As a certified financial planner and chartered financial analyst, Sam Huszczo, founder of SGH Wealth Management LLC in the Detroit suburb of Southfield, Mich., builds his own model portfolios to meet his clients’ wealth management needs. He says he would be fine with picking stocks for the equity portion of his portfolios, but why do that when exchange-traded funds make the job easier? That said, he puts his CFA background to use when parsing and selecting funds.

Schlegel: Tell us about your practice.

Huszczo: Here in Detroit we have a lot of blue-collar people. My firm works with blue-collar and white-collar people who are great savers. If a client is a great saver regardless of their economic position, we feel we can take that piece and get them on the most efficient path to achieving their goals. We lead with retirement planning. Given my CFA background and experience, I run five model portfolios ranging from conservative to aggressive, so all of my clients have the exact same investments, but the percentage of those investments change based on their risk tolerance. By leading with comprehensive retirement planning, it lets us understand their goals and the risk they’re willing to take to reach those goals. We focus on the risk.

I was a lone-wolf shop during the first 10 years of my career, and in the past five years I’ve started the process of taking a wider firm approach. We have three employees now. The most important thing I’ve come across is the systemization of things that enable me to scale the business and take on more clients than I can serve just by myself.

Schlegel: Describe a little more about your clientele.

Huszczo: I started this business from scratch and had to build it through networking. General Motors is a huge company in our area, and fortunately I was able to find a few people from there when I was 23 or 25 years old and looked like I was 16. They remain my clients, and I met more people through them and my business grew from there. My primary client base is General Motors employees, at this point mainly senior management, VPs and C-level folks. I also have a huge foothold in Federal-Mogul (an automotive parts maker and distributor), Ally Financial, Lear, Chrysler, Ford, etc. But GM has been my primary driver. And I have worked with professional athletes in the past, but found I didn’t enjoy that space as much because it’s a lot more budgeting and hand-holding, and I enjoy the investment aspects more. But I still work with NBA executives and sports agents.

Schlegel: What role do ETFs play in your client portfolios?

Huszczo: Currently, I’m completely in ETFs for the stock side of my portfolios. I still use active mutual funds for fixed income because they’re still more competitive from an expense ratio standpoint, and I think you can outperform in the bond space with active management. On the stock side, I believe in the market’s long-term trends and that the large-cap market is efficiently priced. In that area we’re trying to give clients exposure at the lowest possible cost.

I believe there are price inefficiencies in the mid, small and international spaces, and in these areas we use factor-based ETFs. For example, we use ETFs with low-volatility factors to hopefully reduce some of the risk within equities without getting out of equities.

Schlegel: Which ETF providers do you tend to use?

Huszczo: I’ll defer on that because the portfolio changes quite often. But we do use Vanguard because it’s one of the cheaper ones out there. Schwab has a huge network of commission-free ETFs, and we employ that for some of our smaller accounts. And Schwab has some cheap offerings of its own.

On the factor-based side we find ourselves shifting between providers because more companies are offering factor-based products. I just had some Vanguard people in my office this morning talking about the factor-based funds they came out with earlier this year. So in this infancy stage among factor-based funds, the search for the cheapest is an ongoing task.

Schlegel: What would you use if you didn’t have ETFs?

Huszczo: My alternative wouldn’t be mutual funds on the equity side, it would be individual stocks. With my CFA background I can analyze individual positions, and if ETFs didn’t exist that’s where I’d be right now. But there are problems that come with managing a lot of people with individual stock positions, and that’s where the ability to homogenize my model portfolios comes in handy.

Schlegel: Is price the main driver of the ETFs you choose?

Huszczo: Price is a way to differentiate ourselves from our competition from a client acquisition standpoint. There are still a lot of RIAs out there running mutual fund portfolios. I’ve seen where the planning profession’s 2017 survey showed the average all-in fee range for RIAs was between 1.3% and 1.75%. By using the cheapest ETFs we can find, we can get that down to 0.8% to 1.2%. So even the highest end of our range is less than the lowest end of our average competitor. I find when you put those numbers into a net dollar figure for a client, it’s very powerful.

One thing I learned early in my career is the specific index each fund tracks is vitally important. Not all small-cap, low-volatility ETFs are made the same. You have to know which index they’re tracking. You can have two ETFs with similar names but their returns can be very different. That’s why it’s important to talk with a provider’s wholesalers or research funds on Bloomberg and Morningstar to find out all of the stuff behind the scenes.

Schlegel: Do you consider yourself to be a tactical investor regarding factor-based funds?

Huszczo: I think there’s space to do sector rotation, but we don’t trade for trade’s sake. But if the statistics are showing overvaluation or undervaluation, we’ll play to those trends.

Schlegel: Are there any cons to relying on ETFs for the equity side of your portfolios?

Huszczo: In general, ETFs can be more volatile. It’s my understanding that mutual funds can’t be shorted, but ETFs can be shorted, which opens the door to short sellers pushing the position one way or the other. I don’t think that’s a problem for a gigantic fund like Vanguard’s VOO fund [Vanguard S&P 500 ETF]. Given that, we take into account the size of an investment to a degree.

Ultimately, you have to play it [investing in ETFs] the right way. For example, we don’t think many active managers are adding alpha in the large-cap space. So to participate in that market we think a four-basis-point drag [VOO’s expense ratio] is nothing. In the inefficient markets, there can be factor-based funds with expense ratios of 20 to 30 basis points that can pay off by providing some alpha. As long as you know how to use ETFs, I’d say they have a pretty good advantage. But in my opinion ETFs still require a little more expertise on knowing how to use them. I don’t think they’re just plug-and-play like a mutual fund could be.