The transcript from this week’s MiB: Omar Aguilar, CEO and CIO of Schwab Asset Management, is below.
You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube (video), YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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Transcript: Omar Aguilar
President, CEO and Chief Investment Officer, Schwab Asset Management
Masters in Business with Barry Ritholtz · Bloomberg Radio
[00:00:00] BARRY RITHOLTZ: I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Omar Aguilar. He is President, CEO, and Chief Investment Officer of Schwab Asset Management.
They run over a trillion dollars across a hundred different ETFs, mutual funds, and separately managed account strategies. He also runs the Schwab Center for Financial Research and sits on the firm’s executive council. He joined Schwab in 2011, specializing in equities and multi-asset strategy. Schwab’s total assets are over $13 trillion, and its asset-weighted expense ratio of eight basis points is amongst the lowest in the fund industry.
I thought this conversation was fascinating, and I think you will also. With no further ado, Schwab’s Omar Aguilar.
Omar Aguilar, welcome to Bloomberg.
[00:01:08] OMAR AGUILAR: It’s a pleasure to be here with you, Barry.
[00:01:10] BARRY RITHOLTZ: It’s a pleasure to have you. So I want to get into your career and some of your conversations about what’s going on in the market today and what’s happening at Schwab, but you have such a fascinating background, I have to start there. Bachelor’s in actuarial science, then a master’s in applied statistics from the Institute of Technology in Mexico City.
Then you come to the US, and at Duke you’re a Fulbright Scholar, where you get both a master’s in statistics and a PhD in decision sciences. Am I getting that right? It sounds like you were planning for a career in academia.
[00:01:51] OMAR AGUILAR: It is true. And actually, in my last year in my PhD program, I did apply for a couple of academic jobs before I was lucky enough to basically get to Wall Street as an analyst.
[00:02:03] BARRY RITHOLTZ: Yeah. So your first gig was — was it at Merrill Lynch? Was it Bankers Trust?
[00:02:07] OMAR AGUILAR: Bankers Trust, and then Merrill Lynch.
[00:02:08] BARRY RITHOLTZ: You have this deep quant research background. What did you do when you were first starting at Bankers Trust and then Merrill Lynch?
[00:02:18] OMAR AGUILAR: Well, if you recall the degree that you mentioned, my dissertation and the work that I did was in how to use statistical models. Now they’re called data science. Back then it was statistics — how to use those models for making decisions. The whole process of decision under uncertainty was the whole research that I did.
And we applied that in particular to areas like currencies, equity, asset allocation, and I was hired at Bankers Trust to develop those models. So I call that — before any AI or anything else, they were just quantitative models that were able to help people be faster to understand how people make decisions.
[00:03:08] BARRY RITHOLTZ: Hmm. And I don’t remember if it was the PhD paper or the 2001 paper that is still one of the most cited papers in quantitative research. How did you jump from Bankers Trust to Merrill Lynch? When did that transition happen?
[00:03:23] OMAR AGUILAR: Well, if you follow the path of my background, a lot of that is related to the activities on Wall Street, because there were a series of mergers and events that happened that took me to where I am today. Bankers Trust was bought by Deutsche Bank, and at that point the group that I was part of was lifted out to join Merrill Lynch. Merrill Lynch Investment Management was starting to build their institutional business, and that’s where we became a really nice fit. Unfortunately, September 11 happened, 25 years ago.
And then that basically took us to create the private bank asset management services for Lehman Brothers, which wanted to branch out into the asset management business for their wealthy clients. And then from there, it started to get a little bit sensitive in terms of the Lehman business. So I had the opportunity to work with a former colleague from Bankers Trust at ING to basically rebuild their quantitative and systematic investment processes. So that was all related to activities that happened through the Wall Street acquisitions, events, and so forth.
[00:04:33] BARRY RITHOLTZ: And ING, now better known as Voya — that was $20 billion across 15 strategies, including active, index, enhanced index, pensions, variable annuities, and mutual funds. Once you stood that up and got that to a reasonable size — was Lehman before that or after that?
[00:04:55] OMAR AGUILAR: That was before. That was before. We were able to build a lot of these things at Lehman Brothers. It goes back to a lot of what my philosophy is: you have to be in a place where you can marry distribution with manufacturing.
That’s what we believe asset management success relies on. ING had very good distribution, and our idea was to build these more institutional-type, scalable businesses using quantitative tools and technology to be able to deliver that to different folks. And again, unfortunately, we were in the middle of the global financial crisis in 2008, which basically put a stop to every activity across New York and Wall Street and everything else. Right.
And that gave me the opportunity to go back to my academic roots and start working at Financial Engines with a lot of Stanford academics, headed by Bill Sharpe —
[00:05:48] BARRY RITHOLTZ: To say nothing of the Nobel laureate, Bill Sharpe. I just want to clarify one thing.
At Lehman Brothers, the quant research you were doing, was that for alternative investment management or for public equities?
[00:05:59] OMAR AGUILAR: For both. It was dedicated to building asset allocation models for the private bank. And it was the first time that we were able to build a set of strategies that included alternative investments. So we had private equity, private real estate, fund of hedge funds, and that was the whole concept of what we wanted to do for wealthy clients back then.
[00:06:20] BARRY RITHOLTZ: Hmm. And then at Financial Engines, it’s $40 billion in defined contribution plan sponsors. I’m fascinated by Bill Sharpe’s work. I was fortunate enough to interview him about 10 years ago. How did his thinking influence your approach to portfolio management and retirement planning?
[00:06:41] OMAR AGUILAR: Well, going back to this concept of behavioral economics, Bill and the economists at Stanford have been at the forefront of merging these concepts of how do we create markets and invest in markets that are not necessarily efficient in the short run, but in the long run they sort of are. Bill has always been in this idea of capital efficiency: in the long run, it’s better to do the buy and hold and stay put at a low cost, as opposed to trying to go in and out of the market. The whole concept of market timing, and avoiding market timing, was sort of the premise of everything. And that fits very well for 401(k)s, for retirement assets, for pensions, where strategic asset allocation is what really drives your long-term results.
So that was at the core of what we did at Financial Engines, and it’s still at the core of the philosophy that we have at Schwab.
[00:07:31] BARRY RITHOLTZ: So I recall one of the most fascinating things, of many really interesting things Sharpe had said, was the question of the annual 4% drawdown in retirement as the thorniest problem in all of finance. I’ve read that you’ve said 4% for many people doesn’t make any sense. Do you want to address that?
[00:07:53] OMAR AGUILAR: Yeah, well, we did a lot of research, and the need for income is not a static number, and it’s not necessarily something where you can rely specifically on one thing. And what we have found is the 4% rule became just like a number that somebody picked out of a hat and said, 4% works as long as you can generate those. And a lot of that had to do with — if you think about it, depending on the level of interest rates, 4% may be — it is right now probably less than the risk-free rate. So there’s no reason why you have to stay with 4%.
So it is really a dynamic process that depends on the needs of the moment, inflation numbers, real growth, and the level of rates that may affect what is the drawdown that you need to survive.
[00:08:43] BARRY RITHOLTZ: To say nothing of — when 4% was picked, the longevity projections were so much less than they are today. If you are 68 and relatively healthy, you’ve got a good shot at another 15, 20, 25 years of living on that pile of capital. That wasn’t true 30-plus years ago.
[00:09:04] OMAR AGUILAR: Absolutely, Barry. And a lot of the challenges that we face — and this is something that we worked on at Financial Engines — is getting into the habit of early saving, because in the generation of Gen X and any of these generations, there are no pensions like back in the day, right? So people rely on 401(k)s. So the ability for people to use that savings and the matching of the companies is critical for them to get to a point where they can retire.
Unfortunately, during all the research we realized that the majority of Americans don’t have enough to retire, for precisely what you said: it’s more than 25 years of liabilities that they will have ahead, and with 4% drawdowns they will run out of money very quickly before they can actually get there, especially when you have inflation impacting.
[00:09:57] BARRY RITHOLTZ: So what’s really so fascinating about your background: you’re not only a quant, but, unusually, you are a big follower of behavioral finance and thinking about decision making. You lead Schwab’s BeFi program for advisors, including diagnostic coaching tools, and you run the BeFi Barometer study. How does someone who’s that mathy, and a longstanding statistics, probability, and quant student, fall into behavioral finance?
[00:10:30] OMAR AGUILAR: Well, it is a great story, because the area of statistics that was part of my dissertation is an area of statistics that is called Bayesian statistics, and Bayesian statistics is based on a theorem by Reverend Thomas Bayes, way back when. What it does, it basically combines information that you have today, that is called a prior — that could be your experience — and then uses all available data to update your experience, which is really our life. If you just think about it without necessarily creating a model, just think about it: you have an experience, you know what you need to do.
I always give the example of trying to get to the airport. So you have your prior knowledge about how — your own utility function — how early you want to get to the airport, how difficult that may be, the potential problems, the probability you miss the plane, and everybody has a different way to approach it. Two people with the same background, everything else: one may actually want to get there three hours ahead, the other person may want to get there just five minutes before they start boarding. They both take different types of risks, updating that information over time.
That’s basically how the decision process is, and that’s probability at its core. And that’s pretty much what Bayes does.
[00:11:46] BARRY RITHOLTZ: I wonder how Bayes would’ve thought about this if he was married to my wife, who doesn’t wanna miss a plane. We’ll get to the airport two hours early, bring a book. That’s just how it is. But it’s interesting that people have very different approaches to that — how much time do they wanna waste versus the headache of missing a plane. So I’m curious, how does your education in decision science shape the way you think about the big issues like markets, risk, and investor behavior?
[00:12:18] OMAR AGUILAR: Yeah, well, I have always been passionate about providing tools and services to investors to help them enhance their financial lives. That’s at the core of Schwab’s values. That’s at the core of what we do in asset management. And a big part of that, Barry, includes the fact that we want to provide information to clients so that they can make better decisions in their process.
So again, the whole idea of try not to time the market, try to look at your long-term investments, try to stay calm when things are — all that goes back to the core of behavior, because we’re all humans. All of us have evolved over time with two parts of our brains. One is the amygdala, which is the more primitive version of us that allows us to react and fly to safety whenever we see a problem, and allows us to be emotional about things. And then there’s the other part, the front of the brain, that allows us to be rational and allows us to use data to make decisions. That combination sounds very familiar to the Bayes theorem — one that is more gut feeling, the other one that is more analytical and more brain-oriented — and they get combined, and every day they’re battling with each other.
So for us, being able to provide the context for clients that are more emotional, with the information they need to adapt to their investment strategy so that they don’t panic when the market goes down, and give them a process that is quantitative in nature so that they can stay the course, is very important. On the other hand, we have other clients that are more analytical in nature. They think they can outsmart the market, they think they know the answers, and we give them information and data so that they can inform and update their own beliefs so that they can make better decisions. So arming clients with the tools and products and solutions to help them make better decisions is the core of what we do.
[00:14:13] BARRY RITHOLTZ: A little bit of Thinking, Fast and Slow. Bill Bernstein, the neurologist, had said — you mentioned the amygdala — our whole limbic system is what underlies fight or flight. If we don’t get that under control, we will die poor.
And it really is quite fascinating in actual usage. When you’re in the real world, when you’re advising clients and investors about their various behavioral foibles and errors, how do you get them to stay on the straight and narrow? What tools does Schwab use to prevent investors from shooting themselves in the foot?
[00:14:56] OMAR AGUILAR: Well, two things we do: first, we do a lot of education through our Center for Financial Research. We also provide a lot of training to our wealth advisors and our financial consultants on precisely the tools that you mentioned at the beginning. We call it this very cute name, Biagnostics, which is supposed to diagnose your biases — our marketing team was smart enough to put it together. So it is a diagnosis tool for your biases.
And the reality is that all of us have biases one way or another. So the tools allow financial consultants to get to know their clients better. We have data that basically says that the more information we get from the client on their biases allows us to build longer relationships with them. And at the core of what we do, we simplify it by saying, well, we have to balance their needs and what they want. There’s a lot of clients — they tell you what they want, and you as a financial professional know what they need, and we need to put them together.
If you think about it in the world of AI, the need is basically what the computer is gonna tell you. The computer is gonna tell you this is the right allocation, this is what you need to do. But the want is what the client wants to have. And merging those two is the critical part to maintain and have a sustainable long-term investment strategy.
[00:16:15] BARRY RITHOLTZ: Huh, really, really interesting. Coming up, we continue our conversation with Omar Aguilar, President, CEO, and CIO of Schwab Asset Management, talking about how he helped build the asset management group to over a trillion dollars in client assets. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My extra special guest today is Omar Aguilar. He is CEO, CIO, and President of Schwab Asset Management, helping to run over a trillion dollars of Schwab’s 13 trillion in client assets. So let’s talk a little bit about your time at Schwab. You joined Schwab — gee, it’s 15 years already — to run equities and multi-asset strategies.
Back in 2011, after the financial crisis, the fund business was a fraction of its current size. What was the mandate when you first joined? Was it simply, hey, build this up? Or was it a little more comprehensive than that?
[00:17:21] OMAR AGUILAR: It was more comprehensive. The belief, and the reason why I joined Schwab, was that we had a project that was to use technology, use systematic strategies to create and use scale. The business of this was to try to provide a different set of tools for clients to be able to grow their wealth. That was at the time right after the financial crisis; there was a significant amount of apprehension in the market of what was gonna happen, because the experience that people had was bad.
So there were a lot of behavioral aspects and biases of risk aversion that happened during that time. So what we ended up doing philosophically was saying, all right, we’ll start with the foundations of how the asset management business is gonna grow and run for the future. It has to be transparent. Clients define transparency as being a key part. A big value of ours is making it accessible.
So all the solutions and all the products and services had to be something that was available for retail clients, and it had to be also low cost. Those three components were key components of what we have. We said we don’t wanna have a superstore where every single product is gonna be available on our shelves. What we’re gonna manufacture is something that we call core, for every client.
So we built a set of ETFs, a set of beta exposures, and a set of smart beta exposures that allow clients to define their core portfolio, and said the core of your strategy should have the most transparency, the most liquidity, the lowest possible cost, and an accessible route for you. So we built a franchise of Schwab ETFs, and today they’re still the fifth-largest ETF manufacturer in the world, which is sort of a big part of the trademark of the wave of asset management that I was part of at the beginning. At the same time, we said, what are the other components that will be important for clients going forward? Income will be a critical part. We know baby boomers are in the process of retiring; Gen X will come right behind them.
And in that sense, our clients — particularly the clients that you have — will require income solutions. So we built dividend strategies. We built liquidity-based money market funds that were targeted. At the time, interest rates were zero or negative, so there was really nothing there.
But we knew at some point, like it is now, the yields were gonna go up and income was gonna be able to generate. It took us probably 10 years before we were comfortable issuing more bonds. But that was part of the plan. And at the same time we said, okay, well, we also need to start building technology to offer these not just in ETFs and mutual funds, but also in managed accounts, so that then we use technology to start bringing these customizations as part of that future generation.
So that vision is what got us to what it is today. Now $1.9 trillion in assets.
[00:20:22] BARRY RITHOLTZ: $1.9 trillion. I’ve been saying over a trillion. It’s really almost 2 trillion. That’s interesting.
So you’re there for a full decade before you take on the CEO job in 2022, but unusually, you kept the CIO title. They’re such different jobs. How do you split your time? How do you wear both hats?
Does that help, being able to see it from both an investment perspective and a business perspective?
[00:20:51] OMAR AGUILAR: It has been the best job I’ve ever had, Barry. And a lot of that is because the experience I have as an investor and as a researcher, which is the core of my skills and the core of my experiences on research, allows me to understand the investment and allows me to understand the risk we’re taking anytime that we create a new product or a new solution, and at the same time allows me to learn a lot about our clients and our business. I’ve been fortunate enough to have good mentors like Rick Wurster, who is our current CEO, who can combine the ability to run investment management companies with a business setting that allows us to run it efficiently. And that to me has been a great learning, and it’s been a great thing for me.
[00:21:38] BARRY RITHOLTZ: So you mentioned the word efficiency, and as I discussed earlier, you have one of the lowest fee rates for mutual funds and ETFs, at eight basis points. How does that efficiency and scale operate? How do you take advantage of the fact that Schwab is $13, $14 trillion? It’s a behemoth; it’s one of the biggest asset managers and custodians in the world. How do you take advantage of that economy of scale?
[00:22:14] OMAR AGUILAR: Well, I’ll tell you the core of this, and then I’ll give you one specific anecdote of one of our products we’re very proud of. At the core of what we offer at Schwab, it’s always been that we want clients to have alternatives, to have options to pick. So we never go to any of our clients to try to tell them that they have to buy the proprietary products that are run by my group. We basically give them third-party options. And not too far in the past, we basically removed all commissions across all products altogether.
[00:22:47] BARRY RITHOLTZ: Yeah, that was less than 10 years ago.
[00:22:49] OMAR AGUILAR: That was less than 10 years ago. So clients can actually go and buy and sell products from our competitors in asset management as long as they want. And we have the mandate to basically offer everything that we have, because our philosophy, Barry, is that if we create high-quality products at a lower cost, with high transparency, with accessibility, our clients will stay with us and will build trust, because we’re offering options for people to take on some other things. And that has given us the opportunity to grow the business and grow the market share on our own platform, but also off platform.
Not only do we serve clients of Schwab, but clients outside of Schwab also get access to our products. An example is our ETFs. We roughly get 35% of net new assets in our ETFs from outside of Schwab, which is just the core of the quality of the products that have the accessibility, that have the efficiency and the scale that allow us to create that product.
The product that I set aside as an anecdote is our dividend product. Our dividend product basically started back when I joined in 2011, and 15 years later it became the largest dividend ETF in the world.
[00:23:47] BARRY RITHOLTZ: Wow.
[00:23:47] OMAR AGUILAR: And that’s over a hundred —
[00:24:03] BARRY RITHOLTZ: What’s the assets?
[00:24:03] OMAR AGUILAR: That’s over a hundred billion dollars now.
[00:24:03] BARRY RITHOLTZ: Wow.
[00:24:03] OMAR AGUILAR: And at the end, it’s among the lowest cost, but it’s not the lowest cost, and it’s also not the one with the highest yield, which is the reason why we created this: to have a high-quality set of dividend payers that basically build that structure, a hundred names.
And that alone, because of the high-quality investments and the results that it has created — the consistency basically attracted more clients to it.
[00:24:31] BARRY RITHOLTZ: Yeah. The very high yield amongst dividends typically means the price has recently come way down, which is why the yield is high, and typically that means that dividend is about to get cut. I didn’t realize that product was over a hundred billion dollars, but it raises a really interesting point.
You sit at a fairly unique perch. You’re at the crossroads of three major shifts in asset management over the past few decades: the rise of quantitative investing, the move, at least in part, from active to indexing, and the role of behavioral science to improve investor decision making and outcomes. And you are right in the middle of all three of those.
Tell us a little bit about how those major vectors have changed how all of us invest.
[00:25:27] OMAR AGUILAR: Yeah. Well, I think a lot of things have continued to evolve in a certain way because of capital market efficiency. It goes back to Bill Sharpe’s world and theories, and then also the availability of information that clients have today that they didn’t have when I started my days at Bankers Trust. The availability of information that you get today is instant, and the response they have, and the different anomalies that exist. So what we have observed — and a lot of the core pieces of what you mentioned — because of the rise of technology, the use of technology, you can actually create more efficient processes. Now we’re in the next wave, because AI is gonna improve that even further.
And what we’re doing — we have seen the trend that goes from active into passive. We have seen the trend where people prefer lower-cost beta solutions. And then we also see the rise of alternative investments, and we also see the rise of AI as part of the process. So one of the initiatives that we have now is how do we incorporate AI to help clients use that information and those tools to make better decisions.
So go back to decision processes, go back to Bayes theorem: how do we blend the information that the client is gonna put into AI? It’s almost like the prompt that you put into all these agents. And then how do you blend that so that the answer that you get is the mixture of what we believe is the right answer for the client, based on our research, and what the client is looking for.
[00:26:59] BARRY RITHOLTZ: Huh. Really, really interesting. You mentioned alternatives. I’m curious, given your background when you were at Lehman Brothers doing the quant work with alts, I’m curious about your view generally of alts. Obviously there’s been a lot of news this past year, especially in private debt, private credit, and then there’s been this sort of nascent push to move alternatives into 401(k)s.
Give us your perspective from Schwab about alternatives.
[00:27:30] OMAR AGUILAR: Yes. Well, we’re pretty constructive on alternatives. We just completed the acquisition of Forge Global a few months back. Our belief is that for certain clients — mostly mass affluent, wealthy clients — there is this need that requires additional levels of diversification and potentially opportunities. I think the biggest misconception, even with the work that we have seen and all the headlines we have seen on private credit, is that it has not ever been a credit issue.
It has always been a misconception of liquidity. And I think that liquidity education is critical, especially as the market goes down towards the mass affluent and potentially even lower, to retail, which is a question mark. But that is the big component of how do you establish — if you think about the high-yield market, the public market, you can actually see it’s transparent, you can see what it is. There are more delinquencies and more credit events there than there are in the private market. So in private credit, when you actually look at what the size of that market is and what the size of the potential credit issues is, it’s very minimal, or lower than, in some cases, the high-yield market at the worst possible time.
So the problem is the understanding that when you go into private assets and alternatives, there is a liquidity premium that you’re taking advantage of. That means that your money’s not gonna be available the next day. That conversation is what really brings the headlines, because a lot of the challenges that we have seen in some of the funds that are available is because people are requesting their money and they’re not getting the full money back.
[00:29:10] BARRY RITHOLTZ: I’m always fascinated when I watch that happen, and I always want to grab people and say, which part of a seven-year lockup was confusing? You’re theoretically, potentially getting higher returns because you’re not asking for that liquidity. It seems that there’s a little bit of an education problem, with people thinking that they’re gonna get the best of both worlds: high returns, yet still be liquid. How do you read that?
[00:29:41] OMAR AGUILAR: Absolutely. And I think the biggest confusion, Barry, is people are trying to compare investing in public securities or public markets and private as if they were exactly the same. And even when you have quants like my team trying to look at backtests or trying to compare them, trying to put together efficient frontiers, they’re not comparable because of precisely the liquidity component that is in it. If you look at, say, private equity returns or private credit returns, they tend to be smoother over time, and they tend to have a lag when the markets go down. Usually the marks on private equity take two or three quarters before they go down.
And a lot of that mistiming is precisely liquidity. It’s precisely how these things operate on valuation. So that component is something that needs to be clearly explained so that people understand this. Now, the big part of what we’re doing at Schwab, going back to part of your question, is we also believe that especially now there is an opportunity for people to have access to those markets that didn’t have access before.
And the reason why we have the Forge marketplace is there are a lot of companies that are pre-IPO, that are in the process — they’re probably gonna stay private for longer — but whose liquidity needs of those employees or founders are high, because they may be in a great company that at some point will IPO, but right now they’re sitting on shares that they cannot use. Right? On the other hand, there’s clients that would love to have access to that, but they don’t have access because in the past they were never available. So the Forge marketplace allows us to create that supply and demand, so that employees and founders can actually tender their shares in a vehicle, so that then all clients can get access to those. So you give access to private investments, and at the same time you provide liquidity for those that desire it.
[00:31:35] BARRY RITHOLTZ: So not public and not liquid, but semi-private and semi-liquid. Is that a good way to describe it?
[00:31:40] OMAR AGUILAR: That is a good way to describe it. But it’s sort of interesting, because if you think about the amount of wealth that has been created in these private markets over the last decade, it has been fairly concentrated in maybe 1% of the population or less. On the other hand, you actually see the amount of money that is in public equities that could access that. The view of Schwab over time is: can we give access, can we close that gap for the right client?
It’s not for everybody. So that actually they can have that a little bit better.
[00:32:08] BARRY RITHOLTZ: Will these end up in a 401(k) eventually? Because as much as some people have complained — they’ve run out of institutions to sell it to, let’s fob it off on retail — it seems that for people who have a 10-, 20-, 30-year investment horizon, that is a fairly rational place for an illiquid investment. What are your thoughts?
[00:32:32] OMAR AGUILAR: Yeah, our view is, for retirement assets — and this is new — most 401(k) platforms will have access to what is called a brokerage window. And in that brokerage window there is a significant amount of options that you can use, including some of these semi-liquid vehicles that people can use in their 401(k). The biggest challenge here is, for those clients that understand the liquidity that goes with it and the duration that goes into that, it is clearly a good fit. For the majority of clients in a 401(k), they only want to grow.
And if you actually think about it, the biggest challenge with alternative investments still today is that the cost is much higher. As we said, part of our philosophy — if you add those fees over 20 years, you’re already behind the market just by paying those fixed fees. And those you gotta pay. So in our view, if you stay in these public markets when you grow your portfolio — there is this opportunity of using the brokerage window for the right client, where it actually fits better.
But overall, just because of the cost of entry, in a 401(k) over that long duration it seems to be still not the right fit for the average 401(k).
[00:33:44] BARRY RITHOLTZ: I couldn’t agree more. Coming up, we continue our conversation with Omar Aguilar, CEO and CIO of Schwab Asset Management, talking about the current state of markets today. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My extra special guest today is Omar Aguilar. He’s CEO and CIO at Schwab Asset Management, running nearly 2 trillion of Schwab’s over 13 trillion in client assets. So let’s talk a little bit about the state of the world and what’s going on in the markets. Let’s jump right into artificial intelligence. From Schwab’s perspective, how do you see AI changing things within the wealth management business, be it portfolio construction, financial planning, communication, education, even the economics of individualized advice?
[00:34:50] OMAR AGUILAR: Well, it’s making its way very quickly, and the adoption is something where we all in this business started to get on it. The way that we describe it is, this is like the third wave of AI in our society. It started with the hyperscalers — it started with that piece of big investments, capital expenditures going into hyperscalers. It moved to infrastructure, with data centers and semiconductors in there. And now we’re going to that adoption phase that includes a lot of sectors, including financials, including healthcare.
In our case at Schwab, we’re doing this in many ways. One is efficiency: making AI tools efficient for all our employees so that they can actually use their time to do something else for client service. We continue to support our clients. We have been, over time at Schwab, always committed to pick up the phone as fast as we can and give them the service that we provide.
And many of these things will basically get the benefit of AI. We continue to work on analytics — AI analytics that will allow our clients to be able to access their accounts and look at the reports and look at the impact of the markets on their accounts using some of these tools. And for research, we are now in the process where all the research that comes from our Center for Financial Research is now being packaged. So we have what we call the research assistant, which allows clients and financial consultants to get access to: okay, what happened in 2022, what happened in 2023, what did we think when the Fed first made decisions, what was the situation we had?
And then being able to have that information available very quickly to understand what it is. So AI in the adoption phase is clearly something that we’re embracing and we’re investing in, and I know all our peers are doing that too.
[00:36:38] BARRY RITHOLTZ: So about a decade ago, maybe a little longer, when the robo-advisors, the digital platforms, first rose up, there was sort of a concern: oh, this is gonna replace individual advisors. That turned out not to happen. People, especially wealthy people, wanna be able to pick up the phone and talk to another human being. And yet we’ve seen the same sort of thing play out with AI again: hey, what is this gonna replace?
Is this gonna replace analysts and strategists? Is it gonna replace portfolio managers? And what about advisors? Do you see a similar thing playing out, where middle class and high-net-worth investors want a person on the other end of the phone? Or if it could be faster, cheaper, better, will people embrace AI for advice?
[00:37:34] OMAR AGUILAR: Well, it varies by generation, and it varies by many parts of the segments of the market. Our philosophy is, and it’s still today, that the world of personalized relationships will be the key to success in the future. And that cannot be replaced by AI. When you get to see somebody, when you get to talk to somebody, no matter what it is, that component of establishing the relationship — because we’re humans — we’ll never be able to replace with AI.
What AI will do is basically create more efficiencies on tasks and things that financial advisors normally use their time on today, to build better relationships. So if they were using time for creating reports, for doing analytics, for doing other things, and that took 50% of the time, and you can reduce that to say 10%, then now you save 40% of the time for building more relationships, getting to know the client better, getting to understand their biases to see how they can help them better. So that is what we see as the trend going forward, where the combination of AI tools — and I’ll mention specifically AI tools — with the human expertise and relationship building is basically the formula for the future. And to your point, yes, people thought the robo-advisor was gonna take over, and indeed it worked very well for many clients, but it didn’t replace the relationship building for financial consultants.
[00:39:02] BARRY RITHOLTZ: Yeah, some of those AI tools — just something as simple as note taking during a Zoom call. I used to watch people not be able to pay attention ’cause they’re jotting stuff down, or there’s a third person on the call, a whole nother human taking notes. And it just has made things so much easier and more efficient. But again, not replacing individuals.
Let’s turn our attention to the markets. Your mid-year outlook said that earnings are driving the bull market, but the leadership is a little narrow. It’s mostly been AI and energy. First, is that still the case today?
And second, when does that concentration become a risk factor?
[00:39:46] OMAR AGUILAR: Well, the concentration of the Mag Seven has been an issue for the last two years. We started to see rotation out of the large-cap, mega-cap names in tech at the end of last year going into this year. And it comes and goes. We still believe there’s significant concentration, particularly in technology, but we started to see that rotation going into other parts of the market, which is very healthy.
And we’ve seen, even on days where the NASDAQ is down, the S&P maintains and stays in the right place. A lot of that has to do with the fact that some other sectors are starting to carry the weight — things that were a little better value than tech. And I think that started to — so the breadth became better in the first part of the year. I’m a little more worried, from what I’ve seen after that, that the breadth is starting to get narrow again, and we’re starting to see that momentum trade taking on a little bit of a second life, and I think that’s —
[00:40:47] BARRY RITHOLTZ: It stumbled a bit in the middle of the year, the momentum.
[00:40:49] OMAR AGUILAR: It stumbled a little bit, and that was, in our mind, there because we’ve been working with clients to try to diversify their concentrations, try to move assets to other parts of the market. And then it happened: momentum actually took a little bit of a hit. And then when you look at the last few weeks, you actually see that it is starting to recover. A lot of that is clearly because these companies have done really well earnings-wise.
They’re generating a significant amount of business, and they’re spending more capital on AI. But we believe that it’s healthy for people to continue to do the rotation and have opportunities to go outside of those.
[00:41:27] BARRY RITHOLTZ: I’m glad you mentioned the CapEx cycle from AI. That’s been a really significant engine of growth for the past, I don’t know, five years. How much risk is embedded in that, and how can investors position around something — if you’ve underweighted the technology sector or the AI CapEx cycle, you’ve underperformed. How should investors think about this?
[00:41:55] OMAR AGUILAR: Well, we have seen that continue, and we still believe that we’re not completely done. We believe that the CapEx cycle has extended, but what is good is it has extended beyond technology. When you look at the capital expenditures now going into other parts of the market, starting to grow — maybe not as big as what we had with tech, but it’s clearly over there. Now, what —
[00:42:17] BARRY RITHOLTZ: What other sectors are you seeing?
[00:42:18] OMAR AGUILAR: We’ve seen healthcare, we’ve seen financials, we’ve seen some of the industrials doing well on this and spending money on CapEx, which makes sense, right? They can make their products more efficient, they can make other things faster. And I think in a certain way that adoption has increased that capital expenditure setting. I think the question you have — what is gonna be interesting going into next year is that investors are gonna start trying to evaluate how much of that capital expenditure and that investment ended up being profitable.
And I think profitability going into next year will be a key metric to watch, because that’s gonna be where people will say, well, you’re spending all that money, you borrowed money to increase your CapEx for AI, but yet your return on investment is not working. So that is gonna be a really good test going into next year.
[00:43:07] BARRY RITHOLTZ: So in 2024, there was a quote of yours: investors can expect 15 to 20% asset growth annually for seven years. That turned out to be true: in ’24 we were about 25%, and in ’25 we were about 25%. It’s early September, and we’re not that far away from 15%. So it looks like, barring any problems this year, you’re gonna go three for seven.
What was that number based on? That’s a pretty healthy return above what we’ve seen over the past 15 years, which has been a great bull market. What do you base this on?
[00:43:47] OMAR AGUILAR: Well, our research always starts with the macro picture, where we see the economic cycle. And at the time we knew that we were in that sort of early-to-mid cycle that usually goes into an expansion. We were surprised, obviously, that the expansion continued. I think we never expected that it was gonna continue as far as it has so far.
And a lot of that is — and I would probably say I was the first one — if you look at any report that we produced, and most people produced, back in ’23, nobody mentioned AI. That came afterwards, and it moved very quickly. Had we known that, then instead of seven years, we would’ve said 10 years. Right? But that’s a big part of this.
But if you look at the macro picture, even going into that expansion, where you have a healthy economy growing — the nominal growth expectation for this year is still close to 6%, which is impressive. When you look at a labor market that is stable, when you look at the monetary policy and the fiscal stimulus going into the economy that allows us to extend that, and business investment, the credit market is healthy — everything that allows you to create that tailwind was working in the right place. Especially because, relative to the rest of the world, the US was looking incredibly attractive, and it was leading the charge, and it was clearly moving in the right direction, because we didn’t have the same issues that some other regions in the world had.
Obviously now we’re on that path where we’re basically getting close to the peak of the cycle, and from here it’s difficult to sustain, especially because the risk premium associated with higher rates is starting to take a little bit of the oxygen away from those risky assets. So our expectation is that we’re probably at the end of that seven-year run, and we think that at some point in the next year we’ll start to balance it out with both asset classes.
[00:45:43] BARRY RITHOLTZ: Hmm. So you mentioned trade policy tends to hit the economy on a 12- to 18-month lag. The full impact won’t show up until sometime in 2026. Eighteen months ago was Liberation Day. So we are right in the heart of that. What are we seeing from trade policy?
How is it impacting the economy and inflation?
[00:46:07] OMAR AGUILAR: It has had probably less impact than we all thought. It has an impact, and it has had an impact, but —
[00:46:15] BARRY RITHOLTZ: A lot of exceptions and exemptions.
[00:46:17] OMAR AGUILAR: A lot of exceptions, a lot of negotiations, and a lot of practical implementation, ’cause it’s one thing to set up a tariff, it’s one thing to set up certain components, but for that to be fully implemented and checked is more difficult to do — like the compliance associated with figuring out how the tariffs get paid and who does what. And especially because there have obviously been a lot of discussions, even with the Supreme Court, on how this gets reversed and how it gets implemented. That obviously lags the effect, but it’s very clear to us that any kind of tariff has an inflationary aspect. The biggest difference in what we have observed, at least so far, is companies have had very clean and very robust balance sheets.
So for many companies that were involved in that, even though their prices have increased — their inputs have been more expensive — they have been able to weather the storm without necessarily passing it all through to the consumers. That has started to change this year. And if you look at some of the cost of goods starting to get slowly, slowly higher, even though the inflation rate seems to be stable, the prices have gone up. And I think that’s basically part of the inflationary component that people actually feel.
[00:47:29] BARRY RITHOLTZ: Stable at 3.5%. It’s not getting worse, it’s not going to 4 or 5%, but that still means prices are ticking up. Which — let’s talk a little bit about yield, which is directly related to inflation and the Fed rate. Earlier this year, the house view was that now was not the moment to reach for duration. Since you mentioned that, we’ve seen the 10-year move up substantially.
At what point do you lock in that longer duration and higher yield? Is it 6%? Is it 7%? When does it become too attractive to not lock it in?
[00:48:09] OMAR AGUILAR: Right, yes, it’s true. Well, it turned out that our team that does a lot of the work on fixed income was very clear that there were two things that we didn’t want to pursue further. One is credit spreads were too tight; there was no reason for us to go too deep into credit. And the second is duration was too volatile and too risky.
And that has worked well so far this year. Now, when you start to get to the 10-year being at 4.8, close to 5%, that to us is starting to become a little bit more attractive than what it was before. Mostly because now you see the balancing of upside and downside, and actually you see — well, where do yields go from here when you actually have a good economy? Again, go back to the economy. Granted that we have this term premium affecting the long part of the curve, and we see the deficits obviously affecting that component, inflation expectations and the market itself will probably still keep a little lid on that 10-year. So we believe that staying in that sort of average duration, maybe below what typical benchmarks have, is still a pretty healthy component, and you can enjoy very nice yields with high quality.
Again, we still don’t think it’s time to take credit risk. So that is a big part of what we look through. We stay in the middle of the curve. Intermediate bonds with higher quality is the place where people can lock in very nice yields.
[00:49:32] BARRY RITHOLTZ: Intermediate, seven to 10 years. Is that about right?
[00:49:32] OMAR AGUILAR: Yes.
[00:49:32] BARRY RITHOLTZ: So let’s talk a little bit about biases.
Since you spent so much of your career on behavioral finance and better decision making — last year, you said there are four dominant biases that seem to really be affecting investors today. I’m paraphrasing: herding around the Magnificent Seven, home country bias, recency bias, especially amongst young people, and confirmation bias. Tell us about those four. Why did you name those?
[00:50:08] OMAR AGUILAR: Yeah, well, those four — and they continue into this year — it’s been fascinating to see. So herding is very clear: people follow the momentum trade; they love the momentum trade. And a big part of the help that we have is to make clients and investors understand that staying too concentrated — because the momentum trade works until it doesn’t, and then when it doesn’t, it basically could be very painful. So a very natural cognitive bias that people have is they don’t know how to sell their winners.
It’s impossible for them; when they see them on a run, they think that it’s never gonna end. And I think that’s a big part of our education, to try to help them take profits when you can, rebalance when you can. Rebalance is like a word they hear me say all the time. The second one is recency bias.
Recency bias is basically putting more weight on the recent events than on the entire history. That’s a very typical emotional bias. On days when there’s lots of volatility, people tend to say, oh my god, this is the end of the bull market, we gotta get out. And they forget about their fundamentals. Or on days when they see, oh, there’s another great earnings report by semiconductors — well, let’s go into that and put more money into it.
That recency bias, when you only look at the most recent information as your basis to do that, is something we try to understand, and that tends to work out when you actually look at longer horizons, when you look at more information and more data. Confirmation bias is my favorite. And this is the typical example: when you buy a new car, and then you start driving your car, and you start to see cars like yours everywhere, because your brain is basically trained to look for things that convince you that you’re making the right choice. And so confirmation bias — we have that especially in a bull market, when you have clients that call us and say, hey, I told you that stock was gonna go up.
It’s like, well, yeah, it was going up, but not for the reason you said; it went up for other reasons. Even though it didn’t have any fundamental reasons to it. Or, I wanna go into these particular asset classes. The typical example is Bitcoin. Bitcoin is one of those that was clearly in confirmation bias. When it was down at $16,000, people had doubts about how Bitcoin was gonna work; when it went up to 30,000,
people were like, oh yeah, this is the right thing. And they did the same thing again, with no basis other than the confirmation of themselves; they created their own theories on why that was happening. So that is another part that drives a lot of the market. And the fourth one — I forgot what the one was — home country bias. Home country bias is more like the safety component, where you prefer to stay in the US.
One of the challenges we have as a country is that we don’t have enough exposure to international markets. And there are great companies internationally; there are great opportunities to invest and diversify. But most investors tend to feel comfortable buying their stuff — what they’re good at, what they’re familiar with. And a lot of that is being tested a lot in the market, saying, well, if you think about the brands that you’re loyal to, right? You go to the supermarket and you buy the shampoo that you like, and you don’t want to change it, you don’t wanna do anything else, unless you wanna actually try something else.
So it’s this idea of diversification, and trying to understand that it’s not gonna always be the same. It’s actually something we try to teach our clients.
[00:53:31] BARRY RITHOLTZ: And up to two or three years ago, the US was outperforming developed ex-US and emerging markets. The past few years we’ve seen international really come on strong.
[00:53:31] OMAR AGUILAR: Correct.
[00:53:31] BARRY RITHOLTZ: So if you were stuck with — I’m reluctant to say the recency effect — of seeing US outperformance, you might not even think to look overseas.
[00:53:52] OMAR AGUILAR: Well, that was the combination, Barry, because the recency bias that says, well, the US has outperformed the international markets, combined with the home bias, basically will prevent any client from diversifying away from the US.
[00:54:04] BARRY RITHOLTZ: Hmm. So I wanna stay with the biases. If you could persuade investors to think about adopting one rule to thwart their own biases before whenever the next bear market comes along, what might that rule be?
[00:54:24] OMAR AGUILAR: Well, we don’t have one rule. We have three rules — three components.
[00:54:24] BARRY RITHOLTZ: Okay.
[00:54:29] OMAR AGUILAR: So we call it — and a lot of that has come from me, but it is clearly a big part of what our philosophy is — for clients to mitigate those biases. And it works for all kinds of clients. Stay invested. That’s number one.
It’s very important for people to try not to time the market. Stay invested is the first component. And we have lots of data over long periods, lots of cycles, that shows that staying invested is much better than trying to get in and out of the market at different times. Stay diversified.
That’s number two, diversification. Even though it’s like the old trick, it still works. And as I said before, the challenge with clients today, and the challenge for investors today, is they don’t realize the level of concentration until it’s too late. So having the rebalance, having a strategic asset allocation, trying to make sure that they follow that path, is very important.
If you think about it, if you put your portfolio together three years ago and you invested there and you kept it there and you didn’t touch it for three years, today you would be highly exposed to technology, just from the way the market dynamics are. So it is important to take a look and have an approach to rebalancing that allows you to get that diversification. And the third one is stay disciplined. Discipline basically creates a mechanism to have a systematic approach for those pieces.
So things that we discuss with our clients, especially with those that tend to be more emotionally biased, is to say, let’s set up the rules now, before we get into the action in the market. So if you see the market is down 5% one day, we already have the playbook. We already know what we need to do. We don’t have to panic; we don’t have to do a lot of things at that moment.
We already know exactly what we have to do and follow that discipline, whether it is rebalancing the portfolio, whether it is taking profits, whether it is buying some of the companies that may not be natural. And this is very typical — the example that I always provide is, if you had an equal-weighted strategy, well, if things started to get out of whack, you wanna get them back to equal weighted. And that’s sort of a natural thing; people like it because it’s like, yeah, I know that company went down, so I need to buy more. And that’s a little better approach. So stay invested, stay diversified, and stay disciplined.
[00:56:45] BARRY RITHOLTZ: Last question before we get to our speed round, our favorite questions. What do you think investors are not thinking about or talking about today, but perhaps they should be? What topics — could be assets, geography, policy, data — what’s getting overlooked but really shouldn’t be?
[00:57:04] OMAR AGUILAR: I think the main area where clients get distracted the most is they get concerned about geopolitical risks, they get concerned about inflationary pictures, and they have the right to do that. But a lot of the benefit of long-term investing is something that gets overlooked all the time. And again, a lot of that is because of the recency bias that exists today and the availability of information.
So this concept of setting up your goals, setting up your investment strategy, setting up your strategic asset allocation, and following that path is something that, believe it or not, gets overlooked all the time. And it works no matter what part of the cycle it is, as long as you feel comfortable understanding risk — at the same time, the risk budget. And we always talk about this: it is so critical for people to understand how to allocate risk — not to allocate assets, but how to allocate risk. And I think that component gets overlooked all the time. And the way I think about it is that when you go to a dinner, you basically have your main entrée, you also have your salad, you also have your side, and you don’t necessarily give the same level of weight to each one of those.
That’s a risk budget allocation. So you need to understand how much is gonna be in your core portfolio — it’s gonna be long term — and how much is gonna be in other parts of the market. And specifically nowadays, there is a temptation to go into these prediction markets. And I think we try to avoid markets that way, because the difference between gambling and investing is huge. Right?
[00:58:44] BARRY RITHOLTZ: That’s just pure speculation.
[00:58:45] OMAR AGUILAR: And the way that our team has explained it is, when you’re investing, you become an owner. When you are gambling, you don’t have anything. You’re just basically putting money in, the odds are against you, and you don’t have any ownership.
[00:59:00] BARRY RITHOLTZ: The house usually wins.
[00:59:00] OMAR AGUILAR: Correct.
[00:59:00] BARRY RITHOLTZ: All right, so let’s jump to our favorite questions that we ask all our guests, starting with: tell us about your mentors.
You mentioned one earlier who helped shape your career.
[00:59:14] OMAR AGUILAR: Well, the person that brought me to Bankers Trust was a real innovator who actually took a lot of faith, and he was able to see in a PhD student that was doing basic statistics and modeling the ability for that. And I learned a lot from him.
[00:59:33] BARRY RITHOLTZ: And that was who?
[00:59:34] OMAR AGUILAR: That was at Bankers Trust, and his name is Phil Green. And Phil basically put together this vision where he wanted to create this concept. He bought into the idea of the vision.
And that helps me in understanding how these things evolve over time. I also have my advisor from Duke; his name is Mike West. He obviously has a deep academic background, clearly a lot of technical, but he’s also a business owner. He also understands the practical application of all these techniques, which I believe, Barry — that combination of deep quantitative tools with reality, and making that merge, is something that we need more of. There’s a lot of great technicians, there’s a lot of great people, a lot of really smart people.
But having that idea to be able to solve is actually critical. And I would probably say the model that we get from Chuck — the values that he has put together, Chuck Schwab at Schwab — of getting access to clients, providing clients with the right solutions, being transparent, being accessible, and thinking through clients’ eyes. That has been a big mantra for me. Schwab has been the longest job I ever had, and it’s been great.
[01:00:49] BARRY RITHOLTZ: Let’s talk about books. What are you reading currently? What are some of your favorites?
[01:00:54] OMAR AGUILAR: Well, I love the books of — Sapiens was one of my favorites. Just to reread it again. Thinking, Fast and Slow was another one of my favorites. I like to read a lot about these components. I read the Hail Mary book that was actually produced —
Project Hail Mary. So those are great, and those are great components that I like to always think about — the concept of how do you apply those things to what I can do for my work.
[01:01:24] BARRY RITHOLTZ: What about streaming? What are you watching or listening to? Anything interesting these days?
[01:01:28] OMAR AGUILAR: I started watching this show called Silo, and it’s on Apple TV. And that’s another —
[01:01:36] BARRY RITHOLTZ: You’re a sci-fi fan.
[01:01:37] OMAR AGUILAR: Well, it has a lot of pieces that I think were great. I did watch Ted Lasso for a while, and that was also good. Especially the first season was particularly good.
[01:01:37] BARRY RITHOLTZ: Fabulous.
[01:01:37] OMAR AGUILAR: Yeah. It’s quite — and then there was this other show called The 100, which actually was very good because, again, it was sci-fi.
[01:01:51] BARRY RITHOLTZ: Yes.
[01:01:51] OMAR AGUILAR: And it had many, many episodes and seasons. But it was great because, again, it was sci-fi, very similar to Silo, but the whole plot was about humankind being in this nuclear war.
And therefore they selected a hundred people to put them in space, and they had to survive there until the Earth was safe again to come back. Once that happens, then there were a lot of changes. There were a lot of things for survival. There’s a lot of leadership lessons on how to deal with that and how to deal with adversity.
That I thought was fascinating.
[01:02:39] BARRY RITHOLTZ: I know you mentioned reading Project Hail Mary. Have you seen the movie yet?
[01:02:44] OMAR AGUILAR: Yes, we did.
[01:02:45] BARRY RITHOLTZ: Yes. It’s really quite amazing. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in either quantitative analytics or wealth management?
[01:03:00] OMAR AGUILAR: Yeah. Number one is getting your expertise and trying to get up to speed on all the methods that we can use. And in this day and age, understanding — getting a CFA, getting some program where basic theory about investing comes into play. Second, which is very important: soft skills. That’s something you don’t get taught in school, but the ability to have the soft skills to be able to talk and explain, to be able to say, all right, these are the things that you can do and this is how you can structure it.
That, to me, becomes a big part of the asset. So that combination of being good technically, but being able to explain things, becomes incredibly valuable.
[01:03:47] BARRY RITHOLTZ: And our final question: what do you know about the world of investing and behavioral decision making and quantitative research today that might have been useful 30 or so years ago when you were first getting started?
[01:04:02] OMAR AGUILAR: What do I think today?
[01:04:04] BARRY RITHOLTZ: What do you know today that would’ve been useful?
[01:04:04] OMAR AGUILAR: Oh, 30 years ago. I would probably say underestimating the effect of how fast the market was gonna move. I think there was a wrong idea that you can be faster than the market and that people can really get ahead of many things by just trying to capture information faster. I think that information advantage that people claim to have — after all these years in investment, it’s very hard to actually capitalize on.
[01:04:41] BARRY RITHOLTZ: Hmm. Really, really fascinating. Omar, thank you for being so generous with your time. We have been speaking with Omar Aguilar. He’s CEO and CIO at Schwab Asset Management.
If you enjoy this conversation, well, check out any of the 662 we’ve done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you get your favorite podcasts. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Anna Luke and Elizabeth Srin are my producers.
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