Advisor Aims to Facebook His Way to $10B in Assets

Rapid technological advances have brought about a brave new world for financial advisors. And James McDonald has had the courage to embrace the change, creating a brave new business model in the process.

The CEO of Houston-based Index Strategy Advisors (ISA), McDonald is using 100% ETF portfolios to lower costs and improve securities selection while riding the social media wave to reach large audiences and enlisting an army of advisors to magnify the results.

“Since December of 2011, I pulled $45 million in assets under management out of Facebook,” McDonald tells ThinkAdvisor in an interview.

“My job is to teach a thousand advisors to do the same. If we can do that, we’re going to have a meaningful business,” says the ISA founder, whose total AUM now stands just short of $60 million after just two years of operation.

“Our goal is to become a $10 billion business using social media,” he adds.

But before the social media marketing blitz comes the investment insight on which the former hedge fund trader’s business was established.

“We started this firm because of the explosion in ETFs,” says McDonald, praising their low cost, diversification, market access, risk management and securities selection benefits.

McDonald says his firm fully exploits these advantages through its partnership with IndexUniverse’s ETF Analytics platform, which rates and analyzes ETFs.

“We leverage their research to pick securities for our portfolios,” he says. “Where we think we do better than everywhere else is portfolio construction.”

Here’s how it works: “We come up with our thesis,” says McDonald, who currently likes business development because of its high current yield.

“That’s where IU comes in,” he says. “They help us decide what fund to buy for any given sector. There may be dozens upon dozens of options. IndexUniverse is looking at efficiency, liquidity, ability to track an index, issuer risk.”

The former trader has strong views on how to choose the best investments. He’s got the criteria, but relies on ETF Analytics for the securities selection:

“The best markets internationally are going to be the markets with accelerating GDP growth, that have credit ratings upgraded, that have expansion in manufacturing and consumer discretionary spending,” he says. “Those four factors are published on a weekly and monthly basis. So there is a template for identifying opportunities.”

Similarly, for domestic markets, McDonald is looking for “those sectors that are the least sensitive to interest-rate risk” since, he adds, the Federal Reserve has made clear it will raise rates as unemployment falls and the economy improves.

McDonald is therefore looking for low-capital-intensive industries that are not sensitive to rising rates such as consumer discretionary, heath care, the financial sectors — and especially business development.

ETF Analytics helped McDonald identify BDCL — a UBS-issued double-leveraged ETF — as the best way to play that trend because of its low issuer risk, liquidity, close index tracking and 13.6% yield.

McDonald exudes the passion of many optimizers — a trait he shares with adherents of Dimensional Fund Advisors index funds — though he is convinced he has a better mousetrap.

“DFA uses mutual funds first and foremost, so it’s going to be more expensive for the client,” he says, adding that DFA’s “principle is based on small-cap tilt and a higher growth rate.” He insists that lower costs and sector focus of ETFs will best DFA.

“There are markets that can be accessed through ETFs but not through mutual funds,” he says, citing ETFs that enable direct investment in Ireland, Switzerland and Sweden — top-performing markets last year that met his tests for accelerating GDP and other criteria.