Wealth Management and the 'Great Normalization' with Lisa Shalett

Summary

Masters in Business: Wealth Management and the 'Great Normalization' with Lisa Shalett

Introduction

In the April 3, 2025 episode of Masters in Business, hosted by Barry Ritholtz of Bloomberg, the conversation centers around the evolving landscape of wealth management under the lens of Lisa Shalett, Chief Investment Officer (CIO) at Morgan Stanley Wealth Management. With a rich background spanning leadership roles at Sanford Bernstein and Merrill Lynch Asset Management, Shalett offers a unique perspective on the industry's past, present, and future.

Guest Background and Career Path

Lisa Shalett's journey to Wall Street is unconventional. Despite holding degrees in applied mathematics and economics from Brown University and an MBA from Harvard, her initial career aspirations were far removed from finance. “[...] I was a drive time disc jockey,” Shalett shares at [03:25]. Her shift towards finance was driven by a combination of personal realization and external encouragement. After experiencing the grueling demands of management consulting, she took a leap into finance, ultimately landing at Sanford Bernstein, where she felt an immediate sense of belonging ([03:52]).

Leadership at Sanford Bernstein and Merrill Lynch

At Sanford Bernstein, Shalett climbed the ranks to become CEO and Chairman, navigating the firm through significant mergers and the tumultuous financial crisis. “[...] our deep value exposure to financials kind of helped unwind us quite a bit,” she reflects at [06:12]. Her tenure at Merrill Lynch Asset Management as CIO further diversified her expertise, particularly in adapting to an “open architecture platform” that allowed financial advisors to access a broader range of products ([10:35]). This experience honed her ability to collaborate with financial advisors, a skill she emphasizes as crucial in her current role at Morgan Stanley.

Transition to Morgan Stanley and Role as CIO

Shalett's move to Morgan Stanley was catalyzed by the departure of her close colleague, Sally Krawcheck, from Merrill Lynch ([23:08]). Recruited by Greg Fleming, co-president at Morgan Stanley, she embraced the opportunity to build and integrate the CIO office, contributing significantly to Morgan Stanley’s expansive wealth management strategies. “[...] we're serving every type of wealth client, internationally, domestic, self-directed through a brokerage account, all the way through complete discretionary,” she explains at [14:48].

Asset Allocation and Wealth Management Strategies

Central to Shalett's approach is the integration of financial planning with asset allocation. “All asset allocation starts with financial planning and all financial planning starts with the client,” she states at [25:36]. Her methodology emphasizes understanding clients' cash flows, aspirations, and personal definitions of wealth. This personalized approach ensures that investment strategies align with individual goals, whether they involve philanthropy, generational wealth transfer, or retirement planning.

The Great Normalization and Market Perspectives

One of the episode's focal points is the concept of the "Great Normalization." Shalett highlights the unprecedented financial environment post-Great Financial Crisis, characterized by extensive Federal Reserve intervention and prolonged low interest rates. “[...] the past 15 years have been extraordinary in financial history,” she asserts at [40:27]. She contrasts this period with the current shift towards normalized interest rates and economic policies, predicting a transition back to historical norms where long-term rates stabilize around 5-6% and market multiples begin to mean revert ([44:50]).

A notable quote encapsulating this sentiment is, “We're all long term investors until the market goes down,” reflecting the challenges investors face in maintaining long-term strategies during market volatility ([37:51]).

Impact of Technology and AI on Investing

Shalett delves into the transformative impact of technology and artificial intelligence (AI) on the investment landscape. She discusses how AI is revolutionizing sectors like healthcare through personalized medicine and diagnostics, and defense through advancements in autonomous systems. “[...] 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,” she explains at [56:22]. Shalett also emphasizes the need for investors to stay ahead of technological revolutions by identifying and supporting the next wave of "killer apps" and innovation-driven winners.

Behavioral Economics and Investing Principles

Touching on behavioral economics, Shalett underscores the emotional biases that derail long-term investment strategies. “Emotional losses hurt four to five times more than gains satisfy,” she notes at [38:23]. This insight aligns with her advocacy for disciplined, consistent investment plans over speculative, emotion-driven decisions. She champions the power of compounding, advising investors to focus on steady growth and strategic asset allocation rather than short-term market fluctuations. “Being right is not what matters. What matters in the long run is the power of compounding,” she advises at [74:19].

Advice for Upcoming Professionals

For recent graduates eyeing a career in wealth management or finance, Shalett offers a refreshing perspective. She champions the liberal arts education, stressing the importance of adaptability, continuous learning, and self-discipline over specialized financial training. “Study what you love, study what you're passionate about. Learn how to learn and never lose that hunger for knowledge,” she advises at [72:54].

Personal Insights and Day in the Life

Shalett provides a glimpse into her disciplined daily routine, illustrating the importance of structure and mindfulness in her high-stakes role. Waking up at 5:07 AM every day, she combines physical exercise with strategic planning to stay grounded and focused. “[...] I wake up at 5:07 every day and the very first thing I say is I am blessed that I have the career that I have,” she reflects at [64:51].

Significant Shifts in Wealth Management

Reflecting on her three-decade career, Shalett identifies the democratization of sophisticated investment products as the most significant shift in wealth management. From mutual funds to direct indexing and private equity inclusion in retirement plans, she highlights how access to complex financial instruments has become more widespread and user-friendly. “The democratization of very sophisticated access, of access to sophisticated products,” she states at [66:04].

Conclusion

Lisa Shalett's insights offer a comprehensive view of the current and future state of wealth management. Her emphasis on personalized financial planning, disciplined investing, and the strategic integration of technology underscores a holistic approach to managing vast assets and serving diverse client needs. As the financial landscape continues to evolve towards the "Great Normalization," Shalett’s expertise provides invaluable guidance for both seasoned investors and newcomers navigating this complex environment.

Notable Quotes

• “We're all long term investors until the market goes down.” ([37:51])

• “Emotional losses hurt four to five times more than gains satisfy.” ([38:23])

• “Being right is not what matters. What matters in the long run is the power of compounding.” ([74:19])

• “Study what you love, study what you're passionate about. Learn how to learn and never lose that hunger for knowledge.” ([72:54])

• “The democratization of very sophisticated access, of access to sophisticated products.” ([66:04])

Further Listening

Listeners interested in deepening their understanding of wealth management and investment strategies are encouraged to explore past episodes of Masters in Business, available on platforms like iTunes, Spotify, and YouTube. Additionally, Barry Ritholtz's new book, How Not to Invest, offers further insights into the intricate dynamics of investing.

Transcript

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[Barry Ritholtz]

Bloomberg Audio Studios Podcasts Radio News.

[Lisa Shallet]

This.

[Barry Ritholtz]

Is Masters in Business with Barry Ritholtz.

[Lisa Shallet]

On Bloomberg Radio this week.

Really an extra extra. Special Guest Lisa Shallet, 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, 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, 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 Shallot.

Thank you. Great to be here, Barry.

It's great to have you. I've really been looking forward to this conversation.

You.

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 that 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. I don't talk 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, 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 starting to hit that. You know, those magic numbers in the 30s when women are like, if I don't get it done now, now or never. It's now or never. So I took the plunge. I quit. I did not have a job. And I said, okay, 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, 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, you know, 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, 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. And I always thought I would die there. But obviously 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 Pimco from Alliance, is that right? And that's how it became Alliance.

So Sanford C. Bernstein was independent. When founder Mr. Bernstein passed, 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 wrote it till the great financial crisis. And our deep value exposure to financials kind of helped unwind us quite a bit. And I think Alliance Bernstein really spun for quite a long time and took a long, long time to get out of that mess. I left because I got tired of firing all my friends.

That's tough.

Yeah.

Cause you were not just in the investing side, you were chair and CEO, chief executive officer. That's got to be a very difficult experience right in the teeth of the financial crisis.

It was God awful. And really 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 therein began, I think, the unraveling and a little bit of the loss of that cultural juice that had kind of historically made that firm special.

So you leave Sanford Bernstein, which had really become Alliance Bernstein, end up at Merrill lynch, where eventually your 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 just to reframe, 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. She was running, you know, the Merrill lynch brokerage business for BofA. And she hired me to come in and be the chief investment officer at Wealth Management. If you remember, during this period of time 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 Crawcheck to leave bank of America 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. Yeah, Mutual Frankel and Dave Rosenberg and I know a lot of Rich Bernstein. All these people I know from the 2000.

Yes.

Era. Merrill Lynch. And one of the fascinating things about Sally Krawcheck was her defense of the Merrill lynch brands.

Yes.

Post merger. And she really helped turn around 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 America Merrill Lynch Wealth Management. What did you take away from that? You've had this role in several organizations. 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. Right. All the clients were getting proprietary Sanford Bernstein asset management product. And when I arrived at Merrill lynch, it was really 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 kind of place best of breed product 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.

Yup, yup. Remember those, those ads from like the 60s and 70s on TV. They were absolutely unique. So culturally I have to thank. 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, my love of that independent streak, that desire to really call out conflict of interest and say, no, this is what the nuts numbers really tell you. I like to think I Brought that, I think from Meryl. It was really that appreciation of how do you work through financial advisors. So as a chief investment officer, how do you earn the trust of financial advisors to have influence? Right, because they're what stand between you and the client. And so I think I started that process in my career at, at Merrill. 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, connected to PMs that are walking the floors with me. But look, 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 I think about it as 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 you noted in my bio that I 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 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 to your point, I think every segment today is a little bit of a gunfight. I like to think that in core wealth management, Morgan Stanley and where we've come first under James Gorman and now hopefully under Ted Pick's leadership is really differentiating us and allowing us to pull away from the pack, at least in wealth management.

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, 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 there.

You're there almost 13. Yeah.

So and from, 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 really completely new business segments. I can't tell you how. To your point, that flywheel between moving up market into institutions 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 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 a free financial plan? Can we give every single one of your employees an account or advice to their first purchase in a 529 account? Things like that, where suddenly you're acquiring clients at scale, huh?

Really, really interesting.

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[Lisa Shallet]

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 had gone to work at Merrill very much to partner with my very good friend Sally Krawchyk. 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. And I left. And at that point I really thought I was gonna do my own thing. I thought I was gonna 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 you know, before I knew it, there I was, you know, sitting next to Mike Wilson, who I know you know, Mike was taking a stint a rotation through wealth management. And you know, I joined him to build the team and really create the platform that we have today. When Morgan Stanley and Smith Barney were merging, there was really no centralized CIO office. 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, so let's talk a little bit about what goes into managing 100 plus billion dollars 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. You know, 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, you know, how.

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, you know, 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?

Huh. Really, 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 and what your role is in that.

Sure. So look, I think, you know, this is, 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. 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 shareholder value and I think that he embraced that vision. And that vision had kind of three chapters to it. The first was 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, you know, the last piece of the strategy was really, you know, land. So 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, so what you're describing is you're starting with clients that have no minimum and they're self directed at E Trade. I don't mean this in a negative way. They sort of move up or graduate to a little more service. They want a financial plan, they want some advice, they want to think about whether it's saving for 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, 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. You know, 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 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, 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 Morgan Stanley 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, J.P. morgan. Exactly. You had, you know, City had to make choices around Smith Barney. It was very, very hard what Mack 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 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 but for some of our competitors who were suddenly, during the great financial crisis inside, you know, systemically important banks, their needs, right, 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 BofA. 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 had.

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 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. Gor.

And you know, you, 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?

Am I remembering that correct? So yeah, so fantastic memory Barry because that has been transformational as you know, indexing, tax management, direct indexing or the ability to customize all demands and it's a very tech heavy business. So Parametric was buried inside of Viton 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.

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[Lisa Shallet]

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, 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 to round trip and recover our high water mark, 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 there's a lot of red on the screen, people are, your stomach's 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%. 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 we've been trying to remind clients how extraordinary, extraordinary in financial history the past 15 years have been 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 cris 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 we've 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 a, you know, 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 US exceptionalism and the US 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 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 US 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 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 re levered 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 cris that's been healed. 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 that matters.

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 gotta pull it back and there's gonna 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 fundamental growth of 2% and real inflation or experienced inflation of 2.5 to 3, which is what we've had for the last 80 years. Right. Not 2% target that. The Fed says what that tells you is that long term rates used to be normal at 5 to 6%. Right. That's not crazy. And yet the market continued to sell at a 22 times forward multiples. 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 Mass 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 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 2000 and tens when, yes, deflation was at risk.

Correct.

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 mistake. Again, part of the normalization that. Hey, the thing, 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 volume 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? So the Fed is gonna 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 do the math when I do some of chats with the younger folks on the team and I say, okay, real growth, inflation, term premium. See this thing? 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 and higher than the two year.

Yes.

I'm not familiar with. It's been opposite for so long.

Exactly.

So another quote of yours, 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 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.

Huh? 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 within the margin of error or just slightly beyond 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, you can try to keep yourself sane at night, huh?

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?

You know, obviously we would love to spend the bulk of our time talking about asset allocation as it, 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. Parallel, right. I think that, you know, coming off of the election, coming off of the campaign season, 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, 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 of policy.

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, 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? I think that's the big question, 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 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. It's kind of perplexing. Why? 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 US 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 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 we had 800, you know, basis point spreads in 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. 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 perfect error. So, 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, what are you looking at?

Yeah, so we're looking at, at a lot of things, but look, clearly generative AI is transforming, there's no doubt about it. I think the conundrum for investors is how do you stay ahead of the revolution itself? And what I mean by that is that technology innovation tends to follow very clear scripts over history. And by that I mean you tend to get the big infrastructure built, 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, many financial attributes, on many innovation attributes, 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. What are we super excited about right now? We're, 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 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 diagnostic 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 like, for the prior 50 years, we've identified a few thousand different combinations 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 2500 protein folding protocols to using AI identifying like 400.

That's exactly like.

It's an insane order magnetic. 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 gonna be all of these half a million new correct 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 in 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, Drugs. The pharmaceutical industry has been squashed by worries about regulation, squashed by the power of the insurance companies, you know, squashed by patent expiry, you know, 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 humanless, not unlike 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 that's something we're super excited about. Some of the innovations in the energy space space, not so much purely around cleantech 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 2 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.

Yeah.

When warfare changes that rapidly, it has to make you raise the question how do the geopolitical alignments change? How do you.

Here we are, Barry.

How do the big defense companies. 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.

Right.

Starting with you wake up every morning at 5:07.

Yeah.

So first, why 5:07? It's such a specific number as opposed to just setting the alarm for 5 or 5:30. And then if you're up at 5:07, give us a day in the life of Morgan Stanley's chief investment officer.

Oh, geez. So I'm extraordinarily superstitious about odd number numbers.

Really?

Yes.

Wait, you're. You were applied mathematics undergraduate?

Yep.

That doesn't.

It's just scream. I guess it's part of my lived experience is that, you know, I always say, say to people, hey, it's an odd number year. We're good, you know.

Really.

Oh my God. I'm very, I'm very.

So I'm trying to remember the Nobel Laureate in physics. I'm drawing a blanket blank on his name.

Who?

A grad student visited his house and there's a horseshoe over the doorway.

Yeah.

And the grad student says, professor, you don't, 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.

So.

But I believe in it.

Odd numbers. 57 is really.

So it's an odd number. So look, it was something 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 6:30. So I got into the routine of up 5:07, do the quick 20 minutes on the treadmill, grab the coffee, shower out the door and so that's still me. Old dogs, new tricks. It's been really hard.

And how different is every day as cio? 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. But Barry, let me just tell you. I wake up at 5:07 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 because I am learning every day, no two days are the same. I get to hang out with the most amazing people like you, you know, 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 product, right? So whether you talk about first coming into the business and the advocate of first mutual funds was about democratization of diversified stock investing and then passive investing as a way to get access to an index in a more technology efficient way. You talk about the original rollout of liquid alternatives or evergreen type products and now we're at the point where we're talking about very sophisticated private equity equity, private credit products being contemplated for 401k plans and being packaged in these structures to give folks periodic liquidity. So democratization of sophisticated alpha and beta that once upon a time I think 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 bond. 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, 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.

Yes. Apple tv. Yeah, so good. I've been watching Prime Targets.

What are Prime Targets?

So Prime Target is a show about 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 crisis, would unlock or give folks the ability to hack almost any system. 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, innocent nerd guy in the middle.

And what is Surface or surfacing?

So Surface is a show also on Apple tv. 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.

Huh. Really interesting. Let's talk about your early mentors who helped shape your career.

Sure. You know, Bernstein was that seminal place. So the two. I would. 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 certainly, that I ever met in my career. Just brilliant 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 Krawczyk. We talked about one of my best friends in the business. You know, someone that I care a lot about, someone who showed me how to lead, although we were peers. She has a natural charisma, natural instinct for leading people. She and I kind of worked side by side through the 911 crisis. I learned a lot from her in terms of what people need from leaders. 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 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 gonna reveal my politics. The last book I finished was a book called Prequel by Rachel Matt. And it's very.

My wife is in the middle of reading it.

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. States that was very much against America ever getting into World War II.

Very isolationist, very anti.

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 block who came at things from very different points of view. So you had kind of the Father Coughlin, part of the movement. Father Coghlan, for those who know, was a very, very famous Sunday radio show. Catholic preacher.

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, 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, 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 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 by Amazon at 2 and Apple at 1. I mean what broad principle did you learn along the way that would have been useful to have found out much earlier.

Earlier that being right is not what matters.

You're gonna have to expound on that.

Being right is not what matters. What matters in the long run is what Einstein said 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 at least 7.5 to 8% 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, 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 Shallet. She 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 Behavior that Destroy wealth out everywhere March 18th. I would be remiss if I did not thank the crack team that helped 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.

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