We’re happy indeed to welcome you to Research magazine’s fourth annual ETF Hall of Fame.
It’s no wonder that exchange-traded funds are the industry’s fastest growing investment vehicle: ETFs are powerful tools that offer a host of client benefits — plus, they help make advisors’ practices more profitable.
Two of our honorees, recognizing ETFs’ advantages back in the 1990s, began using the funds to lower costs and for broad access to the market. Within the last decade, upon introduction of hundreds of new ETFs, they likewise expanded their use to gain exposure to specific sectors for even greater diversification. Our third winner, using ETFs a scant three years, already has 30 percent of his team’s AUM in these funds.
The arena is dynamic: $824.70 billion is now invested in ETFs, and their number has increased to 933, according to National Stock Exchange figures. Further, this year three brokerages — Charles Schwab, Fidelity and Vanguard — began offering commission-free exchange traded funds.
ETFs’ liquidity, transparency, low cost and tax efficiency make these tools, which offer all-day tradability, extremely hard to ignore.
It was particularly challenging for contest judge Ronald L. DeLegge, who writes Research’s monthly ETF Report and is publisher-editor of www.etfguide.com, to choose this year’s winners among the growing number of contestants.
Here’s what’s most impressive about our 2010 honorees:
Stefan J. Contorno
Vice president, financial advisor, portfolio advisor-Personal Investment Advisory program (PIA); Crisci, Contorno & Associates Merrill Lynch Wealth Management
Home base: Naples, Florida
ETF AUM: $48 million of total $160 million
Community activities: Board member, Naples Italian American Club; active member, Naples Chamber of Commerce
To be sure, the global financial meltdown brought profound changes. That dark cloud’s silver lining? For Stefan Contorno, it was his decision, during the turbulence, to use ETFs for reducing clients’ costs and supply liquidity to cope with the market’s wild swings.
“In a volatile environment, ETFs, with their ability to make tactical changes, really add value. It’s a huge benefit. Mutual funds don’t have that same liquidity, but it’s extremely important to a client’s portfolio. I really like the fact that, if necessary, you can get in and out of an ETF,” Contorno, 37, says.
The advisor co-leads a team serving about 200 affluent households. Though he has implemented ETFs for only three years, already they represent 30 percent of the team’s business. Some clients are invested in all-ETF portfolios, which are diversified among fixed-income, equities and cash.
Rather than research and choose ETFs himself, Contorno relies on Merrill Lynch’s managed ETF models based on the firm’s research. The portfolios are diversified across the board and include fixed-income, equity, commodity and international exposure.
“I choose the best and most suitable portfolio according to clients’ risk tolerance. Using Merrill’s research and recommendations saves a lot of leg-work,” Contorno says.
And using the models has helped Contorno streamline his practice, permitting him to take a more “consultative type of approach,” he says.
To pick the most appropriate portfolio, he profiles each client based on their responses to a detailed questionnaire discussed in face-to-face meetings.
The advisor was initially attracted to ETFs because of the upbeat press they’ve received. After looking into them further, especially Merrill’s platform, he gradually incorporated them into his practice. Though most clients had heard or read about ETFs, Contorno embarked on a thorough education program, furnishing ETF research reports and discussing portfolios that dovetailed with clients’ personal risk tolerance.
In seminars that he conducts for prospects, the FA also enthusiastically spreads the word about ETFs.
“As popular as ETFs have become, a lot of the competition still talks strictly about traditional mutual funds. So we’re able to speak to prospects about a type of investment they’re not necessarily hearing about from their current advisors. It puts us in a unique position,” he says, “and gives us leverage to discuss ETF strategy and portfolios that will ultimately help performance.”
From Staten Island, New York, Contorno — who by age 12 was charting stocks on graph paper — earned a B.A.A. in economics from Baruch College of the City University of New York. In 1999 he began his career as a UBS trainee in Red Bank, N.J. Next, he moved to Wachovia Securities, in Edison, N.J. He was at the firm for eight years until joining Merrill in 2008 and immediately began working with an affluent Florida clientele.
Last year Contorno added Certified Special Needs Advisor to his quiver. That designation helps him work with clients who have children with disabilities as well as to liaise with local attorneys that develop special needs trusts.
A big advocate of using the firm’s research, Contorno says: “A pitfall to ETFs is getting too wrapped up in the selection — spending too much time doing your own research and tracking them every minute of the day.”
His general advice to FAs who haven’t embraced ETFs? “In today’s complex times, not only do our clients need us more than ever, they need solutions. To ignore all the different solutions that are available is a disservice to clients. Advisors should be looking at ETFs, where suitable. Otherwise, we run the risk of our competitors doing that for us.”
Mark A. Frugoni
Vice president-investments, financial advisor, private investment management portfolio manager (PIM), Hubert & FrugoniWells Fargo Advisors
Home base: Houston, Texas
ETF AUM: $60 million of total $150 million
Community Activities: Member, Former Student Advisor Board, political science dep’t., Texas A&M University; lifetime member, Houston Livestock Show & Rodeo, raising funds for college scholarships
No more outsourcing for this advisor: Mark Frugoni has taken ownership of managing his clients’ assets — and for that, he has ETFs to thank.
A decade ago, unhappy with the high fees and manager underperformance of mutual funds and separately managed accounts, Frugoni started using ETFs for fee reduction. Back then, his strategy for ETF-only portfolios focused mainly on broad-based equity, fixed-income and commodity holdings.
But in 2008, he moved away from the broad-based approach and, in addition to adopting a targeted allocation, added a tactical risk-management overlay with buy-sell signals. A few of his favorite ETF providers are First Trust, iShares, Market Vectors and PowerShares.
“We have a buy-sell strategy for our three stock models, our commodity models, our currency models and our bond exposure as well,” notes Frugoni, 41.
“The methodology we use isn’t based on short-term market timing — we aren’t traders. The trends we see in the market can last 18 to 36 months. An underweighted position isn’t taken lightly or with the idea that it will only be underweight for a month — it could be a year or two,” says the advisor, who, employed in Wells Fargo Advisors’ bank channel, serves more than 250 client households.
As a private investment portfolio manager, Frugoni has been accredited with the firm’s broadest discretionary authority but makes sure to e-mail clients alerting them of asset-class weighting changes. “Most advisors outsource the management of their clients’ assets. We feel it’s important that they know that we are managing their money — that the buck stops with us,” he says. “If advisors keep outsourcing the management of client assets, they’re going to lose it.”
Not only has Frugoni’s conversion to ETFs improved clients’ bottom line, it’s enabled him to boost the productivity and profitability of his own practice.
And with his disciplined, scalable, repeatable approach, the portfolio manager is handling ETF asset management for colleagues’ clients too.
The proliferation of ETFs in the last decade prompted Frugoni to switch to a targeted allocation, zeroing in on, for example, financial services or real estate.
The ability to trade ETFs like stocks is “critical,” according to the portfolio manager. This became apparent with “the high volatility and extreme intra-day moves that have occurred — especially in 2008, when we’d see 100- or 200-point swings in the last 15 minutes of a trading day. That’s here to stay. Sometimes the difference between making a trade at 10 a.m. or at 3 p.m. is significant.”
However, Frugoni cautions: “ETFs are not miracle investments. They’re just a good tool. Advisors have to be careful that they don’t oversell ETFs as the solution. The solution needs to be a well-thought-out, disciplined investment approach. The way you deliver the solution is in a low-cost, tax-efficient, targeted manner. ETFs are the way to do that.”
Frugoni grew up in Houston and graduated from Texas A&M University, where he focused on political science and business management. He trained at Morgan Stanley; it was there that he began using ETFs. After a decade at the firm, in 2004 he joined Wells Fargo Advisors.
Thus far, he has opted to try neither actively managed nor fundamentally driven ETFs. The latter, in which securities with the best fundamentals receive higher index weightings, come with high fees, he says.
“You can see the ‘fee-creep.’ With new ETF concepts, you find that the expenses keep going way up,” Frugoni says.
One further caveat: “Every Tom, Dick and Harry is trying to put out ETFs. Firms are registering 15 or 20 ETFs at a time and seeing which ones stick. It’s important that advisors screen providers: Is this firm here to stay? Is the provider a mutual fund just trying to collect more assets, so they’re starting an ETF division? Do the ETFs have reasonable expenses?”
Meantime, Frugoni says he’s concentrating on “continuing to move as many clients to ETFs as possible.”
Noyan J. Garemani
Sr. vice president, sr. portfolio manager, financial advisor, sr. investment management consultant, The Garemani Group Morgan Stanley Smith Barney
Home base: Los Angeles, California
ETF AUM: About $60 million of total $160 million
Community Activity: Board member, C5LA college-bound program for high-achieving inner-city children
ETFs have fundamentally transformed Noyan Garemani’s business. The advisor began using ETFs in the late 1990s for tax efficiency and broad market exposure. But now, with availability of a wide array of these funds, he pinpoints sectors, industries and countries to invest in.
“We don’t have to do the bottom-up analysis of trying to pick stocks,” notes Garemani, 44.
His process starts with a global macro look at the markets. Once he decides on the asset allocation of equities, fixed-income and alternatives — for him, commodities and REITs — he determines which countries to invest in.
For instance, “without trying to find the best Canadian or Japanese companies to buy, we just buy EWC, the Canadian ETF, or EWJ, the Japanese ETF. We get a good representation, and it’s very efficient,” he says.
For investing in the United States, Garemani buys large-cap by sector, such as energy or financials, then uses ETFs for mid-cap and small-cap too. His portfolios contain 30 to 35 holdings, with a healthy percentage in ETFs.
“In the old days you had to research, say, which energy stocks to buy. With ETFs, you can just buy one, and it gives you representation of the [whole] energy sector,” Garemani points out. “And now they have options with a lot of ETFs — you can buy puts to hedge the portfolio. You can rebalance within the sectors in the countries, which we do when the market moves a lot.”
Garemani also likes ETFs because they allow investing in sectors that he was previously unable to access because there was no comparable vehicle with which to do so. “If you wanted international small-cap exposure, for instance, you’d have to look through the mutual funds that were available, then check their performance and managers’ history. You’d try to figure out what would be best or pick the stocks yourself. But with ETFs, there’s an index for it, which makes it very easy.”
An advisor for 22 years, Garemani’s clientele — 70 households — “wants us to help them grow their assets and manage risk during these uncertain times. ETFs have been very helpful because of our ability to diversify across so many different sectors,” says the advisor, who is 90 percent fee-based.
Five years ago, he began using the firm’s discretionary portfolio management platform to manage all ETF accounts. “By then,” he says, “we were able to use ETFs to fully implement our asset allocation strategy — and reduce portfolio volatility at the same time.”
For this FA too, one of the biggest ETF pluses is their liquidity. “We can trade them and exchange portfolios intra-day, get out of one ETF and into another. That’s a huge advantage because there are days when the markets are moving and you want to rebalance the portfolio, but don’t always want to wait till the end of the day to see what prices you get.”
Born in Iran, Garemani arrived in the United States at age 11 and grew up in Los Angeles. He has a B.A. in economics from the University of California, Los Angeles and an MBA in finance from Pepperdine University. At the Wharton School, he earned a Certified Investment Management Analyst (CIMA) designation.
He started out as an advisor at Dean Witter, where he stayed — through its acquisition by Morgan Stanley — for 18 years. Five years ago he joined Smith Barney and made chairman’s council.
Though surely a fan of ETFs, Garemani is not unaware of their limitations. “There are some areas where you actually want somebody there managing the portfolio,” he says. “Commodities are a good example. Some of those ETFs have had issues and not performed as they should have.”
Also, he’s “a little skeptical” of many new ETFs. “You don’t know how they’re going to perform under various conditions. You’ve got to really look under the hood and see how they’re supposed to work, what makes up the underlying index and if that’s the exposure you want to have. You’ve got to be selective.”