Advising on alternative investments as they gain popularity

Whether it’s crypto, angel investments or other alternatives, more investors are looking for non-traditional investments in their portfolios and retirement accounts. Technology is certainly spurring this shift. What does it mean for financial advisors, though? How can they wisely aid their range of clients in ways that take into account their propensity for risk, preferences and also factor in alternatives to a simpler portfolio?

Transcription:

Lynnley Browning: (00:07)

Hello all. Thank you so much for being here. I'm thrilled to welcome Henry Yoshida of Rocket Dollar and Sloane Ortel of Invest Vegan to our panel on advising on alternative investments. Maybe we can start with each of you giving a brief thumbnail of what your company does and then we'll dive right in.

Henry Yoshida: (00:31)

Sure. I'll start. So Henry Yoshida CEO of Rocket Dollar we're Austin based FinTech platform and we let individual investors take their IRAs keep the tax treatment, but instead of stocks, funds and mutual funds, our customers can make private in Al investments using IRA accounts.

Sloane Ortel: (00:49)

I'm Sloan Ortel founder of in Invest Vegan. We're a Brooklyn based registered investment advisor. And one of our big distinctions we're actually ethics first registered investment advisor. So, what we have very clear vegan ethics that delineate all of our investment strategies we manage to, a general kind of core equity strategy and a real estate strategy that I am. I am excited to talk more about.

Lynnley Browning: (01:16)

Excellent. No, we're definitely gonna get into the smaller res that we were talking about before. So I wanted to just kind of set a general scene here around the notion that the idea of alternative alts, it's kind of ironic that these are called alternative because that invokes or evokes rather an image of something fringe, not mainstream, hippy dippy, whatever, like not really part of the mainstream landscape, but the alts market is actually about 10 trillion in assets spread out across hedge funds, private equity funds of funds, various private investments. And most of the investors are, although not all are institutional, although a lot of that does filter down to retail investors through pension funds. Most of which the big ones have about 25%, correct me. If I'm wrong, please, their assets in alternatives.

Lynnley Browning: (02:21)

So, meanwhile, you look at crypto it's about a 1 trillion market and it's almost like a presented as a mainstream, retail investment, which it's, I guess fidelity is hoping it will kind of become that way, given its application to include crypto in employer sponsored retirement work plans. But, so I guess my point is there's this tension between alternatives as fringe versus mainstream and crypto as mainstream versus really super alternative. So I guess my first question, and maybe Henry, you can start why do retail investors need alternative assets in their retirement portfolios?

Henry Yoshida: (03:11)

Yeah, well, so I guess rocket dollar in my entire career, I've worked with retirement accounts. I was a 401k consultant for a long time, 10 years at Merrill Lynch, five years founding and selling an RA that was all 401k consulting. And that actually helped give me a lot of insight into the individual account holders. So I worked with the trickle down accounts. They were with the plan sponsor. Then they became IRA clients of mine. And then I had, I think at some point 172,000 people in our book of business. But so when you ask the question, why do retail investors need alternative investments in their retirement accounts? I think that it maybe a better way to frame it is that I think the way the investment world has evolved since I started my career in the year 2000, that investors generally probably need to have some exposure to investments that we might call alternative, just to make sure they have a properly diversified portfolio, cuz there's many more assets in this space.

Henry Yoshida: (04:09)

I was thinking, talking to someone at this conference and advisor, friend of mine, when I was at Merrill Lynch in the year 2000, an alternative investment, I remember thinking was a publicly registered 40 act fund that invested in I think it was stocks in Vietnam or China. It was one of those and that was considered alternative, but these are publicly traded investments. Now you define it as crypto real estate and private equity and venture. So I just think that investors today need to have some exposure to what we consider an alternative asset class in their portfolios, or it's gonna be hard for them to properly capture a portfolio that encompasses the whole available investable world

Lynnley Browning: (04:51)

Today. Sloan.

Sloane Ortel: (04:52)

Yeah. I mean, I think, if you think about the frame of reference that a lot of particularly younger investors are coming to the market with, right, they've seen a giant recession. They've seen crypto like a lot of the worst people they know get rich in cryptocurrencies. They've seen all sorts of things that challenge the way that, we are taught. I spent a bunch of years working at CFA Institute, and like in the CFA curriculum you get, you're sort of like, all right, so here is how portfolios are. Right. But that doesn't necessarily translate to the way that the next generation of investors have seen people build wealth. Right. And when you think about, I mean, alternative the definition of an alternative asset is by definition, just sort of the, not 60, 40, right.

Sloane Ortel: (05:41)

It's they have to be an alternative to something. But when you think about what people are really looking for, people who are morally aligned, right. Who have kind of misgivings or uncertainties about holding some of this stuff where they, like we've all talked to a client. Who's like, yeah, I'm nervous about looking at what these things own, because I'm sure it'll just be like who's who of like the worst ethical failings and what people are really looking for in my view is an alternative to that, right. An alternative to seeing like another gun thing happened and then going, gosh, do I own gun manufacturers? Oh no, I hope not. Gosh, do I own this? I hope not. Gosh, do I hope to own this? I hope not. And the old methodologies that we have, like the S and P index committee of like guys in bow ties who meet in like Midtown and decide what's there, that's not necessarily like the same values driven or morally aligned thing. That's gonna resonate with that next generation of investors. And so I think it's a really straightforward question of how do you create the portfolio for a client. That's gonna allow them to experience the benefits of compounding, right? And like, so you need to build them a portfolio that they can rock and make sense of, and not just have like an arbitrary list of like 700 stocks that are, you know, kind of retaliated and reorganized without much apparent, meaning

Lynnley Browning: (07:05)

This is great because this sets me up seamlessly. I hope, for my next question, for both of you, which is how exactly can advisors differentiate and build their alts book. I mean, if you had to like walk advisors through how to do this, what would you say?

Henry Yoshida: (07:29)

Yeah. So, alternatives, there's, it's a large asset class, but it's personal to people what they believe in. So if you think about it, you probably have clients. If you're a financial advisor who have this belief that, Hey, maybe cryptocurrency in the form of maybe the most mainstream of cryptocurrency Bitcoin, I should have some of it. I don't need to let's say understand it, but I understand that it's recognized. So I live in Austin, Texas the CEO of fidelity investments, Abby Johnson came to town to speak at a keynote at a crypto conference in my town six days ago which just so you know, crypto has dropped 34% since that time. And it's been six and a half days, since she spoke. But you know, the CEO of fidelity coming to town and talking about this might indicate that, Hey, it's somewhat mainstream and that particular client should own a part of it.

Henry Yoshida: (08:24)

You have another one that just says I'm fundamentally against it. And it could be for energy consumption reasons or that it's not based on a tangible business model that I can assess the value from, but I should own real estate. So I think the way the advisors should sort of position this is, it's a really good opportunity to get to know your clients in a slightly different dimension. So when I started my career, all the questions that we asked prospective clients to become our clients were about the numbers. Like, where did you have this? How much do you have here? You know, what are your goals? How many years, how many days do you, are you gonna retire from how old are your children? How many do you have? They were all questions that you can answer with a number. And I think now you're getting more into like, understanding the psychology of what matters to folks.

Henry Yoshida: (09:03)

Like, what do you want to do with the money? What things do you fundamentally believe in and so forth? And you can carry that conversation into alternatives, cuz they could say, Hey, I like real estate. I feel like I should have some come on alternatives. And I like it because it's tangible because I can't go and touch my Tesla stock or Bitcoin, but I can go and see the house that I bought as an investment property, for example, and someone else might say, Hey, if big, bad fidelity is spending hundreds of millions or billions of dollars and they're flying their 23 billion net CEO around to talk about crypto, then maybe this is an asset class that I should go in. I mean, be fair. When I started, there were a lot of companies like I remember talking to folks about amazon.com, no one really understood amazon.com when it dipped all the way down to $6 a share. But now it's probably one of the most systematically important companies in the United States right now. I mean they were our friend, right? The Amazon drivers through the pandemic were, are essential workers and they were very helpful. They brought stuff to our house. So it's a personal way to actually connect at a deeper level with clients in probably helping you establish that they need some exposure to things that aren't mainstream. I don't like the word alternative, but that's what the panel's called. And that's the word we're using

Lynnley Browning: (10:20)

And that's what the industry sort of, or calls itself. And it's really a bit of a misnomer because what as far as I understand it, if I do understand it correctly, what you guys are cating is that it'd be an essential component of a diversified portfolio, not some sort of side dish or afterthought.

Sloane Ortel: (10:44)

Yeah. Like why would you like if you're gonna try and reevaluate your exposure to alternatives, you have to do that in the context of an overall portfolio. And for folks who are thinking about how to get into this, I'll commit the Cardinal sin of conferences and talk my book a little bit, which is not a book associated with inves vegan. It's a book I wrote while I was at CFA Institute called the CFA Institute investment idea, generation guide. It is actually a textbook and MBA programs. It is a phenomenal way for you to kind of get your assumptions and understandings about the way that the market works onto a page, work with your partners, work with the people in your practice to focus in on what are the aspects of the market, where you feel that your clients have specific needs, right? It might be that you are, you know, aligned with certain meeting stuff and, you know, ethics stuff that I'm producing, if not, that's great. But what you need to do is have a coherent, comprehensive way of thinking about not just your alternative assets, but all of your freaking assets, right? Like it's not like we don't have to do due diligence if we're investing in non alternative assets,

Lynnley Browning: (11:51)

I'm excited to read

Sloane Ortel: (11:52)

Your book. I, oh God,

Lynnley Browning: (11:54)

You've written that book.

Sloane Ortel: (11:56)

It's published under my dead name. So everyone would be cool.

Lynnley Browning: (11:59)

Are there any fiduciary issues that are unique to the alternatives as a class? Or are they the same as for, you know, your garden variety index 500 fund?

Henry Yoshida: (12:17)

So in our case there are, we offer our customers IRA accounts, so individual retirement arrangement. And by the way, that's a little trivia thing that everyone says account, but there it's actually arrangement. So in that sense that you do these accounts, IRAs have to be custody. So you do have to have approval for the alternative investment that you hold from the custody provider, cuz technically the other thing about your IRA account, it doesn't list you as the owner. It lists a trust company for the benefit of you. So there's one layer of separation. So there is a little bit of guardrails from that particular perspective, but there's rules in place right now that are separate from what I'm talking about in IRAs that establish that certain investments in the alternative space. If they're truly private, do have requirements for people to attest, to being qualified either at an accredited or qualified purchaser level.

Henry Yoshida: (13:12)

So these roles have already existed. People go around them. And maybe this is a little bit of a moment to say that somehow, and that might actually change here through in the balance of this year, that cryptocurrencies on the digital space and our customer base. We have I just looked at this. So, cryptocurrencies were 38% of our assets under management and then the last it updates every month, but it's obviously down from there. So it's actually reported now at roughly 28. But that number's gonna probably go down again as a against the overall assets just because of the precipitous drop. But my point is just that cryptocurrency tends to be like a major alternative asset class that has been sort of understood as anyone can get in. As a matter of fact, the average age of an individual in the average network, the average investor's sophistication, however you measure that is probably on average, much lower than what we might understand for people that go into investment accounts at let's say traditional brokers, brokerages like fidelity or Schwab or Vanguard and so forth.

Henry Yoshida: (14:16)

So that's interesting. But in our case, yes, people have to qualify. They have to qualify to go into the investments and then we understand and we're providing an IRA for advisors that bring those clients to us. We tell them that, look, this client's probably independently decided to go into a private real estate investment by a single family home. If they do it, they're doing it for a reason of a different type of tax protection against that count. Right. And so

Lynnley Browning: (14:41)

Forth. You now set me up perfectly for my next question which will, you can start with Sloan because I know this is something we were talking about earlier on the real estate front. What is the value proposition and investment thesis in your mind of smaller

Sloane Ortel: (15:01)

Yeah, I mean, so we use a real estate as a risk dampener for our core equity portfolio, right? So if we have like a more conservative portfolio that we are designed, like a model that we're designing for a client, it might be 60% in our core equity strategy, 40% in the real estate strategy. Right? So, inflationary times, real estate is a amazing thing. This goes back to like Burt Machiel of random walk down wall street fame wrote a book called the inflation beaters investment guide in the early 1970s. And in it, he lays out 10 commandments. One of them, my favorite one is covet di neighbors, real estate you know, so I think that as we approach the next decade where we're not really sure what's gonna happen, you have an asset class that has contractual cash flows that has a requirement to pay out certain percentages of its income, et cetera.

Henry Yoshida: (15:55)

That's all great. What about small rates, public rates as distinct from private rates, which a lot of advisors are familiar with. Right. I think there's a pretty standard equation where people will take like a private REIT that has some leverage going on and they'll sort of go like, ah well it smooths our overall portfolio risk in return, simply because it only reports once a month. Well at this point, what you're starting to see is sponsors of alternative in private REIT deals are actually like bidding on smaller re smaller res because there's a noticeable and substantial evaluation difference between public and private right. Like similar to what you might see in technology companies, et cetera. And I just think that from a governance, from a fiduciary standpoint, the case for using a diversified portfolio res that are yielding like 5% UN ed versus the leverage on leverage construction of most private real estate deals where you might have a yield of whatever, a distribution yield of whatever, but in a stress scenario you're dealing with phone calls that you're not excited about probably.

Sloane Ortel: (17:02)

So I think that because of the incentive structure of the advice industry right, that tends to push us towards higher commission pro products and things that do smoothing, there is a pretty profound opportunity that is neglected by the most advisors and by many practices. So I would encourage everyone to think about that in the way that they're doing portfolio construction and you know, to think about real estate in general, as, you know, an asset class that has moved from the periphery, right? I mean like 15, 20 years ago, re REITs were not included in the S and P right. And now you've had them move in and they've de altern themselves to a degree. But the asset class still retains a bunch of its sort of variated flare, right, where you have these smaller issuers that might be sitting on like 30 grocery anchored shopping centers in new England or something like that are trading at just very compelling values.

Sloane Ortel: (18:05)

And I think are a very solid thing to put in index.

Lynnley Browning: (18:11)

Is there anything you wanna add to the real estate theme?

Henry Yoshida: (18:15)

Well, yeah, so for us another thing looking just in getting prep prepared for today, I was looking at data on our real estate. So that number for us as an overall amount of assets that people have IRAs with us actually has gone up in the last three months. So, just remember people, there's a big difference of course, between personal real estate and investment real estate. And then when you are an IRA provider, you tend to not have any leverage inside. So these are typically a hundred percent equity purchases cuz you can't borrow against an IRA. So we actually saw that number go up. So this kind of indicates to me that that's actually just an indication that people are becoming a little bit more generally risk averse, cuz they would tend to go into more tangible income producing real estate that's non levered and that's increasing. So that's, we've seen a big, big jump in our real estate,

Lynnley Browning: (19:06)

Interesting

Henry Yoshida: (19:06)

Holdings and purchases by size overall assets, you name it. And it's what you'd expect, right? Cuz you would expect that investors that have monies to deploy would actually deploy when maybe others aren't as active or aren't in a position sure. To make investments. I mean, I just picture right now, we're here on a Friday and just I think that, Hey, I don't know. I like to think of our session as, not between you and the end of the conference, but between you and the beginning of your great weekend, first of all. But I also thank you. So I also picture on a Friday afternoon, we're gonna finish the worst week in the stock market. The Dallas's most likely gonna close under 30,000 and somewhere. Warren buffet is like thinking about making a 7 billion cash investment. Okay. Cause that's what he does.

Lynnley Browning: (19:55)

So let's up at the floor up to a couple of questions. Does anybody have questions for either Henry or Sloan or comments? Don't be shy

Henry Yoshida: (20:08)

I'm scared when

Lynnley Browning: (20:09)

You can't there's a hand up over there, but I'm being

Audience Member 1: (20:20)

Thank you for coming here. I'm sorry I joined Lisa. You might have already addressed this, but yeah, like in terms of, in terms of what you do, like your very niche with your offerings. But do you see, I guess like this sounds kind of basic, but do you see that like there's gonna be an increased interest from mainstream providers for the services that you now specialize in?

Henry Yoshida: (20:55)

So elements are on our part. So I do see that right now. So there's a big division in the financial advisory space, so there's kind of the people that work at the big shops, the wirehouses as they used to call them, still do and then maybe RAs. So in the big shops they've already built pretty sophisticated alts, marketplace and desks for like new asset classes, private alternative investments. And then the counter to that is probably the I capital in the case groups, which actually only service independent advisors and RAAs to then be able to evaluate some private investments and show them to their clients. So, our product at rocket dollar, yes is an alts capable IRA. It's designed to be niche advisors that come to us are just saying, Hey, clients wanna do this.

Henry Yoshida: (21:44)

I want to be able to show them that, I can do this in a more tax deferred type of account. So maybe don't look at what my company does. We're designed to be niche, right? I'm going after my initial audience and we'll expand from there, but more broadly I think the big shops are gonna do and offer anything they can to make sure that their advisors and the people who use their services are gonna be able to compete in a 21st century world of a lot of different investments, including halts.

Sloane Ortel: (22:13)

And yeah, I mean, for my part, I'll say, I think that there is a level of inherent demand for what we'll call in a friendly way, non ESG and I think that the practices and the active ownership and the way that we actually invest is really similar to the way that people would manage a book of equities inside of a large pension and actually cohost a podcast that tracks pension long term investing in pensions called it's at free money, 4 20, 69 on Twitter, if you're looking for a podcast to take on the way home, but, yeah, I mean, we're constantly talking with the folks who are like running the equity portfolio sleeves at like the university or at British Columbia's pension or something like that.

Sloane Ortel: (23:02)

And you know, what we are, what I'm essentially doing is taking those active ownership strategies that some of the more granola E asset owners are doing already and adding a level of retail scability to it. So that individual clients can actually understand what's happening and relate it to what's happening to like what they're doing in their other choices. Right. So I don't think that invest vegan will ever take on BlackRock necessarily. But I do think that the core practices and like the things that we are actually doing is this thing from the product that we're offering are already very mainstream in some ways they're just not very easy to get, unless you are some giant pension usually

Audience Member 2: (23:51)

Thank you for your perfect. Where did you economic the dollar, the account all away, charge... A basis points, or kind of curious, what's the sign up for an advisor to work with you if they could don't have control over the customer?

Henry Yoshida: (24:15)

Yeah. So I'll just go, cuz it's easy for us. We charge a flat fee for sign up and then an ongoing maintenance fee for the account. Because the investments are private and typically sourced by the individual who comes to us. We don't charge that now the advisors who choose to come to us, we don't have a relationship directly with those advisors. I'm gonna build tools for those advisors, cuz I spent a long part of my career doing that. But right now the advisors just understand that clients are very apt to do things that maybe they've always understood or held the way. So they may establish that relationship for charging them for those clients.

Henry Yoshida: (24:52)

But we are a digital shop. We get our 360 up front in 15 a month and that's our business model, not based on assets.

Sloane Ortel: (25:01)

I could talk all day long about investment idea generation. I mean like the book I wrote is a good prime on how we're doing it. But when we went to start the firm basically what I did was I went through every liquid, quote unquote equity in the us market and just did a sniff test on everything. Right. And sort of went like, okay, with each instance with each investment opportunity with each equity, does this align with a future that I would like to live in, that my clients would like to live in. Right. We have that simple, like sniff test that we're asking that and we sort of, for stuff that doesn't meet that sniff test, we have a giant naughty list, and we can very quickly take a portfolio and run it against the naughty list and see what's what shouldn't be there and why.

Sloane Ortel: (25:51)

But beyond that, we have a system where like, I've actually created this sort of, I borrowed it from a manager called Fred Alger that some folks might know that used a system called the tick system where every time they have an interaction with a company or they have a data point that comes out they take notes on that process it, but they also condense it down to a tick where they'll tick up a qualitative rating on a company just by an integer, right. Like up one up two. And then we, that allows us to sort of separate out the parsing of information from eventual investment decisions, right? So once a month, when we go to rebalance, we rerun all of our everything and make sure that what's in our portfolios is the highest ticked stuff in our coverage universe.

Sloane Ortel: (26:39)

So there's more a question about like the gardening type or more an answer about like the gardening type practices that we do to keep everything, looking nice. But really it's, we sit on a whole bunch of proprietary observational data about how companies are behaving and how they align with our values basically. And then on top of that, we just do a lot of the standard fundamental investing that you can't really not do. And that goes into the tick metric as well and flows into portfolio construction directly.

Lynnley Browning: (27:17)

I think we can do one more quick question and then we will close this conference

Henry Yoshida: (27:24)

Transition to the weekend time for the weekend. Yes

Sloane Ortel: (27:39)

Well, I mean, what we do is we produce like a pretty like nice annotated list of holdings. Right. Which I think is pretty unusual where we talk about what's in our portfolios and why. Right. So we go in and say like, all right, well, we own like my largest thing is an agricultural lender, which is kind of an obscure asset for a lot of people to invest in, so I will write like a nice blog post and sort of be like, here's this thing. And here's why it's here. Performance reporting. Yeah, we just report it, we bench against the acqui. And we try to keep it as simple as possible. The mechanics, I mean we're pretty simple on the performance reporting right now. So we're just, we're on model marketplaces and we report into informa and those folks, but we don't do the, this portfolio is like it takes carbon off the road or whatever type thing that a lot of people do. Because it's just candidly very hard to produce that information with any level of confidence.

Henry Yoshida: (28:51)

And for us, a lot of these people they're private deals. So they're certain ones are registered or tracked on particular investment platforms. But a lot of these are a private LP investment into a deal. And again I actually designed rocket dollar after my last startup. And then after my time as an advisor, as sort of the first time that I haven't technically been the advisor or recommender of these particular investments. So they're very self source. So what we get paid to do to the gentleman's question earlier about our monetization strategies, people are paying us to provide the ability to give them the ability to unlock their IRA accounts, to do investments that may be their Schwab or their fidelity custody IRA portion, won't hold the paper to. So this is like you got a real estate syndicator and you're in the Midwest.

Henry Yoshida: (29:39)

So, that this particular area is gonna be great for a class B apartment complex, to be able to buy in a syndication, raising $5 million, you want to do a hundred thousand dollars investment. So we enable you to do that. Cuz our back end custody provider will allow you to hold that paper inside of an IRA with us. So that's really what we're enabling. And it's pretty empowering because it's very clear understanding that you're paying us to get access to your money. You are finding these investments on your own or through the help of an advisor that you may establish the ability to sort of compensate that advisor for telling you about it.

Lynnley Browning: (30:15)

Thank you all so much for being here. Thank you, Sloane. Thank you Henry. I hope everybody learned some things I know I certainly did. And definitely follow up with me, with Sloane, with Henry, with anybody. And we'll see you again this time next year. Thank you.