Wealth Management and the 'Great Normalization' with Lisa Shalett
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Something unexpected happened after Jeremy Scott confessed to killing Michelle Schofield in Bone Valley Season 1. Every time I hear about my dad, it's, oh, he's a killer. He's just straight evil. I was becoming the bridge between Jeremy Scott and the son he'd never known. At the end of the day, I'm literally a son of a killer. Listen to new episodes of Bone Valley Season 2 starting April 9th on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

Bloomberg Audio Studios. Podcasts. Radio. News. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

This week, really an extra, extra special guest. Lisa Shallott, Chief Investment Officer at Morgan Stanley, has had a number of fascinating roles in Wall Street, which is kind of amusing considering she had no interest in working on Wall Street. And yet she was CEO and Chairman at Sanford Bernstein.

She was CIO at Merrill Lynch Asset Management and now CIO at both Morgan Stanley Wealth Management and runs their asset allocation models and their outsourced chief investment officer model. So she's seen this industry from all sides, not only as CEO herself.

running operations, running a substantial firm. But as CIO for Morgan Stanley is over $6 trillion. She is directly responsible for $100 billion.

There are a few people in this industry who understand what it's like to work with institutions, work with families, work with individuals, as well as work with advisors and brokers the way Lisa does. She absolutely has a unique background and a unique perch on wealth management and what's going on in the world.

I found this conversation to be absolutely fascinating. And I think you will also, with no further ado, my conversation with Morgan Stanley's Lisa Shallon.

Thank you. It's great to be here, Barry. It's great to have you. I've really been looking forward to this conversation. You have an absolutely bonkers CV. We'll get into that in a little bit. I'm just old. Better than the alternative, I like to say, right? But let's start with your background and your career. Applied mathematics and economics from Brown and then a Harvard MBA. That sounds like you were on a career path to a Wall Street quant from early on.

Tell us what the career plans were. Not at all, right? In college, I was a drive-time disc jockey. I abhorred the idea of working on Wall Street. And so coming out of school, once I realized...

journalists and folks in radio don't make much money in the long run, no offense. This is my side hustle, not offended at all. To anyone around here, you know, I thought I was going to take the high road and be a management consultant. So that's what I did for the first job. So what changed your mind to say, all right, let me go see what these finance bros on Wall Street are all about?

Yeah. So, you know, I did the consulting thing both before and after business school. And, you know, fundamentally, I was never home. I was traveling and on an airplane all the time. I was literally arriving back home Saturday mornings, leaving Sunday nights.

You know, I was starting to hit that, you know, those magic numbers in the 30s when women are like, if I don't get it done now, it's now or never. So I took the plunge. I quit. I did not have a job. And I said, OK, I'm going to go out there and see what's going on.

I knew that I wanted to work with clients. That was one of the pieces of the consulting gig that appealed to me. I wanted to work with super smart people, also something I had loved in that career. And I really just, you know, wanted to be somewhere where I was constantly learning and growing, right? And I'm a New Yorker, so I was coming home.

Most of the search people at that time said to me, the only place to go if you want to do that is Wall Street. I kind of balked.

And they said, but there's just this one place. There's this one place. And the one place for those on Wall Street in the mid-90s that was very special, was very independent, was Sanford Bernstein. I walked in the door and I literally fell in love. I can honestly tell you, the minute I walked in the door, I knew I was home. Wow.

And I always thought I would die there. But obviously, you know, life is long and stuff happens. But it was a wonderful, wonderful. It was the seminal chapter in my career. I'm trying to remember. Did they get rolled up with Pim Cohen from Alliance? Is that right? So that's how it became Alliance Bernstein? So Sanford C. Bernstein was independent when founder Mr. Bernstein passed and

We needed to settle his estate and a decision was made to merge with Alliance Capital, which was a growth shop.

At the time, we thought it would be synergistic because the asset management business of Sanford Bernstein, as everyone I think knows, was a deep value shop. And so that merger happened, I want to say, somewhere in the early 2000s. We became Alliance Bernstein. And then we kind of rode it till the great financial crisis and

Our deep value exposure to financials kind of helped unwind us quite a bit. And I think, you know, Alliance Bernstein really spun for quite a long time and took, you know, a long, long time to get out of that mess. I left because I got tired of firing all my friends. Oof.

That's tough. Yeah. Because you were not just in the investing side. You were chair and CEO, chief executive officer. Yes. That's got to be a very difficult experience right in the teeth of the financial crisis. It was god awful. And really, you know, the trauma was when Lou Sanders, who at the time had been the storied CEO of the firm, he had been my personal rabbi,

when he was asked to step down. And, you know, therein began, I think, the unraveling and a little bit of the loss of that, you know, cultural juice that had kind of historically made that firm special. So you leave Sanford Bernstein then, which had really become

Alliance Bernstein, end up at Merrill Lynch, where eventually you're same role, chief investment officer for Bank of America Merrill Lynch Wealth Management. First, was there still remnants of Mother Merrill when you joined post-merger? There were certainly remnants. So, you know, just to reframe, you know, folks who are Wall Street historians will understand this chapter.

One of the reasons I went to Merrill is I was recruited by one of my best friends, who is Sally Krawcheck. Oh, really? Sally and I grew up at Sanford Bernstein together as baby analysts. And at that time, she was running, you know, the Merrill Lynch brokerage business for B of A.

And she hired me to come in and be the chief investment officer at Wealth Management. If you remember, during this period of time, it was right after the financial crisis, the worst of it. It was 2010, 2011. And, you know, she had kind of gone to bat very controversially.

asking the bank to protect clients on some of the products that had gone bad. And that didn't go so well for her. And within four months of my arrival, she actually heard that she was fired on TV. We were together in her office, and there was literally a crayon on the bottom of the screen that says, you know, Krawcheck to leave Bank of America. Right.

Merrill Lynch. Well, that was sweet of them to do it that way. You know, I have a vivid recollection from the people we were talking about. Josh Frankel and Dave Rosenberg. And I know a lot of Rich Bernstein, all these people I know from the 2000 era Merrill Lynch. And one of the fascinating things about Sally Krawcheck was her defense of the Merrill Lynch brand. Yes. Post-merger. And she really helped turn around the...

a malaise, just a lack of office morale amongst... Here you have this storied name that was picked up on the cheap during the financial crisis and was wildly underperforming as an organization.

and full credit to her for really saving Merrill Lynch as a name and turning tens of thousands of people's jobs around. She really did yeoman's work there, didn't she? Yes, absolutely. So you become chief investment officer for Bank of America Merrill Lynch Wealth Management. What did you take away from that? You've had this role in several organizations. Yes.

What was really unique and special about Bank of America Merrill Lynch? Yeah, so when I was running the wealth management business, reflecting on my experience with Sanford Bernstein, Sanford Bernstein was what we call a closed shop. All the clients were getting proprietary Sanford Bernstein asset management product.

And when I arrived at Merrill Lynch, it was really my first exposure to really entrepreneurial, extremely talented and aggressive financial advisors who were operating with what we in the industry call an open architecture platform, right? Where they could, you know, kind of place best of breed product there.

with their clients. And so that opened a whole new world for me in thinking about asset allocation and thinking about advice and thinking about active and passive constructions together, thinking about alternatives. And so

You know, what made Merrill extraordinarily special were the financial advisors who were just spectacular, to your point, the thundering herd. Yep, yep. Remember those ads from like the 60s and 70s on TV? They were absolutely unique.

So culturally, I have to think Sanford Bernstein and Merrill Lynch were both very different. What did you bring from those two organizations to your work at Morgan Stanley, either philosophically or culturally? Yeah. So I think from my time at Sanford Bernstein, I like to think I brought kind of my love of original research into

my love of, you know, that independent streak, that desire to really, you know, call out conflict of interest and say, no, this is, you know, this is what the numbers really tell you. I like to think I brought that. I think, you know, from Merrill, it was really that appreciation of how do you work through financial advisors. So, you know, as a chief investment officer, how do you earn the trust that

of financial advisors to have influence, right? Because they're what stand between you, uh, and the client. And so, you know, I think, I think, um, I started that process in my career at, at Merrill, uh,

I think in many ways, I still wake up every day and I think I've got more to learn in terms of how to be a better partner to financial advisors today at Morgan Stanley. And what is kind of interesting, given the open architecture at Merrill and the proprietary work at Alliance Bernstein, Morgan Stanley's a little bit of both. You have...

Consilient Research and a number of people running their own funds that are specific to Morgan Stanley, as well as the open architecture. How do you look at the combination of both closed and open together? Yeah. Well, look, I think it does a lot of things. First, it avails me of some of the best colleagues on the planet, right? So I'm surrounded not only by folks in the wealth management business, but obviously I'm attached to one of the best

equity and trading franchises globally. And then to your point, you know, connected to PMs that, you know, are walking the floors with me. But look, you know, I want to be really clear when I think about my clients, we're arm's length. So proprietary product might be appropriate for them if they're open to it.

If, on the other hand, they say conflicts of interest matter a lot to me, I want everything to be totally transparent. We have those options as well. So, you know, I think about it as, you know, we work with clients, we do what clients are in their best interest.

And I know it sounds a little bit like an advertisement, but I really believe that. Well, the next question, the obvious question is, who are the clients? Are they institutions? Are they households? Are they a little bit of both? Yeah. So as you may know, Barry, over the last really decade since Gorman acquired Smith Barney, we've been expanding our footprint in terms of the client segments that we are focused on serving.

really exponentially. So while you might once upon a time have thought about, you know, the Morgan Stanley financial advisors as, you know, serving that ultra high net worth

you know, core client. You know, now we're, you know, serving folks in the mass market through E-Trade. We're serving family offices. We're serving institutions. We've done acquisitions in the stock plan businesses, in the retirement businesses. I think

You noted in my bio that I run, help run one of our OCIO businesses, our outsource, where we're working with foundations and endowments and family offices. So now we're everywhere.

And we're serving every type of wealth client, internationally, domestic, self-directed through a brokerage account, all the way through complete discretionary. I recall back in the day, Morgan Stanley as, well, they're kind of a Goldman Sachs wannabe. And that is no longer the case. It's the best of Goldman, the best of Merrill. And on

This is really inside baseball stuff, so I apologize to listeners. But on the league tables to say, who's number one in underwriting? Who's number one in attracting new wealth management? Who's number one in self-directed? Like, you guys are competitive players.

across the board. And it's not like the old days where Goldman has a good year and they, you know, take the top spot everywhere. That doesn't seem to happen anymore. It seems like the industry has become so competitive. You want to be in the top five or top 10, but the days of, you know, taking number one with a bullet across all these different areas, they really seem to have faded. Yeah, they have. I mean, I think that...

Ours is a business in almost every segment that requires a lot of scale. And as you know, developing scale very often means investing aggressively in tech, investing aggressively in talent, and you got to pick your spots. Right. And so, you know, to your point, I think every, you know, segment today is a little bit of a gunfight. Right.

I like to think that, you know, in core wealth management, Morgan Stanley and, you know, where we've come, you know, first under James Gorman and now hopefully under Ted Pick's leadership is really, you know, differentiating us and allowing us to pull away from the pack, at least in wealth management. And you mentioned the investment in technology and people and the ability to scale.

At your size, and there's only a dozen or two companies that can make this claim, that flywheel begins to become very self-reinforcing, and you have the ability to just continue to add divisions to fill in, oh, we're a little soft here. Let's bulk this up a little bit and put a little muscle on it because we have the ability to offer these services to all our clients.

What's it been like watching the... How long have you been there? You're there almost a decade, right? I've gone 13. They're over a decade. Yeah. And from 2012 to 2025...

That's a huge run. A lot of big financial players, Vanguard, BlackRock, go down the list, have really added some heft. So has Morgan Stanley. What's it been like watching that over the past decade plus? Yeah, it's been extraordinarily exciting for us. Obviously, you always want to be working in a growth business. And so we've been in a situation where we're hiring –

people which is always exciting we're going after new types of clients new problems new situations which keeps you on your toes and keeps you growing and you know really completely new business segments I mean I can't tell you how to your point that flywheel between moving up market into institutions and

feeds your self-directed business. I mean, let me just give you an example. Let's assume that we are administering a stock plan for a large corporate client. Now we're going in and we're saying to that corporate client, instead of

you know, having a financial advisor, going to the country club on Saturday, acquiring a client mano a mano, one at a time, we're now walking into a C-suite and saying to that CFO or that chief talent officer, hey, can we provide all of your employees with a financial wellness program? Can we give every single one of your employees

employees a free financial plan? Can we give every single one of your employees a account or advice, you know, to their first, you know, purchase in a 529 account? Things like that, where suddenly you're acquiring clients at scale. Really, really interesting.

Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? A combination of financial services and generosity programs. Thrivent offers advice, investments, insurance, banking, and generosity, as well as resources to fund service projects or direct dollars to causes you care about. With more than 120 years serving clients, you can plan your finances with confidence. Visit Thrivent.com to learn more. Thrivent.

where money means more.

Join us in New York or via live stream on May 13th for Bloomberg's Winning the Innovation Game, Modernizing IT Without Disruption event and networking reception. This event will gather executives to share experiences and provide insights into strategies for implementing groundbreaking AI, cybersecurity, and data management technologies that will transform your workplace. This program is proudly sponsored by Rocket Software. Register at BloombergLive.com slash innovation.

Something unexpected happened after Jeremy Scott confessed to killing Michelle Schofield in Bone Valley Season 1. I just knew him as a kid. Long, silent voices from his past came forward. And he was just staring at me. And they had secrets of their own to share. Gilbert came. I'm the son of...

Jeremy Lynn Scott. I was no longer just telling the story. I was part of it. Every time I hear about my dad, it's, oh, he's a killer. He's just straight evil. I was becoming the bridge between a killer and the son he'd never known. If the cops and everything would have done their job properly, my dad would have been in jail. I would have never existed. I never expected to find myself in this place.

Now, I need to tell you how I got here. At the end of the day, I'm literally a son of a killer. Bone Valley, Season 2, Jeremy. Jeremy, I want to tell you something. Listen to new episodes of Bone Valley, Season 2, starting April 9th on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. And to hear the entire new season ad-free with exclusive content starting April 9th, subscribe to Lava for Good Plus on Apple Podcasts.

So let's talk a little bit about Morgan Stanley. We mentioned you were previously at Alliance Bernstein, and then you were at Bank America Merrill Lynch.

What led you to make the jump to Morgan Stanley? So I had, when, as I noted, I'd gone to work at Merrill very much to partner with my very good friend, Sally Krawcheck. And after she had left, I made the decision that without her there, I kind of felt among the, you know, the thundering herd without a rabbi, if you will. Right.

And I left. And at that point, I really thought I was going to do my own thing. I thought I was going to do something entrepreneurial. I thought I might join an RIA or form my own RIA at that point. And I just I got a call from Greg Fleming. Greg Fleming was one of the co-presidents at Morgan Stanley at the time.

And he said, look, you know, I have a lot of contacts over there at Merrill Lynch. The financial advisors really love you. You know, come on in and meet our team. And so I did. And, you know, I had a very similar feeling to that feeling I had when I first went into Bernstein of, you know, these are just great people and I would enjoy working with the people.

And before I knew it, there I was sitting next to Mike Wilson, who I know you know. Mike was taking a stint, a rotation through wealth management, and I joined him to build the team and

and really create the platform that we have today. When Morgan Stanley and Smith Barney were merging, there was really no centralized CIO office. It was the only place that that talent was coming from was from Smith Barney, from the Smith Barney side. And so we wanted to recraft a more Morgan Stanley integrated firm offering. And so I joined Mike Wilson to help build that.

So let's talk a little bit about what goes into managing $100 plus billion in assets. How do you develop that? How do you think about asset allocation? And how do you think about the end clients, given how broad your audience and clients are? How do you create a set of options that

checks all the boxes that you know you need to check to do this right, but also gives a broad variety of clients what they're looking for. Yeah. So, Barry, for us, asset allocation, all asset allocation starts with financial planning and all financial planning starts with the client.

But you can't do a financial plan without having what we call capital market assumptions. You know, what do we think every asset class is going to do over the next 3, 5, 10, 20 years?

Our customization of asset allocation really starts with financial planning. That is the linchpin. We fundamentally believe that you've got to understand a client's cash flow, that the client has to understand their own cash flows. One of the things that I know you know

having worked with a lot of clients, is very often clients don't know themselves, right? The good old-fashioned, hey, I'm kind of aggressive, I'm kind of conservative. Those are such non-normative terms. You never know, are we talking about politics? Are we talking about...

Usually you're talking about whatever the market did the past six months, and that's what the determiner. And so working through the behavioral pieces, the getting to know your client, working through a plan with them, really getting into what are their hopes, wishes, dreams, what does money mean to them, why have they accumulated it, how have they accumulated it,

What do they hope their legacy will be? Does it have to do with a charity, you know, a cause, a family member or members and build a plan from there.

Really quite interesting. So since you've joined Morgan Stanley, and I'm going to assume this isn't a coincidence, their focus has increasingly been on the wealth management side of the business, which was a big change to the 1990s and the 2000s. Tell us a little bit about why and how this focus shifted.

shifted and what your role is in that. Sure. So look, I think history is going to be extraordinarily kind to James Gorman. I think James, I feel so extraordinarily lucky to have served in the firm

While he was the CEO, I think strategically back during the financial crisis, he developed a vision. And that vision was, I believe that the wealth management business is a growth-oriented business. I believe it needs scale. And I believe that when combined with a more cyclical markets-based businesses or the banking-based businesses can add ballast and create growth.

shareholder value. And I think that he embraced that vision. And that vision had kind of three chapters to it. The first was, you know, let's buy Smith Barney and get physical scale, right, just the physical scale of a large number of advisors. Let's invest aggressively in technology to support those advisors. I think the second part of that growth was to say, let's

transform how we serve our clients and the client segments that we serve. And they started to explore these other acquisitions first, the acquisitions of these stock plan businesses, which are essentially tech businesses, tech platform businesses, but would allow us to go from acquiring clients one at a time to in groups.

And then the last piece of the strategy was really let's go after E-Trade and Eaton Vance and acquire those. And then we'll have the machinery so that you can acquire clients at the early stages of their life cycle, allow them to be self-directed, and ultimately graduate to advice.

so that your financial advisors actually constantly have a source of new clients, of new wealth clients, that they don't have to be at the country club every single weekend. So what you're describing is you're starting with clients that have no minimum and they're self-directed to D-Trade. I don't mean this in a...

negative way. They sort of move up or graduate to a little more full service. They want a financial plan. They want some advice. They want to think about whether it's saving for a home or college or retirement. And then the next step up seems to be full-on wealth management, where you're dealing with philanthropy, generational wealth transfer, or

A lot of bells and whistles, including estate planning, tax. You guys offer the full suite of services. Absolutely. And I think one of the things that a lot of folks don't know about us is we're the 800-pound gorilla in actually offering alternatives to private wealth clients. We are larger than some of our well-known competitors by a factor. And so what that means is we're now in a position where literally about 80% of

of the alternatives that I would show you as a client are either, you know, first look, meaning we're getting the first look or best price by a lot.

So it's funny because you mentioned Gorman taking over from his predecessor. Yeah, John Mack. John Mack, who I've had on the show, who was just delightful. But the Mack era of Morgan Stanley seemed to have more successfully navigated the financial crisis than many of their competitors. And part of me can't help but feel that coming out of the crisis in better shape

than so many others really allowed, more incidentally, to blow up over the next 50, when everybody else had blown up during the financial crisis in the bad way, they really bulked up in the good way following that. Is that a fair assessment? That is a fair assessment, Barry. I think I look at it in a very particular way. A host of our competitors were forced, quote unquote, into the arms of the big banks, right?

So the B of A Merrill situation. - Right. You had Bear Stearns and JPMorgan Chase. - Exactly, you had, you know, Citi had to make choices around Smith Barney. It was very, very hard.

What Mac and James Gorman did to rescue Morgan Stanley, and literally they talk about it as an overnight rescue where half the employees were packing the boxes just like everybody else, and the other half were on the phone with...

colleagues in Japan. And as you may recall, what saved Morgan Stanley was a huge equity infusion from MUFG, from Mitsubishi Financial Group. And what was wonderful about that is not only was it premised on a fantastic

partnership, but it was an arm's length partnership that allowed the business to be rescued, but not devoured. And I think that for some of our competitors who were suddenly during the great financial crisis inside systemically important banks, their needs just by sheer dint of size got squashed a little bit because the bank...

Obviously had, you know, the CEOs of Citi, the CEO of Chase, the CEO at Wells, the CEO at B of A, you know, they're sitting there with the Fed and SEC every five minutes. Now, I'm not saying Morgan Stanley wasn't at those meetings, but the stakes were different because we weren't a commercial bank with a balance sheet.

the size that those guys have. But even more importantly is you're at Alliance Bernstein, Bernstein gives up control in the merger. You're at Merrill, Merrill gives up control in the merger. Third time's a charm when you end up at Morgan Stanley, Mitsubishi had a substantial stake, but they didn't take a controlling stake and the local US-based management were able to continue making the choices they made.

I have to think that was just a giant home run investment for MUFG. That has to be just a giant winner for them. 100%. And I think, again, if you go back and look at it, where are the Morgan Stanley stock bottomed and where we are today? Like I said, I think the history books are going to be quite kind to Mr. Gorman.

And, you know, you talked about some of the acquisitions, Smith Barney, Eaton Vance.

I'm trying to remember the direct indexer you bought. I didn't know if it came through Eaton Vance. Yes. Was that parametric? Yes. Am I remembering that correctly? Wow. Yes. So fantastic memory, Barry, because that has been transformational. As you know, indexing, tax management, direct indexing, or the ability to customize indexing

are all demands. And it's a tech, it's a very tech-heavy business. So Parametric was buried inside of Eaton Vance. It is definitely diamonds in the rough that we got and now is a key capability offering within the suite of products. Really fascinating.

Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? A combination of financial services and generosity programs. Thrivent offers advice, investments, insurance, banking, and generosity, as well as resources to fund service projects or direct dollars to causes you care about. With more than 120 years serving clients, you can plan your finances with confidence. Visit Thrivent.com to learn more. Thrivent.

where money means more. Something unexpected happened after Jeremy Scott confessed to killing Michelle Schofield in Bone Valley Season 1. I just knew him as a kid. Long, silent voices from his past came forward. And he was just staring at me. And they had secrets of their own to share. Gilbert came. I'm the son of...

Jeremy Lynn Scott. I was no longer just telling the story. I was part of it. Every time I hear about my dad, it's, oh, he's a killer. He's just straight evil. I was becoming the bridge between a killer and the son he'd never known. If the cops and everything would have done their job properly, my dad would have been in jail. I would have never existed. I never expected to find myself in this place.

Now, I need to tell you how I got here. At the end of the day, I'm literally a son of a killer. Bone Valley, Season 2. Jeremy. Jeremy, I want to tell you something. Listen to new episodes of Bone Valley, Season 2, starting April 9th on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. And to hear the entire new season ad-free with exclusive content starting April 9th, subscribe to Lava for Good Plus on Apple Podcasts.

Join us in New York or via live stream on May 13th for Bloomberg's Winning the Innovation Game, Modernizing IT Without Disruption event and networking reception. This event will gather executives to share experiences and provide insights into strategies for implementing groundbreaking AI, cybersecurity, and data management technologies that will transform your workplace. This program is proudly sponsored by Rocket Software. Register at BloombergLive.com slash innovation.

So let's talk a little bit about what's going on these days. And I want to start with a quote of yours that I really like. We're all long-term investors until the market goes down. And we're recording this in the midst of a pretty healthy sell-off in February and March, especially now that the new North American tariffs seem to be

taking place. Tell us, why do we give up our long-term perspectives once the market starts heading south?

So there's the emotions and then there's the math, right? So what I always say is that, you know, what the Nobel Prize winners in behavioral economics will tell you is that emotionally losses hurt four to five times more than gains satisfy. And that's actually intuitively appropriate because typically our wealth, we feel, is

has taken blood, sweat, and tears to acquire or accumulate. And when we experience a loss, right, a 50% loss can happen, right, in a very short period of time, but

But to round trip and recover our high watermark, we've got to be up 100%, right? Which may take us twice to three times as long. And so the math is asymmetric. The emotions are asymmetric. And fear...

As we know, just the same way when things are running hard and you feel like you've got the FOMO and the missing out, it's greed. When, you know, there's a lot of red on the screen, people are, you know, your stomach's, you know, totally seizing up and it's about fear. I don't want to experience loss. I don't want to.

have to make a decision of what do I do here? Yeah, the asymmetries are really fascinating. I am not a fan of Vegas or casinos, but I go there as a sociologist and I always find it amusing that right off the casino floor is a big, beautiful jewelry store filled with lots of expensive watches. And because those gains...

It's house money. It's ephemeral. But losses are an existential threat. It really feels like the world is coming to an end. Exactly. Forget down 50%. Right. We're recording this 5%, 6%, 7% off the highs, and people are talking like it's the end of the world. Let's talk about another one of your quotes that kind of caught my eye, which was,

discussing the great normalization. What is the great normalization? So, you know, we've been trying to remind clients how extraordinary in financial history the past 15 years have been. You

Since the great financial crisis, we've had an unprecedented level of Federal Reserve involvement. We've had markets that have been buttressed by the Federal Reserve balance sheet, that have been buttressed by a disproportionate amount of time having financial repression or low rates, rates being held down.

We've had gone through the COVID crisis, which stimulated unprecedented fiscal stimulus as a share of GDP. And performance, what clients have actually experienced. If you go back to March of 2009, right?

And you and I remember March of 2009, the bottom, we were probably looking at an S&P 500 that was trading in the mid 600s. - 666, I remember the devil's bottom. - The devil's bottom.

And look at where we are now. Even though we're off, we're still up during that time. 9x? 9x over 15 years. So I tell people, let's put this in perspective. What that kind of mathematically translates to is for 15 years, we've compounded at about 15% per year. So that's two times normal for a business cycle, let's call it, where we had two very short recessions.

Two back-to-back, very long business cycles. Not normal. What was also not normal is during that time, the degree to which U.S. exceptionalism and the U.S. outperformed the rest of the world. I mean, we were outperforming every year, year in, year out, by 600, 700 basis points per year.

And so when we, you know, kind of came into January of 2025, we were starting to talk to folks about look at where the dollar is versus virtually every other currency. Super strong. Look at the share of U.S. equities versus the rest of the world.

We're 10% of the world's population. We're 25% of the world's GDP. We're 33% of global corporate profits. But we were 67% of all stock market cap.

Just extreme. And so what we were starting to talk to clients about is, look, this is an extraordinary amount of largesse. And a lot of it has come from fed accommodation, from stimulus. Now we're on the other side of that.

We have a very robust economy. We've relevered the economy, if you will, where the leverage of the private sector, the household sector, the corporate sector that got us into the great financial crisis, that's been healed, right?

Right. We have households that can still carry, for the most part, their interest burdens. Very, very low historically. Right. It's not the total debt. It's the debt relative to discretionary income. Exactly. Exactly. Corporations that still have an extraordinarily relative low locked in cost of capital.

And what's become relevered is the federal balance sheet and the government balance sheet. And now here we are. And every couple of decades, we have to go through these periods where there's heat in the economy. And inflation is one manifestation of the heat. Real growth and investment is another manifestation of the heat.

But the other manifestation is you probably have overdone it on the stimulus and you got to pull it back and there's going to be some pain. So when we talk about normalization, we say, look, we're not going back to 2% interest rates. Normal cost of capital in an economy like America's that has real fundamental growth of 2%.

And real inflation or experienced inflation of two and a half to three, which is what we've had for the last 80 years. Right. Right. Not two percent target that the Fed says. Right. What that tells you is that long term rates used to be normal at five to six percent.

Right? That's not crazy. And yet, the market continued to sell at a 22 times forward multiple. So what we've been saying is part of the great normalization is over the next couple of years, we think long rates start to move towards 5% to 6% like they were in the aughts in the 2000s and in the 90s. Right?

And multiples start mean reverting a little bit to 17. And that's the great normalization. Your earnings actually start growing into those multiples. You mentioned the 2% target of the Federal Reserve. Did you work with Roger Ferguson when he was at Merrill? No, I did not. But he eventually became vice chairman of the Federal Reserve and put out this delightful research piece.

that said the 2% inflation target is

comes from a New Zealand television show in the 1980s, and it has nothing whatsoever to do with the modern economy. I'm, to this day, delighted by that, and I don't understand why the Federal Reserve continues to be so locked in on 2%, which we had in the 2010s when deflation was the risk. Now that we've moved from a monetary regime to a fiscal regime—

3% seems to make more sense, and we're there. We're there. I don't know why they're stuck on that. I think they're just afraid of making a mistake. Again, part of the normalization that, hey, the Fed's a little behind the curve with what's going on in the rest of the economy. No, exactly. And I think one of the things that has the market having to adjust is this idea of a data-driven Fed. Right.

In a world where the Fed's the only headline and the Fed is giving forward guidance, it's really easy to have low vol and for everyone to just ride momentum. But in a normal world where the Fed has to respond to economic data, you and I know economic data is a manifestation of human behavior. It's volatile. Right?

Right. So the Fed is going to be more volatile. Policy is going to be more volatile. It means your interest rate curve, your yield curve needs to have some term premium in it. Remember that? And that's part of the great normalization. I, you know, I do do the math when I when I do some of my my chats with the younger folks on the on the team. And I say, OK, real growth, inflation, term premium. See, this is

It's been zero or negative for the last 15 years. That's not normal. So wait, you're saying the 30-year bond should pay a higher yield than the 10-year bond? Exactly. Higher than the two-year? Yes. I'm not familiar with that. It's been the opposite for so long. It's so hard. So another quote of yours is,

Which I assume is related to this is the era of set it and forget it is over. Yes. Is that what we're saying here? Yes, exactly. So, you know, what comes out of this idea of the great normalization is it's also an era where we can't just passively close our eyes, buy the S&P 500 market cap weighted index and go to bed.

It was a great 15-year run. But our view is that as cost of capital readjusts, as it's actually a positive number,

This is where the skill of corporate management starts to differentiate winners and losers. And we move back to a world, right? And you and I grew up in this world, that fun world where you're actually stock picking, where the research that individual fundamental analysts were doing mattered. And you had to say, hey, these guys are going to win because these management teams are taking strategies that can work. And these management teams are dropping the ball. Yeah.

Really, really super interesting. Given all of these changes that we're witnessing, and again, this is something else you've written about, how do you separate the signal from the noise? What's your process for filtering out? What's just noisy data that's within the margin of error or just slightly beyond and

and genuine important market information. - So this is the art, right? This is the art of all of it, is separating the noise and the signal. For us, the signal is always operates ultimately on just two axes, is what's really going on in terms of the rate of change in growth

and what is going on in terms of the rate of change of inflation because the rate of change of inflation is going to give you an indication of policy bias, of rate bias. And if you can focus on those two things and every single piece of data you get, you say, what does this mean for growth? What does this mean for inflation? You can try to keep yourself sane at night. So I'm curious as to February was a tough month.

We've seen volatility spike now up to 23 or so. I haven't even looked at it today with markets off a couple of percent. The questions you're getting from clients, what are you hearing? What are you hearing about tariffs, about the post-election regime change, about what's going on in geopolitics? What's lighting your phone up and what are you telling these folks?

Obviously, we would love to spend the bulk of our time talking about asset allocation as it corresponds to growth and inflation. Unfortunately, exactly to your point, Barry, we're spending a disproportionate amount of time out of our comfort zone being asked to respond to our understanding and our expectations for the economic impacts of policy.

And what has complicated things, as you know, is that this administration has chosen to implement policy fast and furious and in many cases, quote unquote, in parallel. Right. I think that, you know, coming off of the election, coming off of the campaign season, I

A lot of us were trying, you know, to build models based on, well, they're going to sequence things, right? They're going to, you know, deliver some of the bad news early and then, you know, the candy will come at the end.

I think what we're experiencing, especially after the last 15 years of this kind of one or two note market, right, where it's been, what is the Fed saying? Oh, generative AI looks like good headlines to 17 headlines a day.

Flood the zone. Flood the zone. So clients are asking for certainty. They're asking for clarity, and it's hard. I'm going to be honest with you. So look, we're in the camp, and this is a pure economic view. I hope I'm not going to be accused of...

being political. Pure economists will tell you that tariffs, particularly if implemented over long periods of time and to the extent that they cause trade war or reciprocity, tend to be destructive to total global trade in aggregate, tend to be a one-time inflationary problem, and tend to really kind of hurt the efficiency of markets.

And so I think we're seeing some of that. I think it's very hard for CEOs and CFOs today to be making decisions not knowing what the policy duration is going to be. It's one thing to have a policy and say, okay, we're deregulating X or here's the new tax policy for the next four years. I can work with that. When you tell me we're having 25% tariffs on lumber,

Well, how long? How much? Where? How's it going? You know, I think that's the big question is, is the inconsistency of it and the questions of is this a negotiating tactic? What are we negotiating for? How do I model it? That kind of thing.

And, you know, it's really hard to get a handle on this because let's just use Canada and Mexico. The first tariff was floated and then it was quickly resolved and it felt, oh, this is just a negotiating tactic. The effect of the second 25% tariffs on Mexico and Canada and 10% tariffs on China. And it's not only surprising that it was done, but

It's kind of perplexing. What are we getting out of the tariffs with Canada? When you look at...

some of the supposed basis for this. The fentanyl that comes into the United States is mostly brought in by U.S. citizens and smugglers. It's not coming in from either Canadian lumber or oil or televisions that are being built in Mexico and sent over the border. It's, you know, it's kind of odd, especially given

The North American free trade agreement that was negotiated to replace NAFTA was Trump's treaty. So the whole thing is kind of, you know, clients don't like to hear you say, I have no idea what's going on and be wary of people who say they do. But it really feels like

This is sort of arbitrary and capricious, and we don't really know how this resolves. It's sort of grit your teeth and ride it out. Brace yourself, Martha. That's what it feels like. Just hold on. And the way I always frame things is I say to people, look, what kind of risk premiums are there in the markets? When stocks are very expensive, as they have been for a while here, it

It tells you risk premiums are tight, right? Things are quote unquote price for perfection. When credit spreads are tight, it tells you people are not requiring a premium for fear or default or uncertainty, right? When there are no term premiums in the United States treasury curve, it's telling you the same thing.

So look, if this were all happening against a backdrop where stocks were selling at 15 times, where, you know, we had 800, you know, basis point spreads and high yield, all this kind of stuff, you and I might be saying, hey, guys, yes, there's uncertainty, but this is a buying opportunity. Look, you know, things are selling off of a 15 multiple. Where do you think they're going to land? At 13, we're going to buy here, but we're not there.

Markets hate uncertainty and they really hate uncertainty when things are priced for perfection. - Doesn't give you a lot of room for error. So let's talk about something more positive. AI has been the big story for the past couple of years.

Let's talk a little bit about that and other emerging technologies or innovations you think might impact the investing landscape over the next decade. What are you looking at? Yeah, so we're looking at a lot of things. But look, clearly generative AI is transformative. There's no doubt about it. I think the conundrum for investors is how do you stay ahead of

of the revolution itself. And what I mean by that is that, you know, technology innovation tends to follow very clear scripts over history. And by that, I mean, you tend to get the big infrastructure build, then you get the software applications, and then you get mass economy-wide deployment.

And in that sequence, you get new killer apps and the quote unquote, the winners of that era. I'm not entirely sure that all the winners have been identified with regard to generative AI. And while the Magnificent Seven are magnificent on many, many, many financial attributes, on many innovation attributes, they

You know, I think the market is telling you that maybe they are not the only winners here and that maybe the growth in the infrastructure build doesn't go on forever. And certainly our experience with the Internet validates that.

So, you know, what are we super excited about right now? We're super excited about some of these AI adopters. We're looking at areas, whether it's document recognition, voice recognition, all these various applications, the agents, you know, how we're going to deploy AI into learning agents to help human beings do things.

almost become the white collar robot, if you will. I think, you know, that's all very interesting. But where AI is likely to have some of its most profound impacts is in healthcare.

And the extent to which we're going to be able to use large language models just to process data and personalize medicine and personalize diagnostics and solutions, treatment plans, so much faster. I saw a fascinating video the other day about AI being used

So when you look at the history of healthcare, it really started out as a little bit of chemistry, and then it became biology, and then it became genomics. And one of the challenges is trying to figure out how protein folds and how different molecules interact with the body's receptors and immune system. And it turned out that for the prior 50 years, we've identified a few thousand different

of molecules and protein foldings, which is key to figuring out what the genetic code operates in actual life. And so they went from like the library of 2,500 molecules

protein folding protocols to using AI identifying like 400,000. Like it's an insane order of magnitude. And we've only begun figuring out how do these different proteins work on different parts of the body in response to different diseases, infections, virus. It's like, it's shocking that these aren't headlines yet. They're just academic research, but it seems like

When people are talking about longevity, it's not the cold plunge that's going to do it. It's going to be all of these half a million new protein designs. Tell us a little bit about the investment opportunities that exist in the healthcare space. So right now, healthcare is one of the sectors that we have moved overweight.

Clearly, the healthcare sector over the last decade and much of this bull market in large part has been left behind. And valuations have been, with the exception of some of the obesity drugs, the pharmaceutical industry has been squashed by worries about regulation, squashed by the power of the insurance companies, squashed by patent expiry, squashed by a lot, a lot of things.

But we think that valuations are there. We think that that's a great place to invest, and you can do it obviously through venture and in the public markets. Other themes that we're super, super excited about are defense and space and the conjoint between those two. This idea that ultimately the way we think about weaponry, the way we think about defense will be huge.

Not unlike, you know, some of what you see in the sci-fi movies and Star Wars, unmanned vehicles doing the very surgical games of war, if you will. So I think, you know, that's something we're super excited about some of the innovations in the energy space industry.

not so much purely around clean tech or powering data center, but really thinking about how do we more creatively use and reduce dependency on some of these rare earth materials to create battery, autonomous vehicles, another one. So all of these areas, it's a very, very fascinating time to be an investor in new tech.

Yeah, you mentioned autonomous and defense. This giant New York Times article came out about the war in Ukraine and the transition from World War I and II type trench warfare, armored vehicles, tanks. Exactly.

70% of the casualties inflicted in the war as of recently are being driven by drones. It's absolutely futuristic sci-fi. When warfare changes that rapidly, it has to make you raise the question, how do the geopolitical alignments change?

Here we are, Barry. Here we are. How do the big defense companies... Yep. Like there's a reason Palantir has been super hot and not necessarily Lockheed Martin or Boeing. Correct. It's really quite fascinating. I have two personal questions to ask you before we get to our favorite questions. All right. Starting with, you wake up every morning at 5.07. Yeah. So first...

Why 507? It's such a specific number as opposed to just setting the alarm for 5 or 530. And then if you're up at 507, give us a day in the life of Morgan Stanley's chief investment officer. Oh, geez. So I'm extraordinarily superstitious about odd numbers. Really? Yes. Okay.

Wait, you're applied mathematics undergraduate. Yep. That doesn't scream superstition. I guess it's part of my lived experience is that, you know, I always say to people, hey, it's an odd number year. We're good. Really? Oh, my God. I'm very, I'm very. I'm trying to remember the Nobel laureate in physics. I'm drawing a blank on his name, who a grad student visited his house and

And there's a horseshoe over the doorway. And the grad student says, Professor, you don't believe in lucky charms and things like that. And the response was, maybe it was Plank, I'm not sure. But the response was, I'm told it works whether you believe in it or not, which is pretty charming. But I believe in it.

I do. 507 is really specific. So it's an odd number. So look, it was something, you know, back in the day, one of my jobs was I was a director of research. And so I always had to be at my desk right at 630.

So I got into the routine of, you know, up 507, you know, do the quick 20 minutes on the treadmill, grab the coffee shower out the door. And so that's, you know, still me, you know, old dogs, new tricks. It's been really hard. And how different is every day as CIO? It's like, I like to sometimes ask what's a day in the life like, but I suspect no two days are the same for you. No two days are the same. But Barry, let me just tell you, I wake up,

at 507 every day. And the very first thing I say is I am blessed that I have the career that I have, that I have the seat that I have at this point in my life. Um, because I am learning every day. Uh,

No two days are the same. I get to hang out with the most amazing people like you, like my colleagues at Morgan Stanley, like my clients, all of whom are so, so interesting and successful in different ways.

going to meetings where you get to hear Scott Vasant speak at the New York Economics Club. And, you know, you're just really feel alive. You feel plugged into the world and what's going on. So I feel blessed every day and no two days are the same. So last career question, you've been watching the state of the economy, the markets,

just what's going on in the world for just about 25, 30 years, what's been the most significant shift you've observed in wealth management over that period? Wow. That's a fantastic question.

Look, I think if there was one theme that I would say over my 30-year career that has characterized everything, it has been the democratization of reasonably sophisticated products.

Right. So whether, you know, you talk about, you know, first coming into the business and the advent of, you know, first mutual funds was about democratization of, you know, diversified stock investing. Right.

And then, you know, passive investing as a way to get access to an index in a, you know, more technology efficient way. You talk about the original rollout of quote unquote liquid alternatives or evergreen type products.

And now we're at the point where, you know, we're talking about very sophisticated private equity, private credit products being contemplated for 401k plans and being packaged in these structures to give folks periodic liquidity. So democratization of, you know, sophisticated alpha and beta that that.

Once upon a time, I think, you know, when I started in the industry, people would say, well, there's the market and then there's the extra stuff and you got to figure it out. And if you don't like that, own some bonds. I think now it's the democratization of very sophisticated access, of access to sophisticated products. So let's jump to my favorite questions that I ask all of my guests today.

Starting with, what are you streaming these days? What are you watching to relax or on the treadmill or just to keep you entertained? Love streaming. The most recent thing I finished was something called Shrinking. So good. Yeah. Apple TV. Yeah, so good. I've been watching Prime Targets. What are Prime Targets? So Prime Target is a show about a...

a mathematician who's working in Oxford, who is working on a thesis to generate prime number combinations and permutations that supposedly if he's able to develop this algorithm as part of his PhD thesis would unlock or give folks the ability to hack almost any system. And

and so of course it becomes a scenario where, you know, there's the bad guys are chasing him to try to get his, his thing. And of course, you know, the national security agencies are trying, are chasing him. And it's kind of a spy versus spy kind of thing. And it's a poor, innocent nerd guy in the middle. And what is surface or surfacing? So surface, uh, is a, is a show also on Apple TV. Uh,

It's in its second season. It's about a woman who kind of fakes her death as a way of leaving behind her life and going back to England. She'd been living in the United States. She was married in a marriage that wasn't great. And she fakes her death to go back to England to investigate what she thinks was her mother's murder.

when she was a kid. Really interesting. Let's talk about your early mentors who helped shape your career. Sure. Bernstein was that seminal place. So the two I would speak to, one, Lou Sanders. Lou Sanders was the CEO at Sanford Bernstein, in my humble opinion, one of the greatest value investors ever.

certainly that I ever met in my career. Just brilliant, a numbers person, very, very high integrity, taught me how to be objective to get the emotions out of it, to build the model and have the discipline to build the model. Sally Krawcheck, we talked about, one of my best friends in the business, someone that I care a lot about, someone who showed me how to lead

Although we were peers, she has a natural charisma and natural instinct for leading people. She and I kind of worked side by side through the 9-11 crisis. I learned a lot from her in terms of what people need from leaders today.

when things are tough. They look to leaders to say the right things and do the right things and be strong people and not get, you know, bogged into headlines or theories, but just to say, remember what we're here to do. Let's talk about books. What are some of your favorites? What are you reading currently? What am I reading? So now this is going to reveal my politics. The last book I finished was a book called Prequel by Rachel Maddow.

And it's very... My wife is in the middle of reading that. It's fantastic. That's what she said. It's captivating and it's fantastic. And it's captivating and fantastic, not for good reasons, but it lays out some of the dynamics of American history and American political dynamics between the wars, between World War I and World War II.

And the first America First movement in the United States that was very much against America ever getting into World War II. Very isolationist, very anti-European. Yes, and it was in a way that's similar to our current political dynamic. It ended up bringing in some very different factions, right, where you had –

interestingly, coalitions of people who ended up being a political bloc who came at things from very different points of view. So you had kind of the Father Coughlin part of the movement. Father Coughlin, for those who know, was a very, very famous Sunday radio show, Catholic preacher and

Pacifist, correct? Yeah, but very isolationist. That was one dimension of it. And then you had kind of the anti-communist and the anti-immigrant.

sides of the party and some other dimensions to it. But it's a fascinating book. Prequel, Rachel Maddow, really recommend it. Our final two questions, what sort of advice would you give to a recent college grad interested in a career in either wealth management or finance or anything related to your work? Yeah, so, and people hate when I say this,

because it belies the path that I took. But I'm a big believer in liberal arts education. I don't think that to work on Wall Street, to be a great portfolio manager, to be a great economist, to be a great strategist, that you have to study finance or business administration or go to the Wharton School of Business. I do not believe that.

I believe we live in a world where if you know how to read books, if you know how to teach yourself things, if you know how to learn how to learn, you can have a phenomenal career. And it's exactly to your point, Barry, that you and I, you know, entered the business 25, 30 years ago. Nothing's the same. It's all about adapting. And so I tell folks,

study what you love, study what you're passionate about, learn how to learn, and never lose that hunger for knowledge. Become an autodidact. Learn how to learn, learn how to, what's going on. Our final question, what do you know about the world of investing today that you wish you knew 30 years ago when you were first getting started? And I don't mean buy Amazon at two and Apple at one. I mean, what broad principle do

Did you learn along the way that would have been useful to have found out much earlier? That being right is not what matters. You're going to have to expound on that. Yeah.

Being right is not what matters what what matters in the long run is what Einstein said, you know decades ago Remember the power of compounding if you save if you're disciplined if you just have a consistent plan you will highly likely compound your wealth and

at least seven and a half to eight percent per year, which means you will double your wealth every decade, double your savings, whatever that is. For most of us, if we're lucky enough, we have, you know, three, four doublings in us. Just do that. And it's not to say that what I do all day doesn't matter or what you do all day doesn't matter. It's just at the end of the day,

We're trying to guide people. But as I say to my team, I know the likelihood I'm going to be right on any given decision is at best 50-50. What matters is do we have a good plan and are we being disciplined and consistent about it because compounding is your friend.

Really fascinating stuff. Lisa, thank you for being so generous with your time. We have been speaking with Lisa Shallott. She is Chief Investment Officer at Morgan Stanley Wealth Management. If you enjoy this conversation, check out any of the 500 previous discussions we've had over the past 10 years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast.

Be sure and check out my new book, How Not to Invest, The Ideas, Numbers, and Behaviors That Destroy Wealth, out everywhere March 18th. I would be remiss if I did not thank the crack team that helps put these conversations together. Each week, Andrew Gavin is my audio engineer. Anna Luke is my producer. Sage Bauman is the head of podcasts here at Bloomberg. Sean Russo is my researcher.

I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio. Something unexpected happened after Jeremy Scott confessed to killing Michelle Schofield in Bone Valley Season 1. Every time I hear about my dad, it's, oh, he's a killer. He's just straight evil. I was becoming the bridge between Jeremy Scott and the son he'd never known. At the end of the day, I'm literally a son of a killer.

Listen to new episodes of Bone Valley Season 2 starting April 9th on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.