Welcome to the Orion Portfolio solution portfolio recipe webinar for April 2023. I'm Rusty Vandeman, the Chief Investment Officer at Ryan. And this month we're talking about the custom indexing portfolio. Now why are we talking about it? And I do have some numbers here to share. So according to Suruli, over the last handful of years, direct indexing and custom indexing strategies have had growth rates of 40%. Moving forward, Suruli is still anticipating. Double digit growth rates in the five years ahead looking at a total of nearly 3 trillion in assets by the end of next year. We're only at 1 trillion assets in these type of strategies in 2019. So the growth has been powerful. Now why is this happening? I have three quick reasons. First of all, the technology is obviously greatly in advance and we're able to. Run these strategies much more efficiently than we were a few years ago. Secondly, the strong demand for tailored portfolios, customized portfolios and 3rd, the tax benefits. Now before I introduce today's speaker, a couple housekeeping notes. Again, Andy's going to speak for 20-30 minutes and then the rest of the time is dedicated to Q&A. You should see a Q&A box right below your screen there. Please submit questions and we will try to answer every single one of them during our time allotted. Secondly, in the lower left hand corner, you should see various resources you can tap into fact sheets and other materials related to Orion's custom indexing. And 3rd, A couple hours after this webinar, we should be sitting at an e-mail with the replay and again all the resources. So today's speaker Andy Rosenberger, he is one of the most passionate speakers on this topic. If you've heard him speak before on it and it's just not him, we have a great team here at Orion and custom indexing as well. Andy has been leading the effort for custom indexing at Orion for the past two years and he's been here for 14 years at Orion and a Brinker Capital. Now Andy has a lot of amazing slides, so I'm just going to hand the ball off to him now. Andy, it's all yours. Thanks, Rusty. Appreciate it. And I would encourage you, Rusty, interrupt me if there's something that we're going through and a slide comes up, You have a question and you want to make an observation. Please read it. And Jack? I'd love to take as many questions as we can at the end. So please, anything that you want to go down and you have to go down the audience here, whether it's getting to the product, whether it's asking about the space portfolio usage, anything's fair game. So I look, I look forward to a lot of interaction from the audience. Now to kick it off here, we did a survey a couple years ago and the survey was pretty thorough. We went, we asked end investors, we asked advisors. Several 100 questions. And within that survey there were three data points that I picked out which I thought really kind of hit, hit the hand, hit the nail on the head when it comes to direct index. The first one was asking investors about how they view taxes and when you ask end investors how they view taxes, 90% of them viewed paying that tax as having the same effect. As the effect of volatility, meaning that they were viewing volatility and taxes as being equivalent to one another. And I thought that was pretty eye opening because obviously we're trained in the industry from the very beginning to think about volatility, but very little do we consider the tax impact of that volatility or of the management of that portfolio. Secondly, we asked investors, what do you think about tax obligations? Should should a portfolio be managed to minimize tax obligations or really should it be an active portfolio and you should kind of disregard it or or maybe make it, make it something that's a secondary thought And 80% of investors came back and said they want to focus on minimizing tax obligations. And again, that was one of those things where you kind of have to step back and think about it because you often hear the phrase don't let the tax tail wag the dog. But actually if you think about it maybe a little bit deeper, taxes are something that's very tangible. I mean we just just all went through hang our tax bill just a couple days ago. It's end of April here, the middle of April here and it's it's something that people feel and they experience Whereas when you look at returns, returns are on paper, they come and go, they're up, they're down, they change, right. It's it's not something that they have to write a check for. So this is very tangible to most and investors. And then lastly, when you ask investors about bringing in experts or relying on specialists who know the space, whether that's a CPA or whether it's a portfolio manager or an investment firm, 90% of N investors say that they want the best support they can or that they want those resources. They don't just expect their advisor to do it all, They want the their advisor to really bring in those resources and leverage them where they can. So taxes are a very, very important part of the overall direct indexing story. Now when I say direct indexing, that's really how the industry knows the concept. I'm going to use direct indexing and custom indexing synonymously, but that's just because we at Orion here call our solution custom indexing. So if you hear me switch back and forth between those words, don't don't confuse there, they are one the same. Now tying this back to the tax concept. The reason the industry knows direct indexing and and it's become so important over the past couple years has been really around taxes. But I wouldn't look at it as just being a tax solution. When you think about it and maybe the way that I think about it is presented here on Slide 7 which goes through and it's it's almost a heuristic of how you can divide out the different functionality within a custom indexing offer. And again, you personally, I like to look at it like there's four different groupings or categories which you can put the functionality into. Now these groupings are not mutually exclusive, meaning that you could have a portfolio, which is tax transitioning with taxes, harvesting where there's some sort of customization to it. So it's not one or the other. But again, this is just a way of thinking about different ways that you can approach it or when you're running into client, when you're talking to clients, different ways we can use the solution for those clients. First one on the far left is tax transition. Now when I talk about cash transitioning, really what we're referring to is how do you take a portfolio and take it from point A to point B, point B being that ideal target portfolio, that target allocation that you think is best for that client. You could think about making that transition as simply saying, I have a bunch of positions in my target portfolio and the client has the same positions and I want to incorporate them over, but but that's that kind of falls short of what we're talking about here. What we're talking about is really saying that you can create a plan built around capital gain targets or capital gain budgets over a number of years. We can take the clients existing assets and transition them in a very smooth way, in a very predictable way to get them to a better spot. And not only can you do that with capital gain targets, yearly capital gain targets which create that capital gain predictability, but you can also do it by using things like position substitutes. Meaning that if your target portfolio has Apple but your client portfolio has has Microsoft, you can almost look at those two as substitutable. So there's a very powerful way of having that customization brought in and leveraging the idea that just because you might have one position and the model has a different position that you can't substitute one for the other. So tax transitioning is a great way of making a portfolio more efficient, but I would also look at it like it's a great way of prospecting. And for example you have, you have a prospect you've been working with with for a number of years on the planning side and they have their assets over at Merrill Lynch. Well maybe they don't want to move those assets over because they realize a big tax hit. Well now you have an option to bring that client over under your management and do it in a very thoughtful way. So tax transitioning is that is that key part of the offering of what we can what we can do. Second one is taxes harvesting, I think most advisors on the call understand taxes harvesting. What we really do here that's different is that we put a lot of power behind it. We put a lot of process behind it. We're taxes harvesting pretty much every day we're going in. We're reviewing counts when losses are available. We're being very aggressive to take those losses. And the nice thing about when we do taxes harvesting is that we can also measure that, quantify it and then report on it back to you, which you can then take to the client and help show your value add. And I'll show you what that would look like here in a little bit. 3rd part of it is ESGSRI faith-based screening. Really this is helping the client have a more personalized portfolio and this is also where you can get into having a client portfolio in a custom necking solution that's not taxable. Meaning that maybe the client is particularly particularly concerned about the environment or maybe they're a faith-based client, maybe they they want to exclude certain parts of the market that violate their religious views of the world. Or maybe it's something along the lines that they have particular passion, maybe that that they're they're stronger to animal advocacy, so they want to remove companies that would do some sort of animal testing. And the nice thing about this is that it really helps connect to the end client. It makes it more than just about the returns and it's more about what's important to them. And then the very last box here, the investment customization gets into taking the portfolio. And rebuilding it in a way which is which is more aligned with their overall goals and objectives. This could be something like excluding a particular stock maybe that they maybe it's a company they work for. It could be overweighting a particular sector that they have a conviction in. It could be the fact that maybe they own an automotive dealership and they want to remove automotive companies from the portfolio. It could be we're hearing a lot of a lot of concerns about regional banks right now. Maybe the client wants to exclude regional banks or maybe they want to overweight regional banks. So the investment customization really gives you the levers to say I want to tilt the portfolio in different directions based upon either your your financial plans, the clients financial plans or some sort of investment outlook that you would have. I think this is a great Pagey idea and I think the really cool part about this page now you describe what the feature is and what it is, but why it's important. I love that middle row, the practice improvement, those are really key points. Yeah, Yep, I agree. OK, now we've talked a lot about what it can do, the functionality, tax, transitioning, taxes, harvesting, customization, ESGSRI. Let's let let me take a step back almost and explain how it works. Now, the way that I think about this, the way that I like to explain it and I'm going to dumb it down a little bit here, but the way I like to think about this is how do I explain it to an end client and if I can explain it to an end client. Then I think that helps. Maybe I can you can take some of my words and and rephrase them and and that would be helpful to how you can explain it to the end client as well. So again I'm going to overly simplify here a little bit, but I'm going to break this down into a four step process and the the first step of that process is first just select your index. Now what I mean by that is, well, we can do this on really anything out there. It could be a large cap strategy, it could be a value strategy, a growth strategy, a small cap strategy, a global strategy and all cap. Maybe it's a balanced portfolio, maybe it's a 6040 portfolio. It doesn't really matter what the underlying target is. Really it's just about saying what what is the investment chassis that you're looking to put this on top of. So let's keep it really easy. Let's say that we're going to pick a large cap core strategy, think something like the S&P 500 and we're going to use that as our target exposure. Now by having a target exposure, if you were to implement that in a client portfolio, typically what you would do is you go buy an ETF or you go buy a mutual fund which gives you that exposure. But the key here is rather than buying a packaged product, what we want to do is we want to unwrap it and by unwrapping it. What I mean is that we're going to buy the constituents of that, of that index. So instead of buying VOO or SPY or I VD or another ETF out there, the SP500, instead we're going to buy Apple and Microsoft and Amazon and Google and Facebook and all the other names or most of the names, many of the names which are going to represent that exposure. Now by unwrapping it, here's where you now get the customization and that customization again tying it back. To those four different options will be things like taxes, harvesting tax transition, security substitutes, ESGSRI sector overweights, industry exclusions, all the different things that we just talked about because you now have the constituents, you can now reweight or exclude or overweight those constituents as you need to. And then lastly, we're now going to manage it. And that could be things like taxes harvesting, it could be corporate actions rebalancing markets change over time. And So what we want to make sure that we're doing is keeping the clients portfolio aligned with how the markets or their needs may change. Now again I think I've oversimplified this, but the reason that I've oversimplified this is because too often in our industry when professionals talk about direct indexing they. Far too in the weeds of how it works and get the optimizations and risk models and all the other quantitative stuff that goes along with it. But essentially if you can explain it to the client in this way, you can be much better off talking about the mechanics of it versus the underlying math that the powers the technology. Really at the end of the day this is just a technology which is used to build custom portfolios. Showing that a little bit of a different way here, I think this is a great chart which shows that if you were to take custom indexing, which is a separate account structure where you're buying the individual constituents and you compare it against both mutual funds as a vehicle and ETF's as a vehicle, you get a lot more functionality. Not only do you get the professionally managed approach that you'll get with funds and ETF's, but you also get them low fees and transparency of ETF's in addition to the full customization. Again, we went through those, whether it's investment customization. ESG tax transitioning or tax harvesting. Now I don't Ryan, we have a lot of different portfolios that you can set this on top of. I don't want to say that the options are unlimited here, but pretty much anything you can think of as something that we're going to have available to you. And if you don't see things on this list, I would encourage you to reach out because you know we're always looking for new ideas out there. Now what we've done is we've created. 5 categories, I'm going to call them pillars, which we group portfolios underneath. And those five pillars, first one is market beta. And this would be your traditional passive indices that you would allocate to. So it would be a large cap value quote, small cap, international, global. Pretty much anything that's a broad market exposure would be something that would be available under the market beta category. Next, we have our factor portfolios. Our factor portfolios are taking existing an existing index, let's say a large cap index and we're effectively reweighting it based on different quantitative criteria. So you could say you want to tilt towards high dividend stocks or you want to take, you want to take an out, You want to make an allocation to a portfolio that has quality stocks or trading at a discount quality value or maybe you want a low volatility exposure, you want a momentum exposure. So it's. Putting a quantitative overlay on top of those indices, so you can tilt in one particular direction that you think might outperform or be more aligned with what that client would want from an investment perspective. Something like dividends or low volatility are great example of it and they think like chicken equity. It's a it's a way to get equity exposure to do in a way where you might have less volatility. So that would be our factor category. Next up, we have our thematic portfolios. Thematic portfolios, I think of more satellite strategies. These are meant to be more about bringing in exposures that will complement what you're doing with the rest of the allocation. The core part of the allocation that could be playing something like biotechnology because you're you're, you're thoughtful about the aftermath of COVID, the things like real assets because you're concerned about inflation. Next, we have our ESG category. This is really a way of thinking about not just excluding companies that might be might have a negative perception, but also how do you tilt towards companies which may score favorably on different ESG criteria. So a little bit more tilting in the other direction as opposed to just getting rid of the bat. So Andy, so this is a portfolio recipe webinar and so you're giving us a whole bunch of great ingredients right here. So, so far in terms of adoption of some of these different strategies, what are some of the most popular ingredients advisors and investors are using in terms of building their portfolio So far, yeah, really great question. So by far and away the most popular categories of the market beta and the fact factor strategies within the market beta top three would be our large cap core. So that would be your traditional, you know S&P 500, Russell 1000 type of exposure, our all cap portfolio which is a broad market. Large, mid, small type of exposure and then our global portfolio and that would be a blend of domestic and then international. EDR's roughly a 7030 split between domestic international. Now even though the market betas are are I would call it the most popular categories, we do see a lot of traction within our factory based portfolios as well. They're the most popular would be our high dividend strategy and our quality value strategy. I also point out low volatility has had. Phenomenal performance over the past, call it 12 to 24 months just for the market having a lot of volatility, people, investors have thought more about how do I continue to be invested in equities, but how do I take less risk. So the low volatility portfolio has done extremely well and picked up a decent amount of assets too. I have one more question. I may be jumping the gun because you might even get to this later. Do you ever get a question and I imagine you might. So somebody is looking at they're really attracted custom indexing. And they're probably featuring more the ability to for, for tax credit harvesting basically. So are there certain strategies which are probably a little bit better at generating tax credits, harvesting tax credits, right, right, Really good question. Well, let me, let me point out two different things there. What if you look on the far right, you'll see that we have this column maximum number of holdings. Now what that means is that when you think about the maximum number of holdings, don't look at it so much as the target as opposed to the ceiling or the cap. Most of the time you're going to hit that cap. But what we allow investors to do is either dial that down if they want fewer holdings or dial it up if they want more holdings. And I forget the question, Well, why do we have so many names or why would I want to dial up the number of holdings in the portfolio? It's really not because you get better diversification or you get the industry. It's called a lower trapping error. It's not because of those reasons those help, but that that's not the the main reason. The main reason is because the more holdings you have. The more taxes harvesting opportunities you'll find. Now if you take that, you'll see that there are certain strategies that have a greater number of holdings, like small cap for example, or small mid cap. But also if you think about just the underlying mandate, the more volatility and the more idiosyncratic your portfolio or I should say the less things move in the same direction. The more tax out there you'll get. So if I pick one strategy on here which I think you'll get the most amount of tax alpha, it would probably be that small cap strategy, very diversified, lot of names, lot of potential holdings and things in small cap act very differently from one another. Typically you get a lot more stock specific risk as opposed to let's say large cap where everything tends to move in the same direction. That makes a lot of sense. Yep, great. OK. And then going back to the last pillar here, we have what we call our asset allocation portfolios. Now these are relatively newer. We watched these in I believe it was April of last year, but we've seen a lot of great traction on these portfolios because what we're doing here we said rather than just have an equity only offering, clients and advisors really think about the portfolio, they think about in terms of a risk score and so rather than trying to. Take an equity portfolio and find something else to offset that to come up with a blended risk coordinates right for the client. What we can do is we can offer off the shelf portfolios where that fix becomes already incorporated into the portfolio. So we have two different versions. We have a US version where it's our all cap strategy. We also have a global version which is our global portfolio and what we're doing is we're blending fixed income ETF's into those two strategies. Either one of those strategies to come up with different allocations based upon that risk score. So it starts at 4% equity, goes all the way up to 90% and then the the advisor can now dial up or dial down that particular risk score. You can look at this two ways. You can look at this as a turnkey solution that could be the entirety of the clients assets, the entire portfolio or you could also look at these portfolios as you have a particular strategy or handful of strategies that you want to incorporate into your client portfolio. And you need to, you need to get the risk score to where it wants to be, right. So instead of reweighting the entire allocation, maybe you can trade a 6040 portfolio out for an 8020 portfolio to get that target risk profile. So these are can be used in a couple of different ways, but but we're seeing a lot more adoption in these allocation strategies. Right now I'm just going to quickly cover some of the content here that we went through and really my focus will be on those four different categories. There's four different ways that you can think about using custom indexing. I just want to peel back the onion a little bit and go into a little bit more detail on each one of those. Now the first one I I spent a fair amount of time already discussing tax transitioning, but I want to put a couple of visuals behind it because I think this will really help you understand where we're coming from when we talk about tax transitioning. And I'll give you a little bit of background. If you look at our book of business, you look at how much we have in custom indexing, about 80% of those assets are taxable assets, 20% being qualified tends to be more around customization. The vast majority of clients are using us because it's a taxable account. Of that 80%, roughly 2/3 are accounts that are funded in kind, meaning they're not a. Cash funded portfolio where the clients allocating $1,000,000 or $500,000 and starting fresh, but they're saying I have a bunch of securities that need to bring over in kind and I want to work those positions into the allocation or I want to transition away from those holdings into that target portfolio. And one of the cool things that we've done in Ryan is we've built out technology to really allow you to have a lot of flexibility on what that transition would look like. And so the chart that I have up here is from a brand new piece of technology that we've built. Which really helps facilitate the transition of an allocation. And specifically what you're looking at is when we run a transition, what we can do is run up to 15 different versions of what that portfolio will look like. Each one of these bars will represent a portfolio and the capital gain associated with that portfolio. So as you can see, you go from left to right, each portfolio has subsequently higher capital gains. Now why would you do that well? Because the real, when you realize more in capital gains, effectively what you're saying is you want to become more and more like that target portfolio and we can measure how similar you are to that target index or that target strategy by something called tracking error. We call tracking difference. Same concept, but it's a mathematical measure of the similarity to your underlying target strategy. The lower that number is, the closer you are to that target portfolio, the higher that number is, the further you are away from it. And so you can think about it like a trade off if you want to be really close to that target strategy, you might have to realize a lot in capital gains, but maybe the clients particularly averse to capital gains. And so it's now a discussion of well, are they comfortable being further away from the target portfolio. And so that inverse relationship is represented really well worth this chart, more capital gains, lower tracking error, lessen capital gains, higher tracking error further you're away from the target portfolio. Now I want to hang on for this for a second. Sorry, I need the this is really powerful. So now is this something that the advisor can use with the investor to kind of walk through the different scenarios, so the so basically they can work together which makes the most sense for their particular situation? Yeah, you know, we don't know the client situation as well as as well as you, the advisor does. We can make, we can make educated guesses, we can ask For more information. But a lot of the time what we found is that the client doesn't even know what they want to do. They almost need to be presented a couple of different options to make a decision on what they're comfortable with or maybe they have to go relay it to their to their accountant or the CPA and get and get some sort of, I don't call it blessing, but a limited guidance on on what they can do there. And so rather than go back with one option for that client and and make it be an option that. May not be palatable. What we want to do is we want to present optionality. And so yes, ideally you're working with the client and we're working with you to figure out a spectrum of different options or a range of different options and then let you pick which one would be best for that client. And what you pick for one client may look totally different for what you do for another client who may be who who may have a ton of embedded a lot of losses that have taken over the past few years and has a high propensity to take games today, whereas another client may help. Again, that's a really neat slide. OK, one definition here. I'm sure you're probably gonna get this again later as well. But in the upper left hand corner, there's a term there tracking difference. What is that exactly? How do you define it and how does it differ than tracking error? I assume it's the same thing. It is the same thing. I'm going to comment, I throw a little. It's a nicer word though than tracking error. Well, you got it. You know, you know that on the head. We're tech firm and so the worst thing a tech firm can say is error. So we didn't want to come out there and say error to the client. So we caught a tracking difference. And by the way, Russy, that comes right from our CEO, Eric Clark, That was his observation. So we ended up changing it from tracking error to track difference. It's the same. It's synonymous from our perspective. It really just means how different are you from that target strategy? Great. Thanks. Yep. Now that prior side really translates into this next slide here I'm throwing a lot of numbers that you don't get overwhelmed by the numbers, but let me explain what you're looking at here as part of that report as part of the transition that we're talking about. What we what we'll do is we'll start from 15 different options, 15 different portfolios with different capital gains, different track mirrors that go along with it. And we'll then be able to distill it down to just either 1-2 or three. You can pick how many you want to show the client. And so this is an example. We're showing the three options to the client. Those would be on the far right column, I should say Portfolio A, Portfolio B, Portfolio C Now each one of those 3 portfolios would be what the gains would look like and then the tax liability that goes along with it. So portfolio A we have. A handful of gains, a handful of losses were realizing. If you look right in the middle and that realized gain loss realizing $1000 in gains. Contrast that to the far left column where this is what the client currently owns. They currently own a portfolio that has 278,000 of gains, 32,000 of losses. If they were to sell everything then we're going to recommend it off. They would have moved from a model portfolio and ETF each bonds, whatever it is. They're probably going to realize roughly $89,000 in taxes. Or if I say it a little bit differently, you take your gains to try to get your losses, you multiply it by your tax rate and that's what you pay the IRS. Well, they're going to be paying the IRS $89,000 If they make this change, we're realizing $1000. And so really now we're changing the narrative. We're turning the narrative on its head and rather than talking about the cost of making a change. We can now compare it to that liquidation or that tax liability and show the tax savings that go along with it and that's that called a blue shaded row right in the middle 91 thousand 1388379472672 depending upon which portfolio they end up going with. We can now measure the tax savings that we're bringing to that client as one of those 3 numbers depending upon which portfolio they pick. So it becomes a really powerful way. I'm not just showing the customization to the client. They're also now beginning to be able to quantify the value of being more customized and thoughtful with what you're doing with their portfolio. I would imagine on something like that and I'm just guessing here that some advisors probably have an opportunity to have a really cool conversation where let's say they've got tax savings. I'm just Speaking of like $100,000. So that is, that's an economic benefit right there. They can probably have a conversation with an investor and say, well, these are your savings. You could actually invest part of those savings back into the portfolio and then the tax savings grow even essentially even more over time. You got it. You're stealing over to my Thunder here, When we show the reporting, we're going to do exactly, we're going to do exactly what you said, which is we're going to be able to quantify the tax ends for that client. And we're not only going to be able to do it just from a number like this from the transition, but we'll be able to measure when they taxes harvest and then we're going to be able to measure what's called a growth component. Which is you keep money that stays invested today, money that's not paid to the IRS and it stays invested is now money that compounds and grows on their behalf. And so we'll be able to measure that and show that to the client as well. Cool. OK. Now one other thing where it comes to tax transitioning and I promise I'm spending a lot of time in transitioning, but the other sections will go fairly quickly. The other, the other thing that goes along with tax transitioning is the idea of setting a capital gain budget or ceiling on the portfolio. So why this matters for tax transitioning is that if you think about taking making that transition, doing it over a three-year period, let's say let's pick a really easy number. Let's say the client has to realize or wants to realize 100,000 capital gains to get to where they to get to the portfolio that they're trying to get to. But they don't want to rip demand it off all this year. They want to spread it out over three years or five years. What we can do is we can say instead of having 100,000 today. Let's do 20,000 a year for the next five years. And by having that ceiling on the portfolio, we can create a lot more predictability around what that experience will look like from a tax perspective. Not necessarily return, not from a return perspective, but what the tax liability would look like. And if you think about a year like 2021 where a lot of people were surprised at the tax bill, having that cap game budget in the portfolio can really help create a better client experience. OK. Moving along here to taxes harvesting, this is a great slide. It works really well with end clients. We have this as a standalone investor approved marketing piece. I would encourage you to download it, use it. And the reason I think this slide does such a great job is because it's a, it's a very good way of helping clients understand what taxes harvesting means. You're able to now visually show them what is it, what does it mean to taxes harvest and even though again this seems like a simple concept for people who are in it every day. I've also found that clients, they need to be helped. They need to help understand what does it mean to do Texas harvesting. Most are not familiar with it. So what we're doing is we're going back over the past 10 years and we're saying if you look at the, in this case, we're using the Russell 3000. If you go back over the past 10 years and you look at the return of that index, you can see that in most years it's the deposit number that would be each one of those green circles that you see in the chart. And you can see generally speaking there's only been if eyeballing was correct two years over that past 10 year period where the the index has been negative. But just because the index is negative doesn't mean the constituents for all the constituents will be positive or negative. You can have some that are off, some they're down. It's why we preach diversification, right and so. By now, looking at the bars, you can see the percentage of or the number of names that were up and the number of names that were down. If you had only ETF, you only get one chance, taxes harvest whether that position was negative, but by only the constituents. What you'll find is that you now have many opportunities to taxes harvest even if even if the vast majority, even if 80% of them, 90% of them are up, you still have 10% of the portfolio which is negative, which you can harvest. And then redeploy, reinvest and then take those losses in and use them recording. So again, this is a visual way of being able to demonstrate to the client what Texas harvesting is. And then why they want to do it within their portfolio, Powerful, just like 2021 markets up 26% but 33% of the stocks were negative. You know in 2020 markets at 21% and almost half of the stocks had negative returns, very powerful and that is not. And that's just looking at the calendar year return. Remember they all have drawdowns, even the stocks that were positive still had drawdowns from their highs. So, so many opportunities to tax loss harvest when you've got a collection of individual stocks. So very powerful slide. Yeah, you got it. We have to get the question, well, what is, what is the value of Texas harvesting? Can you measure that? Can you quantify it? I actually much prefer to quantify a client by client before to show a client specifically what they've done. But there's a lot of academic research out there which does try and quantify the value of Texas harvesting a lot of numbers on this page. What I'm going to do is I'm going to direct your eyes towards the far right. This is a particular study that was done from Andrew Lowe out of MIT and they did a study over a it was an 82 year period. By 90, well, it's a long, very long period of time, long time. And if you look at that far right bar, you'll see that there's actually 2 bars over that long period of time. One of them is 1.461 of them is 1.08. Now essentially what they're doing is they're saying there's two different ways of measuring tax alpha. If the end of the period you liquidate the portfolio, you're going to have a lower tax alpha if at the end of the period. You just say, I'm going to, I'm going to keep it in perpetuity. Think of it like the client is is ******** it to their errors. Well that's a that's a a higher number. So if we were to look at the lower number and assume worst case scenario they were to limit that portfolio at the very end of that period, you still have about 108 basis points of annualized tax alpha according to this study. Now I don't know if it's going to be 108 basis points or 150 basis points or 50 basis points. But what I do know is that there's a value from taxes harvesting and it's not a value that is a question of of if it's a question of how much, even if it even for to say it's a very low number. Even if this widely overstates the value and it's half that or or 25% of this number, it still is a positive number because taxes harvesting is something that's I don't recall it easy to do. But it's, it's about doing it. It's not about one firm being better than another firm. It's about the fact that every day we're going and we're taking losses where we can. And if there's one thing I'm pretty sure of, it's that going back to that chart earlier, there will almost always be positions in the portfolio, especially when you have a newer portfolio that have losses that you can take. So it's something that we're going to take on your behalf and we're going to keep track. We're going to report that for you so that you can report that back to decline. If an advisor is charging let's say 1% taxable money and all and all the value and all the benefits of financial advisor can provide, they could just show one thing alone, the tax loss harvesting, the tax alpha. I mean the historical numbers, you're right, it could depend on market conditions and again it depends on the strategy you're using as well. If you're using small caps, the number probably could have been higher than the large caps. But again, another powerful slide and the next two will go very quickly in terms of. Social screening, ESG, there's a lot of different things you can pick from. We create a couple of different personas and what we tend to find is that investors have commonalities, typically have investors who are focused on faith or climate or health and Wellness. And so if you give us a persona, we can go through and pick what those restrictions would look like. Or if you think about it from a bottom up perspective, we have something like 3035 different restrictions that we have available. That you can pick from. So it's a pretty robust offering here. And again, it's another way of connecting with with the client at the portfolio level. It's not just about the return now becomes what do they believe in? Hey Andy, how are each of these defined use a particular provider to actually define each of these screens and filters? Yeah, great question. We use a firm called Sustain a Lytics Analytics was purchased by Morningstar a few years ago. So it's technically a Morningstar company, but Sustain a Lytics was the original. The original ESG data provider in the space you know on that, on that point Rusty I also I I have a big question too. What are the thresholds on how you define if a company will be part of nuclear, oil and gas. And specifically what we'll do is we'll look if you look at these different categories, all of them accept a handful and I'll point those out have a 10% revenue threshold meaning that at least 10% of the revenues. Have to come from this particular screen before they'll be excluded. So think of something like thinking off top of my head here, maybe like Norwegian Cruise Lines, they may have, they may have on some of their cruises gambling available, but if it's less than 10% of their overall revenues, they will not filter out from the gambling category. And so it's trying to remove the minimis, the minimis revenues from or think of Amazon, Amazon may have, may sell certain things on the website that violate one of these criteria, but doesn't mean it's going to, it's going to exclude Amazon. There are a couple of categories where that's not the, that's not the case. They're binary, meaning there's any tie that's going to be excluded and I'm going to do this off the top of my head here, but it's going to be abortion, animal testing, contraceptives. Predatory lending and there's another one here. I'm not going to get off my head. There's a there's a fifth one here, but think of them, think of those categories as being the client doesn't want any, any any exposure is bad exposure. And so those five categories will have any sort of tie removed from it. I didn't realize just this is a very unnecessary tangent, but well meat was actually a a criteria so I've never seen that myself. Believe or not that that is that is an actual restriction and it's A at the very least it's a good conversational piece with the client. I understand it. I I hate to do this, but I need to go back a couple pages because I missed something. There was a question that came in on the tax page and the difference between. Before liquidation and after liquidation. So I kind of missed this earlier question did come in again anybody you have a question you can submit questions in the Q&A box below. But anyway that was one question that came in. Think of it this way, there's different ways of measuring the value add from tax management and in this particular study what they did is they said we're going to start in 1926. So that's when we have data going back to and then they're going to the study was finished in 2018 and 19. So we go all the way to 2018. What do you do at the very end of this study? How do you do, You just stop it and say okay, we're going to measure, we're going to add up all the tax output over that period of time and then we're going to show what it is. And yeah, that's one way to do it, but that may not be the reality of how it would work in the real world. In the real world, one of two things is going to happen, either the client is going to pass away and they're going to, they're going to pass those assets along to their. Fares, in which case the cost basis gets stepped up and you you, you save all that tax. You know it's take a can down the road that you save all those taxes because you don't have to pay them because it's part of the estate and the estate tax gets stepped up or the other situation. And by the way that would be the before tax value, before liquidation value is what that's measuring. The other way of thinking about that is that you spend the money down or you sell everything and you're left with a big pot of cash that you can do whatever you want with it. And so if you sell everything, then you're obviously going to have to pay taxes on that. And so you're going to have a lower value after you pay those taxes. So that would be the after liquidation value. So think about the difference between those two is whether you sell it at the very end or whether you just assume you keep it, hold it in perpetuity or whether the basis gets stepped up. Great. OK. And the last one here, investment customization, we've already covered this. This could be anything at the ticker level, industry level, sector level. It really allows you to pull levers that you want to pull to control the exposure from an investment perspective. And I would look at that again one or two ways either outlook driven, you have a particular aversion to a part of the market or maybe you have a particular optimism that part of the market that you want to overweight. Or you can look at from a planning perspective, meaning the client already has that exposure whether underweighted that exposure for one reason or not. And so you want to, you want to fill that gap or you want to correct for that in the portfolio. All right. Now we're going to take this all home and I'm going to get into the reporting of it here and this is what we were referring to earlier about being able to quantify to being client. What is the value add from custom indexing and all the tax management that we're doing? This is a report that we make available. I'm going to point out two things on this report. One is if you look at the top right, you'll see this cumulative tax savings, cumulative tax savings is our way of saying if you think about it in dollar terms, how much can we quantify to the client? How we save them in taxes, that's going to be a combination of three things. This would be the second thing I'd point out towards the middle of the page actually there's a little highlight here. So that's a cumulative tax agents. If you look to the middle of the page, which I don't have a fancy button to make it pop out, there's the components of that tax savings. Now that that the components of the tax savings are what we do from Texas harvesting. So they're going in taking those losses, being aggressive with when we take losses, multiplying by the tax rates, we can quantify that. The second one be transitioning or bringing positions over in kind including them in the portfolio, we can measure the tax savings from being smart about transitioning. And then the third one, Rusty, what you already mentioned is there's value today by keeping the money invested and not being paid out And so we can compound the tax savings at the return of the client's portfolio and then look at that. As a tax savings as well for one client who may have might have a 10% return that tax savings growth will look different from a client who may have a 5%. So we've built out the software in a sophisticated way where it's going to look not only at the clients individual return their own tax rates and their own tax rate history as well. So pretty cool stuff and again I think it's a great way of being able to go back to the client in a very simple way of saying here's part of the value add that we brought from management portfolio. So I had a question here and you basically answered it. So my question is what is a good tracking difference? And I obviously based on what you said, a tracking difference, what's good really depends on an individual investor depending on what his or her customization requirements are, what how much tax self are they want. But just in general, this current tracking difference, basically put it in colors. So obviously a good tracking difference is below 2%. Yeah, I'm trying to make it as simple as possible. Tracking difference track near is one of those concepts that most people in our industry don't understand how can it, how can they expect a client to understand it. So the way that we can try and do that is by putting a little bit of a scale and a graphic around it. And you know we if think about the industry, the industry tends to define a good track near below 2. But again to your .2 may be okay for one client, it may not be okay for another client. So it's not about saying good or bad, it's about thinking about it more as a trade off. And then helping the climber stand, that's trade off between capital gains tracking our, you know where they want to sit on that trade off spectrum. I think the background spectator disagreed with you. I think they said hired. I can hear it now. So yeah, he agreed with me there. I'm sorry, carry on, sorry about that. That's OK. I know we're running up on time here, so I'm not going to spend a lot of time here. Just think about different ways you can use this in a portfolio. It could be tax transitioning. Maybe you have clients in a concentrated stock that you want to work out of that concentrated stock. Great idea for business owners. You know, if they're thinking about selling their business in a couple of years, think about using a custom indexing portfolio to accrue as many losses as possible over the next two, 345 years so that when they sell the business, they now have a game, they now have a loss, they can offset the sale of the game. So again, think about like a planning tool, not just an investment tool. And then the last one I'll bring up on the screen, charitable gifting. Never ever have your clients gift cash. Always have them gift appreciated stock. Not only did they get the same tax benefit, but they're able to now do it in a way where they can correct their portfolio and and be more tax efficient by getting rid of those embedded gains within that stock. And then we'll finish it up here with it, which is different ways of thinking about it in a portfolio. And I think this is ultimately where your your audience is probably most interested. I wish I had one answer, one way of thinking about it, but the reality is that there's a bunch of different ways you can use it in portfolio. We have 4 up here that we've tried to graphically show. One is that it could be a core part of your allocation. Think about like you want a an all cap exposure which is going to represent that passive exposure to the market and then you want to put satellites around it, if they're active managers, maybe their particular investment exposures you have. Second one is you can think of it like a like a transition strategy. Where I described it like a balloon, it starts out big, like a really big inflated balloon, and then over time as you relieve capital gains, it becomes a smaller and smaller part of your portfolio until it becomes that core allocation or that final ending point, or maybe it's a 20% allocation or a 30% allocation. Their way of thinking about it is a satellite strategy. Maybe you just want a passive, passive strategy which does active taxless harvesting. You don't necessarily need it to be an overwhelming part of the portfolio, but you'd like a little bit of tax out for that to offset some of the some of the active strategies you have in the portfolio. So it could be, you know, ten, 1520% weight type of exposure. And then the last way that we often see it used is when you think about pairing it up with another strategist on the platform. And maybe that strategist is a very, very tactical strategy. A lot of turnover, they're doing what they're doing, they're adding value, but they're doing it more from an allocation perspective. But the problem is they can be very tax inefficient. So I would describe it almost like a barbell. On one end of the barbell you have that active, that tactical strategy and on the other end you have the more strategic custom indexing part of the portfolio which is generating a lot of losses to offset the gains from that other manager, that other tactical strategy. So one offsetting the other from a tax perspective, but still offering value from an investment perspective. So a lot of different ways you can use it in portfolio. There's not a right way or wrong way, just different ways of how people think about portfolio construction and different ways of of leveraging it. Importantly and then final slide here is from an advised perspective, not only does this make you a differentiated solution to marketplace which ultimately helps you grow your business to save times, but it it also helps you differentiate from the competition. Because very few advisors are doing anything to this level of customization or tax efficiency to that extent. And then from a client perspective, you build better portfolios, you minimize taxes, you make it more their portfolio. It's kind of like the old analogy of Duncan Hines and you know, they they came along and they said, yeah, add an egg to the to the cake mix and suddenly sales took off because people felt like they were baking their own cake versus something out of a box, same idea. When when the client feels like it's their portfolio and they've helped build it, the more, the more invested in their in their strategy and they believe it and they're willing to tolerate performance differences or get through the difficult parts of the market. So what we tend to find is that these assets are a lot stickier not only because they're customized but also because people hate paying taxes and ultimately our goal is to differ taxes as long as possible, so. I hope, I hope that that was informative and what I would just end with and maybe I'm stealing a little bit of your Thunder here, Rusty, is we're here's a resource. We're also part of the Iran ecosystem. So we've made it as easy as possible to allocate these strategies. But my team is also here to help you. And so whether that's running a transition or whether that's helping do a client review or working through a case study, we're here's a resource to reach out to. So if you ever have a question, we have plenty of content out there that you can pull from. I would also encourage you to, if you have any questions, reach out to customindexing@orion.com and we'll be more than happy to get back to you with whatever help that would be. And hopefully it would be something along the lines of how do we transition a portfolio or can you help me with this particular client use case? Yeah, we have a team of dedicated investment professionals to help you on that fund. This is great, Andy. So obviously custom indexing is arguably the fastest growing segment in our industry and of course that even includes that Orion. It's growing fast because of all this. Tell us a little bit about your team. It's just not you doing it. You're doing a heck of a lot. But tell us a little bit about your team. Yeah, great question. We have a team of seven dedicated investment professionals who are here to help you. And you know, I I view that team as as much investment professionals as as service and sales professionals too. All our team members are really intended to be people who are good at working with advisors, understand where the advisor is coming from and we really look at it like like a high touch. We want to be part of your business process. So again reach out, we're having to show you rather than just tell you about it. And you know we we pride ourself on being that high touch service offering for your firm. So obviously you made a pretty powerful case for custom indexing, but nonetheless, I got two questions and the answers could be the same. But first, when you're talking to advisors who are new to custom indexing, what are the most common questions or obstacles or hurdles they have to get over before they sort of get the notion of custom indexing? And kind of related to that, when advisors are working with individual investors, their clients, what are the the biggest questions or comments or obstacles they're dealing with? Yeah, I think they're probably one of the same. And it's actually 2 two sides of the same coin, which is the good side of the coin is transparency. The other side of the coin is with transparency. You now see how the watch is working. You see all the positions that go along with it. Meaning that if a typical large cap portfolio has 150 names to it, approximately the client's going to see all those 150 names. And then my question well why do you own name XYZ? Or why do you own it at A50 basis point weight? Or why do you own so many names? So I think the greatest hurdle that advisors have to get over along with their clients is knowing that in the S&P of 100, you're going to buy 500 names or it's going to be packaged in One E TF1 security. Here we're unwrapping that. And so now you get you get the the full transparency, but also all the holdings that go along with it. There's a lot of reasons why we can justify why you want to do that. Texas harvesting, customization, all the things that go along with it. That's a hurdle that clients have to get over, being that it's typically different from what they expect. Yep. Another question is, so how is Orion custom indexing different than other providers of these solutions? Yeah, great question. Well, there's a lot of ways I can spend a lot of time talking just about this, which I want to do. I'll hit the highlights here. I think maybe a big one is flexibility. You know, going back to the transitioning of assets, when you think about taking that at that client portfolio over at Merrill Lynch, bringing it over to Reliance to your management, other other competitors in the marketplace might be very rigid on what they'll allow. We give the advisors a lot of flexibility on what the transition can look like. That could be everything from saying you're willing to have a high track in your portfolio. To the fact that we can bring over not just stocks but we can transition mutual funds and ETF's as well. So a lot of latitude in terms of what you can transition. That would be one good advantage. Another one would be just just the technology that we that we bring to the table. We showed you some of the reporting, the reporting in my opinion and I'm going to be biased here, but I've had other people say this to me as well, outside is the best in the industry. When you look at that tax savings, when you look at how we tried to simplify the reporting, I just think we've done such a great job of helping tell this story to that end client. So I think that's going to be very powerful and that ties into the technology that we built at Align. And then maybe the last thing I'll point out here is the integration, you know the fact that it's embedded within the Orion ecosystem, the fact that it could be part of a sleeve within the UMA, it just we tried to make this something that. It's like any other investment offering out there just for a lot more bells and whistles that can be incorporated or paired with other managers that you may love and use today. Just going back to the basic question here again, just give us again a kind of snapshot of account minimums and fees. Oh, great question. Yeah, minimum is $100,000, which you're going to find is far less than most of the competitors out there. Maybe another competitive advantage and then cost is. 15 basis points, 15 basis points. And that's going to be irrespective of the mandate that you're picking from and that a large cap strategy will be, will be the same price as a small cap, which will be the same price as a asset allocation bar portfolio. So we tried to simplify both the minimums and the fees and what you're going to find is the mean that the the fees are going to be very, very competitive, again, I think probably the most competitive in the industry. The reason we can be so cost competitive is because we're part of the right ecosystem. So if not more cheap than most of ETF's out there yet you get all the taxes, harvesting customers that goes along with it. I do think it's probably one of the most powerful stories in the marketplace today. Indeed, Wendy, this has been really useful. Thank you. Just one more question before closing comments and if people want to learn more about custom indexing or direct indexing. And again, we've got plenty of resources that are at Orion, but there's probably some non Orion resources as well. What do you direct people to if they were to learn more about it? Well, yeah, I think there's a lot of a lot of folks being made on direct index right now. Schooly has written a great report. For those of you have access to Schooly, we can read up on the direct indexing landscape. I would encourage you to send Google alerts on direct indexing. You're seeing new offerings come out all the time from an Orion perspective, what we really try to do. Create content that's going to be client focused, meaning again I think one of the biggest hurdles we have is not the advisors understanding of what we're doing, but how do you, how do you explain it to the end client. And so keep your eye out for new content, more content that we'll be pushing out which really help you help tell the story. Yeah, awesome. Well, thanks again Andy and thank you everybody for your time and trust in Orion portfolio solutions, not. Next month we have treading carefully. In 2023, our portfolio recipe is balancing defense and offense. It will be on Thursday, May 25th and as of now you can start registering for that event as well. Thanks again Andy and thank you everybody and enjoy the rest of your day. Thank you. _1686421809452

The Custom Indexing Portfolio Recipe

As clients continue to demand more customized services, advisors who are looking for a powerful differentiator to their offering need to start delivering personalized portfolios at scale in order to attract and retain client relationships.

Orion Custom Indexing provides fully customizable, flexible, tax-efficient strategies with the goals of improving after-tax client returns and align with your investor’s personal needs, beliefs, and investment objectives - while seamlessly integrating with Orion’s existing technology and investment platforms.

Join Orion’s Chief Investment Officer, Rusty Vanneman, CFA, CMT, BFA, and Andy Rosenberger, CFA, Head of Custom Indexing, to learn how you can easily bring proactive tax management to every client through cost-effective and customized portfolios at the touch of a button. You’ll see how you can partner with CFA Credentialed Portfolio Managers to optimize and monitor client portfolios on a continuous basis and eliminate the need for time-consuming processes through ongoing tax-loss harvesting.

The CFA® is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute - the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org. The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.

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