Can The Financial Industry Be A True Profession? With CAIA’s Bill Kelly

Wealth management has historically been a highly fragmented industry, where the best interests of the client were not always the top priority.

Bill Kelly, president and CEO at CAIA, joins Andy Hagans to discuss whether the financial industry can arrive at a place where it consistently serves the best interests of the end clients (investors).

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Episode Highlights

  • An overview of CAIA, its educational programs, and its worldwide membership.
  • A brief history of the financial and asset management industries, including a comparison to other industries such as accounting and medicine.
  • Bill’s definition of a true “profession,” and why the financial industry has struggled to professionalize.
  • Why the “fiduciary duty” may not be a “one-size-fits-all” solution to the industry’s problems (including Andy’s thoughts on ESG).
  • How education is a key driver of better outcomes, and how CAIA is helping to democratize information in the alternative investment space.

Featured In This Episode

Today’s Guest: Bill Kelly, CAIA

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy Welcome to the show. I’m Andy Hagans, and today we’re talking about the financial industry…I finally got my tongue untied, Bill. We’re talking about the financial industry, whether it can be a true profession, right? Talking about a lot of the philosophical idea behind what is the true profession? What is the fiduciary standard? This is stuff I’m very passionate about. I think it’s very interesting. So, joining me today is Bill Kelly, President and CEO at CAIA. Bill, welcome to the show.

Bill Thanks, Andy. And a great topic, and it’s not only what I love, it’s my day job too. So, you’ve covered a lot of bases for me just out of the box.

Andy Yeah, and you know, a warning for listeners, I actually think this is more like an advertising but we’re getting into some philosophical stuff in today’s episode, which for me, is very interesting. I’d say it’s almost a passion of mine. I mean, obviously, on the show, if you think about it, we’ve had, whatever, 125 episodes, I like to get really interesting, really smart people on the show to talk about what we’re passionate about. And we’re all…I think almost everyone in this industry is passionate, right? Because, you know, what attracted us to the industry, a combination of maybe helping people, making money, and caring for our families, really important kind of deeper stuff. So, Bill, you know, what we’re going to talk about today, I think it may be like the main thing, you know, that we all need to kind of gut check ourselves. But before we jump in to all that, could you please give us a brief introduction to CAIA for those who aren’t already familiar?

Bill Sure. So, we’re a professional body. Alternative investments are the focus, and we’re going to cover some of this today, Andy. But if I think about the first…and we’re now 21 years old, entering our third decade, I would say for the better part of those first two decades, the focus is on institutional quality alts. So, you think about what a sovereign wealth fund would own, so private capital from private equity, to growth, to venture, real estate infrastructure, but also hedge fund structure, products, and commodities. And that’s how we have maybe drawn the lines of demarcation around what the endowment model may have defined over the past 20 years.

But I assume we’re gonna get into topics around democratization, where the average person on the street can now get access to alternative investments. And this could be a broader definition, this could be insurance-linked securities, it could be cryptocurrencies, it could be wine and baseball cards, and other collectibles. So, oftentimes, when I think about an alternative, it’s easier to define what it’s not, which is public equity, public debt, and cash. Anything else is an alternative.

Andy And long-only versions of those, right? Because once we start talking about shorting them…

Bill And you’re hedging, yes.

Andy Yeah.

Bill So, I think that’s an important point as well. And I think there’s been a lot of discussions…and this is away from CAIA just for a second, there’s been a lot of discussion on the 60/40 model being dead or alive and I really think that that’s the wrong narrative. We got to be thinking about that 60% box that’s equity risk premium and how can I access that? I can access it publicly very cheaply by buying the beta, I can buy it in the private markets, I can access it through a hedge fund where maybe I’m taking some of the volatility off the table through some hedging, I can get it through options.

So, there’s many ways of accessing that 60 and that 40, and I think the better discussion, and this gets back maybe to your question about our mission, is to try to bring greater transparency to the end investor about what the optionality is around diversification and that’s what we’ve been trying to do. So, to stay on point, we now have 13,000 members in over 100 different countries, we have an exam that’s given twice a year, we have about 6,000 people sitting for that exam. The September cycle just opened up at midnight last night, so the second cycle is already underway, and the folks that sat for it in March will be getting the results of those grades in the next couple of weeks.

So, the cycle continues to push on. And the mandate we have is very, very important because it’s really like painting a bridge. And not only do we have to start painting when we get to the other side, it’s hard to stay ahead of where the industry is going because this industry has grown and evolved for centuries, and we’re retroactively trying to professionalize it. So, I think we have a very important responsibility, a very important mandate, and keeping that client in the bullseye is exactly what I do every single waking moment.

Andy And Bill, you kind of referenced what I think is our main topic of today. You just mentioned, you know, this industry has been around for centuries, right? I’m thinking of a stock exchange, wasn’t it like two dirt roads and a little fenced area where there were cattle being traded, you know?

Bill Yeah, the Buttonwood Agreement goes back 200 and some odd years, which was the foundings of the specialist of concept on Wall Street, the New York Stock Exchange.

Andy Yeah, so literally hundreds of years but to your point, it’s not a professionalized industry. And when I first heard that from you, it made me like stop and think like, “Well, what does he mean by that?” And I wanted to ask you about it because I realized like, “I don’t think this is an insult, I think Bill is using this in a very, like, technical, philosophical way.” So, why don’t we actually start there? Could we kind of step back? What do you mean by a profession or an industry that is professionalized?

Bill So, I think at 30,000 feet and maybe even lower, it’s not that complicated. When you think about an industry that is brought together as a body for the benefit of the public good or the public people that they serve, and I can use the accounting profession as an example. So, I started my career, I got out of college in 1982, I was an accountant, and got my CPA with Pricewaterhouse. And it was a bit eye-opening then and now and probably more now that I’m with CAIA and reflecting back on the evolution of the accounting profession. It started in the late 1800s, and maybe this is part of the diversity challenge, a bunch of white men by the last name of Price, last name Waterhouse, last name of Burn, last name of Young, and these were the same names that have formulated those big eight accounting firms.

And they got together and said, “Let’s compete by day but let’s create some industry standard, some norms and ethics-based practices that we’re going to bring forward as professionals.” So, if one of these big eight, and they were eight back then, four now, but if somebody’s going to issue an opinion letter, what they’re a pining on and the body of knowledge and GAAP accounting is going to be consistent one to the next, to the next. So, as a user of the financial statements, you or I as competitors are really giving the same end product to the investor or to the user of that financial statement. This is true in Madison, this is true in Lubbock.

If you think about financial services, and more specifically, money management, the first mutual fund here in the U.S. was Mass Financial in the 1920s. The first mutual fund in Europe was Robeco, my old firm, also in the 1920s. The credentialing bodies, and probably the CFA, who I have great admiration for, started their credential in the early 1960s. The CFA was probably 1970s-1980s. CAIA didn’t come on the field until the 2000 timeframe. So, we are trying to retroactively professionalize a global and very complex industry, subject to different regulatory norms all over the world, a different sense of what ethics is all over the world, a different concept of fiduciary responsibility all over the world. And this makes our mission all the more urgent, all the more critical because we’ve got an end client who expects more of us as a profession when at the end of the day, they’re part of a very complex and global industry.

Andy Yeah, wow, there is a lot to unpack there. I mean, first of all, thinking about, you know, CAIA have been around a couple of decades or two and a half decades, and then, you know, the CFA been around since, whatever, ’70s or ’80s. Whatever, it almost doesn’t matter, it’s just a blip on the radar.

Bill They’re older.

Andy Yeah, but it’s a blip on the radar in the context of financial industry history, right? Like, you know, a couple of decades compared to the history of the accounting profession, or let’s take the medical profession, right? From what I understand, not every physician takes the Hippocratic Oath anymore but that idea has been around for…

Bill No, they do. And I’m going to quickly stop you there, Andy, because it’s one of my favorite slides to use. I’m doing a student presentation in Madrid later this week, and I’ll have this slide in there. It’s a bust of the head of Hippocrates. My wife is a physician, I’ve got five kids and my second son is a surgeon, I’ve gone to two medical school graduations in my immediate family. It does not make me an expert, but every fourth-year medical student graduating raises their right hand and takes an oath. And one of the oaths they take is they will not suffer from therapeutic nihilism, which is a fancy term for not over-treating the patient.

And if you think about where we are today in the private equity cycle as an example, where we’re raising more and more funds and there’s denominator effect and managers are having to sell down some of their private equity to top up their public equity. Should we as an industry be bringing in more funds to the LPs at a time where they need less, not more access to the private market? You know, if we were a profession, we would say, “You know what? It sounds like we’re overtreating the patient or overtreating the LP, maybe we should pull back a little bit.”

Andy Bill, can we get that memo to the Federal Reserve too? I think they may have overtreated the patient.

Bill Exactly, yes, and I think they’ve got a science experiment that is untested and the outcome, I think, is there’s gonna be a lot of broken Chinas. We saw it with SVP and Signature Bank, we saw it with the gilt crisis in London late last year, and I think we’ve got a few more crises in us until we get to the other side of that too.

Andy Well, so in the financial industry, I mean, the first thing that comes to mind is it’s very fragmented and you wrote a recent op-ed kind of referring to there’s different credentialing bodies that are fragmented, but also just the asset management industry itself is fragmented. And, you know, on the advisory side, you kind of have buckets or whatever you want to call them, you have like different sales channels depending on what type of advisor you are, what credential or designation you have, even like the legal or ethical standard. So, right away, it’s fragmented, versus in accounting, you have GAAP standards, you know, or you have these sort of universal standards.

So, to me, that’s already kind of the backdrop is like, “Wow, this is a tall order.” So, what you’re proposing is sort of an industry-wide, like a general goal, where everyone…you know, we’re not here today as an industry but we want to get to the place where we’re a profession, which means we have some sort of universal standard and agreement that we put the interests of the end user, the end client, their interest comes first. Is that basically what you’re talking about?

Bill Well put, and then you could say, “Well, where does credentialing fit into that mix?” I would say critically important, but because that ship has sailed many, many decades ago and maybe even centuries ago, again, this retroactive challenge, is it just one credential? I would argue no. And I think that this all the more reason calls for cooperation and collaboration, where we try to complete each other. And I think when I wrote that op-ed piece, there were some people that felt that I was coming out saying, “Hey, I own the old space, and don’t you dare…anybody, CFA or anybody else come in, because this is mine.”

I don’t own it, it belongs to the end client. And to the extent that I have a wholesome credential in that space, maybe there’s a value that I could add there in conjunction with somebody else. And this is why we put the CFA-CAIA staking program in place a couple of years ago where we looked at the learning outcomes of all three levels of the CFA and to Level I of CAIA and said, “We’re not waiving any knowledge, we’re recognizing of reality that a card-carrying CFA has covered most of the learning objectives of Level I, why not go deeper in our Level II and complete your learning across the risk premia spectrum?”

And I think it led me to a point that I say quite often that if anybody has the ability to say, “I’m the hub of the credential wheel in financial services,” I can’t think of anybody better than CFA. I cede that ground to them. But if you’re thinking about risk management, FRM is there, if you’re thinking about financial planning or wealth management, CFP is there, if you’re thinking about alts, it’s CAIA, if you’re thinking about machine learning and artificial intelligence and disruption, CAIA has new credential called FDP. So, you got to think about this hub and then spokes.

But I think we’re also at a period where I’ve been in and around this industry for 40 years, and I think if you picked any five-year window in those 40 years except the last few years and said, “Bill, you’re going to fall asleep on Year 1 and wake up in Year 3 or Year 5,” I would say for the most part, I could have woken up and gotten right back into the business not missed a beat. Not true today, the pace of change, the pace of disruption, the pace of new technologies like machine learning, artificial intelligence, these are coming at us at a pace unseen ever before and I see no slowdown.

So, it really does require greater cooperation, greater awareness, and a greater emphasis on continuing education. The days for me…well, now I have two credentials. I got my CAIA recently, I got my CPA when I get out of college, believe it or not, I’m a Level II CFA candidate if I signed up for Level II. I signed up and passed Level I in 1990 and never went back for Level II. But I think my generation, one degree or one credential, you’re pretty much good to go for 40 or 50 years. It’s not even so much an investment credential, which I still think is very, very important. The concept of continuing learning, continuing education is going to be critically, critically important.

Andy Right. I mean, thinking of a physician, if I’m a doctor who helps treat cancer, I don’t go to medical school and then whatever specialty learning and then I complete that and I go, “Oh, okay, I’m done,” because I’m out there representing and trying to help my patients. And so, if there’s a new medicine or new treatment or a new science out involving cancer research, I want to know about it as quickly as possible, right? Because then I can apply that to my practice and help my patients. But your point is we need that same mindset in financial service where we’re constantly thinking on how we can better serve…well, I say, “We,” I’m not a financial advisor, but, you know, whether advisors or asset managers, you know, that same mindset of, “I need to invest in continuing education, not necessarily just because it’s a stepping stone to higher earning power or something, but because it’s going to lead better outcome for my clients.”

Bill Yeah, and two very big trends that are, I think, obvious to you and most of your listeners, one is democratization, where the access to alternative investments, the space that CAIA largely travels in this credentialing body, used to be the domain of the large institutional investors and sovereign wealth funds. Now, if you look at that AUM global pie, the dominant owner is the individual, no longer the institution, which makes sense. When is the last time we minted a new sovereign wealth fund or a new defined benefit plan? Are you getting a defined benefit plan or a defined benefit check at the end of your retirement? I’m not and I doubt you are either.

So, we’re responsible for our own retirement, we have to handle investment risk, longevity risk, wars in Ukraine, supply chain issues, we’ve got to factor these all into our calculus without a lot of help and training, so it is a bit of a challenge. And then if I turn around and say, “Well, in the good old days, if you had a defined benefit plan, not only did they take care of all those risks, they could invest across this entire risk premia spectrum. I’m putting all those risks on you and all you can have is the public equity, public debt markets, and the money market funds. Good luck.” It’s a horrible value proposition.

Andy And then many clients that are working with an advisor may not even be aware their advisor is not a fiduciary. I mean, many of them may assume that their advisors are fiduciary. Well, you know, I want to ask about that. And to me, this is a trend where an increasing number of advisors seem to be fiduciaries. I mean, maybe you have better insight on the data. Do you think that that…you know, because here’s the thing, you know, these institutions, they don’t just change overnight or…it’s not even institution, like, the ecosystem, you know, it can’t just change overnight structurally. I don’t know if the word painful is correct, but it takes time, you know, for an industry like this to sort of reorient itself. Do you think that’s the key? You know, is that maybe the biggest lever? Is there a world 50 years from now where every single financial advisor is a fiduciary?

Bill So, I don’t know if I can envision that. You need to get a lot of regulatory muscle behind that and the lobbyist arm of any industry is very active and very difficult to break. But I think if you ask most clients or prospective clients in the mass affluent space to define what a fiduciary is, some of them might know, some of them might not, I don’t think anybody is going to give you a perfect definition. But if you said to them, “Well, is your expectation that whatever I do for you is suitable for you, or is it in your very best interest?” I think nine and a half and maybe 10 out of 10 would say, “It better be in my best interest.”

Andy Well, to me, that’s the main problem. To show my hand or to make my opinion known, I guess, I don’t have any problem with fiduciary, non-fiduciary, what I have a serious problem with is when someone thinks an advisor is a fiduciary who is not, right? So, it’s like with real estate agents…I don’t know, is that a profession? I don’t know but, like, it’s very important to understand, is this agent have a fiduciary obligation to you as a client or not? Either way is fine, but I want to know, right? How do I, as a client, make any sort of decision or filter any sort of information coming to me if I don’t understand the motivations, you know, the incentives of the actors involved? And human beings respond to incentives. If there’s one thing that I know is true from the Bible or from everyday life experience, I’d say human beings respond to incentives.

Bill They do, and I think we as individuals want to trust, we want to trust the person we’re working with, we want to trust in the system, but if at the end of the day, if suitability is their standard and that person assumes that, “Maybe how I’m operating…” Even if legally that’s the ground in which they can operate, at least have a conversation with them to say, “Hey, let me explain to you best interest versus suitability and what my responsibilities to you are.” And once they’re clear, then at least…then you can say, “Let the buyer beware.” As a quick side story, right before this call, Andy, I was on the phone with my oldest son, Sam.

He’s in the process of potentially buying a house and this process is all new to him. He just got married. And he talked about the broker. And I said, “Well, Sam, the broker is working for the seller and they’re going to tell you what they want you to know and any information you tell them, they’re gonna use to their advantage.” And Sam said, “No, no, we’re working with our own broker.” I said, “Sam, are you paying this broker?” “No.” “That broker also works for this seller.” So, I think even…you know, Sam is a smart kid, this is his first time with this process. Do you think this broker is gonna sit down and say, “Well, let me explain to you, everything you say to me, I’m gonna use against you in every possible way?”

Andy And, by the way, Bill, I’m sorry to interrupt, but I have to say if I were in that broker’s shoes, I’d be operating in the same way. I’m not being holier than thou, I’m just making the simple point that human beings respond to incentives. It’s exactly what you’re pointing out. So, I’m no different, you know?

Bill Yeah, and real estate brokers, that is a great industry, it’s not a profession, because part of it is recognizing there are going to be conflicts of interest in our industry and everywhere else. And I think we can try to act more and more like a profession by pointing these conflicts out and even saying to a client that, “Hey, it’s suitability because I’ve got shareholders, I’ve got partners, I’ve got a bottom line, and I’ve got to have some responsibilities there too, but I also have a responsibility to you.” So, as, you know, the age-old two masters that Jack Bogle talked about, how many managers sit down and have that conversation with a prospect or a client?

Andy Bill, you hit the nail on the head. To me, that is the key point of two masters and actually, I have something else I wanted to ask you in regards to fiduciary. But if I take that back to my attorney or my physician, if I had a conversation with my physician and she says, “Well, Andy, I have two obligations, one is I want to help you with your health, to be a healthy person, and the other obligation I have is I get paid by pharmaceutical companies and I need to make sure that they’re rewarded for their investments in pharmaceutical research.” I’m suddenly going to be looking at prescriptions and her suggestions, you know, I’m gonna have a whole different mindset in my interactions with her if I think suddenly, she’s balancing my health with another competing interest, okay?

Or an attorney. If I hire an attorney…I mean, you know, I’ve worked with many different attorneys, I have a great one currently that I love, by the way. But good or bad, you know, whatever, I at least know when I hire an attorney, unless there’s some sort of disclosure that I sign, they work for me, they have a legal standard. I may not know every nook and cranny of how it works but I know broadly, they’re obligated by their licensing body, probably by state law, to act in my best interest. And as you pointed out, there’s no two best interests, right? As soon as you say, “Two competing things,” or whatever, it already just shifts my mindset to a totally different space, which is neither…it doesn’t need to be a bad space, it’s just now I can evaluate things up. Realistically, I have my guard up a little bit more, I’m being a little bit more critical, a little bit less trusting. Is that fair?

Bill Yes, and you should be not because the person on the other side of the table is not trustworthy, they have other masters that they need to work with, that they need to please. And this is exactly…it’s a great piece that Bogle wrote, I think it’s circa 2006, 2008, maybe it’s even earlier than that, but it stood the test of time. And I think going back…and every new person coming into this industry on the buy side of asset management, every employer would be well served to make every new employee read that and recognize that, if not in day one, week one, they’re going to run into some kind of a conflict of interest where you don’t have to trip over yourself and expose every single nuance to a client, but recognizing that you’ve got an edge over them and they are expecting you to do right by them 24/7. And it’s not always going to be the case, and being able to understand that, you know, I think it’s a pretty basic principle that any new person coming in should fully understand.

Andy Yeah, and I mean, in that kind of situation, I think you hit the nail on the head, which is if I, you know, own an asset management company or a wealth management firm or whatever, and let’s say we don’t have a fiduciary duty, however we’re regulated. To me, realistically, in my lifetime, I’m not going to reorient an entire industry, right? Or maybe I don’t have time to, I gotta meet payroll next Friday. What you can do is disclose, right? And it doesn’t even need to take a lot of time. And if anything, you know, when folks will disclose something like that, I think you can actually even earn trust.

But then realistically, yes, a client is going to process information differently. And it’s not a disclosure that’s tiny little, you know, six-point font text at the bottom of an email. You’re talking about just a human-to-human conversation where someone in the financial services industry is pointing out to the client, “I’m not a fiduciary, I don’t legally have your best interests at heart.”

Bill Absolutely. One of my earliest mentors…and I think we’re shaped by mentors, good, better, indifferent, and this mentor was excellent. He began every conversation, and this was when I was in the buy side of asset management, “What would the clients think?” And those words have become etched on my mind. And when I first joined CAIA, this is…it’s now worn out but this orange bracelet that I wear around my wrist here, it had WWMT, “What would members think?” And it’s a constant reminder to me that I work for my members, not the other way around, and they have expectations of me like they absolutely should, and how can I equip and prepare them to be the very best professionals out there?

Because that’s our ground troops, they’re out there in the marketplace. I’m in the education side now, so all I can do is to help bring forward very transparent content, be as transparent as a writer and a speaker as I possibly can to talk about the good, bad, and maybe even the ugly parts of our industry, so at least we’re pointing to them, we’re owning them, and I think that’s gonna make us better going forward.

Andy Yeah, I love that. And I think communication, being direct with people and explaining…you know, with the goal being to actually communicate, right? Not just to cover my behind with some sort of legal disclaimer, but the goal being actual understanding, I think that builds up relationships and increases trust. You know, we talked earlier about fiduciary standard. And this is a concern that I’ve had lately, and I think it’s becoming more of a concern with the industry, is that the concept of fiduciary itself seems like it’s becoming a little bit of a political football. And, specifically, you know, ESG, this has been…you know, it’s obviously controversial, it’s huge in the institutional world. There’s a lot less demand for ESG product from retail investors, there’s huge demand from it from institutional investors. Obviously, it’s not going away, there’s too much demand at the institutional level.

But with some of, you know, the rulemaking or discussion to kind of reframe what fiduciary duty can include, can it include ESG considerations, etc., now I’m going back to what you said about serving two masters and I’m like, “Well, wait a minute, if I’m working with an attorney, is the attorney considering social impact or social engineering or whatever along with my legal best interest? Is he balancing or she balancing those two things, or are they just representing my best interests?” Or again, with the medical profession, “Is a physician balancing social interests, social engineering, whatever, along with my physical health? Or do they just look out for my physical health?” So, I’m actually increasingly concerned that even the concept of a fiduciary is going to get sort of dragged through the mud and there’s going to be people that no longer even trust that.

Bill Well, and without trust, we have nothing. So, I think we are a great industry, we have a lot of work to do to become a profession and maybe that’s not an attainable goal. But being more trustworthy to the end client is something we can all work on every single day and I think ESG is a perfect example. I think even using those three letters has a lot of risks attached to it because I think the buyer of the product thinks I’m solving for one risk factor. There are so many risk factors tucked inside of ESG, and what do you want me to solve for? So, if you want me to solve for climate and I am going to shut down a chemical plant in XYZ city in the United States, I’m going to decimate that local economy. All the corner stores are going to close down, the school is going to go out of business, people are going to be unemployed.

So, I did right by the E, environmental, and maybe more specifically climate, but socially, have I done the right thing for the local economy? Absolutely not. So, every decision has a trade-off. And the economists did a great takedown of some of these index providers in the ESG space and they talked about how many risk factors are tucked inside of those ratings and the fact that they only correlate 0.5% of the time. That’s on the one hand a big problem, on the other hand, it’s not surprising at all because we’re measuring everything and nothing at all.

And what are the conclusions? And I agree with this from the economist, they said, “Well, let’s change the E to environmental and if we’re solving nothing else, let’s figure out how we can solve for better climate outcomes.” And not to say don’t worry about everything else, but can we fix it all in one fell swoop? I would say no because we’re now leaving a lot of little nicks in the door and we’ve got to figure out how we can turn capital into a battering ram and take that door down.

Andy Well, and also…I mean, I hear your point and I agree with it, how do you solve for social and environmental at the same time when those are often at odds with each other? Like, S&P, they took Tesla out of their ESG index, you know, I don’t know, because Elon Musk was a Trump vote, whatever. He was in the news, obviously, in a negative way, they removed Tesla from that index, and I’m thinking…that, to me, was all it took and that acronym in my mind was just through the mud because I’m thinking if that could happen with S&P, I’ve now lost my trust in it. But to your point, these things even kind of conflict with each other. But what is even…the philosophical question, is the board of directors of a public corporation supposed to be trying to maximize shareholder value, or do they have a different goal? And if they have a different goal, fine, but I want to know what it is, I want it clearly defined and explained to me, you know?

Bill Well, it’s quite complicated. Just quickly on your Tesla example, I think there are many people that don’t fully understand this. When it comes to Sustainalytics and MSCI, and they’re coming up with that climate factor, they’re trying to determine how much of an impact climate is going to have on the stock price. It has nothing to do with what that company is doing to the environment. Which, to me, that’s preposterous on the one hand, but I think most people think that ESG rating is how good of a citizen Tesla is or ExxonMobil is. Are the risks already priced in? If they are, you get a high rating. It’s no more complicated than that. So, it’s completely upside down in people…

Andy Is that how they’re operating in practice? I don’t know that…to me, then all of these, you know, oil companies or whatever that are in the traditional hydrocarbon energy, they should have high ESG ratings, right? Because it’s probably all priced in, right? I don’t know if I really buy that they’re applying that in practice, even if they are…

Bill Well, I don’t understand the inner workings of their algorithm but that is a fact that they’re looking…they’re not looking at the impact that that company has on the environment when they published the rating.

Andy Okay. So, then I think that’s probably widely misunderstood, then, across the whole spectrum because…

Bill It absolutely is, yeah. And if I could find a link to this article in “The Economist,” Andy, we could put it at the bottom of this podcast, but it’s a very interesting and eye-opening take.

Andy So, that, to me is another example, though, where if it’s not a profession, that you have all these actors who can’t even agree on what ESG is or how to define it, and that…I don’t know, you know, in like accounting or in other professions, when there are new concepts, they probably have a process to sort of really concretely define or put parameters around new things, right? And in FinServ, in the financial industry, it’s just so fragmented. So, to your point, do you think that this can…can it really become a true profession? Or is it more…are you more proposing that we become more profession-like because a true profession may not actually be, you know, attainable?

Bill So, I think if I was a hopeless optimist, I would say we can be a profession someday, let’s keep that. The fact that this industry had centuries of a head start on any credentialing body, we should recognize makes it a massive challenge. Is it impossible? I don’t know. But it should not, for a moment, take our eye off the ball to say that this industry has become fairly concentrated at the top in terms of we don’t have that many asset managers over $1 trillion or over $5 trillion. And if we could get them singing from the same hymn, no, I think we’ve got maybe a move in the right direction but it’s gonna be hard.

But focusing on more professionalism, more of trustworthiness, I think these are admirable pursuits that we should never give up on. And I think having more professional employees at the asset management firms, critically important, having greater transparency with the end client, critically important. Having a regulator that’s maybe focused a little bit more on protecting investors through education and not more regulation, because if we…as we talked about before, we have to find ways of giving you and I access to private equity, private debt infrastructure.

If we’re going to take the very value proposition as to what has made those asset classes different and rinse them out, then what do we have at the end of the day? Probably something that looks very much like the public market proxy, we’ve accomplished nothing. So, we have to have smarter regulation as well. And then you think about the regulation in the U.S. versus the FCA in London versus the SEBI in India, and you can very quickly see that we have all these different regimes globally, but if I’m an investor, I can take my money and invest it in Saudi Arabia, in India, in China, wherever I want to invest it.

So, I don’t need a passport to access these countries but have different regulatory regimes that kind of get in the way to define what the investors should or should not know about. So, I think there are a lot of challenges in front of us. But it doesn’t mean for a moment, we should give up on better outcomes to the end investor because we’ve got to find ways of getting them greater access, moving away from a 60/40 model that is just defined by public equities in the 60 bucket and public debt in the 40 bucket, and how can we give the investor access to private equity, private debt infrastructure, real estate, hedge funds, etc.? And these are very difficult challenges.

Andy Totally. Well, you know, I have to…I don’t know that I’m a hopeless optimist, but I have to join in a little optimism that, you know, some of the trends you mentioned, there’s more education now available than ever before, both for wealth managers and advisors, as well as for individual consumers. And I think, you know, the popularity of CAIA and your designation shows that it’s being used and taken advantage of and implemented in a good way across the profession. So, I think that’s a good trend, education, but it’s one that you can’t really get enough of, right? So, we always need more.

I would also point out, you know, I think…we’ve already talked about Bogle, John Bogle, and just the overarching trend of fee compression and just more professional products. You know, I think within the alternatives industry, there’s more institutional quality products. You know, you mentioned institutional quality products as being within CAIA’s kind of wheelhouse. There are just more of those, many of which didn’t probably exist 50 years ago that you could really call institutional grade.

So, I think there are some good trends. There’s always more work to do, though, so let’s not sit on our laurels. Do you have any predictions or maybe challenges or…you know, where do you see this going in the next five years, because you mentioned kind of that fallen asleep for five years? Well, I’m wondering what do you think will happen in the next five years, how does CAIA move the ball forward? How does the industry move the ball forward in concrete ways?

Bill Well, we can never profess to be all things to all people. But we also…I think, like, we’re not for profit, but I do view CAIA as a global business and hopefully a global business leader and we’ve got to continue to think about our relevancy and how do we evolve to make sure we continue to be relevant in our sphere of influence. So, as I said, we’ve survived and thrived in these two decades with this institutional quality credential. But when it comes to democratization, if an RIA comes to me and says, “Well, you know what? I’ve got a client coming to me asking me about private debt. I don’t know much about it. Could you help me?” If I drop two 1000-page textbooks on his or her big toes and say, “Here you go, past rate 45% to 55%, 48 hours of study time, good luck.” Have I helped or hurt them? I’ve hurt them. Their big toe hurts and their body hurts…

Andy Bill, you got to send them a link to my podcast as like just a teaser to get them…

Bill And I think that’s one very good outlet. And then also, as a strategic answer, you had my colleague Aaron Field back on and I’m not sure where he was in the development of this but CAIA came out with the UniFi by CAIA and it’s gonna be a series of microbadges. So, instead of, “If you really just need to know about private credit, do you need the big heavy hammer of the CAIA credential?” versus, “Can I give you five hours of a pretty decent tour about what private debt is?” So, if you pick up an article or having a conversation with a client or talking to a manager about due diligence, you know what you’re doing. So, private debt came out just a couple of weeks ago. The next one is gonna be very interesting.

Andy By the way, Bill, I just have to say on the private debt, that is so timely, and I think CAIA does a great job with this with asset classes. I don’t know if you had a crystal ball with that one. But just these asset classes that are kind of heating up and I just see more and more demand from that for investors. So, I just had to say, that is very good timing on the private debt.

Bill Well, I appreciate that. And this maybe ties into the early part of the conversation, Andy, because when we started UniFi, we went to some of the top asset managers and wirehouses and RIAs and I’m talking about the Morgan Stanleys, the B of A, Merrill Lynchs, Blackstone, BlackRock, T. Rowe, Vanguard, etc. And we went to this group and said, “Hey, you compete by day and you have your universities and you have your product educational offerings, but could you work with CAIA and UniFi to become the market clearing source where everybody could point to say, “If you need to get education, it’s got to be on this UniFi platform?”

So, we took a lot of these big global organizations and we said, “We need your help, you have the conversation with the end client, we want to control the content,” not a single one turned us down. So, we felt emboldened by that. And our next one out is going to be digital assets. We’re going to work in a horizontal offering that’s going to mimic our old fundamentals product. So, that’s one trend, democratization, we feel we have an early and emerging but a very good answer there. The second one is DeFi, decentralized finance. We’re going from TradFi, traditional finance, to DeFi where why does it take two days to settle 100 shares of IBM? Why can’t you and I do that in the course of this podcast? There’s nothing complicated about it.

And the concept of a plumbing around blockchain and immutable ledger that we all have access to, we could settle a trade in the listed equity in a heartbeat. And it might be the right infrastructure and plumbing to think about how we could get early-stage VC onto a blockchain, where we could create a liquid mechanism where the company itself would not have to raise any liquidity but if you wanted in and I wanted out, we could find each of them the blockchain. Now, we need a due diligence screen in front of that and probably some agents that are recognizing our challenges and our opportunities as well.

But this whole DeFi move is very, very interesting. I think it’s here to stay, I think it’s going to disrupt the middle and back office. KKR in the most recent fund offering, they came out with a Cayman-based fund, very typical offering, one of the feeder funds is on the blockchain. That’s going to be a very, very interesting one to watch because if you look at that feeder fund and compare it to BREIT at Blackstone, when investors wanted out, BREIT had to raise cash to do it. And they raised cash and raised cash, and all of a sudden, they raised the gate because they met the 5% quarterly, 20% annual limit, and had to raise the gate.

If this were on the blockchain, the buyer and the seller would have to find each other, somebody would have to help with price discovery, and if I’m the buyer and you’re the seller and one of us doesn’t like the price, the transaction is not going to happen but the fund itself does not have to raise liquidity. So, if I’m in that fund for the long term, I don’t want the fundraising liquidity. So, this allows sort of a clearing house for “trades” on a blockchain and…

Andy Yes, a secondary market for sure. Yeah. And Bill, you’re right, there’s a lot of smart people working on this. I love what you said about falling asleep for five years. I totally agree.

Bill Nowadays, it’d be five days or five months now, so you’ve got to continue to keep your guard up. I learned something new every single day and it’s why I love this business.

Andy Totally. Well, Bill, that being said, I know we’re short on time here but where can our audience of advisors, financial professionals, and high-net-worth investors go to learn more about CAIA and about that UniFi program?

Bill So it’s all on the website, so CAIA UniFi. We didn’t talk too much about FTP, which is our credential answer for the disruption in the DeFi space. And I just…when our exam results come out, I send a letter typically to the people that have passed and I don’t know if I’ve done it often enough or even at all with people that have not passed the exam. So, I just penned that letter today and by the time this gets out, hopefully, the letter will be out too, so I’m not previewing anything that everybody is gonna see themselves. But in that letter, I said to the people that did not pass that you’re already better off than the average person on the street because you chose to be smarter about your avenue of pursuit and you made that investment for yourself on behalf of the end client.

But part of my message to them was that coming back and taking Level I again may not be for everybody, coming back a second or third time and passing and coming to Level II may not be for everybody, but getting smarter and learning is something we can all do. And we have content, we have blogs, we have podcasts on our website, there’s no excuse for every person in this industry to not go to sleep tonight and say, “I did not learn anything this prior day.” So, it doesn’t have to be the credential, it doesn’t have to be UniFi, it doesn’t have to be FTP or CFA or any other heavy hammer credential, but finding ways of getting smarter on behalf of your end client, there is no excuse and it’s something we all must do every single day. And you can find most of that at but you could find it on a lot of websites too, but I think when it comes to alts, I think we’ve got a very good solution.

Andy I totally agree. I mean, if anything, you know, on the podcast, I like to share information and get smart people like yourself on the show. We try to be entertaining as well but I think there’s no excuse, as Bill said, to go on to and whether you want bite-size chunks or whether you want, you know, the full-blown credentials, that’s up to you, you know, but the information is there, it’s waiting. I’ll be sure to link to all that in our show notes to UniFi, to the main CAIA website as well. And Bill, thank you so much for joining the show today and talking about some of these more philosophical issues, which I love, by the way, I’m very passionate about them, so hopefully we can have you back on soon.

Bill I’d love that. I appreciate the opportunity. Thanks, Andy.

Andy Hagans
Andy Hagans

Andy is a co-founder of WealthChannel, which provides education to help investors achieve financial independence and a worry-free retirement.

He also hosts "WealthChannel With Andy Hagans," a podcast featuring deep dive interviews with the world’s top investing experts, reaching thousands of monthly listeners.

Andy graduated from the University of Notre Dame, and resides in Michigan with his wife and five children.