Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > ETFs

Advisor aims to Facebook his way to $10B in assets

Your article was successfully shared with the contacts you provided.

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 percent 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.

See related: More investors using ETFs as long-term strategy

“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 percent yield.

Related story: ETF wholesalers could better service advisors

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.

Domestically, master limited partnerships are another area he identifies to which ETFs, but not index funds, allow access.

McDonald’s approach to capitalizing on what he regards as a competitive advantage in portfolio construction and execution is through second opinions.

“All get comparison of what they got and what they’ll get,” he says, citing as an example a South Carolina attorney for whom he made a proposal this week.

The attorney’s retirement-oriented portfolio had a 0.6 percent yield and high risk; McDonald proposed an ETF portfolio with a 4.5 percent yield whose “downside capture is about one-third of his previous level.”

Pleased with his portfolio and proud of his proposal, it is his prospecting method that particularly stands out in an industry that generally shuns Facebook in favor of LinkedIn. He uses several social media outlets, and says that the digital economy makes possible the success of a different kind of advisor than the top producers of the past.

“Twenty years ago when I started in the industry, you had to network and develop the ability to hang out at the Kiwanis Club to give out cards, to collect cards. It was good for hustlers. But today Twitter, LinkedIn, Facebook and Google+ … are the new social networks.

“Instead of the old days with fraternities and dinners, where you can interact with maybe six people a day if you’re really on your case, today I can interact with 200 people in 45 minutes,” he continues. “And interaction is authentic and it’s personal.”

While underscoring the need to ensure quality content, and acknowledging the time that takes to develop, when that is done, McDonald says “we can get a message to 20,000 people in about 15 minutes; we have the ability to reach tens of thousands of people for pennies.

“In the old days, you had to take out an ad in the Yellow Pages or buy radio ad time, which cost hundreds [or] thousands of dollars. I can pay $5 for an ad on Facebook that can reach prime households and prime markets, and I can authenticate how many people click through,” he enthuses.

In communicating about investing, McDonald says it helps immensely that ETFs have gone mainstream — people know and feel comfortable with brands like Vanguard and State Street, he says.

But he cautions that the nitty gritty of investing comes at the end rather than the beginning of the process.

“If I make a post about BDCL being the greatest fund, I get 4 likes,” he says, noting that when he posted a picture of his daughter who made honor roll — simply because he was proud of her — he got 100 likes, of whom “30 or 40 were prospects who had not interacted with me before.”

The key, he says, is to engage and interact with people in a genuine way.

“We lead with relationship building and close with expertise,” says McDonald.

But advisors need to hold their financial firepower at that early stage.

“Grandmas, babies and dogs are the best way to build a major audience,” he says.

See also: 


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.