2009 ETF Advisor Hall of Fame: Pioneers in Portfolio Management

In theory, “the core/satellite construction allows for the potential to add extra return to the portfolio without increasing risk,” says King, who has 125 active clients. About 70 percent are early retirees, the balance up-and-coming business owners.

King, who heads a group of five, including three FAs, says that “ETFs have allowed us to provide better portfolio management to our clients and a better opportunity for them to succeed with their investments.” He uses Wells Fargo’s discretionary asset management platform called Private Investment Management (PIM).

The Manchester, Conn., native began conducting ETF due diligence in 1997 by back-testing model portfolios using index returns only. To his surprise, the returns weren’t much better than those of the actively managed portfolios. However, costs on the index portfolios were much lower, and tax efficiency was higher. King was sold.

“No one has objected to our using ETFs. But though we spend a significant amount of time educating them, a lot of people get confused when they see their statements,” King says.

To simplify things, he’s come up with a condensed explanation of his complex combined approach. A client’s risk tolerance, risk budget and allocation determine what percentages of the portfolio will be allocated to ETFs and to active management.

“Those who want only passive investing will have a risk budget of zero percent, which will allocate the entire portfolio to ETFs,” King notes.

The CFP likes iShares and PowerShares, and his top criterion in picking ETFs is the fund’s liquidity. “When we make changes, or even if we just rebalance, there needs to be enough liquidity so you don’t affect the price change,” he says.

The core portfolio is made up of general market capitalization ETFs — large-cap, small-cap, mid-cap, international, real estate and so on. When making tactical or strategic changes to pinpoint a sector, King uses either an ETF or an active manager.

But, he says, “if we want to drill down even further to a sub-sector, an ETF is a fantastic solution without having to expose ourselves to one or two stock positions; rather, the ETF exposes us to a pool of stocks in that sub-sector.”

Graduating in 1993 with a finance-investments degree from Merrimack College, King joined The Boston Company as a Shearson Lehman mutual fund custodian. Relocating to California a year later, he decided he wanted to work with the end investor. He joined Prudential Preferred Financial, in Long Beach, as a fee-only planner, then moved to Prudential Securities.

King has remained with the firm throughout its subsequent acquisitions by Wachovia and Wells Fargo, and five years ago moved his office to nearby Seal Beach.

His biggest business risk was that major relocation, at age 23, to a region where he knew no one except his wife Catherine.

“You’re the worst hire I’ll ever make,” the Prudential manager told him, King recalls. “You’re too young, and you don’t know anyone to sell our products to!”

But King pledged to persevere. “It worked out,” says the now-15-year advisor.

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Riverfront Investment Group

Michael Jones, founding partner, chair; chief investment officer; in industry since 1985

Doug Sandler, founding partner, chief equity officer; in industry since 1992

Home base: Richmond, Virginia

ETF AUM: About $640 million (of total $1 billion)

Community activity: Jones — board of directors, Redeemer Lutheran Church, helping to rebuild New Orleans houses

Leaving a major wirehouse to start their own money management firm last year, during the worst financial crisis since the Great Depression, was pretty scary for Michael Jones and Doug Sandler. But Riverfront Investment Group has succeeded — and ETFs have played a pivotal role in expanding managed assets from zero to $1 billion in the first year.

“Our portfolio strategy couldn’t exist without ETFs,” says Jones, formerly chief investment officer at Wachovia Securities, 2002-08. Sandler, in the equity strategy department 15 years, had risen to become Wachovia’s chief equity officer. They managed assets of $8 billion, $2 billion of which was in portfolios composed entirely of ETFs, $6 billion in portfolios that were 50 percent ETFs.

When Wachovia merged with A.G. Edwards and moved headquarters to St. Louis, Missouri, the two opted to stay in Richmond, Virginia, and open their own shop. The firm now consists of 18, including eight money managers.

In 2003 Jones and Sandler began using ETFs extensively. Riverfront’s investing approach uses ETFs in a unique way: It combines them with individual stocks. This permits quick and easy modification to overweight certain asset classes and underweight others.

“That strategy didn’t exist prior to the invention of ETFs. Our combination [approach] is the best way to solve investment problems,” says Jones, 46. “We use individual stocks for which there is no ETF substitute — Apple, say — but when we want a lot of exposure to Brazil, for example, we buy an ETF that gives it to us in a nice, diversified manner.”

Focusing on stocks his entire career, Sandler, 39, says: “I’m a stock picker, but the fact that I use ETFs shows how much I believe in them. At times, an ETF is just a better tool.”

To select equity ETFs, he puts to work a four-part analysis. He starts by zeroing in on what he’s trying to accomplish; for instance, buying the aerospace and defense industry because it tends to be insensitive to big economic shifts. Sandler also concentrates on market cap and relative strength, or performance. Lastly he looks at liquidity and fees.

The team uses PowerShares, iShares, Barclay’s, State Street and occasionally smaller providers. “We use whatever ETF fits the strategy,” Jones says.

The partners like ETFs as a sensible way to invest in a volatile asset class like biotech. “The sector is very attractive and cheap,” Jones says. With an ETF, “you can buy a diversified basket of biotech companies rather than taking a risk and buying a company with a drug that turns out to do poorly in FDA trials.”

As Sandler points out: “The typical retail investor can’t own enough biotech companies to properly diversify the risk — but when they own a whole group in an ETF, the home runs will outweigh the strikeouts.”

Managing money for financial advisors for the past 15 years, Jones, born and reared in Nashville, Tenn., graduated from The College of William and Mary with a BA in economics and received a Master’s from the Wharton School in 1998.

He was mortgage-backed securities portfolio manager at a predecessor bank to Wachovia, then joined Alliance Capital Management as head of mortgage-backed securities investing. He next returned to Wachovia and in 2002 was named chief investment officer.

Buffalo, N.Y.-born Sandler earned a BS in accounting in 1992, then an MBA from the University of Richmond in 2000. He started out trading bonds at Wheat First Butcher Singer, a Wachovia predecessor, and was with the firm a total of 16 years.

With Riverfront’s launch, Jones and Sandler met with FAs to tell them their strategy to help clients navigate the financial crisis. “We talked about a new way to run money that offered the hope of better reaction to horrible markets and also better reaction in opportunity markets,” he recalls.

Riverfront stays away from actively managed ETFs because, as active portfolio managers, they seek to execute specific strategies with ETFs.

“The last thing we want to happen,” Jones says, “is to buy an ETF expecting a certain set of characteristics and then the active manger changes his mind.”