Bill Hortz's picture

"I encourage all advisors to develop a growth mindset since change is worth the effort and essential in surviving the accelerating disruption hitting our industry." - Ron Surz, PPCA

[The Institute for Innovation Development  recently talked with Ron Surz, President and CEO of PPCA Inc, Target Date Solutions and Age Sage Roboadvisor – a series of FinTech companies designed to financially engineer solutions to what Ron sees as faulty practices in traditional investment analysis and portfolio management practices. Armed with an MBA in Finance, an MS in Applied Mathematics and a strong pension consulting background, he is hard at work disrupting traditional investment management thinking and practices to develop what he sees as post- modern portfolio theory/asset allocation optimizations for better investment outcomes.]


Hortz: You have been very critical of and very busy in disrupting the traditional investment management process and investment analysis tools being used. What are some examples of the “one size fits all” mistakes that you feel has characterized the investment industry for the past 3 decades?

Surz: There’s a long list of entrenched faulty practices in investment consulting, but let’s start by reviewing three of them. At the top of the list is the failure to identify talent (real “alpha”) in active managers. So what’s wrong with decades old practices on investment manager analysis? The answer is very straightforward: indexes and peer groups are terrible barometers of success or failure.

Another failed practice is using the S&P500 as core in core-satellite investing. The S&P dilutes active managers by bringing in deadweight stocks that the active managers don’t like (because they don’t hold them). The S&P is an alpha killer. There is a better core. It’s the stuff in the middle in between value and growth. This version of core empowers active managers by completing them and getting out of their way

On a newer front, target date funds (TDFs) became main stream about 10 years ago with the passage of the Pension Protection Act of 2016. This Act anointed TDFs as a qualified default investment alternative (QDIA). Fund companies jumped on the opportunity as a way to package product and increase sales. TDFs now exceed $1.5 trillion. The BIG problem is that they are all way too risky at the target date, which is when people retire. In 2008 the average fund lost 30%, and they’ve become riskier since then. It’s a crime that could possibly be corrected by lawsuits in the next market correction. 

Hortz: What made you decide to take upon yourself to become a financial engineer in addressing these concerns? What were your first steps and what did you learn through this early stage?

Surz: I think John F. Kennedy was paraphrasing someone else when he said “Some see things the way they are and ask why. I see things the way they should be and ask why not.” My first step was getting educated, earning 2 Masters degrees in Math and Finance. Then I went to work for the largest pension consulting firm in its day, A.G. Becker, where I learned the craft of consulting. I wrote the code for some of the first performance reports, and developed some of the first peer groups that are used to benchmark performance. In doing so, I observed the flaws and resolved to do better, but the industry doesn’t want better – not sure why.  

I also became Becker’s senior VP in charge of asset allocation/investment policy studies where I consulted to $trillions in defined benefit assets. So when target date funds appeared on the horizon they were a perfect fit for my education and experience, so I designed a TDF glide path that is now patented and has been the glide path for the SMART TDF Index with a ten year track record starting in 2008. This “Safe Landing Glide Path” protects at the target date like no other TDF available.

Hortz: Why and how did you go about developing your own set of indices?

Surz: In the late 1980s, having started my own consulting firm, I wanted to provide style analysis, which was just starting to be used, but none of the existing indexes met the criteria that I wanted. In order to do style analyses the way I wanted, I needed indexes that were mutually exclusive (no stock in more than one index) and exhaustive (all stocks were classified).  So I made up a 3 X 3 classification scheme: Value-Core-Growth X Large-Middle-Small. This scheme has subsequently been adopted by Morningstar and Research Affiliates.  A few years ago I expanded the approach into the “Next Generation of Style Analysis” that I call “Style Scan.” It graphs every stock in a portfolio in style X-Y space

Hortz: Can you explain how your proprietary style scan analysis works and why you feel it is a “21st century leap forward” as an investment manager analysis tool?

Surz: Style Scan is a “Style Visualizer.” Every portfolio has its own unique style signature, so comparisons are made easy. Most importantly, the black box of returns-based style analysis is removed. You can visually see exactly which stocks are value or growth, large or small, so you understand why a portfolio is a certain style blend.

Hortz: Tell us about your Centric Core model and why you feel it is “an undiscovered treasure” in defensive diversification?

Surz: Centric Core is the 45 large companies that lie in between value and growth in my style classifications. If you replace the S&P500 with Centric in your core-satellite portfolio you will get better diversification and higher returns. As little as 20% in Centric provides as much diversification as 80% in the S&P. And because Centric doesn’t dilute the active managers as the S&P does, more alpha reaches the bottom line so you get higher returns. 

Hortz: Your biggest concerns though seem to reside with target date funds and their growing adoption and reliance in retirement plans. What do you see as the major problem here?

Surz: The major problem is that TDFs are sold, not bought, and what is being sold is way too risky at the target date, so those near retirement are in jeopardy. I strongly feel that fiduciaries are breaching their Duty of Care by not looking at those risks. Instead they use their bundled service providers. Consequently, Vanguard, Fidelity and T. Rowe Price “own” 65% of the TDF market.  Fund companies perspectives can have inherent conflicts of interest in skewing more to equities versus protecting beneficiaries around the target date, and fiduciaries are allowing/condoning it.

Hortz: Why is your patented Safe Glide Path technology characterized as a “target date breakthrough” and focuses on managing sequence of return risk?

Surz: Much has been written about the “Risk Zone” and “Sequence of Return Risk.” Losses in the Risk Zone that spans the five years before and after retirement are devastating because the beneficiary’s only response is to spend less, i.e. reduce the standard of living. Losing a substantial part of your lifetime savings is just plain wrong, but that’s what happened in 2008. Sequence of Return Risk shows that in retirement, when we’re spending savings, returns matter most when account balances are at their highest, namely near retirement. Savings will not last long if there’s a loss early on in retirement. The “sequence” matters – losing a lot toward the end of life doesn’t move the needle much, but losses early in retirement matter a lot. 

Hortz: How did you go about creating this glide path process and engineer it to systematically optimize risk management?

Surz: I decided that the objective of my glide path would be to not lose participant savings. I coined a Hippocratic Oath for TDFs: do no harm by not losing savings. There is a science designed to achieve this objective. Asset Liability Management solves for an asset allocation through time that meets a liability.  I designate the current account balance as the liability I want to meet and employ the math of asset liability management to not lose money. This discipline leads to an entirely safe – no risk – portfolio at the target date. It’s the only way to meet the objective of not losing beneficiary savings.  Away from the target date, the allocation for young people is similar to other TDFs, but more diversified. The industry agrees on asset allocation/risk for young people, but there is big disagreement about safety at the target date. Since the most money is invested at the target date, you can see why there can be disparate motives.

Hortz: How did your glide path lead to your creating Age-Sage – your “mature robot analyst”?

Surz: Robo Advisors have become a big deal. Automated on-line advice is replacing live advisors and has been embraced by Millennials. It occurred to me that adults might like some investment help too and would appreciate the institutional level guidance in my glide path. Importantly, age is an important consideration in determining an appropriate portfolio, but no one is currently integrating age with risk to the degree we are with Age Sage.    

Hortz: What best advice can you give advisors and asset managers about addressing accelerating change and the need for new mindsets and tools in the investment arena?

Surz: Even though change is good, it’s a very hard sell. Change comes hard. Behavioral scientists tell us that we are all hard-wired to resist change. But as Buddha said “Impermanence is eternal.” I enjoy being a force for change and welcome all the help I can get in working with others around the needed development of our industry. I encourage all advisors to develop a growth mindset since change is worth the effort and essential in surviving the accelerating disruption hitting our industry, changing client perspectives, and the evolution of the markets themselves.

This article was previously posted on Financial Advisor Magazine.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here


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