An ‘Outside the Box’ Investment Strategy That Other Advisors Want to Tap
Merrill’s Raj Bhatia and his team run proprietary investment strategies that are also available to other advisors at the Bank of America wealth management unit.
The prowess of financial advisor Raj Bhatia’s team at Merrill Private Wealth Management puts it in high demand. Not only does it manage money for its own clients; it also does so for clients of other advisors at Merrill, a unit of Bank of America. Bhatia says he and crew run proprietary investment strategies that rely on their own experience and expertise, along with Bank of America’s extensive investment research. Those strategies are monitored by the company’s Investment Solutions Group.
Bhatia has worked at Merrill since 1981. Ariana Bhatia, his daughter, joined her father’s team after stints at Goldman Sachs and private investment firm Vistria Group. She says that their approach to managing capital resonates with clients and fellow advisors. The Bhatias spoke Barron’s about their approach to managing portfolios and how they decided to pair up. Their team is based in Chicago and Naples, Fla.
Barron’s: Tell me about your practice. What kind of clients do you serve?
Ariana Bhatia: There are 13 of us on the team managing approximately $3.4 billion. The majority of Bhatia Group clients are families who have built their wealth through owning a business, roles as corporate executives, or as principals of private-equity or venture-capital platforms.
A lot of times, people come to us looking for a solution to a problem. That could be managing liquidity from the sale of a business or managing wealth across generations. Over time, what tends to resonate is our perspective around managing capital. We look at the whole client and focus on how economics compound over time.
Raj Bhatia: We work with about 150 client families. In addition to that, we manage $1 billion of partner client assets, that is, clients of other Merrill advisors. Merrill Lynch’s Investment Solutions Group monitors our numbers. This is another part of our services that we offer our clients and other Merrill advisors.
So, you are managing money on behalf of other financial advisors in addition to your own clients?
Raj: Yes. It’s a discretionary advisory service. We form a pool with about 40 other advisors in the country, and they add to the pool a specific client’s account that can be devoted to our strategies. My team runs it. We’ve been doing this since 2012. Merrill ISG started to audit our numbers in 2017, so there’s a formal process.
Ariana: This is one of the aspects of our work that we find meaningful because advisors are reaching out to us to collaborate. They lead the client relationship, obviously, but look to our team for an investment strategy. It resonates with them. And it’s a structured process.
Investors seeking active management typically look for three things: consistent excess return, thoughtful risk mitigation, and flexibility. Our discretionary strategies are built with the goal of delivering across all three vectors. The Bhatia group philosophy differentiates itself through an economic value-added framework, combined with deep qualitative research from BofA Global Research. Our focus on understanding how companies generate and compound economic profits has resonated with our clients and advisor partners, who have sought us out over the years.
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Advisors and clients have told us they value our pedigree as seasoned allocators and investors; our investment committee has experience investing across public equities, private equity, private credit, and real estate. We have evaluated a broad universe of strategies and intentionally built something differentiated that aims to follow the value through regime shifts in the market, rather than getting stuck in one style box. Our Merrill advisor partners also value the direct access they have to us for timely, transparent insight as markets change.
Raj: I’ve lived through hurricanes in the market. This experience allows us to build stronger portfolios for clients. One challenge all advisors face is how do you navigate the complexity and volatility of markets.
Ariana: Raj is known for saying on client calls that we can’t stop the hurricanes but we can build a better boat.
How does the strategy get implemented?
Raj: There are two halves to the process. The first part is BofA Global Research—what an analyst writes in terms of ideas and research reports can generate a candidate. We take that and add our lens; we go one step further. That is core to our philosophy.
Ariana: If you think about it, “economic profits” is a very established framework, just as GAAP [generally accepted accounting principles] is. There are thousands of research reports. It’s not something we are just picking up.
What are economic profits?
Ariana: So, pretend you have a restaurant, and you have $1 million revenue and $600,000 in costs. That’s your staff, debt, food. GAAP will say you have $400,000 in profit. The economist might say, “Hey, you might not have $400,000. What about what you owe your brother-in-law who invested in your business?” If you look at that [bigger picture], your profit might be lower. It might be zero. It raises the bar for evaluating things more broadly.
Raj: I have watched BofA Global Research up close for many years. I have used their good thinking, and that generates a lot of great thoughts. But we need a funnel, or sieve, to help identify candidates that work exceptionally well over a period of time.
How do you approach the rest of the client portfolio?
Ariana: We think about the role that various asset classes can play in a portfolio. There is more than just what people traditionally come to us for, which is cash, fixed income, and public equities. We think in a much broader lens. We think about active management. We think about private equity and hedge funds. And if you think across the risk spectrum, you think about things that can generate income. That may be real estate or fixed income. So, there are a lot of different buckets, and a lot of thought goes into sizing those buckets and building out the portfolio.
Raj: Diversification is key. That is the only free lunch in the markets. Everything else is a trade-off between risk and return.
Why actively manage the strategies yourself, instead of relying on third parties to do it?
Ariana: When people invest, they can invest passively or actively. Both have roles in a person’s portfolio. When they do go active for a piece of the portfolio, investors look for three things: return, risk mitigation, and customization, especially at higher asset levels. When you look for these three things, you look for people who do it best.
Raj: For seven years, I asked Ariana [to join the team], and she said no for seven years. I went to our co-presidents and said, “I need your help convincing my daughter to join my team.” And they spent a day with her and convinced her. There are now five partners on the team [the Bhatias, Shen Li, Iain Mirrilees, and Matt Gebert]. If I get hit by a bus, our clients and portfolios will be taken care of.
Ariana: My background is in institutional investing, private equity, and real estate. When I think about my career long term, I love investing, but it ultimately comes down to transactions versus relationships. If you think about the role our team plays, we are investors, but we have these great relationships with clients and help them achieve their goals. That is really meaningful work.
So, yes, Raj did ask me every year, but I wanted to make sure that I explored everything. It’s an important decision. You want to make doubly sure and bring real value to the team.