Audible Frustration: C, ME, ETF
35:43 Share

The global industrial renaissance is transforming our world. Over the next decade, industries like energy, infrastructure, and technology will need an estimated $75 to $100 trillion to modernize and meet demand. Long-term projects need long-duration capital. That's where Apollo steps in. With scale, flexibility, and a focus on growth, Apollo partners with companies to drive the future, one innovation at a time.

Learn more at thinkitnew.com slash renaissance.

Security is your job, and it's theirs too. With Microsoft Security, you have a partner that helps your business move forward confidently. To learn more, visit Microsoft.com slash CISO. That's Microsoft.com slash C-I-S-O. This is a message from sponsor Intuit TurboTax.

Taxes was waiting to get your money back, which turned into worrying about getting your money back. Now taxes is matching with a TurboTax expert who can do your taxes today and help you get up to a $4,000 refund advance loan fast. Get an expert on TurboTax.com. Only available with TurboTax Live Full Service. Refund advance has $0 loan fees and 0% APR. Refund advance loans may be issued by First Century Bank, N.A., or WebBank. Terms apply subject to approval.

Bloomberg Audio Studios. Podcasts. Radio. News. Two things. I'm wearing glasses. You are. Which does not matter to our listeners. I kind of feel like I am wearing a costume. I don't know. Totally different person wearing those glasses. Feels like it. The other point that I wanted to make is that I'll be wearing these glasses at a party tonight. A party? Yeah, specifically. Not my party. No, at your party. Okay, at my party. I'm going to your party. You're party hopping. Yeah. You're briefly stopping by my party. I'm going to your party.

By the time this airs, the party will have happened. That's true. It's a debacle. We're going to cut all this out. Yeah, exactly. If things go dramatically south, this will not be included in the podcast. But if you're hearing it, assume that it went well and we had a great time. It was great. What a great party. This is sort of a birthday party. Right. In that sense. For money stuff, which turned 10 years old. Right.

It's not my birthday. It's not even really Money Stuff's birthday, it was just like a month ago. Oh. And even that is like, the accounting is a little fuzzy, but we're going to say it's the 10th anniversary of Money Stuff. Yeah. 10th anniversary observed. Mm-hmm. 10th anniversary party. What a great time it has been. Hello, and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine, and I wrote the Money Stuff column for Bloomberg Opinion. And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

What are we talking about today, Katie? The fattest fingers in the world, 23andMe, and Wheaton, Illinois. Wheaton, Illinois. I have a fondness for Wheaton, Illinois because I have a Wheaton Terrier, but that's not really related. No. Never mind. All right, fat fingers. Yeah, man, what is going on over at Citigroup? It seems incredible. Yeah, I don't know. Citigroup has had a series of very public and very comical mistaken payments.

Of which the greatest, honestly, was a few years ago in 2020, they sent out $900 million to some hedge funds and they were like, sorry, we didn't mean to do that. And the hedge funds were like, we're keeping it. And there was a court case, it got appealed, it was great. But recently there's been reporting on like a couple of times last year, they sent out like extremely comical mistaken payments.

But they got those back. That was fine. That was like a typo. It was like, in one case, they meant to pay $280 to some customer's escrow account, like I think in Brazil, and they paid

They put in $81 trillion, which is much, much more money than Citigroup has. So you can't do that. But, you know, it's not like then the money left and, like, the customer fled. It's like they reversed the payment, like, the next day, and they told regulators it was a near miss. So they had some near misses. A near miss. A near miss. It's an internal transfer, right? Like, obviously.

On Citi's books and records, they briefly credited the customer with $81 trillion. We don't like the money left the bank. And then they took it back the next day. So, you know, Citi has gotten grief from regulators about like its systems and processes and technology. And it's been sort of like... Understandably so. Yeah, it's been like trying to kind of turn the page and be like, we're really good at not making mistaken payments. So when they very publicly make or almost make mistaken payments and when they're very comically large payments,

That's embarrassing for them. It sort of puts them in an ill light with regulators. But it's not like they lost $81 trillion, which would be amazing. Well, there was $81 trillion, which was amazing in and of itself. That actually made the $6 trillion fat finger that came. $6 billion. $6 billion. $6 billion.

that they had actually done like a week before the $81 trillion one. So like they had this private wealth customer, they had to send this customer, my impression is like a few million dollars, but they typed the account number into the amount field. So instead of typing like $3 million, they typed...

a 10 digit account number that began with a six and they sent six billion dollars to this customer instead of a few million dollars and then again quickly discovered that it was a mistake and took it back and it was all fine but yeah it's like it's a near miss they had to report it to regulators and the bloomberg story reported that the head of wealth management who just started it provoked audible frustration audible frustration which is a great way to describe swearing

But so they were pretty sad about that until like a week later when they did the $81 trillion thing. And they're like, ah, $6 billion is nothing. Not so bad. Not so bad. I tweeted a joke that, you know, a great way to make this stop happening is just not let Citi get the money back. And several people brought up Revlon that they tried to do that with Revlon. They really didn't get the money back. Well. They did, but they took it away. I actually forget how Revlon ended. I remember the headline.

They got the money back. They did. So Revlon was interesting because, first of all, it wasn't an internal transfer. They actually sent the money out of a bank to people's accounts at other banks. But secondly, the accidental payment was part of an actual intended transaction that was a sort of aggressive debt restructuring by Revlon that was basically hosing some of its creditors. And so the creditors who were getting hosed-

randomly got $900 million and we're like, "Sweet, we're keeping this." And then Citi's like, "No, no, I have to give it back." And they're like, "Nope, we're not giving it back 'cause you are trying to restructure this debt in a way that was bad for creditors." And so they sued or they kept the money and Citi sued them and they defended themselves saying, "We were actually owed this money." 'Cause they were owed the money, it's just not right then.

And Citi made the payment on behalf of Revlon and we're keeping it. And they actually won in the trial court, but then it was reversed on appeal. It was like the right answer, but it was like fun for a while. So we weren't around when Revlon happens, but I was trying to remember why have we discussed Citi Fat Fingers on this podcast before? And then I was reminded of a different type of fat finger incident that was uncovered back in May. Do you remember that fat finger stock trade? They were fined by the UK like-

This is the thing.

All these things, it's like screens with a big box with 75 different fields. You can fill in different fields. If you want to sell $58 million worth of stock, there's some field that's like sell $58 million. If you want to sell 58 million shares, there's a different field that's like sell this many shares. This person, I think, put the dollar number in the shares field. The shares are worth hundreds of dollars. You multiply the amount by hundreds of dollars. Yeah.

It was just like going fast in a complicated interface and just put it in the wrong box. Same thing with the account number person who put the 6 billion account number into the amount field and sent out $6 billion. It's just like there's too many things on the screen.

Well, if I had prepped better for this podcast, I would have gone back and listened to the episode we recorded in May because I recall fuzzily that at the time we talked about how there were a bunch of warnings that popped up, at least when it came to the stock trade. There are too many. There are too many and you kind of get numb and you just click through them. How do you fix this? It's

It seems to happen uniquely often at Citi. So I don't know if their processes differ greatly from some of their peers. One thing they seem to have done is like, this is in the $6 billion story, the wealth management group has a new set of, actually, I think the whole firm has a new set of warnings where like, there's some threshold of like large anomalous transfer where like someone not pressing the button gets an alert. Like the head of wealth management gets like,

Like, hey, we're sending $6 billion to someone for no reason. Are you sure? The man who expressed the audible frustration. Or someone else. It might not actually be him. But, like, someone gets a warning. So it's not just the person pressing the button and ignoring the warnings, but someone gets a, you know, you got to do it judiciously, right? Like, you can't pop up 200 warnings for every transaction because then everyone's going to ignore them. But, like, you know, there's some level of, like, it should not be possible for anyone at Citi to wire or to send warnings.

$81 trillion to anyone because that's more than they have. Yes. But even $6 billion, there should be someone checking that maybe. I want someone to ask Jane Frazier about this. I want this, I don't think it necessarily will come up on the next earnings call, but I want to see this in an earnings transcript.

It's very funny to imagine these being material risks to the bank, right? Like a bank going bankrupt because it accidentally wired out $81 trillion. But they're not really. They're symbolic risks. They're like, you should have better tech so that you don't mess stuff up. But it's not like any one of these was like...

that serious of a risk. Except the Revlon one was bad, but not that bad. You have to imagine that this is certainly a symptom of something that maybe is a little bit broken. Yeah, it's like a symptom of bad computer screens. The $81 trillion transaction, the reporting on that is wild. That wasn't putting the wrong thing in the wrong field. That was, they used some sort of rarely used backup screen.

to make the payment that was pre-populated with 15 zeros. So you had to delete the 15 zeros to type in the amount. And if you just typed in the amount, you like overwrote some of the zeros and you sent out trillions of dollars. And that's what happened, which is just like, you could just not do that. You just not have it automatically populate with 15 zeros. And then like, you've saved yourself a problem right there. So it is just like a lot of it I think is like software design and

It's not always a priority for the CEO of a bank to be like, we need the internal software to be more user-friendly. But, you know, it might be for Jane Fraser. At this point, I would imagine it's moved up the priority list a few notches. Right. Someone is asking Jane Fraser about the user-friendly.

you know, user interfaces on the payment software. Maybe we'll get some answers. Maybe a regulator, maybe like, you know. Yeah, I do love the point that you made in money stuff that maybe this is a reason actually to bank with Citi. You're basically, by opening up an account with them, buying a lottery ticket.

Stereotypically, banks sometimes make mistakes. Yeah, I read about a bank doing some error and people would be like, I think you're being too generous to the bank. They never make errors in the customer's favor. It's always in favor of the bank. I was like, well, no, Citi makes errors in the customer's favor all the time. They don't necessarily get to keep the money. You probably shouldn't.

try to bank with a bank that makes mistaken payments all the time, that's more likely to end badly for you. But it would be kind of fun to get $81 trillion in your account. And what if it's like a really small amount, you know? Like what if it's just a casual like half a million dollars that they, would they even notice? I don't know. Yeah. I'm just thinking about my account number at my bank, which has nine digits, which would be nice. Do you want to say them here? Yeah. That'd be cool.

The global industrial renaissance is transforming industries and reshaping our world. Over the next decade, sectors like energy, infrastructure and technology will require an estimated 75 to 100 trillion dollars in CapEx to modernize and meet the growing demand. This unprecedented level of investment is beyond the scope of public markets alone. Long-term projects need long-duration capital.

That's where private capital comes in. And that's where Apollo leads. With significant scale, the flexibility to adapt to evolving CapEx needs, and a steadfast focus on enabling economic growth, Apollo is partnering with companies to provide the financing solutions that fuel the future. Learn more at thinkitnew.com slash renaissance.

Success. It's discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. It's the best in each of us made better by the best in all of us. Whatever success looks like to you, Stiefel is invested in yours. That's why Stiefel is one of the fastest growing global wealth management firms in the country. So when you're ready to chase success, our financial advisors are ready for you.

At Stiefel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stiefel has won the J.D. Power Award for Employee Advisor Satisfaction two years in a row.

If you're an advisor or an investor, choose Stiefel, where success meets success. Stiefel Nicholas & Company, Inc., member SIPC and NYSE. For J.D. Power 2024 award information, visit jdpower.com slash awards. Compensation provided for using, not obtaining the award. Your customers are important to you, but they won't feel that way if they're stuck messaging a clunky chatbot or waiting on hold for a representative.

Estimated wait time is 25 minutes.

With Sierra, your company can deploy a branded AI agent that engages and delights customers anytime, anywhere. Sierra agents pick up every phone call and personalize every interaction. No more menus, no more hold times. And if you have an issue, Sierra's AI agents solve tough problems. Whether they're helping your customer pick out the

My account number is... 23...

And me. And me. What a segue. This is... Look at that. I really like this story. Yeah. Mostly because when we were talking about this at my desk before we recorded this podcast, then I was like, you know what? Don't talk to me. We'll just talk about it in 90 minutes. Okay. 23andMe is...

really fascinating story because I think it's still a household name. It kind of is. And the last time I thought about it, it was going public via SPAC. It was 2021. Things were great. The market was frothy and I didn't realize that it's been slowly in a death spiral since then. Yeah. I don't entirely understand it, but my impression is that like the recurring revenue of selling genetic tests to people, like

You kind of only need to find out your ancestry once. Yeah, but there's so many people in the world. There are a lot of people, but I also think that it's become less...

as people get worried about privacy concerns and they were hacked. It's like a bad database to get hacked. Yeah, specifically in 2023, they were hacked. But they were on the decline before then. They've never made money. Yeah, that's true. Yeah, and I was searching for a reason why. Because you think about, I feel like it was really peak 2017, 2018. They were really popular as gifts around the holidays. Remember Elizabeth Warren took a geneticist

Yeah. And to their credit, they went public at the top and...

The halcyon day is. In public in like 2021 at a like $3.5 billion valuation. I don't know. Anyway. I think they did the SPAC merger in like 2021. And they had like a $3.5 billion valuation. It's currently in the ballpark of 1% of that. Yeah.

So not great. I mean, the shares are trading under $2 right now. I think the absolute high was well above $300. Yeah, it was in the stocks, but yes, that's right. But so anyway, the founder and CEO and 49% shareholder, Ann Wojcicki, wants to take it private. I don't actually know how much she cashed out of this, but like,

Ticket public at $3.5 billion. Wants to take it private at not $0, but like quite close to $0. She wants to pay public shareholders something like $10 million for the company, which is like 41 cents per share. And...

That is an interesting negotiation because she's the controlling shareholder and, you know, the board of directors is in charge of negotiating with her and trying to get a fair price for the public shareholders. I don't know what they think about the future of the business. Like she clearly thinks it's worth something because she wants to buy it and like put some more money into it.

but she's offering $10 million to the public shareholders. By the way, that's much less than the current trading price of the stock. She's offering 41 cents per share now at like $1.50 or something like that. So she's offering a take-under. She's saying, shareholders are deluded about the value of this company. I want to pay you much less for it. If I were a director, I'd have a really hard time accepting a deal like that because like,

You're going to get sued. You're saying, I want to sell this company for a big discount, not only to its all-time high, not only to its IPO price, but to its price today.

It's like a tough deal to take. And so she offered not that deal, but a similarly sort of like low to negative premium deal last year. And the directors said no. And then they all quit because she's the controlling shareholder and like she could fire them. And so they were like, well, we're not gonna take this deal. And so, uh,

There's nothing we really can do here as directors. And so they all quit. And so she was the only director of the company. And she went and appointed new independent directors and offered a new, much lower price to take the company private. And they all said no again this week. So they're back to square one. They haven't resigned. I was thinking she should, you know, do an Elon Musk and just get really friendly board members who maybe are related to her. Well, right. When all of the directors quit, she got to appoint the new directors. Mm-hmm.

And there are two ways you can go with that. You can appoint your relatives who will then sell you the company at 41 cents a share and get sued. Or you can appoint like reputable independent directors who like, you know, you've had conversations with, you hope that they will take your proposal seriously. You hope that they will see the reasons behind your wanting to pay much less than the current price of the company and will take your deal. But

You haven't specifically signed up to that because that looks bad. And so then if they agree to your deal, you look good, right? Like when you get sued, you can say, no, no, these independent directors like really did their due diligence and accepted my deal. So I think that's what was happening here is like these directors are not her relatives. They come from real places like they are.

look like good independent directors who could consider her deal. And if they signed off on it, it wouldn't be a rubber stamp. But then they didn't sign off on it, so oops. Yeah. And I mean, I don't know where this company goes. Obviously, there's some deep fundamental flaws here. You occasionally see these take-hunters. You see these deals where

a company is not viable and someone will buy it for like much less than its stock price and say, we're going to like put a little bit more cash on the balance sheet. We're going to keep the company alive. But like the shareholders are diluted and they, they're not getting that much money. And the board will be like, yes, that's true.

Sucks for the shareholders, but we're doing it. But it's like, that's a tough thing for a director to do, particularly if you were just appointed to do the deal, right? So it's like a tough spot. Like if she's right that it's kind of a melting ice cube and it's not worth what the public shareholders are paying for it, like it's going to be hard for her to persuade directors of that, even if it's true. And then like, you know, where do you go? Yeah. I think they're exploring other strategic alternatives, right?

But it's tough to do that when you have a 49% shareholder. Yeah. I was thinking maybe they could pivot into dog DNA test kits. I know that that's still a very popular market. I think the company has warned that it needs to raise cash or find some solution or else it won't be around for much longer. So I don't know. It'll be fascinating to follow. I mean, it just feels like a company that would naturally want to go private right now. And also I was surprised. The question is the price. Yeah. And like,

Ann Wojcicki does not think it's worth $40 million. Yeah. For a little bit. I mean, she had a partner and that's also part of the problem. Yeah, New Mountain. And I think like the bid that she offered, the 41 cents a share, wasn't that 84% or something below? Below the New Mountain bid. Yeah. Which in turn was lower than the bid last year that the directors resigned over. Her bids have been getting lower. Probably.

Probably for reasons. Yeah. It looks bad. It's a bad process. Normally the board negotiates you up. Here they're negotiating her down. Yeah. Not great. I don't know. I mean, I hope that the...

testing universe continues to exist and perhaps thrive is because you think about true crime. I listen to a lot of true crime podcasts and there have been instances where like these sort of kits where you can find your family members, long lost family members have been uncovered through little kits like this. I think I read an interview with her where she talked about that as a negative for sales because like, you know,

If you're a serial killer. For sure, it's good for. But if you're like, you know, you do a little genetic testing and then like your cousin gets arrested as a serial killer, you're like, oh, I wish I hadn't bought that kit. It's good for society, maybe bad for sales. Bad for sales. But again, as someone who, I don't know, maybe I am related to a serial killer, but I think that these should exist in some form. Right. I think it was the Golden State Killer who was found through something like this, which was wild. Yeah. It definitely didn't help the share price. Right. It's not like a good advertisement for like,

the privacy practices of the genetic testing industry. You wouldn't offer up your saliva to potentially help capture a murderer? Depends on how close a family member this murderer is. Cousin? I feel like...

I don't know in advance which family member of mine did this murder. I mean, you'd probably have some suspicions, honestly, if you were in this scenario. I mean, I could probably guess. You know which of your family members are most likely to be serial killers? I don't really have a problem with it, but I'm guessing none of my family members are serial killers. I bet everyone is like that until their cousin is the Golden State Killer. I can't wait to revisit the next City Fatfinger, Where 23 and Me Goes, when one of your cousins gets arrested. Yeah.

The global industrial renaissance is transforming industries and reshaping our world. Over the next decade, sectors like energy, infrastructure and technology will require an estimated $75 to $100 trillion in CapEx to modernize and meet the growing demand. This unprecedented level of investment is beyond the scope of public markets alone.

Long-term projects need long-duration capital. That's where private capital comes in, and that's where Apollo leads. With significant scale, the flexibility to adapt to evolving CapEx needs, and a steadfast focus on enabling economic growth, Apollo is partnering with companies to provide the financing solutions that fuel the future. Learn more at thinkitnew.com slash renaissance.

Success. It's discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. It's the best in each of us made better by the best in all of us. Whatever success looks like to you, Stiefel is invested in yours. That's why Stiefel is one of the fastest growing global wealth management firms in the country. So when you're ready to chase success, our financial advisors are ready for you at

At Stiefel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stiefel has won the J.D. Power Award for Employee Advisor Satisfaction two years in a row.

If you're an advisor or an investor, choose Stiefel, where success meets success. Stiefel Nicholas & Company, Inc., member SIPC and NYSE. For J.D. Power 2024 award information, visit jdpower.com slash awards. Compensation provided for using, not obtaining the award. Your customers are important to you, but they won't feel that way if they're stuck messaging a clunky chatbot or waiting on hold for a representative.

Estimated wait time is 25 minutes.

With Sierra, your company can deploy a branded AI agent that engages and delights customers anytime, anywhere. Sierra agents pick up every phone call and personalize every interaction. No more menus, no more hold times. And if you have an issue, Sierra's AI agents solve tough problems. Whether they're helping your customer pick out the

Always friendly. Always helpful. Always ready. Visit sierra.ai to learn more. That's sierra.ai.

Moving swiftly along. I love this story from Emily Grafeo and Max Abelson. I know that they've been working on it for a long, long time. A really great deep dive into First Trust, which is an ETF issuer based in the Midwest. I know, it's always an ETF story here. This one, actually, you led money stuff with it. So this wasn't even my influence. Love an ETF story. ETF sales channels, right? One is advisors. We're like a financial advisor.

has a client and the advisor says, this is the menu of stuff that I'm going to put you in. And the client is like, sure, whatever. Right. And so the advisor just picks the ETFs and the advisor is a fiduciary for the client and has an obligation to try to put the client in ETFs that are good. Right. But like the advisors pick the ETF. And then the other kind is like Robinhood, right? Like there's an enormous mass of self-directed investors. A lot of them buy Vanguard ETFs.

S&P 500 ETFs, right? Like huge business of self-directed investors buying cheap index ETFs, but also clearly a huge business or some business of like Robinhood people buying triple levered ETFs and like weird stuff to make weird bets. And I don't really know how that gets sold. I don't know if that's like,

you're like searching Robinhood for fun tickers or if it's like you're on Reddit reading about the latest cool ETF. But I don't have a great sense of like what the split is. Like away from like the Vanguard S&P 500, like a weird ETF, is that like always mostly an advisor product or is that like...

Reddit boards are selling that to Robinhood people. A weird ETF like the triple. Triple levered. Yeah. The buffers. Buffer feels like an advisor product. I don't know. Yeah. I think that's fair to say that buffers are popular with advisors. But sort of the shiny stuff, the funky high octane. The thing that's like we double lever you and we put like one times your money in gold and one times your money in Bitcoin. Crazy product. That seems like it could sell on Robinhood.

Yes, that's probably where you're finding it. And even, I mean, some of the Bitcoin ETFs. Right, your advisor's not doing that. Well, maybe your advisor's, I don't know. But for example, I mean, I wrote up BlackRock added iBit, their Bitcoin ETF, to their model, a portion of their model portfolios for the first time. That was really advisor-driven, financial advisors asking BlackRock to add it because I want to put my clients in this. I understand that. Like, I can see an advisor wanting to put their clients in iBit, but like,

When they launched iBit, it was a self-directed retail product. But I'm saying like their clients, if they couldn't get it through their advisors, then they would probably go to a platform to buy it. Right. I think of a Bitcoin ETF as being, in the first instance, a product for self-directed retail. Yeah. Like the first instance of like...

People want to buy that, they'll buy it on Robinhood. And then like, you know, later an advisor might add it in, but it's not like an advisor product. Yeah. The buffer I can see being an advisor product. Yeah, big time. And an endowment product, apparently. First Trust. Anyway, got us distracted, but like.

First trust that makes advisor products. Yes. I think it's fair to say. Exactly. They have about, the last I checked, about $200 billion in AUM. Their average fee though is 78 basis points, which is pretty high. Nice work if you can get it. The industry average is 58, the industry average. So that includes all the funky, expensive leverage stuff in addition to the stuff that costs like three basis points. That's not-

It's not dollar weighted. No, no. It's just pure. Okay, yeah. Yeah. It's like, do you divide, like take a list of funds and like. I prefer this podcast like an hour before I didn't have time to do that. But the point being that. The dollar weighted average is like.

Yeah. Well, yeah. The point being that it's a relatively small issuer, but it makes a lot of money for its size because it has a pretty high fee. And there's just great quotes in here about the sales tactics that have been employed by First Trust, which according to our own reporting and some other outlets is actually under investigation by FINRA for them. Right. Because like the way you sell advisor products,

It's some combination of like to give the advisor something cool to show to their client. Like a buffer ETF is like, oh, look, I've given you stock upside with no downside. How nice, right? But the other way is to like take the advisor out to dinner and be like, hey, why don't you sell my ETFs instead of Vanguard's ETFs? Because Vanguard doesn't take you out to dinner. Maybe they do, but probably not that much. And the implication is,

of the FINRA investigation and of the Bloomberg reporting is that First Trust

leans heavily on entertainment. There are quotes from the First Trust salespeople saying, "This company was built on entertaining. It was and still is the one leg up on our competition." And another guy says, "You're selling the most expensive ETF with mediocre performance. You better do something different." And that's what we did. And something different is like, so they took them out to dinner. They had conferences in nice places. Also- Where if you're an advisor who sold a lot of their ETFs, you could go to the nice conference.

and they'd pay for you to go to the nice conference. - Also a performance coach. - Performance coach, I love the performance coach. - Yeah, I'm not familiar with the concept. What is a performance coach in this context? - Like one negative mean way to characterize what's going on here is like, they're like bribing the financial, they're giving the financial advisors stuff for the financial advisors that benefits the financial advisors and then the financial advisors are putting the clients into like these ETFs that charge very high fees and don't have like amazing performance.

but that's like too mean. Like what's kind of going on here is you're a financial advisor. You're sort of like holistically trying to be good at it, right? Like one thing that being good at it means is like,

putting your client and investments that go up or whatever that you expect to go up. But there are other things, right? And like one of them is like sales and like being personable and answering your client's questions when they have questions and just being like a good, effective financial advisor. And how do you do that? Well, a variety of things, but like there are coaches who can tell you how to do that, right? Who can tell you how to get better at your job. And so

First trust will go to these advisors and be like, we have this performance coach who will help you be a better financial advisor. And the financial advisor is like, that's great. That's great for me. It's great for my clients if I'm better, right? If my performance is better. So they take the coaching and they,

is it possible that a condition for getting the coaching is that they put their clients into the first trust etfs no that's not what you're that's regulatorily that's not allowed but like there's some implication some internal emails that maybe there was some some hint of that but like the coaching like if you're a financial advisor you're not like experiencing that as like i am taking a bribe right if you're experiencing that it's like i'm trying to do a good job for my clients and one way to do a good job is this coach will coach me and like you know like

As part of doing a good job for my clients, I'm putting them in this expensive ETF, but it gets me this coaching that makes it so good. Yeah. Don't worry about the performance. We've talked about this actually, like Vanguard cutting fees. Right. And you have mentioned there are people, financial advisors, who are like, I don't like Vanguard cutting fees because they don't invest in having a good website. Exactly. Or answering questions. That's a real legitimate concern for a financial advisor, right? Yeah.

My clients are in this ETF. If I have questions about the ETF, they have questions about the ETF. If I can't get an answer, that's bad. Whereas a really expensive ETF, they've got customer service people. They answer the phone when the advisors call. That could arguably be good for the clients. It's expensive. The clients are paying for it. But you could imagine an advisor making a fiduciary decision saying, I want the client in this more expensive thing because the customer service is better and the client needs

needs that too. Yeah. No, it's a super fair point. And an easy to use, intuitive website goes a long way with some of the folks that are in these ETFs. I should say the Bloomberg story talks a little trash about the website for first trust too, but that's not the point. It looks like a pixel hasn't changed since it was first put up. This story is a joy to read though, because it's so deeply reported. So let's talk about some of the emails that Max and Emily dug up. I liked

This one in particular, I was thinking of you as I read this. Apparently in one email five to six years ago, a managing director chided colleagues, writing that pay to play is obviously illegal, but we have wholesalers, which means salespeople, doing it repeatedly. So there you have it. I wrote about this with some sympathy because if you're a person at a financial firm and you notice that your colleagues are doing bad stuff,

it's very tempting to email your colleagues to say, you're doing bad stuff. Please stop it. It's illegal, right? Like that's a good email to send, but it's not really because like then you have an email, you have a record of like your colleagues are doing bad stuff. Even if they knock it off immediately, it's a bad thing to have an email. And if they don't knock it off immediately, it's much worse. Yeah. I hope I never. You pick up the phone and you say, hey guys, knock it off.

I always think like I would hate to get my email searched for so many reasons, but also like for telling my editor it's illegal for you to edit my piece this much. It's a crime actually to limit. Yes, exactly. But, you know, some things look different under different lights. I don't think that this email was a joke, though. I don't think it was a joke either. Yeah. I think the.

The rest of the reporting is like, you know. I'm not saying it's a joke, just to be clear. I'm just drawing a contest between what I said and what this email said.

I think geography is really important here. I think it came through in the piece as well. But certainly, you know, talking to Emily about this, we said back to back and a lot of the OGs in the ETF world happen to come from Wheaton, Illinois, or around it. And I think that is also very important to as that person you quoted said, we've always been about entertainment. The fact that

First Trust was located in sort of a flyover zone, allowed First Trust to just really run this industry when it comes to places like Dayton, Ohio, Wichita, Kansas, et cetera, which I think is interesting. I think about geography a lot because also the vanguards of the world, like Vanguard specifically isn't on Wall Street. Yeah. But like, again, like-

The thing they're doing is covering the financial advisor in Dayton, right? Yeah. They're like going to that person and they're buying them steak or whatever, but they're also like talking to them and be like, yeah, how can we help you? And that advisor is going to naturally be inclined to put their clients into the ETS of a firm that,

talks to the advisor and listens to their concerns than a Vanguard fund where Vanguard never talks to him, but like, you know, they charge one basis point. So it's like- Yeah. Or, you know, BlackRock isn't flying out to talk to them. It's like the coverage is not a straightforward like pay to play, right? It's like something a little different. It's like coverage. It's like paying attention to the advisors and like creating good feelings at the advisors. Like arguably that's bad, right? Like arguably the advisors are fiduciary for the client and they should only be concerned with like

very specifically what is the best ETF for the client's portfolio. But they could take a more holistic view and be like, well, I'm getting service that allows me to help my client, and so I'll put them in the more expensive ETF. I don't know. Well, we'll see. I do want to say a reader emailed me to remind me of a Charlie Munger anecdote. Charlie Munger would ask business school students, is it possible for a company to raise the price of its service and thereby increase sales?

And people think about it and they'll be like, well, you know, raising the price can signal higher quality. And so people might buy more of it. And like, there's examples of that, like in like, you know, beer marketing. But I think Charlie Munger points out also that like raising the price can give you more money to like effectively bribe the sales channel. So like pay more to salespeople, pay more to intermediaries who will then put the ultimate buyer into the product. And you see that here, right? Like Vanguard has a good business of selling ETFs at like very, very low prices.

But there's also a business to sell ETFs at very high prices and invest the money into a sales process. And that's kind of what's arguably happening in here. Well, that's the thing. If there's one takeaway from this other than maybe don't do pay to play. Also-

Don't get divorced. The reason that this came to light, the man who runs First Trust, his name is Jim Bowen. He got divorced and it came to light in his ex-wife's lawyers asking for more money that he's apparently making a ton of money, like Jamie Dimon level money. Yeah, he made like $34.8 million in 2022. It's the thing that's like...

Wild money, like in weird pockets of asset management. So apparently her lawyers honed in on his expenses at restaurants in Naples, Florida in 2021, asking about more than $147,000 spent at Sea Salt, an additional $100,000 spent at Continental Steakhouses, also $70,000 spent at seafood places. And he explained that, I'm dining, I'm entertaining in 2022 in a court appearance that

And then his ex-wife's attorneys asked him on the stand in the same year whether that $70,000 alcohol bill at the Naples Ritz-Carlton was related to First Trust. He answered, mm-hmm. Is that a yes? The lawyer asked. That's a yes? The judge asked. Yes, Bowen said. So that was kind of the smoke around this fire.

That's going to be like the alcohol bill for the money stuff. So my favorite expense from the divorce proceedings is that he spent like $4,800 at Hermes one year on a hall that included scarves. He said were for workers in Chicago's hotels and restaurants. So not for financial advisors. No, this is like, he takes financial advisors out to dinner at hotels and restaurants in Chicago. And he's,

He says, some of my best customers are high maintenance. And these people, meaning the hotel and restaurant workers, are the ones that handle the high maintenance issues. So basically, he takes high maintenance customers to fancy restaurants in Chicago, and the waiters take care of these people. And then he gives the waiters Hermes scarves. It's like a third level business expense. It's very generous. Got to give it to them. No, it's very smart. It's like, OK, I want to sell ETFs to...

retail investors in Dayton, Ohio. How should I do that? I should buy fancy scarves for waiters in Chicago because I'm going to take the advisors of those people in Dayton to restaurants and I want them to be well-treated. And so like, it's like the sort of third level of paying for like the people to ultimately trickle down to like the ETF sales. I'm not much of a seafood gal, but I would have loved to be at one of these dinners. Sounds like a blast. Really good service.

And that was the Money Stuff Podcast. I'm Matt Levine. And I'm Katie Greifeld. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com. And you can find me on Bloomberg TV every day on open interest between 9 to 11 a.m. Eastern. We'd love to hear from you. You can send an email to moneypod at Bloomberg.net. Ask us a question and we might answer it on air. You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

The Money Stuff Podcast is produced by Anna Masarakis and Moses Andam. Our theme music was composed by Blake Maples. Brendan Francis Noonan is our executive producer. And Sage Bauman is Bloomberg's head of podcasts. Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff. I have a party to go get ready for, actually. So you do too. I'm not going to make it.

How is Microsoft Security helping customers stay ahead of 600 million attacks without slowing down business? From automakers to sports organizations and digital banks, Microsoft Security delivers deeper insights, scanning trillions of signals daily to help you see around corners and protect your business.

Security is your job, and it's theirs too. With Microsoft Security, you have a partner that helps your business move forward confidently. To learn more, visit Microsoft.com slash CISO. That's Microsoft.com slash C-I-S-O.