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Few Understand Why Structure Matters, So Here Goes

Posted by Dan Weiskopf, ETF Professor on Sep 15, 2021 8:49:28 AM
Dan Weiskopf, ETF Professor
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What the $%*@ Does Structure Matters Mean?

Structure Matters (SM): SM = Security Selection, Life and Business

Most people understand what is meant by the phrase “Structure Matters,” but for those that don’t get the reference, we thought we would offer some clarity. Structure matters is a broad reference about business, lifestyle choices, and yes, investing/security analysis. In terms of lifestyle choices, structure matters refers to things like religion, or where someone lives (city, suburbs, farm). Lifestyle choices create the foundation of how someone lives. In business, structure matters in terms of corporate structures, compensation, and the management organizational chart. Also, the most effective teams work together on a project because roles, responsibilities, strengths, and weaknesses are defined.

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Structure Matters: Lifestyle

When a person is born, they are brought into the world under the pretense of growing up within a family structure. Without that structure, a person’s life journey can become less traditional, and sadly, without a stable foundation. Laws are about a structural path that organizes society to avoid chaos and destruction. Regardless of one’s choice of religion, there is no question that people are drawn to the structure that it provides when navigating life. Undoubtedly, the choice between living in sunny Jacksonville (FL) vs New York City matters in terms of taxes, living space and lifestyle pace. Regarding healthcare, the structure matters discussion ranges from individual healthcare responsibilities to the benefits and problems of socialized medicine relating to the US structure. Personal healthcare is an issue of freedom of choice, quality of life and responsibility to others. (Our advice is to exercise and eat right. How you treat your body is all you can do to affect how structure matters in your healthcare; the rest is about DNA and luck).

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Structure Matters: Business

In business, structure matters in terms of the type of company, such as Corp, LLC, partnership. Again, this plays out in terms of taxes, and the structure matters in terms of size and scope of the business. However, often ignored is the fact that a business structure also involves the place of incorporation – Nevada, Delaware and/or Wyoming (Open the links for further info). These states have different regulatory and legal environments. Wyoming is a state with a great deal of history around innovation, and recently has been a leader in the crypto/blockchain space. Delaware is the first choice for major corporations, however, employers also have to consider wage inflation and the breadth of the educational workforce they want to attract.

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Structure Matters: Process Solution

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We’ve provided examples of why structure matters, but the question remains: what is the value of the statement? Answer: It is a way of thinking and analyzing issues. Not to sound patronizing, but next time there is a problem in life, break the questions down and analyze the structure of the problem – it might help with the issue, and provide real evidence of how structure matters.

For example, from an investment perspective, in the ETF Think Tank’s TIPs for Labor Day piece last week, we touched on the risks of wage inflation as the problem. The simple problem with inflation in general is that it reflects a structural imbalance of economic interests in people’s lifestyles. This means inflation comes with a need for businesses to raise  prices to keep up with costs (wage inflation, rent, other fixed input costs etc.). This problem can be reflective of an overheating economy where excess money flows can get out of control. We have not had real inflation in the US for decades. The most recent peak in the past ten years was in 2011, at 3.14%. The concern is that the upward spiral can get out of control. The wrong alignment of investments in a portfolio of bonds can feel like thin ice breaking. Talk about how Structure Matters! This is where TIPs can be constructive in a retirement portfolio. Even the most confident Fed watchers must have concerns about hyper-inflation, stagflation, and a deep recession. See Jim Probasco’s article, Are We in for a Hyperinflation? Bottom line – if you are concerned about inflation, consider owning hard assets, shiny objects or things that have limited supply that tend to go up in value under such circumstances, or debt instruments that have an increasing rate with rising interest rates.

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Following a process that is scalable and repeatable is a problem we address daily at Toroso. Let’s face it, in a world where automation drives success and reduces operational costs, structure matters in terms of coding, marketing, and trade execution. This one is for you, Tiago DeMesquita! Tiago, for those #Few who don’t know, is our tech guru. At Toroso, we have a ton of moving parts with our technology, and it is presumed that things should work seamlessly. In truth, technology is too often taken for granted. The fact is that most users don’t understand how the engine works, and therefore only have an issue when systems fail. Systems fail because, at some point, the structure breaks. I think they call these “patches” in the technology world, but in the trading world we call them “errors,” and others may call them $#*@ ups. Regardless of what you call them, they matter big time, and are caused when the process structure fails.

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Finally, since this is a blog about ETFs, we conclude with marketing. The important aspect of marketing and selling ETFs is that, unlike mutual funds, ETFs are “bought not sold.” Way too often, new entrants who are launching an ETF don’t understand this reality. In Tom Adam’s piece “Thrive in 5,” he breaks down the need to address the reality that everyone in business development knows – it takes 10 to 25 touch points to develop a relationship through a sale. Of course, with so many people working from home now, these touch points need to be that much more automated or in fact embodied in the investor or financial advisor’s decision-making process. We think at Tidal ETF Services, thanks to Eric Falkeis, Kedar Wilson, Linda Venuto and Leann Gaines, these processes are well defined and implemented. Working with Financial Advisors and ETF Issuers at various levels in the ETF Think Tank, we think structure matters at all levels. The fact is that time is money, and fee compression is real. This is why our focus remains on identifying good matches around security selection and portfolio construction as well as providing effective investment research tools and social media reach. Thank you, Michael Gayed!

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Conclusion

The next time you have an issue in your life, business or just about anything, we hope you will approach the problem from the standpoint of structure matters. It will help break down the problem and identify solutions regardless of the subject matter. Unfortunately, as a reminder for purposes of compliance structure, which definitely matters – we don’t guarantee answers!    

P.S. My last thank you goes to Greta Burgdorf, our editor. These blog posts take a ton of time write, but let’s be honest about something: an essay that is not organized properly, has a problem. Essays plagued with disorganization or bad grammar are difficult to read and are often disregarded. Yes, it is important that structure matters with essays!

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