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“I was always challenged to grow an analytics business that was confronted with the demise of active managers as their customer base. So in casting about looking for growth opportunities, I routinely came upon the US wealth segment as something that was undergoing significant demographic and technological change. And as we all know, changes in markets always equal opportunity.”
–Jonathan Hudacko, Co-Founder, Just Invest
Just Invest is a technology company that uses large-scale data analysis, quantitative algorithms and risk modeling to deliver scalable portfolio and tax management, greater client engagement and best in class economics for both advisors and investors.
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This episode of Wealth Management Today is brought to you by Ezra Group Consulting. If your firm is evaluating new technology or looking to improve your current wealth platform, you need to contact Ezra Group. Don’t spend another day using technology that doesn’t offer an elegant user experience. Your advisors and clients deserve better and you can deliver it to them with the help of Ezra Group.
- Apex Clearing [09:58]
- Aperio Group [10:58]
- BlackRock [06:15]
- Envestnet [12:53]
- DriveWealth [09:57]
- MSCI [04:55]
- Parametric [10:56]
- Thomson Reuters [15:08]
Topics Covered in this Episode
- The Genesis Story
- Why Direct Indexing?
- Just Invest’s Tech Stack
- Holistic Portfolio Optimization
- Tax Management vs Tax Loss Harvesting
- Are You a TAMP?
- Startup Experience
- ESG 2.0
- #ItzOnWealthTech Ep. 60: Technology is the Front Door for Advisors to Work with Custodians with Lauren Wilkinson
- #ItzOnWealthTech Ep. 53: Can Sustainable UMAs Help Save the World?
- 50 Portfolio Management Software Solutions For Advisors Can’t All Survive
Complete Episode Transcript
Craig: When Jonathan Hudacko and Vijay Rao launched Just Invest in 2016, they thought it would take at least a decade for zero commissions and direct indexing to become mainstream while they both have in about five years, sooner than expected, their startup was well positioned to take advantage of these accelerating trends. I spoke to Jonathan and Vijay about how personalized indexing is really the future of investing, how they’re rebalance as a service. We’ll take the market by storm and a whole lot more on this episode of the WMToday podcast
Welcome everyone to the wonderful world of wealthtech. This is the Wealth Management Today podcast, and I’m your host Craig Iskowitz. And I run a consulting firm called Ezra Group. We are experts in everything related to wealth tech. We deliver our growth oriented solutions to banks, broker dealers, asset managers, and technology providers through our advice and research. And on this podcast, I speak with some of the smartest people in the industry who are on the leading edge of technology and innovation.
So I’ve known the guys that Just Invest for a while. I met Jonathan at a conference, I believe a family office technology conference a few years back, and I was impressed with what he said on stage. He was on a panel talking a lot about ESG, and that’s a big part of the value add of Just Invest. ESG appears to be an overlay on top of their rebalancing, their outsourced rebalancing technology, and they’re direct indexing technology and tax management. So a lot of good things they’ve got going for them. I’ve known Vijay for a while, who is their CIO, and I’ve recently met their Chief Revenue Officer Rosanna Leroe-Munoz. She also is on this podcast, but she doesn’t introduce herself, so I apologize. It’s my fault as the host, a good host should always make sure all his guests introduce themselves. So I’m letting you know that she speaks towards the end. A lot of good content, a lot of the conversation back and forth between everyone and myself. So here we go.
On this episode of the wealth management today podcast, I’m happy to announce we have two guests, Jonathan Hudacko, co-founder and CEO of Just Invest and Vijay Rao co-founder, and Chief Investment Officer of Just Invest. Hey guys.
Jonathan: Hello, this is Jonathan.
Vijay: Hey Craig.
Craig: So thanks for being on the program, guys. I really appreciate it. I know that we were spending some time coordinating with all the things going on in the outside world. So I’m glad we’re all here. Can you give us the 30-second elevator pitch for Just Invest?
Jonathan: Absolutely happy to do that. So Just Invest is technology driven asset management, where a team of professionals who’ve been in the technology side of institutional investments for the bulk of our careers saw tremendous amount of change in the wealth management side and decided to jump from institutional to retail, and we’re really innovating in how the end investor can have greater control via their advisor over their investment.
The Genesis Story
Craig: That’s a good overview. I know you’ve got a long history in the industry, what got you started and why did you start Just Invest?
Jonathan: Okay. I will give you the genesis story from my perspective and let Vijay elaborate. Every team member brings their own sort of rationale and reason, but I can ultimately say thank you to Henry Fernandez, CEO of MSCI for the creation of Just Invest, because when I worked at MSCI I had the benefit of participating in annual strategy meetings and was always challenged with how can you grow an analytics business that was confronted with essentially the demise of active management as their customer base. And so in casting about looking for growth opportunities, routinely came upon the US wealth segment as something that was undergoing significant demographic change, technological change.
And as we all know, changes in markets always equal opportunity. So after pitching some of those opportunities internally, ultimately decided that it would make most sense to go after them as an independent startup. So that’s really the genesis from a business perspective. We certainly had the benefit also from my MSCI experience of working with a lot of large institutional investors who were really at the vanguard of integrating ESG and customization, as well as bringing passive investments in-house, all thematics that you’ll see in the Just Invest product.
Vijay: From my side, I saw a lot of the same trends. I also worked at MSCI, but I think I got a different view of some of those trends when I worked at what is now BlackRock. At that time, it was actually BGI where I worked on the fixed income desk there, and I saw how institutional investors invest. And I really was able to see how institutional investing I should say is quite different from retail investing. Institutional investors have ESG considerations in a large number of their portfolios, if not all of their portfolios. Their portfolios are optimized towards benchmarks, and are tracked towards benchmarks. They have very specific investment policy statements and certain mandates that they’re looking to target. And when you look at the retail market, it’s very model driven, product driven. A lot of those themes just don’t exist at all in the institutional space. So when Jonathan and I got together and we started talking about the opportunity in US wealth, combined with the advances in technology and cloud computing and data models, ESG data risk models, etc, we kind of saw a really good nexus where we have the skills and the background and the knowledge to put this all together and deliver a more interesting product to financial advisors and ultimately their clients.
Why Direct Indexing?
Craig: So why direct indexing? What was it about that the market that told you now is the time, because direct indexing has been around for a while, so why now for direct indexing?
Jonathan: Well, it’s interesting that you ask that question specifically around direct indexing. When we started, that was still not terminology that was broadly adopted. When we launched, we went out with “personalized indexing” as the moniker that we were trying to establish. We capitulated and accepted, direct indexing as it became obvious that that wave was coming through the industry. But I think regardless of the name, the sort of ingredient mix, and why now is very clear. So there’s really two sides of that coin. One is from, as Vijay alluded to on the technology side we have far more compute power at a reasonable cost and cloud computing in particular, makes it much more available. So it’s sort of this democratization of high power technology really allows for rules based portfolio management.
And if you distill rules-based down sort of its most core piece, you get to take an index and rebalance towards it, and you can layer in additional data driven rules. So to me, that’s a core of direct indexing. The other side of the coin was what’s been happening in the custodial/brokerage land. When we sat down in 2016 to start the business, we had some theses about what would happen over the next five, six years. And those have come far quicker than we anticipated, which has been a positive and I think why you’re now suddenly seeing direct indexing really come to the forefront of people’s thinking and discussions. And two of those are the commissions going, what we didn’t anticipate them going to zero until I think 2026 in our original business plan, but we did anticipate them kind of stepping down. So we saw that from 12 to 4.95, that going to zero last year was certainly ahead of schedule. And then the other one is fractional shares. Obviously some players who are sort of at the front edge of technology had already been offering fractional shares, folks like DriveWealth and Apex. But to see it now appearing at the major custodial platforms really opens up the opportunity set I think for folks who want to pursue this kind of strategy.
Craig: We’ve seen that too, especially the fractional shares where in the past it was a major differentiator and now almost everyone has it. So it’s something that we’re seeing as well. So looking at some of the competitors out there, a lot of firms are cropping up with direct indexing and offering it in different ways. What makes Just Invest’s way of delivering direct indexing different than your competitors?
Jonathan: Sure. I’ll touch on it and I’ll let Vijay also add his thoughts, but I’d like to say, first of all, there’s really two big names in the space who we can all, I think owe our gratitude for pioneering what used to be called custom SMAs. Parametric and Aperio Group, very well known in the space and they do incredibly great work, so we’re very respectful of them. And I like to tell folks they’re really good portfolio managers. They do a good job of managing their client’s portfolios. I think where we differentiate is that we put technology first. So we think of ourselves as technologists who do portfolio management and it’s a subtle, but I think it’s a very pivotal and important difference because when we apply technology as the leading edge of what we’re doing, that means that we can do a lot of things differently at different scale, at different frequencies and at different sizes of account that the incumbent providers have operated at for many years.
So that’s really the core piece of differentiation where we’re basically providing far more innovation for the advisor to have control, transparency and customization over their clients’ accounts. That’s technology driven, so we give them a very rich user interface to direct us and to direct the accounts. And then on the backend it’s all very modern cloud architecture, high scalability, virtualized systems, that lets us scale up and manage many more accounts and many smaller accounts than people have historically.
Vijay: From my side, when I look at the competitive landscape the term “direct indexing” is still a little bit nebulous and a little bit undefined. As Jonathan mentioned we see the leading lights in direct indexing as being Parametric and Aperio, and we see them as having blazed the trail. There are others out there that had a very different model, which they also call direct indexing. I’m thinking about folks like Motif, for example where you have a basket of stocks that you can buy and sell and rebalance, at will. Envestnet as well has a very different model of direct indexing.
I think the jury’s still out. I mean, a lot of these firms have been successful, some have not, on what exactly direct indexing is and what the ultimate application to the client is. Certainly, we believe that delivering an index based exposure with customizations, whether that customization is around ESG values or preferences, or whether it’s around tax preferences, managing around a concentrated position, tax los- harvesting, multi account tax optimization. All of those things I think are in play and out for the jury to decide, how much interest areas, for advisors and their clients. Certainly, leveraging the technology backbone that we have, we believe that delivering a lot of those solutions, those more complex solutions around ESG and tax management, not just tax loss harvesting but actual tax management, whether that’s a concentrated position, whether that’s multi account management, etc, is important for the advisor. At least the advisors that we’re speaking to.
Just Invest’s Tech Stack
Craig: Now, can you talk a little bit more about the technology? You’re talking about how everything’s cloud based now and you mentioned how it’s scalable. Can you go a little bit further without getting too deep in the tech space, how you built out your backend? What’s the architecture, what’s underlying that?
Jonathan: Yeah. Let me start with the team just briefly, because we’ve been very lucky to have assembled a team with a lot of experience. If you look back into our career, so Alan Cummings, who’s not on the call, but is our third co-founder, joined us from Aperio Group and was pivotal in building their first operating platform. So he has a tremendous amount of experience in watching a firm do both custom SMAs or direct indexing if you will, at scale and go through what I think we can all fairly term hypergrowth, Kiran Lagisetty who’s our CTO, worked at Thompson Reuters, worked at MSCI with myself and he then went on to a startup in the big data space. So these guys bring a ton of experience around high volume portfolio processing, initially in the institutional space and in the retail space at Aperio. And then we sat down and we said, great, with our practical experience of managing portfolios, and we know many of the issues when you’re running portfolios, particularly with customizations, around where these things can basically trap solutions, algorithms, in corner cases, you need to be prepared to solve for those. Then take what everybody loves to build on, we use Amazon, it doesn’t mean that Google or Azure, or others aren’t good solutions either. We just happened to like the tool set that was available on Amazon. So we’ve built everything there. We’ve implemented a number of internally built algorithms for tax loss harvesting as well as some commercial risk models and optimizers to go along side by side. And all of that’s packaged into a fairly sophisticated on demand virtualization tool kit. So as we ramp up in the morning to run all of our client accounts, we fire up nodes, we go through all the accounts, we get results back, and then we can shut that down to basically just to sort of a heartbeat set of servers that are available for on demand ad hoc analysis. So we can control our costs, we can share that cost control with our clients. But we can also ramp up in a second’s time to be able to process high demand, or if there’s a lot of volatility in the market.
Tax Management vs Tax Loss Harvesting
Craig: That’s excellent. I think a lot of people don’t take the time to learn about their vendor’s backend and the architecture to understand whether they can really scale because as you’re growing, you don’t want to be caught in these scalability issues where you’re adding too many clients and the big volatility day hits and then everything’s down. So I always recommend my clients do that level of due diligence to find out the technology on the back end and how it was built and who built it, right? Who were the players and where they learned their craft. So let’s get back to a tax management. Vijay mentioned something, the difference between tax loss harvesting and tax management. This is something I bring up a lot, especially when talking about portfolio rebalancing, where people throw around the terms, tax optimization, tax management, and tax awareness and tax loss harvesting, they sort of use them interchangeably. How do you define the difference between tax management and tax harvesting?
Vijay: For me there’s multiple different in the tax space that advisors and their clients really need to be aware of. Tax loss harvesting in my mind is purely selling securities, which, which may be down, harvesting that loss and using it as a tax credit in the future, either against the gains that you may realize in that account, or gains that you may realize elsewhere with other investments. However, tax loss harvesting it’s been in the industry for a while. I think there are some firms that do a great job of it, and there’s a lot of firms still coming up the learning curve, but that’s kind of only one piece of the pie, especially when you look at your typical advisor and their typical clients. Many of those clients have more than one account, they have tax deferred accounts like an IRA, they have tax free accounts, maybe like a Roth IRA, and they will also have a taxable account.
And when you have a client that has multiple accounts, you really want to be thinking across those multiple accounts and trying to minimize things like the tax drag, for example. So your muni bonds, for example, should go in your taxable account, your high dividend paying stocks, maybe they go in the IRA, your high growth stocks might go in the Roth IRA. And really the idea around tax management or tax location as some people call it, is really, minimizing the overall cost to the client. I think the industry as a whole has done a really good job, in terms of reducing fees to clients. The fee compression has been huge in the past, 5 to 7 to 10 years. But we haven’t really seen much improvement in the tax management space where we see, people really taking advantage of those tax advantage vehicles that many of us are entitled to and have access to, to minimize the overall fees and taxes that come out of our investment return.
Holistic Portfolio Optimization
Craig: A lot of rebalancers have, well more advanced rebalancers have location optimization where they’ll place securities in the most optimal account based on certain algorithms and certain understanding of how different assets throw off cash. So you’ve got a product called Panorama. How does your holistic optimization differ from the way other firms might do it?
Jonathan: Yeah, Panorama is a multi account rebalancer, in many ways similar to some other products that are on the market, in many ways different. We do it as a service on a sub advisory basis and really, the unique value proposition with Panorama is that we’re not using a model that we’ve come up with. Really, we work with the advisor to implement their asset allocation models and the securities that they place in those asset allocation models. So if an advisor really likes a mutual fund or an ETF to use for emerging equities, or an advisor really likes a specific fixed income mutual fund, in the credit space or in the high yield space, whatever it may be, we can on an account by account basis, specify the model for each and every client, each and every household, I should say, and, make sure that as we’re rebalancing, we can rebalance tax efficiently amongst those multiple accounts to minimize the tax cost of that rebalance, and also minimize the tax drag that that portfolio, that household will realize, as they go through time. So really that’s the value proposition out there with Panorama.
Craig: Is there anything specific about the way you built Panorama as a rebalancer? Can it go and rebalance other types of portfolios or only limited to direct indexing portfolios?
Vijay: No, not at all. No, it’s not limited to direct indexing portfolios. You can have an equity direct index in there as one piece of the asset allocation. You could just as easily have a lineup of ETFs or mutual funds, or really any other publicly traded asset in there. It’s not limited to direct index SMA. We do think having a direct index SMA does enhance the tax benefit to most households. But you know, we’re not stuck on that. We certainly have a number of accounts that don’t have a direct index and we’re purely rebalancing tax efficiently amongst a number of mutual funds or ETFs. And some of those households, for example, would like to be in a direct index, but they’ve got low basis positions in there and so forth that they can’t reasonably get out of without paying a pretty penny in taxes. And that’s fine, that’s part of the process and part of the tax optimization that we deliver through Panorama.
Craig: You mentioned tax optimization, is it true optimization? So do you get to the level of looking at the clients’ 1040 and at that level of optimization, or what do you mean by that?
Vijay: Well, we work with the advisor to understand the client’s tax rates. We look at the cost basis of the positions in the account. We’re not looking at the client’s 1040s or their tax returns, for example.
Craig: Gotcha. So can you do things like transition sleeves, like a UMA where you’re bringing in holdings, you’re ACATing in securities from another account and then you’re selling them down over time to minimize the tax impact?
Vijay: Absolutely, absolutely. That’s one of the main use cases of why advisors get started with us and some advisors come to us for the majority of their books. So, an advisor wins a new client, for example, the client has money elsewhere and they kind of have a jumble of securities that the advisor doesn’t really know how to rationalize or really move towards, an index based exposure. We can take that list of securities and we can load them up in our system. And over time we can manage them and try and direct them towards an index like exposure while minimizing the cost of the tax cost of that transition.
Jonathan: Craig you’ll be familiar with the phrase “glide path” from the retirement industry, but we like to talk about a tax glide path, which is for many of our clients, as we receive their accounts and their positions, there are notable gains as Vijay points out. You know, you don’t want to blindly punch those out and realize the taxable event from the client. So we will map out for the advisor, a glide path that’s tax free at whatever level that the advisor and the client agree to. For some, they prefer to reduce their tracking error or their deviation from model at a faster pace and incur some tax costs. For others they want a zero tax cost to be paramount. So we let them have the flexibility of those parameters.
Craig: And are those done manually, or that’s all built into the system, you have automated tools that can set that up?
Jonathan: As I said when we start from a technology first perspective, so everything gets coded and automated.
Are You a TAMP?
Craig: Do you guys operate more like a TAMP? So it sounds like you’re rebalancing as a service or it’s outsourced rebalancing. That sounds more like a TAMP.
Jonathan: Well, it’s interesting that you mention that. We don’t really think of ourselves as a TAMP because we’re not making the selection. The model is left to the advisor, we’re here to serve the advisor and ultimately their end investor client. So we’re not in the business of manager selection and fund selection. We wholly leave that to the advisor, they show up and they say, Hey, Just Invest, here’s the model I have and that I use with my clients. I don’t want to be in the business of having to monitor and rebalance them on an ongoing basis, and I recognize that you guys have some tax aware technology that I don’t have. Can we implement my model with you? And the answer is a hundred percent yes. That’s our core model. So in that regard, I don’t think of us as a TAMP. I think of us as a rebalancing service,
Craig: I would think of you as a TAMP because just in the way of TAMPs have changed so much recently, and there’s many different ways to skin the cat, as they say. So while you’re not an old school TAMP, you’re definitely TAMP-like since people are outsourcing the trading and rebalancing to you, and since you can push the button. Once you can push the button, then in my mind, you’re some sort of TAMP. You may not be like an old school AssetMark kind of TAMP, where you’re handling everything, but you’re some kind of a TAMP.
Jonathan: Fair enough, I’ll accept the moniker.
Craig: It’s not a bad thing to be, right. You know, you’re some sort of sub advisory processing.
Craig: One thing I want to ask, if you don’t mind, I wanted to throw it over to Rosanna. Can you tell me a bit, because you have a lot of experience with startups in the space. And I asked this question before, I just wanted to get it on record. What attracted you to Just Invest because you had a really cushy job where you were before you worked at a couple different startups, all in this space and you’re very successful. And yet you left that cushy job to come over to Just Invest. What was it about the company that attracted you?
Rosanna: So thank you for the question, Craig. I think a lot of it comes back to team. So Just Invest is my fourth startup at this point and because you’re trying to get on the path of adoption, understand the market, a lot of that is shifted and shaped by your team, their insights and how well you execute and how clean that execution is. And I’ve actually known Jonathan and Vijay for a very long time, we’ve always had a relationship. I’ve called them through the years and they’re excellent human beings. But on top of that, I really respect the combination of the financial subject matter expertise and the technology. And so when I had an opportunity to come work with them, I absolutely jumped at it. I don’t think in the market right now it’s very common to see the level of subject matter expertise and the technology combined.
I also think that we’re doing something that has a really, really large addressable market and will really be a game changer, and that we’ve had an opportunity now to lead. When you look a lot of the statistics in terms of who’s in our space, how much money they’ve raised and what their actual client base looks like, and I included some of that information in our prep material there. I think the data just points to the fact that we are basically winning. And I think that we’re going to continue doing that as we are able to serve our RIA clients with a great custom experience that they can deliver to their clients and really, really, really clean execution and operational efficiencies. So team is the answer. And you know, it’s, it’s just really exciting how much we’ve been able to grow given where we are right now.
Craig: That’s a fantastic answer. I’m glad you put that out there. I liked hearing that other point of view. So let’s get back to Jonathan. Let me talk to you about the ESG portion of your sales pitch. So you are an outsourced rebalancing sub advisory. How does the ESG part fit in and why is it different? There’s lots of ESG options out there now, you’ve got ESG funds 40 act funds and ETFs and other providers. Why would I go to Just Invest for ESG?
Jonathan: You’d come to adjust, invest for ESG because you’d want it done the way you want it done. As opposed to the way somebody else thinks that should be done. You know, again, Craig, we’re really here at the service of others, so I have my view on what’s important in the ESG space. I’m sure Vijay has his view on it, but it’s not our duty to put our view into a client’s account and their portfolio. Our position is we want to hear from the client through the advisor, what’s most important to them? What issues did they want to address in that account? And then we will take the data sets and the information that we have available and we’ll propose to them a pathway forward. And if they agree with that, that’s what we’re going to execute. So we’re not falling on any side of offense and unfortunately ESG can get highly politicized. Again, it’s not what we’re trying to do. We’re trying to really say to a client, tell us what’s important to you. Here’s the breadth of depth and depth of information that we have available through the various data sets and algorithms. And here’s how we can address anything that you want to address. And that isn’t just in the account management itself, it also extends all the way through to proxy voting and raising proxy issues to companies.
Craig: So if I’m an advisor and I want to get involved in ESG, do you provide the screens and the recommendations or they’ve got to bring everything and you’ll implement it.
Jonathan: We have two models. We have a base set of ESG, both negative screens where companies that are involved in certain activities, or they have a certain level of revenue from an activity. So a classic one is tobacco. Does your client want to be involved in generating yield from tobacco sales or not? So we can screen those out. We have predefined ones that an advisor can take off the shelf. but they’re also welcome to sit down with us, go through the data dictionary that we have available and customize all of those for them. And that’s something that’s quite important increasingly for advisors because they want to differentiate their business relative to their competitors, their peers. So just taking off the shelf for many is okay, but for many where they’ve developed an in house ESG expertise, they prefer to really sit down and say, we want our ESG definitions as X, Y, and Z.
And we’re happy to do that. So we implement that into the, into the front end for them. The other side of ESG is also what’s called ESG 2.0, it’s not just negative screening, but it’s really starting to focus on best actors in a given industry or sector. Carbon emissions is probably a classic example there. So for a lot of clients, they initially start out with saying, I want fossil fuel free. I don’t want to own any oil companies. But when you start to dig into this issue and realize that a lot of these companies are on a rapid transition, I think BP made a huge announcement this week. In fact that they were just tripling or quadrupling their investments into clean energy. Do you want to be outside of that? Do you want to not be helping direct companies through shareholder activism? So some clients end up saying fossil fuels is not free, is not the path that would go, but I want to focus on lowering carbon emissions from the companies I own. Then we can look at a different data set and we can tailor that to them as well. And so then we’re choosing best actors across their portfolio and emphasizing that.
Craig: I like that ESG 2.0, I think that might be the title of our episode. Where do you get your data from your ESG datasets?
Jonathan: As you know, there’s lots of different NGO sources, et cetera. I will say our core commercial data set is MSCI. They are well-regarded and routinely win awards for the best institutional ESG data vendor. So as a base state, that’s our core platform or catalog that we start with.
Craig: Also, I like I was looking at your website and making a note here. I liked your term “hyper-personalized SMA” because SMAs are all personalized. That’s one of the value add of an SMA it’s a personalized mutual fund, but you’re taking it another step and a hyper personalized ESG SMA direct indexed product.
So I think that’s about all we have time for. I think I’ve hit all my questions. So guys, this was a group effort. I really appreciate your time Vijay, Rosanna, Jonathan and Emily, who didn’t get a chance to talk. But thanks for being on the program. I’m looking forward to seeing more big things from Just Invest. You guys changed the market for ESG and direct indexing.
Jonathan: Thank you very much, Craig.
Vijay: It was great, Craig. Thank you.