First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 8 - Scott Friske - How to Stay at the Cutting Edge of Asset Management - ROI Podcast
In this episode, Ryan is joined by Scott Friske, head of new product development at First Trust for a discussion about where great ideas come from and where the next generation of investment products is headed.
đź“š Scott's Book Recommendations:
- The Leadership Bookshelf by James Stavridis & Robert Ancell
- Ego is the Enemy By Ryan Holiday
- The Hard Things About Hard Things by Ben Horowitz
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00:00:00:00 - 00:00:32:02
Ryan
Hi, welcome to the first Trust ROI podcast. I'm Ryan Issakainen, an ETF strategist here at First Trust. Well, for those of you who have wondered where some of the best ideas at first trust in terms of product development come from, I am very pleased to be joined by Scott Friske for today's episode. Scott leads the team that's responsible for developing investment products at First Trust.
00:00:32:04-00:00:52:01
Ryan
Today, we're going to talk about what the process looks like. Where do we get our best ideas from? How has the product line evolved over time, and why have we been single-minded about providing solutions for financial professionals? Thanks for joining us, and I hope you enjoyed the episode. Today, I'm joined by Scott Friske, head of product development at First Trust.
00:00:52:05-00:00:54:22
Ryan
Scott, thanks for joining us on the ROI podcast.
00:00:54:23-00:00:56:22
Scott
Thanks for having me, Ryan. It's good to be here.
00:00:57:00-00:01:17:07
Ryan
To Scott, the most obvious question that I have for you is whether you're in charge of leading the team that develops some of the products, whether it's ETFs, unit investment trusts, or a variety of different product lines. And first, trust is known as having really innovative ideas. So my first question for you is, where do most of those ideas come from?
00:01:17:09-00:01:57:08
Scott
Nobody in this industry has a crystal ball. Nobody can predict where the market's going. Exactly. It's really difficult to make long-term decisions from a product perspective or from a business strategy perspective. At least that's what I've experienced in my time in financial services. And what I have also experienced is that if you know who your customer is and you spend your time asking them questions about where you can matter to them and how you can help them, the answers become a lot more clear.
00:01:57:10-00:02:26:08
Scott
So for us, that's financial advisors. That's where we spend all of our time. We have a large team working on the product. On the product side, they're supported by a huge research group and a huge capital markets group. We work together with the entire firm, with our sales force, and with our economics teams, all focused on finding out what we can do that adds value to the advisory ecosystem.
00:02:26:10-00:02:29:21
Scott
And that's where we spend our time, and that's where those ideas come from.
00:02:30:00-00:02:53:16
Ryan
So it's a collaborative process. So as you think about the products that we've launched over the last few years that have come as a result of some of the demand coming from the fields, You know, first off, we are talking about some success stories. You know, kind of with the benefit of hindsight, you look back and say, man, it was a great idea that we chose to launch this type of product.
00:02:53:18-00:03:18:06
Scott
Yeah, for us, I would probably start by saying actively managed fixed income. In 2012, we were early in active ETFs. The first active ETF was launched in 2008, and it was difficult to get an exemption from relief. We were fortunate that there was relief from the regulators to be able to launch any asset class in an active ETF.
00:03:18:08-00:03:44:20
Scott
And so we were forward-thinking in obtaining the flexibility to be able to do that. And then we wanted to differentiate. And there weren't many firms launching active ETFs; firms that were known for active management in fixed income largely weren't in the space. So it gave us an opportunity to bring some unique strategies that were differentiated in a very efficient wrapper that our whole firm was focused on.
00:03:44:22-00:04:01:22
Scott
We have been in the ETF space, as you know, obviously since 2005. Yeah, but that kind of focus allowed us to spend our time figuring out what fit the ETF wrapper really well. So I'm very thankful that we did that. And then, wait.
00:04:02:00-00:04:18:00
Ryan
Before you go into the interview, get some other thoughts. But as you think about actively managed fixed income, you know, you kind of survey what is in the lineup today. Some funds are subsidized, and some funds are managed in-house. Why have we chosen to do both?
00:04:18:02-00:04:39:20
Scott
Yeah, we look for the best strategy, and we have an open architecture platform that will work, will partner with third parties, and some advisors that are unaffiliated where we feel like they have a great discipline that complements anything we may be able to do in-house because we want to bring the best product to the advisor on a platform that we possibly can.
00:04:39:22-00:04:57:20
Scott
And if that means that we hire a sub-advisor and partner with them, that's great. If it's something that we have the capability to bring internally, that's great as well. But it's really focused on what's the best fit and who's the best firm to manage.
00:04:58:01-00:05:11:12
Ryan
So it's really, again, looking for expertise, right? And yeah, if we've got the expertise and, you know, the qualifications to manage in a specific asset class, then that's great. But if we don't, you're not afraid to go outside the firm.
00:05:11:12-00:05:35:07
Scott
Yeah. We can't be all things to all people, and we don't try to be. We don't have a corner on the truth. There's no way you can possibly be the best at everything. It's a lot more likely that if you have the ability to reach your target market through distribution, you can find other people who have been focused on a craft for a very long time and partner with them. They're good at what they're good at, and we're good at what we're good at.
00:05:35:07-00:05:37:17
Scott
And we put them together. One plus one is equal to more than two.
00:05:37:19-00:05:47:15
Ryan
Okay, So in addition to actively managed fixed income, what else have you kind of done again? Looking back with the benefit of hindsight now, you say, Well, boy, that was a really good decision.
00:05:47:17-00:06:20:15
Scott
Definitely the option space. Okay. In 2019, we launched our first target outcome ETFs, annuities. Those are products that give you exposure to US equities or different types of index strategies, with participation on the upside and protection on the downside. And those strategies have existed in structured notes and in the annuity space for a long time. But the innovation there was partnering with a firm called Sebo Vast, who's an affiliate of ours.
00:06:20:17-00:06:26:01
Scott
We're really glad we did that because, you know, who knew COVID was coming and we had that product line ready and available?
00:06:26:01-00:06:27:00
Ryan
Amazing timing.
00:06:27:02-00:06:52:10
Scott
It was. Yeah. So there's all sorts of stories within the story I could tell you about, you know, providential opportunities that we had. Good timing, you know. That was, you can call that luck; you can call that just working really hard every day. And I'm going to go back to the proximity of our clients. We just stay close to the client because markets change.
00:06:52:10-00:07:15:04
Scott
And you know, the term unprecedented has been used a lot in the last three or four years. And the challenges that the advisors have in navigating the problems and opportunities their clients have. Right. Helping them achieve their goals. Sure, it was unprecedented. So for us, it's just to have your eyes open and work really hard to try to figure out what's next.
00:07:15:06-00:07:33:07
Ryan
One of the things that's kind of been, you know, I'd say it's built into the DNA of first trust is that the distribution effort has really focused on the financial professional as opposed to the retail investor. Why do you think that's such an important part of what we're trying to do at first?
00:07:33:09-00:08:02:18
Scott
We serve about a thousand. I'm sorry, 100,000 financial advisors today. And those 100,000 financial advisors have tens of millions of clients. And there's no way that we can know what's best for each one of those clients and advisors. They understand that client. They understand what's unique about each one of their clients. And our job is to support them in helping them work with their clients to achieve their goals.
00:08:02:18-00:08:17:19
Scott
And so it's focusing on your target audience, your target market, and your target client, which for us is the intermediary. It can be a family office; it could be an advisor; it could be a broker or dealer. Any type of steward is where we're focused.
00:08:17:20-00:08:45:14
Ryan
You know, one of the things that some people sometimes fail to understand is that the intermediary, the financial professional, is really critical in helping that investor actually stay disciplined and reach their goals and really understand this variety of different product lines, ETFs that are, you know, that maybe have buffered downsides or are actively managed if they're going to use those as the ingredients to build a portfolio.
00:08:45:20-00:08:56:07
Ryan
There's a lot of work that goes into that. Right. And, you know, financial professionals are better equipped to do that than, you know, the retail investor sitting at home.
00:08:56:12-00:09:34:07
Scott
Yeah, we're big believers in the value that advisors provide. And our CEO, Jim Bowen, has this phrase that he coined. And its first trust exists to serve the stewards of the wealth of the most productive people on earth. And that word steward and our operative word service, we serve the stewards because the stewards are the ones that craft the individual plan for the individual client and walk that family through decades, in some cases, generations of wealth creation and wealth management, in some cases just trying to figure out how they can retire and live off their savings.
00:09:34:11-00:09:58:20
Scott
Maybe they have a pension, or maybe they don't. There are so many issues that American citizens face that a financial advisor can help them prepare for and plan for. It's like failing to plan. Plan to fail. Right. And that's what the advisory community does. and we're inspired by that. And that's why we've organized ourselves around building our products in support of that ecosystem.
00:09:58:22-00:10:31:07
Ryan
COVID, if that is not the prime example, that's still kind of visceral in everyone's, you know, everyone's life of the value of that financial professional saying, No, this is, you know, we set up this strategy, we have these investments, and we're going to stay committed to that, even when it seems like everything is falling apart. And, you know, it's amazing how important that is, because those people that sold, those people that decided to jump ship, I would suggest that many of them failed to get back in at the right time.
00:10:31:09-00:10:42:12
Ryan
So I think that's, you know, I'm thankful, as someone who's been in first trust for some time, that that is our approach because I think it is in the best interest of the end client.
00:10:42:14-00:11:07:13
Scott
The financial advisory profession wouldn't exist if there weren't ultra-high-net worth people all the way down to someone who's just trying to scrape together enough to retire and live a decent retirement and needs help. They don't trust themselves with their own financial decisions. So they outsource. It's kind of like any other professional service.
00:11:07:13-00:11:11:22
Scott
I'm not going to diagnose my ailment. I'm going to go to a professional. So it's well.
00:11:11:22-00:11:14:20
Ryan
You may go on, you know, Google and start Googling, scare.
00:11:14:20-00:11:15:08
Scott
Yourself to.
00:11:15:08-00:11:17:03
Ryan
Death. But generally, that doesn't work out well.
00:11:17:07-00:11:18:18
Scott
Yeah.
00:11:18:20-00:11:39:12
Ryan
Okay. So we've talked about, you know, these are some of the things that we're thankful that, you know, the first dress made the decision to launch certain product lines, thinking about, you know, what's next, what's coming down the road. You know, we were preparing for the next decade and beyond. What are some of the areas that you're most excited about in terms of product development?
00:11:39:14-00:11:45:07
Ryan
You know, maybe start off with ETFs. But I'm also curious about other different types of investment products.
00:11:45:08-00:12:10:20
Scott
Yeah, ETFs. There's going to be a whole wave of additional innovation there. There's a little over 3300 ETFs in the U.S. market today. There's over 8,000 mutual funds, and there's over 25,000 different share classes among those 8,000 mutual funds. So if you compare the choices available in the traditional kind of legacy wrapper, there are 56 million households that own a mutual fund.
00:12:11:02-00:12:34:16
Scott
There's only 7 million that own an ETF. So as the ETF continues to expand in the ways that it's used, I'm excited by and inspired by just what we've seen happen over the last couple of decades. The mutual funds have been around for about two and a half times as long as ETFs have. So there's going to be a lot of innovation there.
00:12:34:18-00:12:48:16
Scott
I think in many ways. But with the ability to utilize some of the newer investment solutions that are gaining popularity, such as direct indexing, and the ability to customize, there's a lot of opportunity there.
00:12:48:20-00:13:06:14
Ryan
I had, so I wanted to ask you a little bit more about direct indexing, because, you know, it's one of these trends that over the last several years we've heard more and more about. You know, I remember there were conferences—one of the big ETF conferences in Florida—I think you were at back in 2017 or 2018.
00:13:06:14-00:13:26:09
Ryan
The big theme was, you know, direct indexing is going to come in; it's going to take over. And, you know, there's been a mixed level of success, but there are still a lot of reasons to be excited. So you talked a little bit about it, but I want you to expand on what makes this such a compelling story and who it is.
00:13:26:11-00:13:29:06
Ryan
Who does it really seem most appropriate for?
00:13:29:08-00:13:58:04
Scott
There's a number of benefits to direct indexing as an option for certain types of clients for an advisor, and one of them is the ability to customize. So it's an individual account. This is done through a separately managed account. So an advisor can customize it, maybe based on their values. It may be based on an investment policy statement that they have a certain type of return they're trying to generate or risks they're trying to mitigate.
00:13:58:06-00:14:08:10
Scott
You can customize all of that in a managed account, and that's what I would call full-service direct indexing, where you're not just providing exposure to benchmarks A through Z.
00:14:08:10-00:14:32:22
Ryan
So you're customizing that. And you know, that makes me think immediately of, you know, some of the ESG policies that individual investors or institutions may have. One of the challenges of ESG, you know, environmental and social governance, is that those mean different things to different people. And they may have certain values that they want to put in those portfolios, and someone who's another investor has different values.
00:14:32:22-00:14:35:13
Ryan
So direct indexing helps to solve that problem.
00:14:35:15-00:15:18:07
Scott
It does. Yeah. You can individualize a portfolio based on each investor's values. And we have clients who are two members of the same household who have slightly different value-based portfolios. The ability to do customized mandates for institutions across the spectrum of how they want to invest alongside a certain set of values There's a lot of opportunity to take the technology that you have with direct indexing, the way you can screen portfolios, and deliver something that's customized for each end user and the whole ESG thing.
00:15:18:07-00:15:35:19
Scott
You're absolutely right. ESG products are very challenging because they mean something different to everybody. And by the way, who came up with the definition of ESG? Is it? I don't know the answer to that question. I don't know that anybody could really give you one.
00:15:35:20-00:15:49:16
Ryan
Okay. So in addition to the customization of the portfolio, there are some other features. Sometimes I hear about, you know, certain features that allow you to have some benefits from a tax standpoint. How does that typically work with a direct indexing account?
00:15:49:17-00:16:16:14
Scott
Yeah, because you own the individual securities directly in a separate account. To the extent that the direct indexing technology is always looking for losses to harvest while tracking to your benchmark. When you set up an account, you basically say, I'm going to limit the tracking error to my reference benchmark. Let's say it's the S&P 500 or the Russell 1000 to a certain percentage, and that's largely based on my risk tolerance.
00:16:16:16-00:16:38:04
Scott
If I'm a more aggressive investor, I might be okay with more tracking errors. And what the tracking error allows you to do is harvest losses in individual securities and replace them with like-kind securities from that benchmark. And you're generating what we refer to as tax alpha, and that's tax losses that you can offset against future gains and improve your after-tax returns.
00:16:38:06-00:16:49:19
Ryan
So you're talking about maybe selling one stock from a certain industry and buying a different stock from the same industry, or at least one that has a high degree of correlation with that stock that you sold. Is that what that is about, right?
00:16:49:20-00:17:10:13
Scott
That's right. Yeah. You know, Caterpillar and John Deere, or two popular examples, Coke and Pepsi. And really, what the technology does is look at the individual risk characteristics of each company and try to find the next closest match to the individual risk characteristics of that company that you're going to use as a replacement.
00:17:10:15-00:17:36:13
Ryan
You know, another topic that has been a lot in the press recently is that there's been some lawsuits and things have to do with cryptocurrency. There's been several firms that have filed for Bitcoin ETFs or other cryptocurrency ETFs in the past. First, Trust has also filed for certain products. Is it a good idea to have these products, and where should I first trust them in their development?
00:17:36:15-00:17:58:03
Scott
Yeah, where there's regulatory clarity, there's a need for these products in the marketplace. There's no question about that. Advisors need help understanding what is and is not a tangibly valuable crypto asset, or digital asset. What's a scam? What's not? They have clients asking those questions. They're not equipped with the resources to answer them in most cases.
00:17:58:05-00:18:24:10
Scott
And so the conversations we've had with advisors are around: Hey, we would love it if you could provide an education, if you could provide advice on allocation, and then the instruments with which to do so. So our firm has spent a lot of time and energy, perhaps not as much as a few others, but evaluating that space and per our conversation earlier around partnerships, it's likely that we would be doing that with a partner.
00:18:24:12-00:18:42:22
Ryan
I want to make sure I don't leave out equities first. A trust was built upon this unity business, or unit investment trust business. Through the years, there's been tremendous innovation there. And I'm curious; same question with, you know, I had four ETFs. What are you most excited about and some of the innovations in the Unity space?
00:18:42:23-00:19:07:12
Scott
Yeah, the unity wrapper has been around for a long, long time. A lot longer than the ETF. And in fact, two of the largest ETFs on the market are units. That's a very little-known sort of fact. So I always use that as an example of the breadth of utility that the unit investment trust structure has.
00:19:07:14-00:19:29:16
Scott
It's also for certain types of advisors; it's a business model. They don't charge an advisory fee. They get paid a commission in the industry. They look at that kind of thing the same way they look at maybe an a-share mutual fund or something like that. We don't think that's a fair comparison because UCITS are rules-based and transparent.
00:19:29:18-00:19:49:00
Scott
Every time they mature, the advisor gets to have a conversation with the client about that allocation. Do we want to reinvest with the same allocation? Do we want to reposition? Do we want to take more or less risk? Are we generating enough income from these investments? Where are interest rates? Should we just park it in cash? Should we do something different?
00:19:49:02-00:20:04:17
Scott
There's a level of engagement that the unit structure enables the advisors to have with their clients and really focus on positioning the assets appropriately for each environment that we're in.
00:20:04:19-00:20:29:07
Ryan
That's a great overview of, you know, some of the differences and sort of advantages of that unit structure. It's amazing that, you know, First Trust has become a leader in that space, and it's been around for a long time. And there's really, you know, the competitor; the list of competitors is not quite as long as maybe I would expect it to be given some of the success that we've had in the unit space.
00:20:29:09-00:20:48:12
Ryan
Okay, Scott, I have made it a habit of asking some of the guests on the podcast to excuse me for reading recommended actions. I'm always looking for, you know, ideas of books to read and thinking about, you know, the Scott Friske reading list. Are there any books that you're reading or have recently read that you would recommend?
00:20:48:14-00:21:10:16
Scott
Three books come to mind. One of them is a book called The Leadership Bookshelf, and this is a book that highlights 50 books that other leaders have read and recommended. And so if you're looking at one of the things that I think is really hard, especially for younger people who haven't lived through history as much, history is what I read.
00:21:10:18-00:21:30:17
Scott
That book was for me a great guide to what other leaders do, and these are generals, admirals, and navy. They're public figures. Their people have been successful, who are the author of this book, interviews and interviews. The person who recommended the book and why they recommended it He gives an overview of the author and then gives a brief overview of the book.
00:21:30:17-00:21:52:02
Scott
And so, that was a great guide. Then the other two are Ego is the Enemy by Ryan Holiday, and it is just such a great book because we all have an ego and we ought to discipline it daily. Yeah, and it's a great guide. I mean, he's kind of stoic; he's written a number of books now. He lives near Austin, Texas, where I live, so I'm a big fan of his and his writing.
00:21:52:02-00:22:20:08
Scott
And then the third one is the hard thing about hard things, and that's written by Ben Horowitz of Andreessen Horowitz, and it's about how hard it is to build a business. And he tells some kind of war stories about what it was like when he was kind of coming up through the ranks as a CEO and as a founder, how he cut his teeth, and a lot of really hard lessons he learned about how to deal with people of all kinds of different circumstances.
00:22:20:08-00:22:27:16
Scott
It's just a really good book that kind of gives you in-your-face exposure to how hard it is to start, run, and succeed in business.
00:22:27:18-00:22:50:19
Ryan
That's fantastic. Okay. My final question is: as you think about some of the trends that are happening in our industry, we look at the economy. You know, First Trust's economic team thinks there is likely to be a recession coming. There's a lot—I don't know—a lot of reasons why people look at the landscape, and they're negative and they're kind of a little pessimistic.
00:22:50:21-00:23:03:13
Ryan
So my question for you is, What are you optimistic about? I mean, you look around at the world around you. I think it's important to have things that you're optimistic about. So I'm curious, Scott, what are you optimistic about?
00:23:03:14-00:23:28:09
Scott
That's a good question. I'm not an economist. I'm not a marketer. But I think living in America, where we have freedom—we have religious freedom, we have political freedom, we have freedom of speech—we have all sorts of freedoms here combined with the American spirit—the hard work and the work ethic that you see so many people apply every single day.
00:23:28:09-00:23:49:11
Scott
And the companies on the venture side that we see that we get looks at to invest in, you know, early stages and the amount of innovation that's happening in our country, partly because of the intellectual property rights we have here. And if you build it, no one's going to take it from you, like it exists in some other countries.
00:23:49:11-00:24:26:10
Scott
But I'm just generally an optimistic person. And so I look at difficulty as an opportunity. So if we're going to go into an economic headwind, financial services is going to really lean on the service aspect, and who's going to be there for those that need the most help? And from a kind of business perspective, I think we're not inviting difficulty, but when it comes, we are eager to be the first call for our clients and to be there to support them when it gets toughest.
00:24:26:12-00:24:50:02
Ryan
Great answer, Scott. Thank you so much for coming on the podcast. We'll have to do this again some time down the road, but I really appreciate the work your team does as well. And I appreciate all of you. Thanks for joining us on the ROI podcast. Have a great day.
