E190: $600 Billion Parametric CIO: Thomas Lee on Markets, Debt & Trust

Tom, I've been excited to chat.

Welcome to the How to Invest podcast.

Thank you.

Thank you for having me on, David.

So give me a sense for the scale at where Parametric is today. Scale of Parametric.
We are, by the numbers that asset managers are usually measured, we're a little over $600 billion in AUM. We have over 1,000 employees based in six offices in the U.S.
and four outside the U.S. We manage 220,000 accounts, so mostly separately managed accounts.
We also manage some ETFs and some traditional 40-act funds and some usage funds in Europe. So we have a, you know, we're a decent sized asset manager that exists inside of Morgan Stanley Investment Management.
So I mentioned we are about 600 billion. Morgan Stanley Investment Management is 1.6 trillion.
So we are roughly 37% of those assets. When we last chatted, I was excited to hear that you had worked at the Federal Reserve.
And my first question was, what is inflation and where do you think inflation stands at today? It's funny you ask that today, because as you may be aware, they released CPI this morning and it came in at 2.7%, which is an uptick from – that's year-over-year CPI. It came in at 2.7%, which I think is up over May.
May was 2.4%, but it was the expected number. Non-core, so if you eliminate food and energy, was, I believe, 2.9%.
The numbers in – if you look inside the numbers, you're seeing big jumps in things like audio-video. So it looks, at least the early speculation is that tariffs are starting to hit and it's coming through in the numbers.
CPI is the traditional, what you see on the evening news, reading the morning newspaper. That's the inflation gauge that the government produces that most people reference.
It's also the number that's baked into Social security payments and other types of contracts. So that's where you see CPI.
The number, and it's calculated by using a basket of goods that's fixed for two years. So it's not really robust or dynamic.
And it doesn't include third-party provided services. So for example, if your employer paid for your health insurance, it wouldn't be factored into CPI.
The number that the Fed focuses on, and they've done this for at least the last two decades, is PC, the personal consumption expenditure. That number is calculated through surveys of all goods and services consumed, and it's chain-linked, which means it's more robust.
And why that's important, David, is because the natural reaction for people if prices change significantly is they change their consumption pattern. So if all of a sudden beef becomes very expensive, people consume less of it, maybe consume more chicken or pork.
Or if gas becomes very expensive, people drive less. The PC number for that reason tends to reflect more, at least in the Fed's estimate, they looked at this for a long time, what real consumers are experiencing.
And so it's the number that they focus on, and it runs generally consistently below CPI. So those are the two kind of main gauges of inflation in the

economy. I know all this is mired with politics and public policy, but fundamentally, when you go outside, whether you're buying groceries or your rent or whatever, it feels like inflation is higher.
Why does it feel like inflation is higher than in the two percents? it depends on who you are and what you consume. I mean, everyone has, everyone's own inflation experience is based on their personal consumption pattern.
So do you rent an apartment or do you own a home with a fixed mortgage? That will affect how, you know, housing is one of the biggest contributors to inflation. Do you drive a vehicle that has, you know, has an electric engine in it or do you drive one that has a combustion engine in it? That could affect how you look at it.
What groceries do you purchase? Do you eat out a lot? Those are the things that are going to affect how you may view inflation. Do you take trips? Do you stay in hotels? That may affect how you view inflation versus somebody who doesn't do some of those things.
So it's a very personalized experience. I think what the government does is a gauge, which kind of measures, tries to give everyone a sense of where they are, but there's a distribution around that based on your personal consumption.
Inflation is very idiosyncratic to how you consume. Just to play devil's advocate, there's either this meme or this conspiracy theory, depending, I guess, how you frame it in the market, that the true, quote unquote, true inflation is not revealed to the public and that it's much higher.
A lot of people in crypto space believe this, but also some very educated people believe this. Is there incentive for the true inflation rate not to be disclosed the public? Is there an incentive? Well, clearly, I just mentioned that inflation is baked, CPI is baked into things like Social Security and other financial instruments, which the government pays.
So I guess you could argue that there's an incentive for the government to try to misrepresent inflation. The amount of coordination that would have to occur for that to happen and the amount of people who would have to be in on this, I mean, just to me doesn't seem realistic that the government could somehow do that.
What I think is possibly, you know, a little bit more realistic, and I think it's only at the margins, and I'm sure you've heard the story before, you used to buy maybe a pack of frozen corn that was 16 ounces, and now it's 16 ounces, but four ounces are vacant in it or something like that. Same bag, less contents in the bag.
So there's always been an argument, are people really shrinking the product, providing you with fewer goods for the same price? That's something that would be very difficult to measure. So I guess at the end of the day, I don't believe that the government, I think that it's easy to speculate about that, but it's not something that is likely or occurring.
There's too many smart people in the market who would figure that out if there was something fraudulent happening. And the reason it's so hard to coordinate is because the different Fed branches, individually calculated economists, individually calculated, as well as analysts and macro investors individually calculated.
So it's not only different people in different offices, it's also different constituents. Well, really, it's the Bureau of Labor who calculates the CPI, and I think it's the Bureau of Economic Analysis that calculates the PC.
Then you have a bunch of economists, as you point out, locally at district banks studying kind of what's going on pricing in their market. And then you have economists at universities and other places doing macro studies.
If those things were offered in a line, yeah, you'd hear about it. So tell me about the five-year, five-year forward rate.
The five-year, five-year forward rate is what the Fed has identified as a long-term, it's the long-term, it's the inflation expectation five years from now. So it's what the market is estimating.
They compare nominal bonds and tips and say, what is the market projecting for the five-year inflation rate five years from now? Ultimately, that rate, the way the interest rate market clears is heavily dependent on people's inflation expectations. It's not what inflation we've experienced.
It's their expectation about future inflation. The five-year, five-year, as it's often called, is a good measure of long-term inflation expectations.
It's also a measure of Fed credibility. If the Fed is not credible, that number could be potentially very volatile or higher.
And what we've seen, and if you look at a graph of this, it bounces in a very narrow range. I think right now is around 2.4%.
It's been as high as 2.6%. And if I go back to early pandemic or before, it was below 2.
But for the last couple of years, it's hung between 2.3 and 2.6. So it's a really tight ban.
And the Fed credibility, I'm guessing that's not that they could do

models correctly, that's they stay an independent organization. It's that the Fed is willing to make the tough decision.
As there was a former Fed chairman, William Martin Chesney, or the last name was Martin, who said, you know, he was the Fed chairman from in the 50s and 60s. He said the Fed's job is to steal the punch bowl away right when the party gets started.

And what he meant is, hey, when the economy just starts to overheat, starts producing at a level that's not sustainable, it might introduce inflation, they have to step on the, they have to put on the brakes. They put on the brakes through, primarily through the management of short-term interest rates.
Those are the market's belief that the Fed will do that. That's credibility that Paul Volcker, if you go back way to the early 80s and the first Reagan administration, you know, after inflation got very ugly in the late 70s, Volcker established that credibility and it's been sustained ever since.
The Fed will do whatever's necessary to prevent inflation from getting out of hand. I've looked up the five-year forward rate since our last conversation.
I think today it's 2.33%. And I find that just shockingly difficult to believe, given that at least my interpretation of Doge failing is that essentially one of the tools and the tools for the national debt to be decreased has been largely ineffective, maybe some effectiveness.
And now it's just a matter of time before the U.S. has to inflate away the debt over several decades.
Why is that not a consensus view? And why am I wrong about how with having that?

You're asking some good macro questions. I mean, the, the US has a history.
And we do have, you know, if you look back, and I think I want to say the last time, the debt to GDP ratio was at this level, we're hovering around 120%, was just after World War Two, like 46, 47. And if you look at the U.S.
in the early days, we ran an inflation rate around four to five percent. That's one of the ways we got out of that hole.
But there were other reasons for running that. We had soldiers returning from overseas.
We had a GI Bill. We had people building houses and all sorts of things going on.
I, you know, why doesn't the market think that ultimately that we're going to inflate our way out of this debt problem? I think it gets back to the belief that the Fed doesn't allow that. The Fed is independent.
The Fed will not allow inflation. The problem with just trying to use inflation to get out of this debt hole is if it has the potential to raise interest rates and we roll over a lot of debt so it can make it very expensive.
So we have to kind of manage that if we were to, if politicians were to somehow think miraculously that we could create inflation and make it easier to pay off the debt with cheaper dollars, they would have to consider what it means for the amount of debt that we have to roll over on a regular basis and how that could be impacted if the market came to that belief. I appreciate the macro lesson.
I do want to talk about parametric where you're a CIO. You mentioned that you have roughly 600 billion assets.
How much of that is high net worth and how much of that is institutional? I would roughly break that down. Roughly one third institutional, so 200 billion or so institutional and two thirds high net worth retail.
I mentioned, I don't think everyone in that category qualified. There's various different definitions of high net worth.
But part of what we are doing is bringing, democratizing what has historically been institutional management capability to lower and lower AUM. So everyone in that category might not qualify as high net worth.
So you say that you're bringing institutional tools, institutional practices to the high net worth. What are some examples of that? What are some kind of tools or funds that you've created in the last decade or so that address some of the issues? So, David, if you think about it, institutions have always had the ability, or in my career, dating back to the early 90s, have always had the ability for large allocations to have their assets managed in a custom manner.
The benefit was it can be very much customized for them. Sometimes they can negotiate a better fee and, you know, overall just a better experience for them.
That for many, for a long time, was of large institutional institutions. increasingly as technology has evolved, as innovation has occurred, I'm thinking of innovation in the way we manage operations, in the way we manage custodial operations, fractional shares, things of that nature.
We've been able to provide separately managed account experience to lower and lower AUM bases. within, for many of our clients, that minimum is $250,000.
We've actually evolved our technology within Morgan Stanley Wealth, their common ownership, to the point where we can get that down to $25,000. So what that means, what are the benefits that brings to clients? Taxable clients can have the accounts and manage for tax.
Clients can have the portfolio customized for factors, for values, for completion. And when I say the word completion, what I mean is I work at Morgan Stanley.
Part of my compensation is deferred Morgan Stanley stock. I may not want Morgan Stanley in my portfolio holdings to avoid that concentration.
So maybe I want my holdings to avoid Morgan Stanley, maybe Goldman Sachs at the same time. I don't want that.
So I can have the portfolio design for that completion around what I may hold elsewhere in my portfolio. All those capabilities now, we are bringing to a lower and lower AUM.
And they once were just the privy of the largest institutions. One of the things that I've learned recently is about having a public position.
Let's say you have a company, you invested as a VC, now you have $5 million in Coinbase shares is actually building a portfolio around a long only position, whether it's tax loss harvesting or just like using that to offset losses. Explain that on a simple level.
Why would a high net worth individual do this? Let's use a very simple example of what people often call direct indexing. It's the ability to track an index while deferring gains and realizing losses or throwing off losses, which those losses an investor may use elsewhere in their portfolio, maybe to unwind a cryptocurrency position or a concentrated low basis stock position.
That is the value of a kind of direct indexing is I can still get an index-like experience. I can also get some losses that I will maybe use elsewhere in my portfolio, or I can just roll forward and I will defer gains.
More recently, that's been extended where people are willing to, or some people who have maybe extreme positions, maybe they have a low basis in concentrated stock like Amazon or NVIDIA, are willing to employ a short position on top of that. So you can generate even more losses.
The issue that people always have to keep in mind is we're not eliminating a tax liability. Think of these portfolios as a sponge that's just absorbing it.
So if you at some point want to liquidate that portfolio, you will experience those taxes. Many people say they don't want to liquidate them.
The end game for that group is ultimately death and step up. Long short, that gets a little more complicated because you can't step up a short position.
But sometimes people get confused. They think we're eliminating

taxes. We're not doing that.
We're just deferring them. And deferring them can be a benefit for

investors, particularly if that deferral goes to the end of their existence, at which point they

get a step up for just a direct indexing account. Could you not unwind those short positions towards the fund end? Or what's the practical difference between the lack of step up and basis in the short position versus the rest of the portfolio? The way I would think of it, David, is, again, using my sponge analogy, you can maybe shrink that long short down, but at some point, if the person wants to liquidate that portfolio, they're just going to have that concentration of gains in there.

You can't completely eliminate it.

There's going to be some taxes to pay.

If there is, as we talked about, someone dies, then there is a step-up basis on the long, but the short never gets that benefit.

So tell me about the hyper-customization of finance.

I think the best way to think about this is to go back in time and just look at this arc. So we go back to, and by the way, there's a great article in the CFA Institute has produced, it's called a monograph called the title Beyond Active and Passive, discussing the hyper-customization of finance.
If I remember the author's name, I'd say it, but if people want to dig into this further. Go back to the earliest pooled funds.
I think the first ones they find on record are right before the inception of the U.S., 1774. And they were a reaction.
This was in the Netherlands. This was a reaction to a credit crisis that occurred as a result of the British East Indies company.
So back then, if you wanted to invest, it was just one stock. You thought it was diversified because they had business all over.
If that company failed or something happened, there was no way to get rid of it. And most people's wealth wasn't concentrated in that.
The first pool fund on record, or at least I'm aware of, was 1774. And the idea behind that pool fund was strength through unity and access to diversification.
We pool our assets, we get unity and diversification. For the manager of that pool, you get scale.
So that's kind of the early onset. um those uh and they were these were these were closed-end funds So you didn't have a lot of liquidity.
You had active management risk. Roll forward roughly 150 years.
1924, you get Mass Financial. Boston comes up with the first open-ended fund.
So here you've got a daily NAV. So now you get liquidity.
You still have active risk.

And it took probably 30 years for those open ended funds to overtake closed end funds,

but eventually they dominated. So by the 50s, they were growing faster than them.

And then they dominate them. Then you get to, I'd probably say 1976, but if I want to be honest,

Wells Fargo was doing this in the late 60ss indexing. And in 1976, August of 76, again, our bicentennial, John Bogle rolls out the first Vanguard does the first index fund.
It was like $11 million they scraped together and created the first publicly available index fund. I mentioned Wells Fargo had one earlier, but it was an SEC registered, not available to the general public.
So you have this evolution happening where things are getting generally better and better. By the way, that Vanguard, I think is the largest, maybe the largest mutual fund today.
It's 1.5 trillion or something of that nature, just enormous. But then as you get into the 90s, you get ETFs, basic ETFs, and then the ETF market explodes, and you get all these plethora of ETF offerings, which shows the demand for customization.
Technology continues to evolve. And then as you get into the, you know, Parametric opened its first SMA in 1992, very difficult to manage, but as technology got better and better and better, what we used to do, you know, when we'd have discussions with advisors or their clients talking about the benefits of separately managed accounts that used to be missionary work, now it's just become commonplace because people are seeing, hey, what used to be the benefit of unity and diversification, I can achieve that now through the evolutions of technology and innovation in an SMA.
And the big benefit that I get through customization is I can tailor everything to my specific needs. Again, mentioning those things I stated earlier, tax factor, completeness, whatever the case may be, it can all be tailored to my specific needs.
And so in that hyper-customized world, I own more securities, individual securities, less funds. Again, with fractional shares, I can do that with smaller and smaller bases.
I can do a multi-asset portfolio of fixed income. All that can be achieved because of building on all the innovation that had occurred previously.
And so as I think about that natural evolution from the very first funds to where we are today, it seems to me the only way we're going to move forward is through continued customization. And it's what people have come to expect in other parts of their life, whether they're ordering from Amazon or whatever their streaming service is.
My kids don't watch any TV anymore. Everything's streamed.
It's very customized to their specific needs. I think that's going to be the expectation for individuals' investment.
And ultimately, it's going to be a scale business. And not everyone's going to make the journey because the technology involved in doing it is extremely complex.
It's nothing you buy off a shelf. Most of it's built internally.
Parametric's been at this for 30 years.

As I mentioned earlier, we're managing

roughly 400 billion in SMAs.

I think that hyper customization,

that demand for hyper customization

is the tailwind at our back.

Yeah, I could be wrong, but that's my belief.

So fascinating kind of evolution

in that first you had economies of scale,

you had everybody pooling their money.

And because of that, they could invest and make efficient investments on a per investor basis. And they could get diversification, yeah.
They could get diversification as well versus investing into one asset like in the 18th century. And then today you actually have technology that basically divides it into almost infinite slices.
But in order to divide it like that, you need a heavy investment into research and development and technology that's able to offer that kind of unbundling of the shares into everybody's individual account. Exactly.
So you needed innovation. And again, innovation occurred in a lot of places along the chain, operations, custodial product.
I mentioned fractional shares, the ability to trade fixed income in small, small lots efficiently. And then you need that technology to get to the point where, like I said, we can track and manage almost a quarter of a million accounts, and they're all customized to specific guidelines created by the advisor or their client.

One thing that's counterintuitive about that is it seems like the technology, especially, and I'm sure there's been some regulatory change as well that's allowed things like fractional share.

But why is the technology so expensive to create in order to fractionalize shares and create these small SMAs? It doesn't seem like that should be that complex. I can manage 100 accounts maybe with a simple little macro or something.
But when I start to get to 10,000 accounts, 50,000 accounts, 100,000 accounts, when I'm tracking a million tax lots and I have to do a data, the scale drives the complexity. That's what really gets challenging.
Said another way, when you take away all human in the loop, it infinitely complex i don't know if i'd say infinitely but it's significantly complex not theoretically infinitely yeah yeah where parametrics gravitating to is you know several years ago it was portfolio managers looking at a portfolio and punching keys to optimize it and manage it. Increasingly, we're managing portfolios by exception.
So the system knows those first steps that the portfolio manager is doing and saying, okay, here's what I suggest as the optimization. And the portfolio manager can then look at things much more efficiently and process them much more efficiently.
So it's a management by exception. Skeptical person may say that that's nice that you could have an ESG overlay, or as you mentioned, you have Morgan Stanley shares, you might not want to have Morgan Stanley within your portfolio.
These feel like edge cases outside of the tax part of it. Give me some very common use cases where people are using this customization to drive returns either pre or post tax returns.
Yeah. Somebody can say, hey, I want a concentrated AI portfolio and we'll create a simple basket of, you know, factor-based AI-centric names.

They'll go through and say, yeah, we agree, and we can manage that portfolio for them.

Or I want to, you know, concentrate, you know, whatever factors you may want.

That would be a mainstream case. I don't know if completion is necessarily an edgy case.

I think a lot of people think about it more. They understand.
They don't want to own more of where they maybe work and get vested securities. And you're right.
Tax loss harvesting for taxable investors is the one that's most quantifiable. That is not edgy.
We don't use the phrase ESG. We use values-based investing.
ESG has become kind of a political football. But I do believe we're still in a world where there's still many people who want.
And by the way, those values that they reflect might be the anti-ESG values. Like whatever factor these screens are selling, I want to buy.
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Get started today. Do you believe in the efficient market or the mostly efficient market hypothesis? Yes, I generally believe that markets, particularly in the short term, are generally efficient and they're always driving efficiency.
I do believe in the very long term, because so much capital is based on the short term, there can be inefficiencies, but it takes patience and a long time to exploit that. I'm a big believer in the mostly efficient hypothesis, which is basically saying, I'm waffling a little bit, but a use case in that is when my mom calls me and she said, she says, I read somewhere, I saw a video that Palantir or Uber or Microsoft is good or bad.
I'm like, great. As long as you're investing in the public market, if it is efficient, you can, you can essentially, you can't make alpha, but you also can pick randomly.
I can make a portfolio of, of stocks that start with the letter A, and I shouldn't do that much worse in theory, at least than, than the S&P 500. So it kind of anything that could drive this behavior of people investing more in the markets overall, and in, in most cases is actually very pro-social behavior.
So I'm a big fan of these overlays because it allows people to align with their values and invest in a way that I think probably mirrors, at least on a risk adjusted basis, the S&P 500. Yeah, hopefully.
Listen, I agree. I think we generally agree that in the near term markets are generally efficient.
I would encourage any investor who's looking at buying, say, a single name. I think this is a Warren Buffett quote, but you can set me if I'm wrong.
It's in every market, there's a fool. Make sure you know who that fool is before you invest in it.
Otherwise, you're the fool. So it's another way of saying, what's your edge? If you don't have an edge, you're just at the whim of the market.
In your role as CIO, how do you define the role? Are you making macro bets or making some prognostications in the market or in the regulatory arena or tax scheme? Or is it purely to be Switzerland and let other people kind of make those guesses and provide the pipes and rails to do that? First of all, I would say parametric does not hold out the ability to, consistent with our efficient market hypothesis, the ability to provide forward guidance on the market. So we don't represent that as a capable skill set that we have.
My job as a CIO falls into kind of a couple categories. First, internally, it's the allocation of resources.
So where do I allocate resources that I believe best match the needs of our client? I don't do that. I'm not some dictator.
I don't do that by myself. It's in collaboration with many other people.
But ultimately, I have to own the allocation of resources. Where do we hire people? Where do we allocate them? Where do we give them an upgrade in technology? Where do we have to stall things out? Those types of things.
Second, I represent parametric and public forums. So I have to oftentimes go see something, you know, and I do enjoy this part of it, go talk to our, you know, some of our biggest clients, but I also like seeing as many, you know, if I'm in a market for a meeting, I try to see as many of our clients as possible because it gives me feedback on what things we're doing right and doing wrong.
You'd be amazed at people's willingness to tell someone they see as a leader of the firm, Hey, by the way, this is where you guys are dropping the ball. They're more than happy to tell me, and I'm actually glad with that frankness.
And maybe third, as I mentioned, Parametric has grown to over 1,000 employees. And in addition to being CIO, I'm co-president of Parametric.
My colleague, Ranjit Kapila, he is the other co-president. He runs our technology and operations portion of our business, critical to the value we deliver to employees.
But part of what I have to do and he has to do is we have to be able to tell a story. Meaning, and I don't mean fabricate a story.
I mean, how do you communicate with people and get them aligned to the direction you need the firm to head? How do you do that in a way that is easily understood and then reverberates throughout the organization? And that's part of my job is to be able to do that effectively. What are the biggest mistakes they made early on in communicating with a thousand plus employee base? You've heard that old narrative about, you know, you sit around the campfire and you whisper something and hear the person to your left and then it goes around the campfire and it comes back to you completely different.
And that's a little bit like if you don't figure out how to break something down into very simple terms, it's going to get mangled. I think I've learned that the hard way.
What I thought was communicating clearly, but probably wasn't as clear as it should have been because something didn't happen the way I expected it to happen. And we got a negative outcome.
You hopefully learn and get better as a result of those mistakes. And I assume it's something that every person who's leading any kind of group of people goes through.
Like I said, people, you're a campfire with some people and you can't get it right. How do you expect to get it right through different layers of leaders at a firm? You got to be really crisp, clear, and repeat it.
Alex Hermosi, who I think is one of the greatest communicators really of our generation in terms of the business world, he takes it to a whole nother level. Not only does he simplify things in very easy, digestible ways, but now he also tries to either have it be alliteration or actually rhymes.
Because if it's rhymed, if it rhymes, it means that's true. So he distills even on that level.
And I don't think you could oversimply communicate something, especially when it comes to the top. I think people in many ways get over communicated to this.
They could sometimes even interpret a physical posture or tone in a way that's not consistent with what wants to be communicated. So you have to be really careful.
I 100% agree with you. And that's why a fair amount of my time has meant not connecting with people on video, but trying to fly to different locations and meet people in person.
As I thought about your statement about rhyming, I don't know if you remember this from your early days, but schoolhouse rock. I'm just a bill, like creating a song and how you can teach people things through the simple process.
But yes, creating a narrative for people to understand what you're trying to deal with or address or the direction you want the firm to head. I agree that's important.
We'll get right back to interview. But first, we're looking for the next great guest.
If you or someone you know is a capital allocator and would make for a great guest, please reach out to me directly at David at WeisbergCapital.com. I've done a deep dive on this.
I don't know if you're familiar with David Deutsch's mimetic theories and something that a lot of really influential communicators, I would throw Elon Musk in that group, is they've actually found out that it's not even words or statements that are most memeable or copyable. It's literally memes.
So the word memes comes from Richard Dawkins in the, I believe in the seventies, which are these ideas kind of like genes that spread quicker than actually explanations or long monologues. It's the reason why people use narratives or stories versus explanations, because those are more memeable.
So there's a whole, there's a deep rabbit hole to go to, which we could save for another conversation. All right.
David, I'm going to hit you up for some recommendations on books because no, I'm deeply interested in this and how if people are right about AI, this is going to be one of the greatest skills that people are going to have to master, which is how do you communicate? How do you tell a story to kind of lead people in a certain direction? You mentioned that when you travel and you talk to institutional investors, they oftentimes give you the feedback. Is that how you're growing parametric in that? Is your growth driven pulled from your customer or do you kind of go in and try to learn as much internally, develop models, react to where the market, where your competitors is going? What's that mix between push and pull products? It's definitely a blend.
I don't know if I can put a percentage on one versus the other. We are clearly taking feedback from our clients and trying to understand where they see the market going.
We have, we're inside of Morgan Stanley. So we have leadership at Morgan Stanley that sees broadly across different parts of the marketplace.
Morgan Stanley runs a large wealth platform. So they get feedback from the advisors, many of them who are clients of ours.
So we can use that feedback.

And, yes, we are also looking at what our competitor is doing.

There are certain competitors we pay more attention to than others.

We can't chase every new competitor down a rabbit hole, but we want to understand what trends are evolving in the market.

I just finished, I'm probably late on this, the innovator's dilemma. And it concerns me, you don't want to follow your best customers over a cliff.
So we always want to make sure we're understanding what evolutions are out there and if we're missing anything. You obviously focus on public markets, but you also live within an ecosystem of public and private.
You see this rise of alternatives. What are your views on the rise of alternatives and how that affects parametric and maybe how parametric and Morgan Stanley can play in alternatives as well? Well, Morgan Stanley Investment Management has a big book already in alternatives, real estate, private credit, private equity.
They already have that skillset and are growing some incredibly skillful people working in that area. Ultimately, and you hear this coming out of places like BlackRock and others, they're moving to a point where they're bringing alts down further into the high net worth and possibly someday retail channel.
My expectation where Parametric will play a role in that is alts will be a part of a model portfolio. So in the hyper-customization world of the future, it'll be what's provided as a model portfolio.
Parametric will be the implementer of that model portfolio. We may have a sleeve in that model portfolio.
We may tax manage the entire portfolio. Alts may be one part of it.
The issue I think that we're struggling with now or the market's struggling with now is how do you package those alts in a way that's liquid enough to put in a high net worth model portfolio? Is it a simple interval fund or is it's gotta be something a little bit more liquid? That's the part I'm less involved in, but I know that's kind of a big question they're pursuing. I think we've all, or at least there's been some experience with a large real estate fund that gated a while back when real estate started suffering.
And I think people are trying to figure out like, how do we avoid that outcome? How do we create liquidity? It's a tough thing to solve. So we'll see what they come up with.
These are multi-factor problems. You know, I've been thinking a lot about this, the interval funds.
First of all, obviously, a lot of them are starting to have quarterly liquidity over five years in this kind of 2020 quarter gate but another one is purely naming conventions calling something like a private equity 2035 fund similar to how they do retirement funds yeah doing like education or literally making it calling it the private equity illiquid illiquid fund and there's a lot that could be done around that but certainly what's surprising to me in full transparency, I made investment in a company called Alto, which is Alto IRA, which basically allowed people to invest their Roths and traditional IRAs into private assets. But you have these trillions of dollars in 25-year-olds retirement accounts that are sitting in liquid assets.
And that to me is absurd. And that should be the low hanging fruit.
I think a lot of companies should focus on that and the regulatory should focus on those opportunities versus kind of a little bit more of a difficult situation and different education situation with educating people about illiquidity in their taxable entities. What you're hitting on is most of these structures i may have this wrong are for qualified investors qualified investors five million dollars uh liquid net worth that's going to eliminate a lot of people definitely most people in their 20s so it's how do we how do we do this going forward we'll see sometimes these paradigms are so obvious in retrospect, this idea of you have one account, you have your private assets and your public assets, so that a parametric would be able to come and see where you might have liquidity in your venture capital or private equity and plan for that through things like tax loss harvesting.
It's such a good idea, but such a different paradigm than existing paradigms where everything's kind of its own fund. And unless you have a billion dollars plus and you have a full-time CFO that's doing this kind of analysis on a monthly basis, the regular man, a.k.a.
the non-billionaire, does not have access to these types of tools. As I think about the advisor model, definitely the platforms are trying to get advisors to buy into the models meaning they don't want advisors creating these separate accounts and doing this themselves they want them to focus on a model and i don't know if you follow how closely you follow the ria market but that's going through enormous aggregation you know we're not we're probably within three four or five years from having the first dollar RIA.
They're doing this, they're starting to look like the platforms. So what everyone wants to do, because that's how you scale these businesses.
So what everyone wants the advisor to be talking about with the client is a model. Here's a model.
Look at this model. And this gets to the hyper customization, right? If I just have a plethora of models and I can offer them, then you can do a lot of things with them, including fit that alternative piece in.
And you can have a centralized manager, like somebody like Parametric, kind of sitting over the whole thing, managing a sleeve, tax optimizing all the publics, and coordinating with the alternatives. Again, I don't fully understand how that all works yet because I don't know how the alt piece fits in, but you can see it.
It doesn't feel like it's that far away. There seems to be a lot of convergent factors.
I had the CEO of iCapital, which is kind of working on making the pipes and rails to invest into this. I had the CEO of Adapar, which is kind of working on figuring out all the data and how to do streamline kind of all data.
There's other K-1 platforms that are streamlining K-1s. And then there's, of course, new regulation.
There's a credit investor test. And all this kind of perfect storm is coming together.
In the best case, best outcome, make the best investments available to the longest tale of people in a worst outcome. Yeah.
And worst, worst outcome, some people may be duped into some funds by bad actors, but those are kind of the two that that's kind of the utopian and the dystopian future that we're going to see play out in the next five, 10 years. Yeah.
And I think you forgot one other big factor, which is the largest money manager out there, BlackRock getting getting into the space and now starting to look at it like, can we index in this space? Is there a way we can create benchmarks in this space? That, to me, is going to drive a lot of activity.

obviously you guys are more of a passive investor than active investor and that's been a huge trend and specifically in the 2010s and now some people are going active because somebody has to make the

market efficient and market by, theoretically cannot be all passive because somebody's making it active. Just if you were to take a step back from your role, is there room for active investors to kind of balance the market? Or is that kind of a misnomer? I always think there's room for the active investor.
I think I acknowledge to you that I think somebody long-term, if they have a long enough

view and make a, you know, there's probably inefficiencies in the marketplace.

I don't doubt that there may be somebody with skill out there.

I think it's hard to demonstrate.

You know, if I filled Yankee Stadium with people and told them to all flip a coin, I

eventually would find 10 people who flip heads

20 times in a row or something. So maybe you just get there by luck.
I think it's very hard for investors to identify those people. And so you have to kind of think about, can I identify that person? And are they someone other than that has skill and not just one of the 20 flipping the heads? to add to your side of the argument,

even if you were able to identify skill after 25 years, A, that person may be in another seat or retired, but even if they're on their own seat, their motivations have changed. This is a common thing in venture capital and private equity.
People start to work less. They take the incremental weekend off and vacation, which may be rational, but not good for their portfolio.
So even by the time you determine their skill, oftentimes, you're also not able to implement. It's just purely kind of academic information.
You're not able to implement that into investment strategy. One of the smartest clients I dealt with, he had this rule, a manager moves to Florida, manager buys a Lamborghini, he terminates them.
It's like, these are two automatics. The other, the other, maybe the other thing you got to remember, and Warren Buffett talks about this, at a certain point, if they're successful, their size overwhelms them, right? Warren Buffett's like, I can't be more than the market now.
I'm too big. It's very hard for me to be anything other than the market.
And I think to his credit, he's honest. And I think other people say, no, no, no, I can take on more assets.
I can do more. I can do more.
And it's very hard to do and continue to have that edge. If you could go back to 1989 and distill investment or management principle to yourself that you could hold on through your entire career, what would you teach young Tom that just graduated from college? What would be the principle? It's hard to say, David.
My experience at the Fed made me more of an efficient market person. So I was always very respectful of the market from a very early age.
I didn't ever believe that I had an edge, a great edge in any way. And I always understood that the market drives for more efficiency.
So I don't know that I would have any great insights to give 1989 Tom Lee. It sounds like Herschel Walker referring to yourself in the third person.
I don't know if I'd have any great advice to give him about investing. Maybe I could say career advice.
And this is something I often have discussions with young people, which is careers like life are nonlinear. Everyone kind of thinks like, hey, if I do A, B, C, D, E, F, I end up in G.
And maybe, you know, if you're at Morgan Stanley, G is like Ted Pick's role or something. And everything's nonlinear.
And I think people need to understand that,

appreciate it,

and think about resiliency throughout their careers.

I personally started a firm with six employees

and we just, we weren't like brilliant people

thinking about customization back then.

It was the only thing we could do to win business.

So necessity is the champion of innovation,

but I've been acquired three times because we are in a consolidating, public markets are consolidating. And with each of those acquisitions came different strategies, different cultures, different focuses, different resources, and being able to be resilient through that.
Because I think everyone's career is kind of like that. I don't think I'm unique in i think that's the most important thing and i don't think i fully understood i know i didn't fully understand that in 1989.
i don't want to age you but obviously 1989 is 36 years ago you've had a prolific career when you talk about resiliency is it harder when there's like stagnation where you're just like like it's been another year we, we grew 2% another year or is failure more difficult? What's the most difficult thing to live through and how do you know that you should push through versus maybe pivoting? Listen, that's a great question. No growth, low growth is very challenging, right? Because part of the benefit I get out of working here is seeing people around me succeed, watching them build lives, watching them buy houses, have families do things.
I mean, obviously, I want our clients, it's important for me that our clients succeed, but I also want to see our employees succeed. And that requires advancement.
And that requires growth. So I think to the second part of your question is, how do you know when, hey, we just got to hold on and missionary work's going to become a trend? I don't have a great answer for that.
I mean, I think sometimes it's stubbornness. Like you believe something, you believe this, you believe like evolution is behind you and it's going to happen.
And so you're willing to keep something alive. I think you're always experimenting with different things and seeing if things will take off.
The problem is, again, you don't know how long should I continue to experiment with this? When do I cut it off? That is the art of this business. I don't have a good answer for you.
But the best answer that I've heard is have your priors changed? Has your thesis on it changed? In which case you may want to, you're getting feedback and you say, okay, I take that feedback. I'm going to pivot.
Or is it just hard? Some things are just hard. Having a contrarian view is hard.
You know, believing in a passive strategy when active is hot or vice versa is hard. And that's just sucking it up versus in the case that you were wrong about something, you thought there would be a big tax opportunity, but the tax scheme has gone against you.
And now you're like self justifying in trying, you're trying to update your thesis without revisiting why you start taking the action before you took action. We're so good at diluting ourselves and like evolving the narrative in our own head, let alone other people.
You definitely don't want to get anchored. You definitely want to approach things fresh and think about, Hey, you know, am I wrong here? Or do we need to pivot as you state? I read a book a long time ago by Bob Rubin, where he talked about this.
It's keeping your options open as long as you want to take in as much data to make the best decision as you can. But ultimately, you're never going to have all the data.
So you're going to have to take a risk. And hopefully, as you point out, a key to advancing is making the right choices.
You make a few wrong choices and you end up somewhere else.

I love the Jeff Bezos analogy to this. Two-sided doors, one-sided doors.
Two-sided doors are decisions that are easily reversible. You want to make them as soon as you have a pretty good

idea. And then one-sided doors, like strategic or platform decision.

Sometimes if it's a decision that will bind you for 10, 20 years, it's efficient to spend seven, nine months, 12 months, as long as they're getting incremental data. It's another kind of, you know, lens to look through at, especially difficult career decisions.
I agree with you. I'm familiar with the Bezos model that you mentioned.
And the issue that I'm kind of getting in, and it's not surprising to you, the higher you get up in an organization, you usually end up with fewer two-sided doors and more one-sided door decisions. People who lower in the food chain will take care of the two-sided door ones.
Essentially, via organizational design, you structure the tasks in such a way that you deal with the difficult decisions. I think everyone does, right? Because the one thing I have to optimize is my time.
So I can't sit here and take every decision. I've got to trust people.
I've got to hire good people, make sure I empower them to make those decisions. I think that's why Elon Musk calls CEO the worst position at a company, because you, by definition, get all the unsolvable, most shitty mistakes and most shitty decisions flow up to the CEO.
And most people want to be CEO until they realize that it's literally you're constantly dealing with the most difficult. There is no easy day because if there was an easy day, it wouldn't escalate to you in a larger way.
But yeah, no, Barack Obama, I think he made a comment about this in his book when he was president. It's like, no decision reaches my desk if it hasn't been vetted by like 30 people.
So it's really the hard decisions that reach his desk. I agree.
That's why at least CEOs are often the highest paid people. Tom, this has been absolutely fantastic.
What would you like our listeners to know about you, about Parametric or anything else you'd like to share? I would say about Parametric, we are about, as you and I've talked about, we are understanding of efficient markets.

We're humble.

We believe in customization and building partnerships, partnerships with advisors, partnerships with clients, whether they be institutional or sometimes high net worth is institutional like money or retail.

That's who Parametric is. That's our DNA.
And I understand that's become more popular recently, but we've been doing it for 30 years. And it's not something that you can just flip a coin and do one day.
It becomes, you think about investments a different way. You think about investments as a service, more like a service and less like a product.
And that's something that's very hard for people who've only sold product their whole life to do. You create all the infrastructure, you hire people, you hire a specific type of person with specific competencies and cultural values.
You have this certain type of technology, you have processes, you have values, which is one type of thing is more important versus another type culturally. So it goes back to an innovator's dilemma.
There's a reason why organizations get disrupted because they get so ingrained in specific processes, whether positive or negative, that it becomes their strength and their weakness. Well, they follow their best customers who don't know the new trend and they can't get away from it.
So no, I agree. Tom, I'm pledging to go to Minneapolis

and sit down with you

or have you in New York City.

That'd be better.

But I look forward to continuing.

I'm in New York quarterly,

so happy to do it whenever it works for you.

David, thanks for your time.

Thanks for listening to my conversation.

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