taking that fully research strategy and giving it to smart people, you can give it to a machine and a machine will not have that human risk. It takes that layer away and all it will do is execute over and over and over again. And so quant is nothing more than in our opinion, the best of humanity. It's best thinking without the risks of humanity that come with that in an ongoing basis. And so quant isn't too far away from what we all know and love as far

as humanity is concerned. We're just looking for ways to have less risks manifest themselves throughout a long run process. And that's kind of how we explain it and see it. I don't know if everyone agrees, but that's kind of how we look at it. With these models, what are your primary inputs? Are you looking at more things from a high level 10,000 foot view in terms of asset classes? Or are you talking about drilling down more into specific holdings? How does that work in terms of what your inputs are? We have four mathematic archetypes that generate 19 models. And each archetype is a completely different way of looking at the world. We have some that will look at everything from a volatility perspective. We have some that will look at just economics. We have some that will look at blends of those two

things. We have some that will just look who won't even care about levels of equity, some that only care about the types of equity and vice versa. So it's a very diverse mathematical way of looking at the world. I'll give you some high level characteristics though. Ultimately, whenever you're going to get into an environment where you have to add equity or drop equity, generally speaking, it's going to hit you through one of two veins. What is the market volatility doing and what is the economic data telling you? So when you get into a crisis and you have a portfolio that has different models deployed at different points in time, such as short-term, midterm or long-term, you're essentially laying traps, if you will, for environments like a downturn.

So in this particular scenario, we had volatility erupt. The portions of the portfolio that are angled towards targeting volatility trigger your first layer of defensive measures. Then you gather information as economics devolve, and then you can add additional layers of derisking. So because different mathematics have different jobs, if you will, you get a layered approach to your de-risking or up-risking effect across the portfolio, which we believe adds to your compound effect. And that's ultimately what everything we do does. All Helios does is try to figure out

different ways to more efficiently compound a portfolio over time. Certainly not perfect in any way that we do it. But our major inputs are going to be how is the market behaving through volatility measures? How are the economics behaving through all, of course, that lagging data indicators? And then we parse it out into multiple ways of thinking. But it's the classic comfortable approach and explanation, even though it gets really, really gnarly in terms of detail from here. And then is it up to the advisor themselves to figure out which models are right for their specific clients? They can lean on us for that if they'd like. So if you think about, I use this example from time to time, if you're going to eat, you can either be creative and cook something

at home. So you can blend your own models together and create exactly what you're comfortable with if you feel comfortable like a couple of CFAs you have on staff. Great, go for it. And some love that. Sometimes you might want to go to a buffet where there's a number of things that are prepared for you and you pick and choose how much or how little you want. We can set that up that way for you by using our portfolio builder tools. And then the last one is that sometimes you just want to sit down at a restaurant and a plate shows up in which everything is packaged for you. And we have that built as well.

So different advisors plug into us in different ways. That's part of our implementation process is determining what level of input you want your team to have and how do we arm them all the way through to we're going to do it for you, generate an entire package for your investment committee so you can bless it. And then you're off and running. So we support advisors of all types. Why not execution? Why just allow the advisors to take your suggestion? Did you ever go down that road? We originally started out that way. And again, maybe it was just our philosophical belief structure in that that's too expensive or the types of advisors we began working with right away. But what we really found out is that once advisors had confidence in their asset management approach, once they knew what activity was going to happen through education, they were no longer afraid of trading. So I could say to someone, hey, yeah, pay me 20 basis points. I'll trade this stuff for you. But now that you know I'm only going to hit a button four times a year, they did the math

quickly and said, well, I can hire a person for a tiny fraction where that 20 basis points would cost and have them hit the button four times a year. And Helios will also train and support that person. So what we found is that we just became one of the poster childs for helping advisors understand. They have a lot of powerful tools in front of them. And if they're afraid of execution, it's just a lack of education, we'd rather put that money back in their pockets and be a partner to them as far as driving new revenue than being someone who uses just this mystical wall of fear to do that. So I'm sure there are advisors out there that we don't do business with. because they don't want to touch trading. But my experience has been as soon as you educate them,

they're very grateful going forward. So what's actually inside of the models? Are these ETFs or mutual funds or stocks or a combination? What do they look like? So all of our indices that are with S&P Dow Jones are made up of real life ETFs. So they're just low cost beta type holdings, SBY, MDY, things like that. When we integrate with an advisor, though, we customize it to them. So we get a list of all of the holdings they're using now, whether it's mutual funds, ETFs, whatever it might be. We run that through our calculation process called Helios Wins Above Replacement, if you like baseball, or as we call it, H-war.

What that will do is it will allow us to calculate whether or not we like the probability of that fund increasing its forward-sharpened information ratios into the future. And if we like what you're using, we're going to tell you to keep it. If we don't like what you're using, we're going to ask you who your relationships are. So do you like working with Hartford? Do you like working with PEMCO? And if you do, what is the stuff they have that would then fit the slots that are missing? So every advisor that works with us has a unique set of holdings that are kind of blessed by our

calculations, but yet it's comfortable in that it uses as much of what they're already using as possible and keeps all their relationships intact. So it makes implementation with us much easier than if we had to say, sell everything and buy everything that we like. And it also allows us not to blow up portfolios. So if we have billions and billions that are working with us right now and everything's one strategy or one mutual fund, and we trade out of that, we nuke the whole thing. And by diversifying out what everyone owns, we don't run that risk as much anymore. If you're not on there executing,

obviously, you're probably not getting paid on a percentage of assets approach. How are you getting paid? Is it a flat fee? And you're just one of the service providers for the advisors, basically? Yeah, we have a ranged flat fee. So it's designed to be cheaper than hiring anybody in house would be. So we want to make ourselves kind of indispensable in that way. I hate using averages because averages are the worst, but everyone wants to know, well, okay, well, what would the cost be for me? Generally, if you were to average out our flat fee on the book, it would generally be about three basis points. So we're definitely part of a very, very low cost wave of folks in the industry that believe in driving as much revenue back to the advisors so that they can cut costs for their

clients. I'm not quoting anyone three basis points, but if you take our averages is what it ends up looking like. So we've never lost on price. I'll tell you that much. So you have four broad strategies, 17 specific models. Who's running these models? What are the computers? Who builds all this? Tell us more about that. Yeah. So we have a team of five here. That's all they do. Everyone else in our teams are operations and sales and all that kind of stuff. But we have, in my opinion, a brilliant team. Everyone stacks up. We went to these schools and we worked at these companies and we have all those pedigrees here internally. But there's a team of five that runs everything here for us. That's all they do day and and day out is not only the models, but support detailed questions that come in from clients. And then obviously, we have S&P running everything as well. So every day we quality control them. They quality control us to make sure all the algorithms are working, not only through our team and their team that they're saying the same things. And then obviously things go out the door. So we've got a fantastic team led by Joe Malin. He's our chief investment officer.

Still always one of the top five smartest people ever met. And the team just gets great from there on. So we always like to say that we give you an entire team of some of the best asset management. management minds that I've ever come across for the cost of or less than the cost of one normal employee you might pick up off the street. So what are some other ways that advisors are using your services? So it looks at you also have this Helios integrated planning. How does that work? That sounds like obviously something completely different. Yeah. So it ended up being that we felt we were doing a pretty good job of disrupting the way that people think about certain elements of asset management in the retail space. And I wanted to do the same thing with financial planning.

So financial planning, it's one of four softwares. The outputs all look the same. Advisors charge different things for each one of them. And I get that some clients are really tough, but the vast majority of financial planning process clients are pretty basic. And I thought, what is the whole in the advisor process here? And my mind came to a state planning because I had a friend of mine who's worked with a lot of financial planners throughout the Sacramento area. And all of a sudden, I realized all these financial advisors, several big problems. Number one, when the second spouse dies, all the money leaves the practice, right, up to 90%. When they send out all of the money.

these estate planning referrals to attorneys, they very rarely ever get a referral back. And they're not getting paid any of that revenue. So what would happen if we could include estate planning in financial planning practices? So we built a technology that works in every state, but we only work in 49 states. We don't do North Carolina where an advisor has the ability to, as part of the financial planning process, walk their clients through a series of questions in an online interface. That data comes into our team. Our team of estate planners will then review it and turn around a very, very high quality estate plan within 48 hours. The advisor then can deliver that to the client as part of the financial planning process. And now they are delivering a whole new set of value that's magnitude's

cheaper. So as an example, our state plan costs 450 bucks. The average nationally is about $3,500. So that leaves the advisor a lot of room for markup or to add additional revenue to their financial planning fees. And that's an ongoing thing or a one-time cost. And so that's not that you're partnering with someone. You've actually hired people internally to do this. Correct. Yeah. So we have an internal team that is both made of estate planners and attorneys. If we get really, really busy, we have a network of attorneys that we send stuff out to. But the technology is building everything. It's more or less just a review that our team will do to make sure that everything looks good. It's also should be noted that our system will screen out any complex

estate plans that really should be handled by a local attorney that takes a lot of handholding. We're really interested in enabling advisors to do the other 80% of estate plans that are equal shares to kids and make sure that they don't spend it all right when they get their inheritance. That type of stuff is really what it's designed to. So we screen out all of that and we give advisors multiple options so that they can remain compliant friendly regardless of which broker-dealer they're in. How are you developing new relationships? Are advisors coming to you? Do you market to them? How do they even hear about you? That's the next frontier for Helios. We've had our growth rate on word of mouth, basically

alone. Things like this are really our first four ways into trying to drive greater awareness. But we've been a completely word of mouth company. And now it's the time I think folks know about us. So we're excited to start marketing, if you will. Is it mainly, I'm sure it runs a gamut, but is it mainly advisors coming to you just saying, listen, we have a smaller team. We don't really have the ability to build out right now. We need help.

Is that typically how it works? Those kind of advisors come to you? Yeah, advisors come to us because they've got one of three main concerns. And usually it's all of them, but there's either one of them. Either number one, they want a competitive advantage. They're a team that wants to grow. In our industry, if you're going to grow, you've got to take it from someone else. And you need a unique story to do that.

Everyone tells the same service model story. Everyone tells the same financial planning story. You've got to compete somewhere else. And those that want to drive a competitive advantage through asset management, they come to us. Part of the reason is what's known as a limited availability firm. We will only work with a certain number of advisors in any one given area. And once we're full, we're full. That way, when we create a competitive advantage for them, we're not diluting it by just mass giving out everything that we do.

When you say in one given area, you mean one geography? One geography, yeah. Has the restriction on travel changed or altered the way that you communicate with clients, or has it sort of been a seamless transition? Seamless transition. We've always been built to be a virtual company for sure. In fact, we have pods and that's kind of how we overoperated. So no, it's just kind of fallen into our wheelhouse, thankfully, but it's been a struggle for advisors, obviously, to adapt. But for us, it's been exactly what we do. What's next for Helios? So you've got the quantitative research arm. You've got the estate planning platform. Are there any other additional services that you're thinking of branching into? I do have that, and I have kind of a cool announcement to make. But to his previous question, I said that kind of folks came to us in one of three ways. The first one was competitive advantage. Just real briefly to close that loop. The second one is they're looking for a lot more scale and efficiency inside their practice.

They want their books to be consistent. They want prep and post time to go down. They want the ratio of clients to staff to go down. They want to make their book something that they can easily move around. So scale and efficiency is a huge one that we get. And then the third one is regulatory and compliance. They want to make sure that they have a fully researched document. minute way in their investment committee of saying, this is why I do everything I do. And they want to

reduce their business risk of staff turnover by having partners like us that aren't going anywhere. So those are one of the three reasons to your point. So hopefully that makes sense to everyone. But what's next for us is more technology. So at the end of July, we're going to be launching a analytics platform called Helios Tools. It's going to be able to allow an advisor to do their risk scoring of their clients. So kind of those behavioral analysis scoring systems that we really like. they'll be able to do portfolio analysis of an existing portfolio and match that up against obviously the risk the client's comfortable taking. And then they'll be able to do a comparison analysis of what they currently have to what they

potentially could have. And this is what we call phase one of the beta version of Helios tools. We needed to build those engines for what we're going to do next, which is going to be amazing. But what's interesting about this first four way of ours into technology is one of the things that I really don't like about our industry is advisors don't have a level playing field. technology has been a barrier to the average client getting a really good look at themselves what they have and what they need. And it's a matter of how much investment clients and advisors are willing to pay to get that type of stuff. So when we launch this phase one version

of Helios tools, we're going to put incredibly powerful, totally unbiased solutions into people's hands completely for free. So we will become the first open platform for portfolio analytics that is no strings attached whatsoever. That all starts next month. So we're pretty excited about that. Very, very exciting. Chris, was there anything that we didn't get to that you wanted to? No, this is great. I really am humbled that you want to know a little bit about us, and maybe your listeners do too.

We're really excited to kind of announce ourselves of the world and stop being as word of mouth as we've been. But thank you so much for this. This is fantastic. Great. Thank you for coming on. We appreciate it. All right, we will include all of the links in the show notes. Thank you for listening, Animal Spiritspot at gmail.com, and we'll see you next time.

Thank you.