What Is Modelist?

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This is the Transition To RIA Vendor Profile Series where we take a look at the solution providers powering the RIA model. On this episode:

Vendor name:

Modelist

Vendor category:

Asset Management

Episode host:

Brad Wales

Episode guest:

Joe Mallen

Vendor contact info:

Website

Full Transcript:

Brad Wales – Hi, I’m Brad Wales with Transition To RIA, and this is the Transition To RIA Vendor Profile Series where we take a look at the solution providers powering the RIA model. On today’s episode, we’re answering the question, “What is Modelist?” To help us with that is the CEO of Modelist, Joe Mallon. Joe, thanks for coming on.

Joe Mallon – Thanks for having me, Brad.

Brad – I’m excited for this conversation, particularly because a thing I talk about in a lot of my Q&A series is the increased flexibility that advisors have by transitioning their practice into the RIA model. That’s in all different kinds of regard from technology to marketing their services to how to manage the assets.

I think it’s very refreshing to see all the kinds of options that are out there for advisors that do take that new path that they probably don’t have available to them now. I think Modelist, as we will be learning together here, is going to be a great example of that type of solution that advisors can consider.

So with that, a little set up for you on that front Joe, if you could start by just giving us that kind of proverbial high level and then we’ll dive into more details. What is Modelist?

Joe – Yeah, you made a good point. If you transition to an RIA, you’re given hundreds, if not thousands of options nowadays, right? You look at the Kitces map, it’s huge. So we sit in the realm of maybe a TAMP or outsourced investment research.

Modelist is a platform that builds custom model portfolios for independent and RIA advisors. So our whole passion and mission is to build an investment infrastructure for a firm that makes the most sense for them, not the most sense for us or for the products that we have because we don’t have any.

So we work with each of these firms to understand them as a practice, where they’ve been, what works for them, and try to make them a better version of themselves. And we do that through our platform of investment solutions and strategies, content, and integrations. I’m sure we’ll talk more about it, but I just want people to think of us as really a fiduciary targeting partner for investment model scalability.

Brad – I guess I would say advisors, both not in the RIA model and in the RIA model, there’s some advisors that part of their value proposition is they are passionate about it. They like building bespoke individual portfolios themselves and that’s a fit for some advisors. Others say, no, I want to outsource that in some regard and then others maybe even a combination of those two.

Where do you find the most interest for this kind of solution? Is it that do-it-yourself for lack of a better term that says “Maybe I’d rather do this in a more automated way that’s maybe more scalable?” Is that one potential client and/or for that advisor that does want to outsource and perhaps because of the firm they’re at now, they’ve only had kind of a limited selection of how to go about doing that and now this is another option to consider. I’m guessing it’s both but would welcome your thoughts on that.

Joe – No, it’s almost a layup-type question. We coined a term called guided rep is PM. What we mean by that is a lot of our clients come from a world of doing it themselves. And we try to ask them three questions. Are you good at managing money? Do you enjoy it? Do you have time for it? And typically, there’s a no somewhere in there.

I’ll say in that aspect of it we can provide the scale that most people doing it themselves don’t have to enable them to grow, give them time back in their day, all of those things. The other side, we’re attractive to people that are currently outsourcing because I look at most outsourcing options today and they involve giving up your brand, your identity, maybe fiduciary responsibility by just adopting third-party models.

You have a lot of model providers that most of them now are asset managers and they put their own products into the portfolio and you get a lot of scale there. I mean they’re high-quality investors but is that really helping your practice, your business? They’re claiming a lot of customization, but there’s really just not a deep level of customization in terms of what funds do you use, how do you trade them, can you tax loss harvest, or can you integrate direct indexing. All of those types of things we feel were more attractive than outsourcing.

So it was a perfect question. We want to sit right in the middle of giving advisors the ability to outsource the day-to-day functions, but not have to give up control, brand, narrative, all of that. So we exist in that paradigm and in some cases they lean more heavily on us, sometimes we lean more heavily on them on what they want to do. We just provide the tools to do it.

Brad – I want to dive more into some of the variables you just listed like direct index, tax loss harvesting, and whatnot. But I have a macro question to lead into that from what you just said.

I always caution folks that the word TAMP for better or worse is used, in my opinion, in a number of different ways. One so-called TAMP offering has one service offering and then another solution that’s calling themselves a TAMP could be providing something meaningfully different. Do you consider yourself a TAMP? If not, how would you compare Modelist to what your definition of a TAMP is?

Joe – Great question. A career ago, I was the CIO at a TAMP. I think a theme I saw there, and which is part of the passion for starting this, was TAMPs are great. They’re a solution for, I’ll say, the full infrastructure for running a business. You have your reporting, your client billing, trading, connections to custodians, reconciliation. I’ll loosely say the revenue center for a lot of these TAMPs has become the investment management part.

Each TAMP has its own kind of solution on the investment management side. Often that consists of a model marketplace where you can access an ABC manager. But the problem for the advisor’s client is when they access those models, it’s a TAMP fee, it’s a strategist fee, and then you have expense ratios; a lot of hands in the pot. So we like to think of ourselves not as a TAMP, but we’ve pulled out the value creation part of building investment models for advisors and gone directly to the advisor to build it and they can execute with us at the TAMP of their choice.

So for example, before we went live, we were talking about Black Diamond. We’re available at Black Diamond. Nobody knows it. We’re not advertised, but we can build custom models for an advisor under their brand, their identity, put it onto Black Diamond, and they’ll do the trading. And we’ve reduced expense ratios. We’ve taken no small spread, I don’t say no fee, but a small strategist fee that gets included with the trading fee. So it’s really one trading fee that gets pulled at once plus expense ratios for total cost. So I think to answer your question is we aren’t a TAMP, but we can work with advisors to build the best TAMP-like experience and fill in the investment gaps that are important along the way.

Brad – And maybe let’s talk through an example. Maybe someone can see it. Let’s pick a team called 500 million for whatever their motivations, whether they’re moving on from a do-it-yourself approach or they’re just looking for something different. We’ll get into basically what that process looks like here a little bit.

So they come to you and then what is the suite of services? Is this, okay, we’re going to learn about your clients. We’re going to learn about how you like to invest. We’re going to help you make models but then you also referenced direct indexing, tax loss harvesting. So what exactly is being delivered logistically or what’s the service offering, I guess?

Joe – Perfect, I’ll take you through the sales process almost. So we’ll sit down with that $500-million-dollar RIA. Where do you custody? What holdings do you have? What are you doing now? What’s worked for you? What type of clientele do you have? Where are you hoping to grow? Where are you hoping to add services for the clients that you have? And so we’ll take their models, we’ll take what they have and we’ll build like a better version of themselves.

So consider that practice. They’ve run 10 model portfolios that they’ve just put together themselves. They have a qualified and an unqualified version. We’ll inherit the naming conventions of what they’re doing. We’ll take in the funds that they have. We’ll look for options to potentially reduce costs or pick better solutions, in our opinion, or break apart in adherence to a product company. And then we’ll build those 10 models for them.

We’ll do conservative to aggressive, qualified, non-qualified. We can do ESG. We can do income-oriented. And then with that, we’ll build all of the content for them. So we have research reports that go, that help support compliance. We have a marketing deck that actually helps them tell their story. And this is branded for them. We will then show them how the models work with 100% transparency. So we dictate how much growth or value or what sectors do we want to own at any point in time. And all of this is done through our rules-based research.

And then when it comes to implementation, we’ll put funds in there that make the most sense for that client’s portfolio or for that advisor situation. So we build that infrastructure of creating a scalable, white-labeled investment experience for the RIA. And then when it comes to implementation, we really say what are you looking for? One big problem I see now is advisors that like to trade their models directly at iRebal with Schwab and then they’ll have a direct-indexing solution over here and then they’ll have a long-short solution here.

We say what if we put all of those models onto a trading solution and they all get managed with tax overlay benefit if they need it. And then, say in the large gap space, rather than use an ETF, what if you use our 40-stock solution that has no cost to gain exposure to the market? Or what if you use the third-party SMA managers that are available at that platform?

And then as time goes on, we do marketing material for the advisors or client outreach-type stuff with their logo on it. We do trade rationals. So every time a model changes, we write something that is hyper-specific to that model portfolio with their brand on it. So it’s really building a sophisticated investment experience in-house for them under their brand, and in many cases doesn’t cost the advisor anything. We charge an SMA fee to the client.

And then the last two parts I’ll add is we have integrations with a firm like YCharts where we’ll populate the advisor’s YCharts for them. It comes included as part of our package. So we’ll give them a license to YCharts and they can see all their models in there, all the updates, everything, do the client analysis, etc.

And then we have an AI engine on the top too, where we partner with a firm called Hamachi to feed the models, the content and everything to an AI agent. The advisor can really ask questions of the markets and get appropriate answers based upon what we’re feeding to it, or ask questions about their model portfolios. Is my portfolio reacting to a spike in oil prices? It’ll tell you an honest answer based upon how those models are constructed and what they currently own. So that makes sense? I know it’s a lot there.

Brad – I’m scribbling notes to throw stuff back at you. So obviously a heavy lift on the front end to work through the new relationship, figure out the objectives that the advisor team wants to accomplish. You help them build all this out, put all this into place, but then it’s an ongoing service, right? So a big lift on the front end, but I presume there’s the ongoing maintenance of those models or circumstances change or desires change. If you could just extrapolate, I assume I’m correct on that; it’s not just like a one-time exercise. This is ongoing.

Joe – No, I think that’s the value of our IP. So my co-founder, a guy named Ken Peterson, he’s brilliant. He’s a PhD. He started his career at Bridgewater, was head of global macro at Santander in London. And I think culturally, he and I share this passion of the industry’s always sold stories to advisors and expensive products. We use the term like the risk destroyer 9,000 mutual fund. We look at those things, know what they’re doing. There’s not any free lunch when it comes to investing, but what we can do is create rules-based ways to think about markets, like how do we react based upon anticipated Fed moves? What are we doing about credit in this world right now? What are we looking at as far as aggregated economic data or sentiment or valuation among sectors? All of those things manifest into 60-plus strategies that we have that are the building blocks of those models we build.

So we just think being somewhere in the range of just long-term buy and hold to, you know, incredibly tactical. We can do both. I Most advisors fall somewhere in the middle that they want to make appropriate adjustments to their portfolios over time and we’ll do that for them and we’ll give them the rationale as to why we did it.

They’ll know exactly how it happens. They have a sense of pride and ownership and trust in the models that we’ve built for them because they were in the kitchen when they were built. So then we just run it and we explain when things happen, we talk to our advisors, we do monthly calls with all of them on what’s going on in the market and then follow up with content that they can label and use.

Brad – I was just going to ask you about the white label because you referenced that earlier. So from the end client, obviously your client is the advisor, from the end client, they don’t necessarily even know that Modelist is part of this, if I understand right. You are supporting that advisor behind the scenes and giving them the opportunity to put together, here’s this investment strategy and approach. But it’s all kind of under their brand, their name, and not to diminish Modelist’s impact, but you’re behind the scenes by design. Am I correct on that?

Joe – Yeah, you’re correct. We leave it up to the advisor if they want to have us as part of the investment committee or put us on their website as an outsourced consultant. We’re more than happy to allow them to do it. It just really depends on the firm.

But I would say, given the profile of people wanting to work with us, they’re entrepreneurial. They want to grow. They want to grow their brand and identity that it might be best to keep us in the background and just say you work with an institutional-level consultant, if you want to say something like that to your end client. We like to use the term we’ve invested in a third-party resource to help us make investment decisions.

Brad – Yep, kind of part of the expanded team, if you will.

What’s your experience of the motivations where this is resonating? We talked about the do it yourself who maybe wants to switch over. From your conversations, is this, at times, folks who also want maybe a lower-cost approach compared to they’re doing now? Is that a main motivator? Or is it more they just want more flexibility in what they can offer their clients and what it’s historically been able to do? Or is it possibly something else? What are some of the main motivations that make your solutions resonate with advisors compared to what they have now?

Joe – Both, and I think I’ll give you a quick example of each. So we have a client that was using large asset managers’ model portfolios. They’re all in the game now, BlackRock, State Street, Vanguard, you know. They’ll build custom model portfolios that are quote-unquote free or no cost to your clients. But when you look under the hood, it is majority if not all of their own funds. What started off as pretty low-cost portfolios have crept up into the 20-plus basis points, upper 20s, because active management starts to creep in there and more margin gets built in for the asset manager. There’s more boutique shops that are doing this now too where they have a handful of funds, but they’ll do model portfolio services. But they tend to have 70-, 80-basis point product.

At the end of the day, we just look at that and go. “Are you a true fiduciary to your clients if you beholden yourself to getting free things in addition to the model portfolio, but you have handcuffs on you as to what your clients are allowed to own?” And will they tax loss harvest a position if it falls and put it into a competitor product?” Maybe not. Will they use SMA managers in the large gap if it’s appropriate even though they’re not going to earn an additional fee? No.

So there’s a lot of conflict in that world. We’ve gotten a lot of advisors that are like, hey, this was easy. It’s fine. It works. But we’re like, hey, you’ve completely given up you. You’ve completely given up your brand and you’re beholden to what they’re telling you to do. They’re not super active. They just kind of buy and hold and make tweaks here or there. So that’s the setup for the advisor that outsources fully to investment manager.

We go to them and go, what if we built you a portfolio that is you, branded as yours, we’ll do all the content to support it, and we’ll do the trading, and we’ll do the tax overlay, and we’ll have access to direct indexing. The expense ratios can be as low as seven bips. Let’s say our fee plus trading is 15. Now that client is paying 22 basis points, which is a far or superior experience. I don’t know if can say superior, compliance might get mad at me, but we just feel like it’s a more appropriate experience for the clients of that advisor.

And I’ll tell you our number one challenge in that argument is my clients don’t know the expense ratios of what they’re paying, but if you debit something from their account, now it looks like I’m increasing their fee. One of our main goals right now is to train away from that knee-jerk reaction that your clients trust you if you’re a good advisor. And this is the best thing for them. According to economics, you just got to explain it that way.

So that’s the one I don’t elongate an answer, but the second one that I’ll keep it shorter is the advisor doing it themselves. Like they got to 500 million. Some of them have been picking their own stocks. I don’t see many of them that get very large, but they’ve been picking their own funds, their own models. It’s fine. But I think we can wow them with the level of support and content that we do when we take over that responsibility, like really forward-thinking pieces like technology, reports, analysis, market updates, AI. And it’s all stuff they probably desire to build in-house. We’re like, hey, don’t hire an expensive CIO. We can do all of that lift for you, and it’s probably not a full-time job within your practice.

So that’s where we appeal to those folks, and many are coming to us for help, either on the investment side or help with trading in conjunction with it. And we really like that ladder because we can take a whole lot of time off of their plate and execute it for clients in a really efficient, cost-effective way.

Brad – And on the flexibility front in terms of your practice in the RIA space, I think, when talking about business development or marketing, you generally have much more flexibility than folks that are at a more captive environment.

An analogy that I would use is it’s the equivalent of a one-on-one basketball game, and when working in a captive environment, have to play with one hand tied behind your back because you’re at a firm that limits how you can market your services. The advisor in the RIA space, however, gets to play with both hands because they have much more flexibility on that front. And obviously it’s not a fair fight, but as I tell advisors, that is your competition down the street potentially. Someone down the street that you’re going up against for the same potential clients has more flexibility.

And so I think this equates to that as well, the advisors in the capitive situation, where they only have a limited set of solutions of how they can implement these sorts of things that we’re talking about, need to pay attention to the fact that the competition out there has access to something like this. I think those advisors have to think long and hard and like, okay, am I going to be able to stay competitive if I kind of have these guardrails and my competition doesn’t have them. Just some food for thought for advisors to kind of think about.

Joe – I love what you said there, just because that’s where I look at captive advisors, whether they’re at Ameriprise, Raymond James, Morgan Stanley, right? You’ve built a business under their brand and their identity.

What if most people going RIA are entrepreneurial? You want to grow your business and now you’ve opened your world up to all these different options. But if you look at what you did at Ameriprise or whatever, you got mutual funds in there. Why? Not because they’re the best. No, because they paid the most money to the platform to be on there. Your clients’ portfolios tend to be very expensive, fraught with conflicts of interest at every part when it comes to security selection, to asset allocation.

We like to say if you’re going to make the jump we can backfill everything, that level of comfort you got from the home office in regards to investments. Let us do it for you and we can fill that gap. You don’t have to cobble that part together, we can do it for you. But then we can tap into all of those things you talked about like play with two arms and we try to encourage people don’t chop off an arm again and beholden yourself.  Why move from an Ameriprise to a single asset manager of the world? You haven’t done anything for your enterprise value.

Brad – Yeah, I’m going to steal that and add that to my analogy. Hey, after you get the second hand to play basketball with, don’t chop one of them off. Yeah, that’s good, I like that.

Joe – Yeah. Maybe it’s not a hand or an arm, maybe it’s a couple fingers, but hey.

Brad – Either way, don’t disadvantage yourself. So kind of from a logistics standpoint, you know to run an RIA you’re using a lot of different vendors for different reasons. But if I’m kind of understanding this correctly, so please extrapolate on it this, I would say there’s kind of three main pieces to what you’re doing.

There’s the custodian that holds the assets, there’s you that builds all these things out that you’ve been talking about, and then there’s the third prong in my example which is how it’s actually implemented. So whether that’s a Black Diamond or some sort of third outsource trading apparatus. Am I correct that those are the main pieces of how this logistically happens?

Joe – You nailed it because we like to think of ourselves as in that room with the advisor on their side of the table. And when it comes to those questions, let us help. We’re agnostic as to where it goes on the platform, but we’ve built partnerships with, I’d say a majority of, you know, we’ll put TAMPS in one spot that have their own trade execution solution.

And then there’s a realm of folks that are just trade execution. And that can run from just clicking the buttons for you on a flat-fee basis or a basis-point charge with automated trading and tax overlay or the full direct indexing solution.

So we’ve built an arsenal of a lot of those providers that we can help implement with. So you’re right, in most cases that platform becomes the sub-advisor on the account. We’re just a research provider to the advisor and because we’re a registered RIA we can collect basis points by sending those models to the platforms that do the trading and they can reimburse us in basis points.

We’ve negotiated with these platforms so we’re not surprised when an advisor goes to a platform and like, hey, they offered me a model marketplace. They’re going to charge me, you know, 15 bits and I get access to all these third-party strategists. There’s some free ones. There’s some 20-, 30-day free ones.

We’re like, what if for that same 15 basis points, we leverage our partnership with that platform and we build you custom model portfolios and all of the things I described. For you, you get that asset and we execute it on that platform for the same price. We think that’s a very compelling argument.

Brad – Yeah, I’m interested. So to expand on that just briefly on the pricing, and I’m sure it matters how much assets are in play and kind of what services are provided, but generally how do you price this? Is this a basis point kind of approach or what does it typically look like?

Joe – Yeah, so we start at 10bps under $100 million. We’re trying to be the investment solution for a practice. We’re not somebody that’s going to come in and trade 10% of your book in a tactical, fixed-income option to complement your rep as PM stuff. That’s not us. So we start at 10bps with a monthly minimum. And that goes down with scale.

We have advisors that are billion-dollar advisors. We have advisors that are $120 million and I think we work well for both. And then the trading cost is additional to that, but like I said with our partnerships and our relationships we include, both are transparent with who gets paid, but both of those costs become the SMA fee to the end client. So we like to navigate is cost important or are features important because there’s a little bit of a range there.

And then secondly, we will work with people on a flat-fee arrangement, either folks that don’t have access to trading or don’t need it, or at a platform like we mentioned, Morgan Stanley, LPL, something like that, where we just don’t have that trading authority. So we’ll negotiate a flat fee with them, you know, roughly call it 40,000ish a year depending on the scale and the complexity of the firm.

Brad – We’ll end on how folks can get a hold of you and your team to kind of have this conversation, but to kind of set the tone for an advisor team that does reach out, that has watched this video, that thinks this might be something that could work for them, but obviously the devil’s in the details, what can they expect on that first conversation? They reach out, how does that conversation unfold?

Joe – A lot of questions. We have people approach us from time to time and say, hey, give us your track record and your performance. And we pretty quickly identify that that’s probably not a good fit for us. They’re not interested in the transparency and the honesty and all of the things that we try to come to the table with. So that first conversation is just a lot of learning. Who are you? And we dig. Many advisors go, hey, you’re the experts. I hate investments. We talk about it for 1% of the time with my clients. We talk about the garden, their kids, and then I push a machine that says, “Here’s investments.”

But the other thing is, you have preferences. Everyone does. Let us dig. Let us find out what those are. Because we think by knowing all of that information, we can build something that’s most attractive to you. We don’t try to force a solution on you that makes you uncomfortable. We don’t ever want to put advisors in a position where they have to apologize for their clients for performance by us telling them that, hey, look at the alpha of this model that we built. And then they get horribly disappointed if it doesn’t meet expectations. That’s it.

Just questions, learning. We often ask the advisor to just give us some detail on what you’re doing, and we’ll show you. We’ll show you kind of an example of what our solution would look like, what it costs and we hold that up against anybody.

And that’s where we try to compete is just that honesty edge. No tricks, no lack of transparency. Every model we run is fully transparent. We just want to be a sound, trustworthy partner. So, we’d love to have advisors reach out no matter what the shape of their business is. And we figure out how we can help them connect dots and build a kick-ass investment platform for them.

Brad – I like it. What is the best way for folks that do want to have that initial conversation to get a hold of you and the team?

Joe – Yeah, it’s a modelist.me. We also have modelist.ai, which will be the technology part of the platform. Or follow us on LinkedIn, just Modelist, M-O-D-E-L-I-S-T. And if anyone knows the person who stole the modelist.com URL and is part of it, let me know. I’ve been trying to get it for years.

Brad – Trying to track it down, yeah. Well, in the meantime, I’ll put it in the show notes modelist.me and then I assume the modelist on AI will continue to evolve.

Joe – Yeah, don’t call there yet. That’s coming. I had to throw a little teaser in there, but that’s coming.

Brad – Yeah, fair enough. Well, someone might be watching this, you know, three years from now and I’m sure it’ll all be built out.

Joe – Yeah, we’ll all be out of business and replaced by AI at that point anyways.

Brad – Exactly. So, modelist.me. Well, Joe, I appreciate you coming on, helping us get this is just kind of high level. There’s a lot more details to it. So, I encourage advisors that want to learn more to reach out and see what it might look like for their practice. So, thanks for coming on.

Joe – I appreciate it. I’m looking forward to the AI avatar you make for me on your post.

Brad – Yes, that’s right. Joe and I, when I reached out and said, “Hey, would you, would you mind joining me for an episode?”, he took note that a requirement is he will be made into a caricatured avatar for the, what’s it called? The graphic that goes with the video. So with that, Joe, hang tight. You’ll see it soon enough. And again, thank you for joining and helping us out here. All right. Thanks.

Joe – Thank you.

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