Using Decision Science in Investing: Masters in Business with Omar Aguilar

0:00At Brookfield, we believe you can own wealth that's measured in generations. Because true ownership looks beyond today and beyond cycles. For 125 years, we've built long-term wealth through expertise, discipline, and a clear vision for the future, providing investors access to alternative strategies built for what's next. Brookfield, own what's next. Learn more at Brookfield.com-own. This is not an offer to sell or investment advice, investing in vols risks, including loss of capital. Past performance is not indicative nor a guarantee a future results. Please review performance and offering materials before investing. Some people treat Chachi-PT like some kind of smart search engine, and some use it to get work done. Chachi-PT work is a new way of working in Chachi-PT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn

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2:52Omar Aguilar. Omar Aguilar, welcome to Bloomberg. It's a pleasure to be here with you, Barry. It's a pleasure to have you. So I want to get into your career and some of your conversations about what's going on in the market today and what's happening at Schwab. But you have such a fascinating background. I have to start there. Bachelors in actuarial science, then a masters in applied statistics from the Institute of Technology in Mexico City, then you come to the US and at Duke, you're a full bright scholar where you get both a masters in statistics and a PhD in decision sciences. Am I getting that right? It sounds like you were planning for a career in academia. It is true. Actually, I did in my last year and my PhD program, I did apply for a couple of

3:54academic jobs before I was lucky enough to basically get back to Wall Street as an analyst. Yes. Your first gig was at Merrill Lynch? Bankers Trust. Bankers Trust, then Merrill Lynch. You have this deep, quant research background. What did you do when you were first starting a bankers trust, and then Merrill Lynch? Well, if you recover what they agreed that you mentioned, my dissertation and the work that I did was in how to use statistical models, now they're called data science, back then it was a statistics, in terms of how to use those models for making decisions. The whole process of decision on their uncertainty was the research that I did. We apply that in particular to areas like currencies, equity, asset allocation, and I was hired at Bankers Trust to develop those models. I call that the before any AI or anything else, they were just quantitative models that were

5:00able to help people be faster to understand how people make decisions. I don't remember if it was the PhD paper or the 2001 paper that it's still one of the most cited papers in quantitative research, how did you jump from Bankers Trust to Merrill Lynch? When did that transition happen? Well, if you follow the path of my background, a lot of that is related to the activities on Wall Street because there were a series of mergers and events that happened that took me to where I am today. Bankers Trust was bought by Deutsche Bank, and at that point the group that I was part of was lifted out to join Merrill Lynch. Merrill Lynch, Investored Management, was starting to just build their institutional business, and that's where we became really nice fit. Unfortunately, September 11 happened 25 years ago, and then that basically took us to create the private bank asset management services for Lehman Brothers that wanted to branch out into the asset

6:03management business for their wealthy clients. Then from there, it started to just get a little bit sensitive in terms of the Lehman business, so I had the opportunity to work with a former colleague of Bankers Trust at ING to basically rebuild their quantitative and systematic investment processes. That was all related to activities that happened through the Wall Street acquisitions, events, and so forth. ING, now better known as Voia, that was $20 billion across 15 strategies, including active, index, enhanced index, pensions, variable annuities, and mutual funds. Once you stand that up and get that to a reasonable side, was Lehman before that or after that? That was before. That was before. We were able to build a lot of these things at Lehman Brothers. It goes back a lot of what my philosophy is, is you have to be in a place where you can

7:05marry distribution with manufacturing. That's what we believe as a management success relies on. ING had a very good distribution, and our idea was to build these more institutional-type scalable businesses using quantitative tools and technology to be able to deliver that to different folks. Again, unfortunately, we were in the middle of a global financial crisis in 2008, basically put a stop to every activity across New York and Wall Street and everything else, and that gave me the opportunity to go back to my academic roots and start working at financial engines with a lot of Stanford academics headed by Bill Sharp. To say nothing right, of the Nobel laureate at Bill Sharp, I just want to clarify one thing. Lehman Brothers, the quant research you were doing, was that for an alternative investment management or for public equity? It was dedicated to both the building asset allocation models for the private bank, and it was the first time that we were able to build a set of strategies

8:06that including alternative investments. We had private equity, private real estate, fund of hedge funds, and that was the whole concept of what we wanted to do for wealthy clients back then. And then at financial engines, it's $40 billion in defined contribution plan sponsors. I'm fascinated by Bill Sharp's work. I was fortunate enough to interview him on about 10 years ago. How did his thinking influence your approach to portfolio management and retirement planning? Well, going back to this concept of behavioral economics, Bill and the economics of Stanford have been at the forefront of merging this concept of how do we create markets and investing markets that are not necessarily efficient in the short-run, or in the long-run they are. Bill has always been in this idea of capital efficiency in the long-run. It's better to do the buy and hold and stay put at a low cost as supposed to try to go in a market.

9:07The whole concept of market timing and avoid market timing was the premise of everything. And that fits very good for 401k for retirement assets, for pensions, where strategic asset allocation is what really drives your long-term results. So that was at the core of what we did at financial engines, that is still at the core of the philosophy that we have a CHOAP. So I recall one of the most fascinating things of many really interesting things Sharp had said was the question of the annual 4% drawdown in retirement as the thorniest problem in all of finance. I've read that you've said 4% for many people doesn't make any sense. Do you want to address that? Yeah, well we've done and we did a lot of research and the needs for income is not a static number and is not necessarily something where you can rely specifically about one thing. What we have become is the 4% rule became just like a number that somebody picked out of the hat

10:12and said 4% works as long as you can generate those. And a lot of that had to do because if you think about it depending on the level of interest rates, you can actually 4% maybe it is right now probably less than the risk-free rate. So there is no reason why you have to stay with 4%. So it is really a dynamic process that depends on the needs of the moment. Inflation numbers, real growth and the level of rates that may affect what is the drawdown that you need to survive. To say nothing of when 4% was picked, the longevity projections were so much less than they are today. If you're 68 and relatively healthy, you got a good shot at another 15, 20, 25 years of living on that pile of capital. That wasn't true 30 plus years ago. Absolutely, Barry. And a lot of the challenges that we face and this is something that we work on financial engines is getting into the habit of early saving because in the generation for Gen X and any of these

11:15generations, there is no pensions that we're like back in the day. So people rely on 401K. So the ability for people to use that savings and the matching of the companies is critical for them to get to a point where they can retire. Unfortunately during all the research, we realize that the majority of Americans don't have enough to retire for this precisely what you said. It's more than 25 years of liabilities that they will have ahead and with 4% drawdowns, they will run out of money very quickly before they can actually get there, especially when you have inflation impacting. So what's really so fascinating about your background, you're not only a quant, but someone usually you're a big follower of behavioral finance and thinking about decision-making. You lead Schwab's BFI program for advisors, including diagnostic coaching tools and you run the BFI barometer study. How does someone who's that mathy and a longstanding statistics,

12:22probability and quant student fall into behavioral finance? Well, it is a great story because the area of a statistics that were part of my dissertation, it's an area of statistics called Bayesian statistics. And Bayesian statistics is based on a theorem called by Reverend Thomas Bayes Way back when what it does, it basically combines information that you have today that is called a prior that could be your experience and then uses all available data to update your experience, which is really our life. If you actually just think about it without necessarily creating a model, just think about it, you have an experience, you know what you need to do. I always give the example of trying to get to the airport. So you have your prior knowledge about how you and your own utility function, how early you want to get to the airport, how difficult that may be the potential problem is the probability you miss the plane and everybody has a different way to

13:22approach it. You know, two people with the same background, everything else, one may actually want to get their three hours ahead. The other person may want to get there like just five minutes before they start planning, they both take different types of risks. Obdating that information over time, that's basically how decision process is and that's probability and its core and that's pretty much what base theory does. I wonder if Bayes, how he would have thought about this if he was married to my wife, who she doesn't want to miss a plane, we'll get to the airport two hours later, bring a book, that's just how it is. But it's interesting that, you know, people have very different approaches to that, how much time do they want to waste versus the headache of missing a plane? So I'm curious, how does your education and decision science shape the way you think about the big issues like markets, risk and investor behavior? Yeah, well, you know, I have always been passionate about, you know, providing tools and services to investors to help them enhance their

14:24financial life. That's the core of Shua values, that's the core of what we do in asset management. And a big part of that, by our includes the fact that, you know, we want to provide information to clients so that they can make better decisions on their process. So again, the whole idea of trying not to time the market, trying to look at your long-term investments, trying to stay calm, you know, when things are, all that goes back to the core of their behavior because we're all humans. You know, all of us, you know, have evolved over time with two parts of our brains, one that is the amygdala, which is the more private, you know, primitive, you know, version of us that allows us to react and, you know, go fly to safety whenever we see a problem and allows us to just, you know, be emotional about things. And then there are other parts, which is the part of the front of the brain that allows to be rational and allows us to use data to make decisions. That combination, it sounds very familiar to the base theorem, one that is more gut feeling, the other one that is more analytical and more brain oriented and they get combined and every day they are battling

15:26with each other. So for us, being able to provide the context for clients that are more emotional with the information they need to adapt to their investment strategy so that they don't panic when the market goes down or they don't have and give them a process that is quantitative in nature so that they can stay the course is very important. On the other hand, we have other clients that are more analytical in nature, they think they can outsmart the market, they think they know the answers and we give them information and data so that they can inform and update their own beliefs so that they can have better decisions. So, arming clients with the tools and products and solutions to make them and help them make better decisions is the core of what we do. A little bit of thinking fast and slow. Bill Bernstein, neurologist, Ted said, you mentioned the amygdala, our whole limbic system is what underlies fight or flight. If we don't get that under control, we will die poor and it really is quite fascinating.

16:29In actual usage, in the real world, when you are advising clients and investors about their various behavioral foibles and errors, how do you get them to stay on the straight and narrow, what tools to Schwab use to prevent investors from shooting themselves in the foot? Well, two things we do is first we do a lot of education through our central financial research. We also provide a lot of training to our wealth advisors and our financial consultants. So, precisely the tools that you mentioned at the beginning, we call it this very cute name, biagnostics, which is supposed to diagnose your biases in a way that's, you know, our market team was smart enough to put it together. So, it is a diagnosis team for your biases and the reality is that all of us have biases, one way or another. So, the tools that allow financial consultants to get to know their clients better. You know, we have data that basically says that the

17:31more information we get from the client or their biases, allows us to build longer relationships with them. And at the core of what we do, we simplify it by say, well, we have to balance their needs where they want. There's a lot of clients that tell you what they want. And you as a financial professional, you know what they need. And we need to put them together. If you think about it in the world of AI, you know, the need is basically what the computer is going to tell you. The computer is going to tell you, this is the right allocation, this is what you need to do. But the one is what the client wants to have. And merging those two is the critical part to maintain and have a sustainable long-term investment strategy. Huh, really, really interesting. Coming up, we continue our conversation with Omar Agalar, President CEO and CIO of Schwab Ascent Management, talking about how he helped build the Ascent Management Group to over a trillion dollars in client assets. I'm Barry Richholtz, you're listening to Masters in Business on Bloomberg Radio. At Brookfield, we believe you can own

18:36wealth that's measured in generations because true ownership looks beyond today and beyond cycles. For 125 years, we've built long-term wealth through expertise, discipline, and a clear vision for the future. Providing investors access to alternative strategies built for what's next. Brookfield, own what's next. Learn more at Brookfield.com-own. This is not an offer to sell or investment advice, investing in false risks, including loss of capital. Past performance is not indicative nor a guarantee of future results. Please review performance and offering materials before investing. Some people treat Chachy-P-T like some kind of smart search engine. And some use it to get work done. Chachy-P-T work is a new way of working in Chachy-P-T that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to

19:37turn into something useful can just become something useful. Put Chachy-P-T to work on your most ambitious ideas and projects. Get started at Chachy-P-T.com by selecting Work Mode, available on plus and pro plans. The world of business is constantly evolving. Every day, new challenges, new opportunities, new ways of working. Comcast business keeps you totally in step, with secure AI back networking built to power the way modern business gets things done today in more than 100 countries around the world. That's some serious muscle. And get this, Comcast business powers over 90% of the Fortune 500 and millions of small businesses. Behind it all, network engineers, cyber security specialists, support teams, thousands of experts answering your call at 2am like it's 2pm. Always on, always ready. That's a lot of coffee. One partner powering how business gets done for companies of every size all around the

20:40globe. When you add it all up, no one does business like Comcast business. For big business, AI opened up a world of promise, but that world of promise turned into a world of pain. Costs spiraling data scattered across disconnected systems, security and governance increasingly complex. AI initiatives struggling to scale and ROI that remains frustratingly out of reach. The challenge is in AI itself. It's having the infrastructure AI needs to succeed, which is right where Boomi says we got you. Tens of thousands of enterprises trust Boomi to connect data, applications, processes and AI. With Boomi, businesses can eliminate silos, automate workflows, strengthen governance and create the foundation AI needs to perform at scale. The result, faster innovation, more efficiency, better business outcomes. Boomi turns a world of AI pain into a world of AI gain. As Boomi says, we got you. Head to Boomi.com to learn more.

21:41That's B-O-O-M-I dot com. I'm Barry Ridholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Omar Agalari. He is CEO, CIO and President of Schwab Asset Management, helping to run over a trillion dollars of Schwab's 13 trillion in client assets. Let's talk a little bit about your time at Schwab. You join Schwab. It's 15 years already to run equities and multi-asset strategies. Back in 2011 after the financial crisis, the fun business was a fraction of its current size. What was the mandate when you first joined? Was it simply, hey, build this up? Or was it a little more comprehensive than that? It was more comprehensive. The belief and the reason why I joined Schwab was that we had a project that was to use technology, use systematic strategies to create and use scale. Scale in the business of this was to try to

22:47provide with different set of tools for the clients to be able to grow their wealth. That was at the time, right after the financial crisis, there was a significant amount of apprehension in the market of what was going to happen because the experience that people had was bad. There was a lot of behavioral aspects and biases of risk version that happened during that time. What we ended up doing philosophically was saying, all right, we'll start with the foundations of how the asset manager means is going to grow and run for the future. It has to be transparent. Clients define transparency as being a key part. A big value of Schwab is making it accessible. All the solutions and all the products and services had to be something that was available for the retail clients. It has to be also at low cost. Those three components were key components of what we have. We said, we don't want to have a superstar with every single product that is going to be available in our shelves. What we're

23:49going to manufacture is something that we call it core for every client. We build a set of ETFs, a set of beta exposures and a set of smart beta exposures that allow clients to define their core portfolio and say that core of your strategy should have the most transparency, the mostly liquidity, and the lower possible cost and an accessible route for you. We build and a franchise of Schwab ETFs. Today, we're still there, the fifth largest ETF manufacturer in the world, which is a big part of the trademark of the asset management that I was part of at the beginning. At the same time, we say, what are the other components that will be important for clients going forward? Income will be a critical part. We know, baby boomers are in the process of retiring. Gen X will come right behind them. In our clients, particularly the clients of Schwab, will require income solutions. We build dividend strategies. We build liquidity-based money market funds that

24:52were targeted. At the time, the interest rates were zero or negative. There was really nothing there. We knew at some point, like it is now, the yields were going to go up and income was going to be able to generate. It took us probably 10 years before we were comfortable issuing more bonds, but that was part of the plan. At the same time, we say, okay, well, we also need to start building technology to offer these, not just in ETFs and mutual funds, but also in managed accounts, so that then we use technology to start bringing these customizations as part of that future generation. That vision is what got us to what we did today, now $1.9 trillion in assets. 1.9 trillion. I've been saying over a trillion. It's really almost $2 trillion. That's interesting. You're there for a full decade before you take on the CEO job in 2022, but unusually, you kept the CIO title. There's such different jobs. How do you split your time? How do you wear both hats? Does that help being able to see it from both an investment perspective and

25:57a business perspective? It has been the best job I've ever had, a lot of that is because the experience I have as an investor and as a researcher, which is the core of my skills and the scores of my experience is on research, allows me to understand the investment, allows me to understand the risk we're taking any time that we create a new product, a new solution, and at the same time allows me to learn a lot about our clients and our business. I've been fortunate enough to have good mentors like Rick Wister, which is our current CEO, which can combine the ability to run investment, management companies with a business setting that allows us to just run it efficiently. That, to me, has been a great learning and has been a great thing for me. You mentioned the word efficiency, and I discussed earlier, you have one of the lowest fee rates for mutual funds and ETFs at eight

26:59basis points. How does that efficiency and scale operate? How do you take advantage of the fact that Schwab is $13, $14 trillion? It's a behemoth. It's one of the biggest asset managers and custodians in the world. How do you take advantage of that economy of scale? Well, I'll tell you the core of this, and then I'll give you one specific anecdote of one of our products we're very proud of. At the core of what we offer at Schwab is always being that we want clients to have alternatives, to have options to pick. We never go to any of our clients to try to tell them the they have to buy the proprietary products that is run by my group. We basically give them third party options and just not too far in the past, we basically remove all commissions across all products. That was less than 10 years ago. That was less than 10 years ago. Clients can actually go

28:00and buy and sell products from our competitors in asset management as long as they want. We have the mandate to basically offer everything that we have. Our philosophy is that if we create high quality products at a lower cost with high transparency, with accessibility, our clients will stay with us and will build trust because we're offering options for people to take on some other things. That has given us the opportunity to grow the business and grow the market share in our own platform, but also off platform. Not only we serve good clients of Schwab, but also clients outside of Schwab, we basically get access to our products. Example is our ETFs. We roughly get 35% of net new assets in our ETFs that come from outside of Schwab, which is just the core of the quality of the products that have the accessibility that has the efficiency and the scale that allows us to create that product. The product that I said as an anecdotes, our dividend product. Our dividend product basically started back in, when I joined in 2011,

29:05and 15-year-laters became the largest dividend ETF in the world. That's over $100 billion. That's at the end. It's among the lowest cost, but it's not the lowest cost. It's also not the one with the highest yield, which is the reason why we created this. It's to have a high quality set of dividend payers that basically build that structure 100 names. That alone because of the high quality investments and the results that it has created, the consistency basically attracted more clients to it. The very high yield among dividends typically means the prices recently come way down, which is why the yield is high. Typically, that means that dividend is about to get cut. I didn't realize that that product was over $100 billion. It raises a really interesting point. You sit at a fairly unique perch. You're at the crossroads of three major shifts in asset

30:08management over the past few decades. The rise of quantitative investing, the move, at least in part, from active to indexing, and the role of behavioral science to improve investor decision-making and outcomes. You're right in the middle of all three of those. Tell us a little bit about how those major vectors have changed how all of us invest. I think a lot of things have continued to evolve in certain way because of just capital market sufficiency that goes back to Bill Sharpe's world and theories. Also, the availability of information that clients have today that didn't have when I started my days at Bank of Strust. The availability of information that you get today is instant. The response they have on the different anomalies that exist. What we have observed and a lot of the core pieces of what you mentioned because of the rise of technology, the use of technology, you can actually create more

31:12efficient processes. Now, we're now in the next wave because AI is going to even improve that even further. What we're doing, instead, is we have seen the trend that goes from active into passive. We have seen the trend where people prefer lower cost beta solution. Then we also see the rise of alternative investments. We also see the rise of AI as part of the process. One of the initiatives that we have now is how do we incorporate AI to help clients use that information and those tools to make better decisions. Go back to decision processes. Go back to base TRM is how do we blend the information that the clients is going to put into AI. It's almost like the prompt that you put into all these agents. Then how do you blend that so that then the answer that you get is the mixture of what we believe is the right answer for the client based on our research and what the client is looking for. Really interesting. You mentioned alternatives. I'm curious and given you background when you were at Lehman Brothers doing the quant work with all. I'm curious about

32:17your view generally of all. Obviously, there's been a lot of news this past year, especially in private debt private credit. Then there's been this sort of nascent push to move alternatives into 401k's. Give us your perspective from Schwab about alternatives. Yes. We're pretty constructive on alternatives. We just completed the acquisition of Forge Global just a few months back. Our belief is that for certain clients, mostly mass affluent, wealthy clients, there is this leave that requires that additional level of diversification and potentially opportunities. I think the biggest misconception, even with the work that we have seen and all the headlines we have seen on private credit, is that it has not ever been a credit issue. It has been always a misconception of liquidity. I think that liquidity education is critical, especially as the market

33:22goes down towards the mass affluent and potentially even lower to retail, which is a question mark. That is the big component of how do you establish, if you think about the high yield market, public market, you can actually see it is transparent. You can see what is. There is more the linkancies and there is more credit events there than it is in the private market. In private credit, when you actually look at what the size of that market is and what the size of the potential credit issues is very minimal or lower than in some cases the high yield market is at the worst possible time. But the problem is that the understanding that when you go into private access in alternatives, there is a liquidity premium that you're taking advantage. That means that your money is not going to be available the next day. That consolidation is what really brings the headlines because a lot of the challenges that we have seen in some of the funds that are available is because people are requesting their money and they're not getting the full money back. I'm always fascinated when that. I watch that happen and I always want to grab people and say which part of a seven-year lockup

34:25was confusing. You're getting theoretically potentially getting higher returns because you're not asking for that liquidity. It seems that there's a little bit of an education problem with people thinking they're thinking to get the best of both worlds. High returns yet still be liquid. How do you read that? Absolutely. I think the biggest confusion about is people are trying to compare investing in public securities or public markets and private as if they were exactly the same. Even when you have quants like my team trying to look at backties or trying to compare them trying to put efficient frontiers, they're not comparable because of precisely the liquidity component that is into it. If you look at say private equity returns or private credit returns, they tend to be smoother over time and they tend to have a lag. When the markets go down, usually the marks on private equity, they take two or three quarters before they go down. A lot of

35:27that mis-timing is precisely liquidity. It's precisely how these things operate and valuation. So that component is something that needs to be clearly explained so that people understand this. Now, the big part of what we're doing at Chouave and going back to part of your question is, we also believe that especially now, there is an opportunity for people to have access to those markets that didn't have access before. The example of the reason why we have forged marketplaces, there is a lot of companies that are pre-IPO that are being in the process. They're probably going to stay private for longer, but whose liquidity needs of those employees or founders is high because they may be in a great company that at some point, at the moment, but right now, they're sitting on shares that they cannot use. On the other hand, there's clients that will have access to that. We love to have access to that, but they don't have access because in the past, they were never available. So, forged marketplace allows to just create that supply demand so that employees and

36:31founders can actually tender their shares in a vehicle so that then all clients can get access to those. So that there, you give access to private investments, and at the same time, you provide liquidity for those that want to desire it. So, not public and not liquid, but semi-private and semi-liquid? Is that a good way to describe it? That is a good way to describe it. But it's sort of an interesting because if you think of the amount of wealth that has been created on these private markets over the last decade, it has been fairly concentrated in maybe 1% of the population or less. In the other hand, you actually see the amount of money that is in public equities that could access that. Just the view that Shua over time is, can we give access? Can we provide that gap for the right client? It's not for everybody, so that actually they can have that a little bit better. These end up in a 401k, eventually, because as much as some people have complains, they've run out of institutions to sell it to, let's fob it off on retail, it seems that people who have a 10, 20, 30-year investment horizon, that is a fairly rational place for an illiquid

37:38investment. What are your thoughts? Yeah, our view is for retirement assets, and this is new. Most 401k platforms will have access to what is called a broker window. In that broker window, there is a significant amount of options that you can use, including some of the semi-liquid vehicles that people can use in their 401k. The biggest challenge in here is for those clients that understand the liquidity that goes with it, the duration that goes into that, it is clearly a good fit. For the majority of clients who are 401k, they actually only want to grow, and if you actually think the biggest challenge with alternative investments is still today, is that the cost is much higher. As we said, part of our philosophy at Shuaaf, if you add those fees over 20 years, you're ready behind the market just by paying those fixed fees, and those are for you, that you got to pay them. In our view, if you stay in these public markets when you grow your portfolio, if there is this opportunity for you using the broker window for the right client,

38:42that actually fits better, but overall, just because of the cost of entry in 401k over that long duration, seems to be still not the right fit for the average 401k. I couldn't agree more. Coming up, we continue our conversation with Omar Agalar, CEO and CIO of Shuaaf asset management, talking about the current state of markets today. I'm Barry Rittholz, Shua listening to Masters and Business on Bloomberg Radio. Some people treat Chachi Pt like some kind of smart search engine, and some use it to get work done. Chachi Pt work is a new way of working in Chachi Pt that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put Chachi Pt to work on your

39:43most ambitious ideas and projects. Get started at chachipt.com by selecting Work Mode, available on plus and pro plans. The world of business is constantly evolving. Every day, new challenges, new opportunities, new ways of working. Comcast Business keeps you totally in step with secure AI back networking built to power the way modern business gets things done today in more than 100 countries around the world. That's some serious muscle. And get this, Comcast Business powers over 90% of the Fortune 500 and millions of small businesses. Behind it all, network engineers, cybersecurity specialists, support teams, thousands of experts answering your call at 2am like it's 2pm, always on, always ready. That's a lot of coffee. One partner powering how business gets done for companies of every size, around the globe. When you add it all up, no one does business like Comcast Business.

40:45For big business, AI opened up a world of promise, but that world of promise turned into a world of pain. Costs spiraling data scattered across disconnected systems, security and governance increasingly complex. AI initiatives struggling to scale and ROI that remains frustratingly out of reach. The challenge is in AI itself. It's having the infrastructure AI needs to succeed, which is right where BOOMIE says we got you. Tens of thousands of enterprises trust BOOMIE to connect data, applications, processes and AI. With BOOMIE, businesses can eliminate silos, automate workflows, strengthen governance and create the foundation AI needs to perform at scale. The result, faster innovation, more efficiency, better business outcomes. BOOMIE turns a world of AI pain into a world of AI gain. As BOOMIE says, we got you. Head to BOOMIE.com to learn more. That's B-O-O-M-I dot com. This is Robert Smith from Business History. If you're listening to this,

41:46there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow. What you probably didn't dream about, keeping up with cyber threats. That's where master card can help. With access to tools that help identify cyber threats to better protect your business. Building a dream business, priceless. For cyber security in a changing world, there's master card. Learn more at mastercard.com slash small business. I'm Barry Rittholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Omar Agalar. He's CEO and CIO at Schwab Asset Management, running nearly two trillion of Schwabs over 13 trillion in client assets. Let's talk a little bit about the state of the world and what's going on in the markets. Let's jump right into artificial intelligence. From Schwab's perspective, how do you see AI changing things within the wealth management business,

42:50be it portfolio construction, financial planning, communication education, even the economics of individualized advice? Well, it's making its way very quickly. It's the adoption is something where we all in this business started to just get on it. The way that we describe it is, this is like the third wave of AI in our society. It started with the hyper scalars. It started with that piece of big investments, give capital expenditures, go on into hyper scalars, it moved to infrastructures with data centers and semiconductors in there. Now we're going to that adoption phase that includes a lot of sectors, including financial, including healthcare. In our case for Schwab, we're doing this in many ways. On one is efficiency. Making AI tools efficient for all our employees so that they can actually make their time to do something else. For client service, we continue to support our

43:52clients. We have been over time at Schwab always committed to pick up the phone as fast as we can and give them the service that they provide and many of these things will basically get the benefit of an AI. We continue to work on analytics. AI analytics that will allow our clients to be able to access their accounts and look at the reports and look at the impact of the markets into their accounts using some of their tools. For research, we are now in the process where all the research that comes out our center for financial research is now being packaged. We have what we call the research assistant that allows clients and financial consultants to get access to what happened in 2022? What happened in 2023? What we thought when the Fed made decisions, what was the situation we had and then being able to have that information available very quickly to understand what it is. AI in the adoption phase is clearly something that we are embracing and we are investing. I know all our peers are doing that too. When in about a decade ago, maybe a little longer, when the

44:53Robo advisors, the digital platforms first rose up, there was a sort of concern, oh, this is going to replace individual advisors. That turned out not to happen. People, especially wealthy people, want to be able to pick up the phone and talk to another human being. Yet we've seen the same sort of thing play out with AI again, hey, what is this going to replace? Is this going to replace analysts and strategists? Is this going to replace portfolio managers and what about advisors? Do you see a similar thing playing out where middle class and high net worth investors want a person on the other end of the phone or if it could be faster, cheaper, better, will people embrace AI for advice? Well, it varies by generation and it varies by many parts of the segments of

45:54the market. Our philosophy is still today that the world of personalized relationships will be the key to the success in the future and that cannot be replaced by AI. When you get to see somebody, when you get to talk to somebody, no matter what it is, that component of establishing the relations because we're humans will never be able to replace AI. What AI will do is basically create more efficiencies on task and things that normally financial advisors are using their time today to build better relationships. So if they were using time for creating reports, for doing analytics, to do and other things and that would take 50% of the time and you can reduce that to say 10%. Then now you save 40% of them for building more relationships and establishing and getting to know the client better, getting to understand their biases to see how they can help them better. So that is what we see the trend will go on forward where the combination of AI tools and I will mention specifically AI tools with the human expertise and relationship building is basically the

47:01formula for the future. To your point, yes, people thought the raw advisor was going to take over and indeed work very well for many clients but it didn't replace the relationship building for financial consultants. Yeah, some of those AI tools, just something as simple as note taking during a Zoom call. I used to watch people not be able to pay attention because they're jotting stuff down or there's a third person on the call, a whole other human taking notes and it just as made things so much easier and more efficient but again, not replacing individuals. Let's turn our attention to the markets. Your media outlook said that earnings are driving the bull market but the leadership is a little narrow. It's mostly been AI and energy. First, is that still the case today and second, when does that concentration become a risk factor? Well, you know, the concentration of the MAX7 has been an issue for the last two years. We started to see rotation out of the

48:05large cap mega cap names in tech. At the end of last year, going into this year and it comes and goes, we still believe they're still heavily concentrated. There's still significant concentration, particular in technology but we started to see that rotation going into other parts of the market which is very healthy and we see in days where the NASDAQ is down, the S&P maintains staying the right place. A lot of that has to do because some other sectors are starting to just carry the weight in some other parts, things that were a little better value than tech and I think that's starting to just read. So the breadth became better in the first part of the year. I'm a little more worried that when I've seen after that is that the breadth is starting to get narrow again and we started to see that momentum trade taking a little bit of a second life and I think that's. It's something that's a bit in the middle of the year. It's a stumble a little bit and that was, you know, in our mind was there because we've been working with clients to try to diversify

49:06their concentrations, try to just move, you know, assets to other parts of the market and then, you know, it happened that momentum actually took a little bit of a hit and then when you look at the last, you know, few weeks, you actually see that that is starting to just recover which a lot of that is clearly because these companies have done really well earnings wise. They're generating significant amount of business and they're spending more on capital on AI. So, but, you know, we believe that it's healthy for people to continue to do the rotation and have opportunities to go outside of those. I'm glad you mentioned the the CapEx cycle from AI. That's been a really significant engine of growth for the past, I don't know, five years. How much risk is embedded in that and how can investors position around something if you've underweighted the technology sector or the AI CapEx cycle you've underperformed, how should investors think about this? Well, we

50:07have seen that continuous and we still believe that we're not completely done. We believe that the CapEx cycle has extended but what is good is it has extended beyond technology. When you look at the capital expenditures now going in other parts of the market, it started to grow. Maybe not as big as what we had with the tech, but it's clearly been over there now. What other sectors are you saying? We've seen healthcare, we've seen financials, we've seen some of the industrials doing well on this and the spending money on CapEx which makes sense, right? They can make their products more efficient. They can make you know, all the things faster. And I think in a certain way that that adoption is has increased that capital expenditure setting. I think the question you have is, you know, what is going to be interesting going into next year is that investors are going to start trying to evaluate how much of that capital expenditure and that investment ended up being profitable. And I think profitability going into next year will be a key metric to watch because that's going to be where people will say, well, you're spending all that money, you borrow money to increase your

51:10CapEx for AI, but yet your return investment is not working. So that is going to be a really good test going into next year. So in 2024, there was a quote of yours, investors can expect 15 to 20% asset growth annually for seven years that turned out to be true in 24. We were about 25% and 25. We were about 25%. It's early September and we're not that far away from 15%. So it looks like borrowing any problems this year. You're going to go three for seven. What was that number based on? That's a pretty healthy return above what we've seen over the past 15 years, which has been a great bull market. What do you base this on? Well, you know, our research goes into starts always with the macro picture on where we see the economic cycle. And at the time, you know, we knew that we were in that sort of early to mid cycle that usually goes into an expansion. We were surprised, obviously,

52:15that the expansion continued. I think we never expected that it was going to continue as far as it has been so far. And a lot of that is. And I would probably say I was the first one. You know, if you look at any report that we produce and most people produce back in 23, nobody mentioned AI. That came, you know, afterwards and it was very quick and it moved there. You know, how do we know that then that would have sent instead of seven years, it would have sent 10 years. But that's a big part of this. But if you look at the macro picture even going that in that expansion where you have, you know, healthy economy growing, you know, the nominal growth expectations for these years still, you know, close to 6%, which is impressive. When you look at labor market that is stable, when you look at, you know, the monetary policy and the fiscal stimulus that going to the economy, that allows us to extend that and business investments, you know, the credit market is healthy. Everything part of that that allows you to create that tell when, you know, it was working in the right place, especially because relative to the rest of the world, the US looking

53:18incredibly attractive. And it was leading the charge and it was clearly moving in the right direction because we didn't have the same issues that some other regions in the world had. Obviously now we're in that position where we're basically getting close to the peak of the cycle. And, you know, from here, it's difficult to sustain especially because, you know, the risk premium associated with higher rates is starting to just take, you know, a little bit of the oxygen outweighed of those risky assets. So, you know, our expectations is that we're probably, you know, in that, you know, end of that seven year run. And we think that at some point in the next year, we'll start to balance it out with classic classes. So, you mentioned trade policy tends to hit the economy on a 12 to 18 month lag. The full impact won't show up until sometime in 2026. 18 months ago was liberation day. So, we're right in the heart of that. What are we seeing from trade policy? How is it impacting the economy and inflation? It has had probably less impact

54:20than we all thought. It has an impact and it has had an impact. But a lot of exceptions and exemptions, a lot of exceptions, a lot of negotiations, a lot of extensions and a lot of, you know, practical implementations because it's one thing to set up a tariff. It's one thing to a set of certain components. But for that to fully be implemented and checked is more difficult to do. Like the compliance associated to figure out how the tariff is getting paid and who those what. And especially because there has been obviously a lot of discussion, also even with the Supreme Court and how this gets reversed and how the gets implemented, that obviously lacks the effect. But it's very clear to us that any kind of tariff has an inflationary aspect. The biggest difference of what we have observed at least so far is companies have had very clean and very robust balance sheets. So, for many companies that were involved in that, even though their prices have increased their inputs, have been more expensive, they have been able to weather the stone without necessarily passing it all through the consumers.

55:22That has started to change this year. And if you look at some of the cost of goods, you know, starting to just get slowly, slowly higher, slowly higher, even though the inflation rate, you know, seems to be stable, the prices have gone up. And I think that's basically part of the inflationary component that actually people feel. Stable at 3.5%, it's not getting worse, it's not going 4% or 5%, but that still means prices are ticking up. Which, let's talk a little bit about yield, which is directly related to inflation and the Fed rate. Your earlier this year, the House view was, now was not the moment to reach for duration. Since you mentioned that, we've seen the 10-year move up substantially. At what point do you lock in that longer duration and higher yield? Is it 6%, is it 7%, when does it become too attractive to not lock it in? Right. Yes, it's true. Well, it turned out that our team that does a lot of the work on fixed

56:26income, was very clear that there were two things that we didn't want to pursue further, which is credit spreads were too tight. There was no reason for us to try to go too deep into credit. And the second is duration was too volatile and too risky. And that has worked well so far this year. Now, when you started to get to like the 10-year being at 4.8, close to 5%, that's to us, it started to just become a little bit more attractive than what it was before. Mostly because then now you see the balancing of upside and downside. And actually you see, like, well, where does the yields go from here? When you actually have a good economy, again, go back to the economy, again, granted that we have this term premium effect in the long part of the curve. And we see the deficits obviously affecting that component, inflation expectations and the market itself will probably still keep the little little of that on that 10-year. So we believe that staying in that sort of average duration, maybe below what typical benchmarks have is still a pretty healthy

57:26component. And you can enjoy very nice yields. And with high quality again, we still don't think it's time to get credit rest. So that is in a big part of what it looks. It would stain the middle of the curve. Intermediate bonds with higher quality is the place for people. Can a lock in very nice yields? Intermediate 7 to 10 years, is that about right? Yes. So let's talk a little bit about biases since you spend so much of your career on behavioral finance and better decision making. Last year you said there are four dominant biases that seem to really be affecting investors today. I'm paraphrasing. Hearding around the magnificent 7th home country bias, recency bias, especially amongst young people and confirmation bias, tell us about those for what what is your name those? Yeah, well, those four on their continued to be into this year. It's been fascinating to see. So, herding is very clear. People follow the momentum trade. They love the

58:29momentum trade. And a big part of the help that we have is to make clients and investors understand that it's staying too concentrated because the momentum trade works on until it doesn't. And then when it does and basically could be very painful. So a very natural cognitive bias that people have is they don't know how to sell their winners. It's impossible for them when they see them on a run, do you think that it's never going to end? And I think that's a big part of our education to try to help them to, you know, take, you know, take profits when you can, rebalance when you can, rebalance is like a word they hear me say all the time. The second one is recency bias. This recency bias is basically putting more weight into the recent events than what it is the entire history. That's a very typical, you know, emotional bias when, you know, in days when there's lots of volatility, people tend to say, oh my god, this is the end of the bull market, you know, we got to get out and they forget about their fundamentals. Or days when they see, oh, you know, there's another great earnings report by semiconductors. Well, let's go into that and then put more money

59:34into it. That recency bias when you only look at the most recent information as your basis to do that is something we try to understand. And that, you know, tends to work when you actually look a longer horizons when you took out, you know, more information and more data. Confirmation bias is my favorite. And this is the typical example when you buy a new car and then you start driving your car and you're starting to see cars like yours everywhere because your brain is basically trained to try to look for things that convince you that you're making the right choice. And so confirmation bias basically have, and we have, especially in a bull market, when you have clients that call us and say, hey, I told you that stuff was going to go up. It's like, well, yeah, it was gone up enough because the reason you said, but it went for other reasons. And, you know, even though they didn't have any fundamental reasons to it, it's actually gone to that. Or I want to go into these particular classes. The typical example is Bitcoin. You know, Bitcoin is one of those that was clearly in confirmation bias when it was down at $16,000 and people had doubts about how Bitcoin

1:00:34was going to work. When it went up to 30,000 people are like, oh, yeah, this is the right thing. And they did the same thing again. And they said, no basis other than the confirmation of them, they created their own theories on why that was happening. So that is another part of that drives a lot of the market. And the fourth one I forgot what was the one country. And Hong Kong Tribis is more like, you know, the safety component where you prefer to stay in the US. One of the challenges we have as a country is that we don't have enough exposure to international markets. And there's great companies internationally. There's great opportunities to invest in diversify. But most investors tend to feel comfortable, you know, buying their stuff, their good ad. They're familiar with their familiar. And a lot of that is being tested a lot in the market. Or saying like, well, you know, if you think about your brands that you're loyal to, right? You go to supermarket and you buy the shampoo that you like and you don't want to change you don't want to do anything else unless you want to actually try something else. So it's this idea of

1:01:37diversification and trying to understand that he's not going to be always the same as actually something we tried to teach our clients. And up to two or three years ago, the US was outperforming, developed XUS and emerging markets. The past few years, we've seen international really come on strong. Correct. So if you were stuck with, I'm reluctant to say the recency effect of seeing US outperformance, you might not even think to look overseas. Well, then that was the combination barrier because the recency bias that says, well, the US has outperformed them international markets combined with the home bias basically will prevent any client to diversify away from the US. So I want to stay with the biases. If you could convince clients of Schwab, if you could persuade investors to think about adopting one rule to thwart their own biases before whenever the next bear market comes along, what might that rule be? Well, we don't have one rule. We have three rules.

1:02:38Oh, we have three components. Okay. So we call it, you know, and this is a lot of that has come from me, but it's clearly a big part of what our philosophically is for clients to mitigate those biases. And it works for all kinds of clients. Stay invested. That's number one. You know, it's very important for people to try not to time the market. Stay invested is the first component and we have lots of data over long periods, lots of cycles that shows that stay invested is much better than not being or trying to get in and out of the market at different times. Stay diversified. That's number two. Diversification, even though it's like the old trick, it still works. And as I said before, the challenge with clients today and the channel for investors today is they don't realize their level of concentration until it's too late. So having the rebalance, having a strategic asset allocation, trying to just make sure that they follow that path is very important. If you think about it, if you put your portfolio three years ago and you invest there and just keep it there and you don't touch it for three years, today you will be highly exposed to technology.

1:03:41Just for the way the market dynamics is. So it is important to take a look at and have an approach to rebalancing that allows you to just get that diversification that you have. And the third one is to stay disciplined. The discipline basically creates a mechanism to have a systematic approach for those people. So things that we discuss with our clients, especially with those that are tend to be more biased emotionally, is to say, let's set up the rules now before we get into, the action on the market. So if you see the market is down 5% one day, we already have the playbook. We don't have to panic, we don't have to do a lot of things at that moment. We already know what exactly we have to do and follow that discipline. Whether it's rebalancing portfolio, whether it's taking profits, whether it's buying some of the companies that may not be natural, this is very typical. With the example that I always provide is if you had an equal weighted strategy, well, if things started to get out of work, you want to get them back to equal weighted. And that's

1:04:43sort of a natural thing to have. People like it because they're like, yeah, I know, that company went down so I can need to buy more. And that's a little better approach. So stay invested, stay diversify on a state discipline. Last question before we get to our speed round, our favorite questions. What do you think investors are not thinking about or talking about today, but perhaps they should be. What topics could be assets, geography, policy, data, what's getting overlooked, but really shouldn't? I think the main area where clients get distracted the most is they get concerned about geopolitical risks. They get concerned about inflationary pictures and they have the right to do that. But a lot of the benefit of long-term investing is something that gets overlooked all the time. And again, a lot of that is because of the recent CBIAS that exists today and the availability of information. So these concept of

1:05:45setting up your goals, setting up your investment strategy, setting up your strategic asset allocation and follow that path is something that, believe it or not, gets overlooked all the time. And it works no matter what side part of the cycle is, as long as you feel comfortable understanding risk. At the same time, the risk budget, and we always talk about this, is so critical for people to understand how to allocate risks, not to allocate assets, but how to allocate risk. And I think that component gets overlooked all the time. And the way I think about it is that when you go to a dinner, you basically have your main entrance, you also have your salad, you also have your side, and you don't necessarily have the same level of weight to each one of those. That's a risk budget allocation. So you need to understand how much is going to be in your corporate portfolio, it's going to be long-term, how much is going to be in other parts of the market. It's specifically nowadays, which there is a temptation to go into these predictive markets.

1:06:47And I think we try to avoid markets that way because the difference between gambling and investing is huge. Right, that's pure speculation. And in the way that our team has explained it is, when you're investing, you become an owner. When you're gambling, you don't have anything. You're just basically putting money in the odds that are against you and you don't have any ownership. The house usually wins. Correct. All right, so let's jump to our favorite questions that we ask all our guests starting with, tell us about your mentors you mentioned one earlier who helped shape your career. Well, the person that brought me to Bank of Strasbourg, a really innovator that actually took a lot of faith and he was able to see in a PhD student that was doing based in statistics and modeling the ability for that. And I learned a lot from him. And that was from who? That was a Bank of Strasst and his name is Phil Green.

1:07:48Phil Green. And Phil basically put together this vision where he wanted to create this concept. He bought into the idea of vision and that helps me in just understanding how these these have all over time. I have also my advisor from Duke. His name is Mike West. He has obviously deep academic background, clearly a lot of technical, but he's also business owner. He also understands the practical application of all these techniques, which I believe vary that combination of deep quantitative tools with reality and making that merge is something that we need more. There's a lot of great technicians. There's a lot of great people with a lot of really smart people, but having that idea to be able to solve it's actually critical. And I would probably say the model that we get from Chuck on the values that he has put together, Chuck Schwab, at Chwab, of getting access to clients, provide clients with the right solutions,

1:08:50being transpired and being accessed and thinking through client eyes, that has been a big mentor of for my other. You know, Schwab has been the longest job I have ever had and it's been great. Let's talk about books. What are you reading currently? What are what are some of your favorites? Well, I love the books of, you know, the Sapiens was one of my favorites just to reread it again. Think Fattas is low is was another great of my favorites. I like to read a lot about, you know, these components. I read the Hail Mary book that was actually a pretty fun project. Hell Mary. So those are great and there's a great, you know, components that I like to always think about the concept of how you apply those two things that I can do for my work. What about streaming? Were you watching or listening to anything interesting these days? I started watching this show called Silo and Apple TV and that's a, it's a, it's a lot of pieces that I think it was, it was great.

1:09:52I did watch the Ted Lasso for a while and that was also good, especially the first season was particularly good. You know, it's it's it's quite and then there was this other show called the the 100 which actually it was very good because again, sci-fi. Yes. And it had many, many, many episodes and and seasons but what it was great because it was again a sci-fi very similar to Silo but the whole plot was about the the human kind was, you know, in this nuclear war and therefore they selected a hundred people to just put them on space and they have to survive, you know, there until the earth was, you know, safe again to just come back. Once that happens, then, you know, there was a lot of changes, there was a lot of things for survival, there's a lot of leadership lessons on how to deal with that and how to deal with adversity that I thought was fascinating. I know you mentioned reading project, Hell Mary, have you seen the movie yet?

1:10:55Yes, we did. Yes. Really. It's really quite quite amazing. Our final two questions, what sort of advice would you give to a recent college grad interested in a career in either quantitative analytics or wealth management? Your number one is the the yes, getting your exercise and trying to get up to speed on all the methods that, you know, we can use. And in these to day and age, you know, understanding, getting a CFA, getting some project where basic, you know, theory about investing, you know, comes into play. Second, which is very important, you know, soft skills. That's something you don't get taught in school. But the ability to have the soft skills to be able to talk and explain, they'll be able to say, all right, this is the things that you can do and this is how you can structure that to me becomes like a big part of the assets. That combination of being able to be good technically, but being able to explain things becomes

1:11:56incredibly valuable. And our final question, what do you know about the world of investing and behavioral decision making and quantitative research today might have been useful 30 or so years ago when you were first getting started? What do I think today? What do you know today would have been useful 30 years ago? I would probably say that, you know, the underestimating the effect of how fast, you know, the market was going to move was there. I mean, I think there was a foul, you know, a wrong idea that you can be faster than the market and that people can really get ahead of many things by just trying to capture information faster. I think that information advantage that people claim to have, you know, when after all these years in the investment, you know, it's very hard to actually capitalize. Really, really fascinating. Omar, thank you for being so generous with your time. We have been speaking with Omar Agalar, he's CEO and CIO

1:13:01at Schwab asset management. If you enjoy this conversation, well, check out any of the 662. We've done over the past 14 years, 14 years, 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you get your favorite podcasts. I would be remiss, fun and fact, the crack team that helps put these conversations together each week. Annalook and Elizabeth Sedron are my producers. Sam Danzinger is my video producer. Sean Russo is my researcher. I'm Barry Rittalts, human listening to Masters in Business on Bloomberg Radio.

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