EarlyBird May Family Finance Webinar with Evan List

For May's Family Finance Webinar, Jordan Wexler interviewed Evan List who is an advisor at EarlyBird and Vice President at AllianceBernstein, a renowned global wealth management firm with over 15 years of experience in financial planning and wealth optimization for families.

In this webinar, we take a comprehensive look into the intricacies of EarlyBird portfolios, learn about our portfolio design principles, how to select the right portfolio for your family’s needs and dive into why EarlyBird selected the ETFs in our portfolios.

We cover the following topics:

• Building an investment portfolio 101 - How should parents think about this process and how did EarlyBird approach the construction of our portfolios
• What are the advantages of ETF's and why did EarlyBird choose BlackRock iShare ETFs
• What does SPIC insurance mean
• What are the 5 EarlyBird portfolios and a breakdown of the holdings and % allocation
• Wrap up with the power of long term investing

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Jordan Wexler: Awesome. Welcome everybody to the fourth EarlyBird Family Finance Webinar. As many of you know, we do these once a month for 30 minutes in which we bring in an expert in various fields to have a deep dive conversation, about all things, finance and really creating a space that we can learn and have a really great conversation. And so today we are extremely excited to have Evan List be our guest. Evan was actually one of the first people that I ever spoke to about EarlyBird from a financial standpoint over three and a half years ago now, and he has been amazing advisor for EarlyBird and is a very accomplished financial advisor himself and so we're thrilled to have him. Thank you so much for taking time, Evan, out of your day to connect with us and discuss the EarlyBird portfolios.

Evan List: Happy to do it. It's nice to see everybody and to talk about the thing that we all love to talk about which is helping our kids build their nest.

Jordan Wexler: Yes! So why don't we kick it off with Evan – give a little bit of background on yourself as a financial advisor. What is AllianceBernstein? What do you do? Give a little background.

Evan List: Yeah, and I promise to keep it short and sweet because today is definitely not about me. It's about answering questions for all of you guys. But as Jordan mentioned, I'm an advisor at Bernstein Private Wealth. I've been here now going on 16 years, which is kind of hard to believe, but we are a fiduciary wealth management company. So that just means that we don't outsource any of the money management responsibilities. We partner with some of the wealthiest family offices around the globe. As a firm, we manage roughly $800 billion in assets from stocks, bonds, hedge funds, private equity, private credits, but the key thing is leading with planning, leading with education leading with values and understanding what makes each family tick and what their goals and objectives are. All of those lessons that we apply here at Bernstein every day are things that we think are relevant to everyone on this call which is: planning and education are key to having a successful investment strategy. That is what we built into the investment options that you see today on the EarlyBird app.

Jordan Wexler: Awesome. Thank you, Evan. So as Evan just alluded to, actually, he was one of the original advisors around how we built our five portfolio. So as everybody knows, on EarlyBird, you on board within a couple minutes, you answer questions and we recommend a portfolio. So we thought it would be great to begin with asking Evan: When we started to think about these, what were some of the key factors that you considered when instructing a portfolio like this?

Evan List: Yeah, I think it all comes down to the philosophy that every single investor is unique, has their own unique set of circumstances, risk tolerance, their backgrounds, their goals, their ability to save and their own experiences with investing. Some folks come to EarlyBird with mountains of experience, having done it themselves for a long time, while many others have never invested a dollar into public markets so understanding that was our first challenge. This is a very different proposition than what I do on a day-to-day basis, which is managing money for families that have hundreds of millions of dollars, right? A very different conversation when you're there, than when you're starting from scratch. We wanted to build enough variety in the portfolios that we could address every single one of those different risk tolerance and objectives, while still making it accessible and low cost so that everyone could start with an even playing field.

Jordan Wexler: Awesome and so that, of course, took us to the world of ETF's. Do you mind quickly giving us some insight on why we chose ETFs and what they are?

Evan List: Again we're trying to find a solution that was broad enough to be accessible to everyone and applicable to everyone while still being high quality. So, Exchange Traded Funds or ETFs have actually evolved a lot over the last 10 or 15 years since I've been doing this at Bernstein. ETFs have really replaced what we used to call 'mutual funds'. Mutual funds still exist, those are pooled vehicles, but ETF takes it to that next level of efficiency because they are available intraday, they trade on an exchange, like the name indicates, so you can buy in or sell out of an ETF at any moment.

They're priced right at that second that you want to get access to that investment and they're typically very low cost. There has been a race to the bottom on what those expense ratios are and the iShares product by BlackRock – they happen to be the largest and thus the lowest cost for many of the asset classes that we were trying to use. So it was a natural fit to go to the iShares by Blackrock ETFs. It allowed us to get the right building blocks in place to construct these acid allocations. The portfolios are going to evolve over time, but for now it's the right balance to achieve what we were trying to do, which makes it applicable to everybody.

Jordan Wexler: Just really quickly, you talk about cost. As just a recall investor, what does that mean? Is there a fee associated every time I buy or sell? How should we be thinking about that?

Evan List: There's no such thing as a free lunch, right? I think we've all heard that before. If you yourself, some of you might have investments with a brokerage firm or with Bernstein, I don't know. There is a cost of getting that professional advice, and then another cost at a lot of these places for actually implementing that advice through purchasing and owning these different investment strategies.

At Bernstein we don't have multiple layers because we are the manager. Similarly, with EarlyBird, we wanted to make it very simple and we wanted to make it very cost-effective, so these ETFs – they do have a cost but in their cases they are very, very small. As close to zero as you can get whilst still – when we talk about basis points, that is a 0.01% that would be one basis point. These ETFs that we've chosen are all less than 15 basis points each so you add them together and the cost is very, very de minimis.

Jordan Wexler: Awesome. And that cost actually goes to Blackrock, right?

Evan List: Yeah, it's for them to construct the portfolio to buy and sell the different components to build what is an index tracking service.

Jordan Wexler: Awesome. Lastly, on this slide that I think is important for us to cover is : How should we be thinking about safety security and with the unknowns in today's crazy macroeconomic climate? What is SIPC, and what does that really mean for us as investors?

Evan List: It's a great question. I didn't really think too much about it for a long time while I was at Bernstein, we kind of just take for granted that our assets are secure, but this March and April as we've gone through this regional banking crisis, I think it's brought to the forefront that we need to be thinking about where our assets are held as much as what they're held in. What are we invested in? So you've probably heard a lot about FDIC insurance. That is the federal insurance on cash deposits at banks. That is, up until this period, was a $250,000 insurance making sure that if you had cash on deposit at a bank, that was yours. No matter what happened to the bank, you were insured for up to that amount.

It's a question to see how that changes going forward, but let's just assume that that's the FDIC insurance limit – $250,000. That's all well and good but that didn't really have coverage over investment accounts. SIPC is another layer of protection, like an insurance policy, that protects investors from fraudulent activity. For us, we carry upwards of $20 million of insurance coverage – FIPC insurance coverage – on every account just to make sure that God forbid there's some sort of fraudulent trading activity that every investor is covered and can reclaim their losses.

Jordan Wexler: Awesome. So a very important piece of, of course, anytime you're investing on any platform, making sure that they have SIPC coverage and making sure that you really understand that as well as FDIC, which is with your bank.

Evan List: And just to make sure we're being very clear. SIPC, it's insurance on fraudulent activity on the account. What it is not, is a guarantee or a backstop to investment losses. When you invest in stocks and bonds, there's going to be volatility. You can lose money, right? That's what we're doing here. We're hoping that we're investing in things that will grow over time, but SIPC insurance is not covering you from investment losses, just from fraud.

Jordan Wexler: Yes, very important. Cool. So let's dive into our portfolios. As most of you know, if you have EarlyBird accounts, we have opted to create five fixed, managed portfolios, and so we are going to go through each one, but I think starting at a higher level, with the aggressive portfolio. Evan, it would be great to hear how we thought about these different buckets of allocation, because as you can see, there's four different core holdings in this portfolio. Here is the actual percentage distribution within the total portfolio and discuss a little bit of these different buckets and how we structure them.

Evan List: Yeah, absolutely. So this was one of our first big conversations as we were sitting down all of us together to strategize about what these portfolios should look like. My biggest lesson that I was hoping to educate our earliest, our youngest investors on is that the world is a very complex place. We live in a global economy as many of you know. You buy products online and they come from all over the place. Similarly, there are really good companies all over the globe and so the first key, when we think about investing in a stock portfolio, which for the aggressive investors, for those of our youngest investors who have a long-time horizon – the recommendation is probably to be very close to 100% invested in stocks because that's our engine for growth over time.

There's more volatility but if you have a long-time horizon, 15-18+ years like some of our youngest investors, you have time to heal the wounds and so you want to have a stock portfolio. But this is not 1960. The world is much more complex and so we don't just want to own the largest US coverage. We want to be invested in really good companies across the world.

So today, only about 40% of global market cap is existing in the US, but we do live in the US. We pay taxes in the US and most of us will go to college in the US. So we wanted to tilt the geographic weighting to still be biased to owning more US than non-US stocks, but with an understanding that many great companies don't fly their flag here in the US. Step one was geography. We wanted to have 60% of our stocks to be US and 40% to be outside of the US, and that outside the US component is broken down by what we call 'emerging markets'. Those are countries where companies – they're going really, really fast. There's a ton of volatility. There's regulatory questions. We don't know where they're going to go, but over time, those companies and countries are growing much faster than we can here in the US because we're a very big economy, very developed. We want to have some exposure to emerging markets but not too much.

So we have 10% in emerging markets, 30% in developed non-US companies and the other 60% in US and then, like I said, we don't just want to own the largest companies in the world or in the US, we wanted to have a sliver, in this case about 9% exposed to smaller companies, specifically here in the United States. Those tend to grow faster than the larger companies and so having that fuel in the portfolio, should help us grow over time. And the biggest keyword here and you've all heard it, I'm sure a thousand times: diversification. By owning companies of different sizes and different geographies, we actually can smooth the ride and experience better return. That's the efficient frontier that we want. Smoother and better from a return standpoint and so, that's how we really built the stock component. And then, I don't want to belabor the other portfolios too much. We can go through each one, but just think about it as a spectrum. At the most aggressive. It's 100% growth. 100% stocks.

As you start to move to adding more moderation to that growth, you see we layer in some bonds into the mix. In this case because these are taxable portfolios, we chose to use a national municipal bond strategy. Now, municipal bonds for those of you who don't know those are bonds issued by municipalities to build things like new sports facilities or new convention centers, new Metro facilities. Those are issued by one of 4,000 units of municipal government in the United States and the benefit to us is that we get tax exemption for the income that we receive from those municipalities. So that's why it's tax efficient to use municipal bonds. And as you see, we start to move to be more conservative. We start to bring in the volatility. We also lower the expected rate of return. So it's a smoother ride but it's also a less return juiced ride. But we move all the way to the right where we will have 100% of your money invested in a bond strategy.

Jordan Wexler: Amazing. So As you all can see, five portfolios, that one gets recommended to you. Before we get into the recommendation engine and talking about how families should be thinking about this because there's a unique component there, I thought it would be cool to quickly open up one of these. As you can see here, we have the iShare S&P 500. This is their website. So highly recommend you to, of course, go in here. Take a look for yourself.  Generally, these websites are really helpful. They have some interesting high level concept exposure to largest established US companies, they have different facts, they have different return rates over a 1 year, 3 year, 5 year, 10 year period, which is always really important to take a look at, but what I wanted to click into was actually, their holdings. So maybe really quickly. Evan, you could talk a little bit about what we're looking at here. This is what an ETF is, a bundle of some of these top companies.

Evan List: Yes, so the S&P500 iShares ETF that gives us exposure to the 500 largest US companies within the S&P 500 index. This ETF is built to track that index with very little variation, if any. What you see here is that the top 10 holdings or top 15 holdings – they're all the companies that you and I interact with on a daily basis. The bigger ones that get bigger, they float to the top of these indexes and you get that passive exposure. So this is not meant to make a bet on any one or two companies, this is tracking the entire US economy pretty much.

Jordan Wexler: Amazing. And as you can see here, the weight is the percentage of holding of Apple. So this IVV, the core S&P 500 ETF has about 7.5% of Apple stock, about 7% is of Microsoft stock. So, as Evan said, the most important thing: diversification, and this is by far the best way to do it to get that exposure to all of the largest and greatest companies that the a world really has. I thought it would be interesting to – the last kind of thing before we open it up to any questions would be:

How do you talk to families that are opening custodial investment accounts with the knowledge that this is for my child. My child is two years old, three years old. I'm 45 years old. I come from a very conservative family. My money is very just like – I like to make sure it's safe and secure but again the strategy shifts a little bit because this is not specifically for me, this is really for my child. And so the time horizon concept completely changes. How do you think about that? What recommendations do you have for our EarlyBird users?

Evan List: It's a good question and I'm a father of three myself. So I have kids who span the gamut from young to older.

How to engage with your kids to begin those conversations is the most important. Those will evolve over time to become more helpful in actual investing. I think we are doing as much as we can within EarlyBird to provide you with the tools to have those conversations. And I think that this portfolio, this custodial account is a perfect vehicle to give you that excuse to have a conversation about money, about saving, about investing, all those things. Certainly I wouldn't get too into the weeds with a two year old or even an eight year old about ETFs versus other things, versus one portfolio or the other. You have to find the sweet spot for you and your family – that risk and return trade off.

I think that what we illustrated today is, if you are more aggressive in your investment strategy over time, your money will grow higher than these other strategies. It is not a debate. I can show you charts over 10, 15, 20+ year time horizons. The longer time you go out, the more success you see for stocks, but that does mean that you have to live through one-year periods where the market could be down 20, 30 or more percent. So you have to take the risk with the return. There's no free lunch. And so for some families who understand fully that they have a long time horizon and that they should be invested maybe more aggressively, but it just doesn't allow them to sleep well at night seeing their kids money go up and down so much, adding some level of bond exposure by going down to one of these less aggressive portfolio options, even adding 30% exposure to bonds or 50% exposure to bonds. It's not going to change the trajectory that much on a return, a percent or two on an annualized basis, but it can significantly reduce the risk.

So you've got to fine-tune it. I would say that the nice thing here is that you don't have to just set it and forget it for two decades. You can make adjustments along the way. As you add funds into your EarlyBird account, the beauty there is that it's what's called a dollar cost averaging. So let's say you have it on a $500 a month contribution, you're adding that $500 a month into good months, bad months, flat months, volatile months. If you do that every single month, regardless of what's happening in the economy or the market, over time you're going to look back and the portfolio will have grown tremendously and you won't have to have worried too much about market timing, which is a fool's errand.

Jordan Wexler: Amazing. That's where I was going to end it too. Dollar cost averaging – everyone's doing it on EarlyBird. Whatever you are capable of putting away on a monthly basis, consistency is the name of the game. Making sure that you are putting that away that same amount month over month so that you are not ever trying to time the market because I believe that we can attest to – nobody beats the market and predictions and timing like that. Dollar cost averaging is the best way to go. Thank you, Evan, so much for the comprehensive overview.

Evan List: Anytime.

Jordan Wexler: We have a couple more minutes. If there's anybody in the chat that wants to ask any questions, we would love to be able to open up. Freddy, I believe. Please, what's your question?

Freddy Lozano: Hi thanks. I just had a quick question. This probably more for EarlyBird and just as far as like, assessing risk from an operating perspective. This concept, I love it, I guess we're all early adopters in not going through a 529 SCP plan through Fidelity or something, right? We'll have more engagement in the market through this for our children over the long term. I haven't – this probably on me, I haven't done my due diligence –and I don't want to be a negative, Debbie Downer here, but what would happen with the custodial side of things if EarlyBird were to go under?

Jordan Wexler: Absolutely, really important question and we've made sure that we have plans in place. If EarlyBird was to go under, there are multiple options that we would provide all of our users. The first one is to facilitate the process to ACAT your account, over to another brokerage service that you might use. So we would facilitate the help of opening up that custodial investment account over at another brokers like, Fidelity or Schwab, and you can simply ACAT these holdings in the account value over, or if you choose that you want to just liquidate those funds, of course, we will help to liquidate the funds and move those back into your connected funding source. So those are really the two primary ways that we would help if the worst case scenario was to happen and we were to go under.

Evan List: And Freddie, just to make clear – these investments because they are publicly traded ETFs through iShares,  your children who are technically the owners of these, you're their custodians. You've given them this money, so actually, you can't take it back into your personal name without their permission. But it is held in your name, so the shares are actually custody, by our custodian but they're not owned by EarlyBird. You own shares of these ETFs, you can choose to take them wherever you want. So that should give you some peace of mind that you're not invested in EarlyBird. Early Bird is the filter and the app, and the ecosystem through which you are getting access to own these investments but you own them yourself.

Freddy Lozano: Understood, thank you.

Jordan Wexler: The last thing I'll say which is part that I don't think we fully covered, but that is potentially helpful for everybody, is that when you onboard to EarlyBird, you answer about 20 different questions from your age, your child's age, your risk tolerance, your annual household income, your employment, status, all these different pieces of information, we take into account and we have an algorithm on the backend that then recommends which portfolio we believe fits your current circumstance the best. So through a point system, that's how and why you see "We recommend the moderately aggressive portfolio" or "We recommend the aggressive portfolio". Ultimately though this decision is your discretion and it's up to you to be able to decide which portfolio you settle on.

As Evan mentioned, this is something that can evolve and change over time so you can go into the app today. You can actually go into your child's portfolio, you can look at the other portfolios that are available and it's up to you to really figure out and set – and we recommend looking on an annual basis. If anything has changed, if your annual household income has changed. Of course, your kid got older, a lot of different variables do change over time and so it's important to check this at least once a year to make sure you're still in the portfolio that fits you best.

Awesome. Well, we are at time. Thank you all so much for joining our May monthly webinar. Evan, we deeply appreciate your time and we look forward to hopefully seeing you all next month, which we will let you know the topic shortly. Thank you, everyone. Bye.

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