How Artificial Intelligence fits in the service of asset management is just one facet of a robust discussion about the impact of emerging technology on the industry, notes Tyler Porterfield, leader of the Platforms effort for Franklin Templeton.
How Artificial Intelligence fits in the service of asset management is just one facet of a robust discussion about the impact of emerging technology on the industry, notes Tyler Porterfield, leader of the Platforms effort for Franklin Templeton.
Porterfield’s team manages relationships with custodians, TAMPs, fintechs and the home offices of national RIA systems, representing all capabilities and properties across Franklin Templeton.
In a conversation with Action! magazine, Porterfield discusses the renewed case for active management beyond simple benchmark-beating, the growing integration of private markets and tokenized assets into client portfolios, and how emerging technologies are democratizing sophisticated investment strategies once reserved for ultra-high-net-worth clients.
He also explores the challenges and opportunities of building outcome-oriented portfolios in an era where the investable universe is rapidly expanding, and why maintaining human judgment and investment philosophy remains critical even as automation transforms the industry.
An edited transcript of the conversation follows.
Action! magazine: The market has witnessed an undeniable shift in asset management toward passive. But there’s been a revival of interest in active management, particularly amid unforeseen economic volatility. What are your thoughts on this?
Tyler Porterfield: The market is still drastically in favor of passive. This is a very fee-conscious, margin-compressing industry that we're in. And so, of course, if passive is working, if you can get it at a fraction of the cost of active, that is going to attract a lot of interest. So, why have people more recently come around to the idea of blending more of their portfolio exposure back towards active?
One is because passive has been on such a tear. Two, I think there is a bit more of a move away from thinking just in a relative-return framework to an absolute-return framework, and toward outcome-oriented solutions. Our clients live in an absolute-return world, not a relative-return world. So outpacing an index that's up by 20 percent, by 150 basis points, it doesn't matter to them as much as being up 21.5 percent, of course. This is like going back to the future here, but the idea that you can design smarter portfolios that are more customized to the investor by looking for objectives, rather than looking for outperformance or minimizing underperformance, is coming back into vogue as well.
Some of the statistics you see around the success rate of active managers are a bit skewed, because so often, people just quote at a high level, ‘X percent of active managers that are benchmarked against the S&P 500 trailed the benchmark over the trailing five years, or ten years.’ And that's accurate. But it also assumes that that's the only objective those managers have.
Oftentimes, the better value of an active manager in a category like domestic large-cap equity isn't about trying to beat the S&P 500, but about delivering index-like performance with lower volatility, a higher overall yield profile, or a combination of both. So if that's the objective and the client understands it, you can underperform the S&P 500 in a raging bull market and still accomplish your objectives of higher yield and lower volatility. So I think that people are coming around to the idea of measuring and weighing the success of active managers based on objectives beyond just absolute return and outperformance of their stated benchmark.
Action! magazine: Your Franklin Templeton colleague, Tony Davidow, has discussed the new wave of alternative investments. Do you see new approaches to active investing as well?
Porterfield: I do. I think that we're going to see continued evolution in the way that financial advisors build exposure to the private market, alternative strategies, into client portfolios, in a smarter manner. And by smarter,, I mean: One, you can do it more cost-effectively and efficiently by blending public and private partnerships into the same vehicles. Of course, there are regulatory guidelines around liquidity parameters and 40 Act funds. But you can also think through the way to design models.
If you start with your allocation to an asset class, let's just say it's fixed income, and maybe Client X has a target of 40% allocation fixed income. Now, how much of that fixed income really needs to have daily liquidity versus can you pick up a yield premium by taking, of that 40%, maybe 25% of it in daily liquid mutual fund or ETF? That’s the way we've historically gotten fixed-income exposure. Maybe 15% of it can be in something that provides liquidity on a limited-trade-window basis, thereby providing a much greater illiquidity premium to the client. Advisors thinking about it first in terms of broad exposure to the asset class, and then second, in terms of whether or not that exposure should be public market or private market, can help make sure that you are not misallocating to strategies that have an illiquidity profile.
Action! magazine: What then are some of the challenges wealth management is trying to solve for in the current market, and how does that impact private wealth?
Porterfield: One of the largest macro trends right now that, as an industry, we are trying to solve for is achieving balance between solving for scale and solving for efficiency in financial advisor practices. Technology is at the intersection of that trend. Technology is allowing for greater personalization without compromising scale. Historically, to scale objectives, you had to align your investment profiles across clients and investment portfolios. Now, with the advent of the next-generation custom indexing, TAMP platforms have the ability to run model portfolios that allow you to rebalance in very client-specific ways, without it being a time- and effort-consuming activity for the financial advisor. It’s going to allow financial advisors, brokerages, and RIAs to achieve both scale and personalization objectives inside of portfolios at the same time.
Action! magazine: The diversification changes you’ve noted – are they due to technological innovation, or just lessons learned from the market in the last couple of years, such as increased pricing pressure and volatility?
Porterfield: All of the above – I'll take this question in reverse order. First off, if you look back about 15 to 20 years ago, there was a giant short-term wave towards liquid alternatives. That was due to many people convincing themselves that you could get the diversification benefits of alternatives without having to sacrifice the liquidity profile of mutual funds and ETFs. It feels like that was definitely overstated and oversubscribed to as a narrative.
What we're doing now is we are intentionally building products that don't violate that liquidity profile conundrum, but are a little bit more user-friendly for weaving into model portfolios. You’re able to, from an operational subscription basis, access via NSEC ticker trading directly on custodial platforms’ mutual fund programs, and that just allows a lot more time that was spent working through subscription documents to get the same level of private markets exposure, to be redeployed toward building better client relationships, knowing the clients better, and making sure that the portfolio is being designed for them is really bespoke to the client situation, rather than just fitting them to a number and a risk profile.
Action! magazine: As a product provider, has it gotten easier to be more bespoke? And does everything have to be customized? Are there cases where off-the-shelf solutions work better?
Porterfield: Across the industry, you've seen a lot of hyper-specialized ETF launches. Those can be used as components to build personalized portfolios for clients. I also think the advent of fractional trading, direct indexing and broader usage of the SMA vehicle at a lower minimum allows for hyperpersonalization for the client that doesn't have to be delivered in a packaged, registered 40 ACT product as well. That's where we're seeing the greatest benefit to the end client – advisors who are adopting the types of investing platforms that allow them to, in a really efficient way, design a portfolio around a client's specific needs, goals, outcomes and financial trajectory, without it being for the lowest common denominator, something that can appeal to the broadest masses, which is the history of most mutual funds.
Action! magazine: There’s a higher bar for sophistication. The average retail investor with even a small amount to invest can diversify into alternatives, cryptocurrency, FX, precious metals, even private equity markets. The expectation now is to give me much more.
Porterfield: Yes to all of that. In the past, the hyperpersonalized portfolio was the domain of the ultra-high-net-worth investor. Technology has enabled the delivery of personalized portfolios at much lower minimums for mass affluent investors. And that is absolutely a good thing.
Action! magazine: We’ve touched on this a bit – within the model marketplace, what are trends that you're paying attention to, that you think your peers should be paying more attention to as well?
Porterfield: One we talked a little bit about, which is blending in private markets allocations. And the second one is around blending in exposure to digital assets. We've seen a rash of spot coin ETFs and ETPs that have been brought to market. But I really think that all of this fits into the broader thematic of expanding the investable universe, which will improve diversification benefits. And there are a lot of assets, going back to what has historically been the domain of the ultra-high-net-worth investor.
There are a lot of assets that have very low to no correlation to public markets and capital markets in general, that you just had to buy outright in whole units, you know, whether it's classic cars or intellectual property, physical real estate. Now, with the advent of blockchain technology, you can tokenize those assets and deliver the same exposure at the same efficiency level, broadly and effectively across portfolios, at the sizing that makes sense for each individual client.
Action! magazine: What are the innovations that your team is working on?
Porterfield: What we're working on the most right now is custom model solutions for an RIA or broker-dealer, where they want an investment manager to fit into their overall value proposition and investment ecosystem. There are a lot of different points on that spectrum, from being a provider of tools and maybe educational research to assisted model creation and full OCIO work. We’re making sure that we have a flexible offering that can fit well on that continuum, where our client wants us to sit.
From that point, we can assemble different tools, different components of portfolios, and different ways to think through rebalancing to make sure that model creation is aligned with the vision that group has for their investment platform. And then what we're really looking forward to is the continued tokenization of assets that historically have not been able to be built into liquid client portfolios.
It will be interesting to see what that will do to the efficient frontier and to the diversification benefits we should be able to realize from the greater incorporation of those asset types into client performance.
Action! magazine: Does that open your team up to a larger clientele?
Porterfield: When you're as large and as broad as Franklin Templeton, the perfect client is any client. It’s up to us to make sure we're the perfect investment manager for the client. We have the tools, the human talent and the intellect to do that now. And so, our ambition is less about understanding what the perfect client is for us, and more focused on ensuring that we have a broader suite of potential clients that we can access. And, making sure we are crafting our message, our value proposition, and our engagement plan around not having just one message to the whole world, but rather, one message to each individual client on what we can be for them.
Also, the strategic relationships we're building, whether it's between AdvisorEngine, OSAM and their Canvas platform, or other custodians, are all part of the value chain. We can build more together, so two + two can equal more than four as a result of collaboration, even across entities that might have historically been more competitors. This is going to push the industry forward, and it makes it easier for the client because everything's centralized and connected.
Action! magazine: The discussion around AI is ubiquitous. How does it play into the work that your team is doing at large?
Porterfield: We're spending so much time on it right now. No two people will have the same journey when it comes to adopting artificial intelligence tools in their business and personal work. But it's become very clear: AI certainly isn't going away, and it has a lot to offer in terms of improving the quality, speed, and efficiency of many time-consuming tasks, regardless of where you sit in the industry.
If you can outsource such tasks to these tools, you can shift a lot of time bank capacity towards more human, interpersonal tasks, away from the rote execution in our jobs. The biggest beneficiary will be the end client, because their financial advisors will know them better. There will be less time spent on tasks that can be outsourced to the agents.
On the other hand, it's very crucial not to just fully outsource. You want to keep a hand on the wheel and train the models as well, so they can keep learning and keep getting better, to ensure accuracy, protect PII, and make sure that not everybody sounds and acts the same, too.
I shudder at the vision of a future for this industry where every investment manager has the same value proposition and the way they think about running money is exactly the same, because it's all informed by the same set of base algorithms. That is not in the client's best interests. We need to make sure that where there's investment culture and a philosophy, that can't be distilled down to ones and zeros.
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