Wall Street Veteran Michael Green Talks ETFs

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio News.

**Paul Sweeney** (0:07)
Michael Green with us right now, the huge impact in the American debate here about six months ago.
I'll say over the measurement of poverty, huge response to him saying, look, if you got to write the tuition check for your kid, if you got to do camps, whatever, when you take it down on a monthly basis, it gets expensive rapidly. It's just a really constructive debate on all sides. Now, Senior Executive Advisor, Tier1 Alpha Asset Management, this morning, you're doing a career change. I think a lot of global Wall Street's like, wait, Michael Green can write his own ticket. What's the why here?

**Michael Green** (0:43)
What are you doing? That's exactly why. So actually, Tier1 Alpha Research, which I'm a special executive advisor, is the research firm that I spun up when I started Simplify. The objective was there was to run the research program that I knew needed to be run. We had to create a self-funding organization, so that research is currently distributed primarily to hedge funds. Most of the large hedge funds are recipients of it. But we needed to do that so that we could fund the research, because there are no expenses available for funding significant research at the ETF space, given the compression and fees.
We've now actually taken that research. We've gotten to the point that we can turn it into implementable products, and so I am launching a new firm, Tier1 Alpha Asset Management, that is targeted at converting that insight and that research body into implementable products that answer the question that everyone has always asked. What should the retail or what should the individual investor do, given your view that passive is changing market structure and actually creating the conditions under which active management will underperform? So talk to us about separately managed accounts.

**Paul Sweeney** (1:46)
We've been talking about that this morning with another guest. How do you guys think about them?

**Michael Green** (1:50)
Well, separately managed accounts are really just the equivalent of hiring a private wealth manager to manage your actual account. So you don't have to worry about the custody components. It's not like you are sending your money to Mike Green and saying, please invest this for me as you do at a co-mingled account like a hedge fund or even a mutual fund.
You retain control of that. Now there are expenses associated with that. That means that you have to do the trading on each account in different manners. You have to make sure that you're managing that process so that you're not favoring one client versus another. And so there's some operational complexity that is there, particularly within the institutional space where allocations can run in the billions of dollars, which would be the size of an entire hedge fund. You ultimately gain value in allowing them to retain custody of their underlying assets.

**Paul Sweeney** (2:34)
We talked about a new concept, which I think people can tell by the sound of my voice, I'm a little skeptical on.
The concept that I'm seeing is everywhere. Not just Casey, your wonderful guest from Texas. Mr. Casey's husband, get her tickets to Ohio State, Texas, please. Michael Green, tax laws harvesting, what in God's name is this concept?

**Michael Green** (2:57)
Well, this has been powering a lot of the growth in the industry for actively managed accounts. And in the simplest form, it takes advantage of the fact that on a tax basis, you want to tax the individual security transaction. So if I bought Microsoft at, let's say, $2 a share in 1987, and it's currently trading wherever it is, I don't know, $500, there we go.
The tax implications of me selling out of that position are a $498 capital gain. Right now, it is long term and so it is favorable, but it is still a significant hit. And so if you say, hey, I think Microsoft is going to fall 30 percent, that's roughly the equivalent of just selling them. Well, you're going to take that tax hit when you sell anyways, so you might as well not actually sell it. And those embedded capital gains that have built up over an extraordinary run, mostly in boomer portfolios, that are now taxable on the actual sale of those assets, have created the opportunity for people to manage those individual tax lot exposures and create positions that offset many of those gains with short-term losses, which are taxed more favorably. In other words, they create more credits. That tax management is really the area of growth within discretionary management. Candidly, I look at it and say it is absolutely incredible value added, and everybody should have that in their toolkit, we absolutely do have that capability to do it.