A Financial Advisor's Perspective On Including Alts In Your Portfolio With Josh Wright

This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and and interview successful investors. Welcome to the Invest Like a Billionaire podcast. I am your co-host Ben Frazier, joined by co-host Bob Fraser. And guys, we have a really fun episode today. We were joined by our guest Josh Wright, and Josh is a registered investment advisor who loves alts.

So that's a horse of a different stripe there. So most investment advisors don't know anything about alts. So this is the kind of the insider's view, right, of investment advisory space, how it works and how they deal with alts.

Yeah, so this was kind of a longer interview, but it was like good to the end, and we could have kept going for at least another hour because Josh is so knowledgeable about this space. He's one of the sharpest guys that I've ever met just in the kind of financial planning investment advisory space, and he talks about how he uses alts for his kind of traditional financial planning clients He works with real estate investors and he kind of breaks down a little bit of why the industry is kind of scared or just tepid with alts, you know, how he uses them in his— with his clients. So it's a really great interview. You guys are going to love it and kind of just understanding a little bit more of, of, you know, how the general mainstream media looks at these and, you know, how he uses them specifically. So enjoy this conversation. Welcome to this episode of the Invest Like a Billionaire podcast. Today's guest is Josh Wright, and we're very excited to have him in the studio live in person. Josh, thanks for joining.

Yeah, thanks for having me.

Yeah, so Josh, we're really excited about this interview. We've actually worked with Josh for several years. He is a registered investment advisor here in Kansas City and actually loves alternative investments, which we'll get into later, but it's pretty unique in the whole world of investment advisors. And really for this podcast, Invest Like a Billionaire, the whole goal here is to look at what are the ultra-wealthy doing? What are the billionaires doing with their investment strategies? And how are they generating their wealth? And one of the biggest differences we've talked about a lot in other podcasts between the ultra-wealthy and the average investor are alternative investments. We've pulled up stats before, Josh, where family offices, pensions, these larger institutional investors, sometimes have 40 to 60% of their portfolios into private alternatives, you know, hedge funds, private equity, and real estate. So love to hear your story, Josh. I'm gonna give a quick little bio so you guys, uh, get really excited because Josh has some amazing thoughts in the space. But he's been an investment advisor for 19 years and worked for a long time in the kind of traditional wealth advisory space, and in 2017 started his own firm and has had a lot of success. He actually has a background in real estate growing up in the hotel business, and he saw the importance of having diversification in real estate early on. And he's actually developed an expertise in 1031 passive investment exchanges, which we'll get into in a little bit. And his views on planning and investing are very unique in this space, which I'm really excited to dive into. And he's a board member for the Kansas City Estate Planning Society. He's active with the Alzheimer's Association, has a wife Nicole and a pug named Stella.

That's right.

That's the official bio.

So she's my kid.

So Josh, just give us a little bit of background. Yeah, your kind of evolution in this space of being an advisor and growing up kind of, you know, the more traditional sense, but then eventually moving into alternatives as a core piece of what you're doing for your clients.

Sure. Yeah. So I started out in the business the traditional way. It was a commission-based world. I started out at a big wirehouse, you know, a very salesy world, to be honest.

And I struggled where you got commissions when you sold some stock to somebody, pretty much.

Yeah. Yeah. Hefty, hefty commissions. In fact, I told somebody the other day that commissions on a mutual fund sale when I started in the business were over 7.5%. Front-loaded, upfront. So imagine trying to make money for your client if you take a 7 or an 8% haircut. They want out of the gate, day one out of the gate. And no matter how many times you told them and explained to them how those fees work, they'd still call you the next day and say, I put $100,000 in, why do I show $92,000 on my statement? You know, so anyways, yeah, so I started out on that side of the business. Financial.

At that point, were you like aware of like, wow, this seems really fee-heavy? That was just the state of what you're doing and like, this is great, make some money.

I wasn't that aware of it till I got to the business. I had no idea how salesy it really was until I literally got to day one. I grew up in Kansas, but I started my practice in Phoenix, Arizona with the bright idea of starting a relationship-based business in a city where you don't know anybody. It's a terrible idea. I wouldn't recommend it. But my first manager was an old-school sales guy from New York. He was all about the sales numbers and I struggled. I spent a year just pounding the pavement 7 days a week, day and night, trying to build a business. I'll tell you a quick story. This will sum up what the business was like then. One of the first clients was an older lady who came in. I met with her. She had $50,000. She wanted to put it somewhere safe. Now, she had plenty of other money, but she said, I want a guaranteed rate of return. My first thought is you're in the wrong place. I could offer her a money market fund where I got paid a little bit of commission, or I could offer her a CD where I got paid nothing through the firm that I was at. So I did the CD. The rates were the same. Even though I didn't get paid, my hope was I'd build a relationship and and hopefully get some investment from her down the road and make a long-term client. The next morning at our sales meeting in front of 16 other advisors, my, I guess we'll just call him my primary manager, came in, smacked me in the back of the head in front of everybody and told me, or told everybody what an idiot I was. And that's what I'll sum up what the business was like. He told me it was still suitable. To put her in the money market fund, even though, you know, the, the CD was more appropriate, obviously, in my opinion. So that's what the business was like in the beginning. Now, I migrated back to Kansas City, found a mentor, began to partner with him, buy into that firm over time, was, was in a firm for 13 years, began to build a business, and it was all financial planning, investment management. I took that firm fee-based in 2005. That was very early to the fee-based world. Everybody thought I was nuts and I told them we have to remove conflicts of interest if we're going to grow this. Now, I'm a planner by nature. My other partners in the firm were much more salespeople, but fee-based just made sense to me.

Of course, the whole world went that way. So the difference is you charge a fee like a very small percentage of assets under management. You're not getting commissions based on what you're putting them in versus the old way was getting commissions and you got more commissions for different investments than you did for other investments. So you actually incentivized to put them in certain things versus other things and it creates conflict of interest. Absolutely. So you took it fee-based, which is just, you get paid the same no matter what they're in.

In a fee-based world, we get paid the same no matter what. We're getting paid to give good advice and give results. But also manage risk too. I always tell my clients, being fee-based just ties my fate to your fate. People always think about the upside when you're fee-based, but you need to think about the downside. If we go through a 2008 and I lose half of your money, that means my paycheck went down 50%. It's really hard to live if your paycheck goes down 50%. So there's strong incentive, in my opinion, to not lose money. But in a fee-based world, you can be holistic.

You, you're really on the hook to give the best advice But there's also, you're not incentivized to make them money either.

Well, they're not going to be a client very long if you don't make them something.

Yeah.

You know, and I'll kind of tie that back to kind of my philosophy, but you know, to finish that background. Yeah. So I spent a number of years in that firm, took us fee-based in '05, set up our first RIA or registered investment advisor in 2012. And then eventually sold my interest in that firm and started my own RIA. In 2017. You know, along that way, we've been primarily focused on financial planning, investment management. But as you guys alluded to, alternatives are a huge part of my practice, as well as the real estate side of my practice. I think alternatives are great, so we can, we can definitely dive into that.

And that's super unique. As, as Ben pointed out at the beginning of the show, you know, one of the biggest differences between ultra-high net worths and normal people is the way they invest, and primarily in their use of alternatives. You know, the, the large, very large investors typically invest, you know, something on the order of 50% of their investments into alternatives, and the little guys don't. Well, one of the reasons the little guys don't is because the advisory space, they simply don't do it. I mean, we've, we've literally had investors who were very excited about investing in, in alternatives in Aspen, for instance, take it to their investment advisor and literally get a, don't turn this down, run from this, run. I mean, terrify these people about, about making, you know, about, you know, what has been a very, very safe investment, a very good investment. And it makes a lot of sense. But literally, I mean, scare the pants out of people, you know, this kind of thing. And so the space is very much anti-alternative, you know, so, so, you know, Give us your perspective and how, how did you make the shift?

Well, two, two parts to that. So the first part, how I made that shift, was really based on my first bear market, which should be everybody's shift. So I came into the business, I came into the business at the tail end of the tech bubble blowing up. That was my first taste of that. Now, I, when I was in school, I really thought I was going to go into portfolio management, so I focused all of my schooling on portfolio management. You know, I always say Modern Portfolio Theory, and we can, you know, go any direction you want to go. My experience with stocks, we'll just start there, was stocks— diversification in stocks helps when markets are going up. This is my opinion. When markets are going down, it's like a flushing toilet. Stocks are one big bet at the end of the day. That's my opinion, and there's plenty of statistics to back that up. So in the '08 experience, now I was building out my own investment strategy prior to the '08 experience, but I can tell you people who went through 2008 who lost 50, 55%, whatever number of their assets, diversification amongst stocks, you know, that the old school pie chart of US stocks, international stocks, bonds, et cetera, you still lost 30, 40, 50% of your money. That experience or those experiences is really why I built my own strategy, migrated much more towards alternatives because I view things from a financial planning perspective at the end of the day. And this is really born out of the first client I had that intended to retire right before a bear market happened. They take a large loss and all of a sudden they're not retiring. That experience was enough for me to say, okay, something's I need to do something different for my client. And I went through a whole journey of looking at other strategies, alternatives, until I came to a place where I found the strategy that worked for my clients. And it was based around the financial plan. So with my clients, we start with a plan first, and then we fit the strategy to the plan. And here's the reason we do that. If you sit down with a client and they tell you, I don't need a plan, I just want you to go make me money. My first response will be, well, what the hell does that mean? It might mean one thing to you but something completely different to me. And let me tell you, expectations are different when the market's up and when it's down, as we all know. So I start with a plan because we got to have some target we all agree we're moving at. I need buy-in from their side of the table. But once we build that plan, what are the two things that blow up a financial plan? First one is too large of losses, and the second one is too many negative, consistently negative years in a row of return. Those two things will blow a plan up. So I logically went to the step of saying, what strategies can I build and melt together that's going to keep losses small but let my winners run ultimately? And that's where really what I've done, and that's where alternatives came into play. I mean, we can talk about the the stock and bond side of my strategy, but alternatives for me are that consistent workhorse. Not to mention, a good alternative is really truly non-correlated to stocks and bonds and commodities and other asset classes. And that's what you need. And, you know, not to make you guys feel too good, but pitched the Aspen Income Fund to a new prospective client this morning. I'd done some real estate business with him. He's a great example. He owns a lot of real estate around the country. A wealthy gentleman just sold his company last year. I said, "What'd you do with all that money?" He said, "Well, I day traded it last year." I thought, "Oh, goodness." And he said, "I realize I'm not good at this. Let's talk about strategy." So, we walked through planning first. What are you trying to accomplish? Are you doing enough? Are you on track or off track? That's really what my job is. I don't need to dive deep into the details unless you want to, but I need to make sure you're track because we don't want to have that conversation if he wants to retire at 60 and he's 57 and I'm saying, oh, sorry, you didn't do enough. There's just no time to make that up. So we had the discussion around what are the goals first, let's fit the strategy to the goals, and then I showed him what we do in the stock and bond space, and then I showed him Aspen Income as an example of an alternative we would use, and here's the reasons why. When I talked about volatility, I talked about the yield off that fund. I said, look, if my target is 8% average return during the growth years, the accumulation years, and I get 9% yield off this fund, as an example, off the Aspen Income Fund, whatever that number is— oh, by the way, the share price doesn't move a whole lot. Oh, by the way, it's not correlated at all to what we do in the stock and bond space. The light bulb was clicking for him and he said, "Yeah, that makes a lot of sense." In fact, he asked me, "Does that correlate to all of my real estate?" And he owns a lot of direct real estate investment. And I said, "Frankly, no, it really doesn't because that strategy, that Aspen Income strategy, really its return and risk characteristics are completely driven by that strategy directly. It has nothing to do with what's going going on in these other spaces. So, you know, that's just a good example of the way that we look at alternatives and Insight. And no, they did not pay me to say any of that stuff. I just literally— it happened right before I came here, so it was a good, good example.

So, so you— a couple things I want to hit on here. So you mentioned correlations, and this is, this is really critical. So traditionally, right, the 60/40 portfolio, you know, you invest 60 in bonds, 40, 40% in or 60% stocks, 40% in bonds, right? And the idea is they're uncorrelated, right? So that stocks go up or down, bonds go down, but they're completely independent. Well, the reality is in, in the recent downturns, the correlations all went to 1, means fully correlated. Everything went down purely. And I would argue macroeconomically speaking that that is probably going to continue because there's so much liquidity in the world and it goes into the same things that they're all— when that liquidity evaporates, there's got no place to go but down. And so you're seeing increased concentration risk. And even when you look at the amount of ETF investing that's going on, how much of the stock market is actually controlled by these ETFs, which are concentrated in just a few stocks, the entire market is wired to be correlated together. So talk about— and so your point about alternatives being truly uncorrelated is, is absolutely valid. You've got to get something that is not publicly traded in order to avoid those correlations, in my opinion.

Yes.

Yeah, I completely agree. And, you know, our— the stock and bond side of our management process is fairly uncorrelated by virtue of the way that we do manage. And sometimes that means going risk-off and actually taking chips off the table and coming out of the stock market. But you can't have your cake and eat it too at the end of the day. I tell clients this all the time, both the stock and bond side, the alternative side, you can't have that plus 30% year when the stock market's up 30% and not get all the downside that comes with it. It's just impossible. Or if there's If I could do that, we wouldn't be having this conversation. I'd have my own island and I'd be checked out. Yeah, I mean, a good alternative, you're right, it has to be private, number one. The pricing of that alternative, how that share price is configured, has to be based on some kind of an appraisal of the actual value of the asset. You can't have human emotion coming into it. And the stock market is just human emotion at the end of the day. You know, do economics play into stocks? I think, I think they do over long periods of time through themes. But at the end of the day, in any given year, you know, I'll give you— actually, I'll give you an example of what I told this gentleman this morning. I said— showed him a chart of the S&P 500 going back 125 years. I've shown you this chart, Ben. So in there, and you can find this online anywhere, you mark the periods where the market was up in green and the periods where the market was basically flat in red. And you put the number of years in each of those segments. What's crazy is you see these stretches of time, 12 to 15 years at a pop, where the market gave you nothing. Now imagine if you hear some statistic about the stock market. The market averages 9% a year over time, whatever number somebody throws out there. That might be true in a— if you're looking at, let's say, 125 years of history, but having lived with clients and worked with clients for 19 years, here's the reality of that. You don't live 120 years, you don't invest for 120 years. If you're lucky, you get 30, 35 years to save and invest prior to retiring, and that's assuming you don't have 3 kids in college at the same time like my father did, or you lose a job and it takes 3 years to get back on your feet, or you Do what I did and start a business in the middle of your career. All those things, now you're 35, 30, or 25, or 28. When you stretch that timeframe down, those statistics look really, really different. Now, 15 years at a zero out of 30 years to save is a serious problem. I always tell people, it's not that the market won't come back, it just may not come back in your lifetime. the time you need it to. That's the real problem. So, if you can take a good stock and bond strategy and then take an allocation to alternatives around that that have their own drivers of risk and return and yield— I'm a big fan of yields. We could talk about that too. That's why I like real estate as well. You can get to that number you need to get for the plan much more consistently. Also, if your losses are smaller, you can get them back much, much quicker. Quicker. You know, imagine if you went through 2008 and you were down 5% instead of 56%. You probably would have been above even by the end of the year if you were just a buy and holder in that type of scenario, which— how many people will sit through 56% and not panic?

So, so I'm a total math nerd, and, and I've seen stats about how much, how much money the stock market earns you over time. Right? Well, the numbers that people quote are all over the map. I mean, how can that be, right? Well, the difference is when is your start point and when is your endpoint. That literally changes it by an order of magnitude.

Yeah.

So if you mark it from 2000 or 2001, you know, versus 1995, huge difference in return. And if you're buying the stock market at a peak, so timing really matters. If you buy a market when it's low, your returns are really good. You buy the market when it's high, your returns are really poor. And I actually have a chart, a scatterplot chart, that shows that the 10-year return of the S&P 500 based on its P/E ratio, and it is absolutely— there is a reverse correlation. You make more money if you buy the market when it's lower on a P/E basis. You make less money if you buy it when it's higher. So it's just It's a fact, but people don't understand the importance of timing, and you're avoiding the timing concern by using alternatives, which have a completely different pricing mechanism. So it's brilliant.

I think the other thing we've talked about before too is you can talk about average return numbers and you can, you know, assume you can solve for the timing issue, which is a very big issue, but most investors aren't getting the average return of the S&P. One, because you have diversified in stocks and bonds. Two, you have fees. And then three, the drawdowns have an inordinate impact on what you're actually trying to hit as your target. And if you lose 50% in your portfolio, it takes you 100% return just to get back to break even.

Yeah.

Right? So you talk about that with clients a lot too, is minimizing those losses. And in fact, kudos to you in 2008. You actually were not down that much, right? If not positive.

Yeah, we actually had some positive return.

Yeah.

Which is— what? Yeah. Yeah, I know. Shocker.

Did your client base go up after that?

You know, those clients are clients for life at this point. What's a struggle is we don't have years like that every year, right? I tell clients markets go up like stair steps, but they come down like elevators. So until they've lived through an elevator dropping period, they don't understand it. But I think we do a good job of communicating with our clients proper expectation. I mean, I, I tell clients right up front, or prospective clients, hey, if you want what the market's giving day in and day out, the only way to get that is to go buy the market. Go buy— you don't need us for that. You can go buy an S&P 500 ETF for almost nothing. Pretty much. But you need to understand what you're getting. Sure, you get the upside, but you get all the downside. The other thing though, and I'll add to what you said, Ben, is you got to take taxes into account as well. Real returns are quite different than paper returns at the end of the day before taxes. This is why alternatives can be really, really good. This is why real estate we find very, very good as well. When you can get tax benefits like depreciation pass-through, things like that. And you get a 7% yield off of a private real estate fund and 90% of that's tax sheltered because of write-offs. Now, your real return looks quite a bit better. I'll give you a story on this real quick. I have a real estate client actually doing a $3 million real estate sale. They've got a big stock and bond portfolio, not with me yet, hopefully, that they're managing elsewhere. And they said, you know, we may not do a 10, we may just sell it and pay the tax and invest in the market. I said, okay, what are your plans there? And they said, well, do you think it's a good idea? I said, well, I said, what's your tax going to be when you sell? They gave me an estimate, which I think was low, which everybody underestimates. But I said, let's just assume you pay 20% in taxes, which I think it will be a lot more. So now you've got 80% of your money. Where are you going to reinvest that? They said, well, we'll put it in the market. And I said, do you work with an advisor? And they said, well, we're interviewing 2 or 3. And they begin to tell me, 2 stories from 2 different advisors they got. One person told them he was going to make them 14% a year. I kid you not. Now, this is going to lead to a story of why compliance is so crazy in our industry. But I said, if he can make you 14% a year, I don't know why he needs you. You know, he could do that with his own money. But what kind of risk are you going to take to get that? The next gentleman said 10. These people are mid-60s, they're retiring. Now think about that class, the client. How are you going to go get 10% market return year in and year out? And I said, what's your goal? And they said, well, cash flow. We need cash flow from this money to live. I said, okay, so think about that. And this is all stocks, right? They don't know anything about alternatives. I'm getting ready to discuss alternatives. I said, you're going to have to go invest that money in stock market.

Or 10% dividend yielding stock.

You're going to try and get a 10% return. They're not even thinking about dividends. They're just thinking about getting 10%. I said, now to get income, you're going to have to sell stocks. Assuming you've made your money, you've made 10%, you're still going to have to sell. And that's a big assumption. You're not going to have to sell that. You're going to have to pay cap gains on every dollar you take out. Oh, by the way, what happens when we go through a drawdown year where you're down 20%, 25%, 30%, whatever, and you're taking another 5, 6, 7% withdrawal from that account. Now you're down 28, 38, whatever it is. I said, you can't make up that kind of money. And so we walk through what the real math looks like. Then we begin to have the discussion around alternatives. And that's actually where we're going to end up going is, you know, I explained to them, if you see a 10% return in a stock, 9% of that might be appreciation, 1% might be dividend yield. You look at an alternative fund that owns real estate or credit or whatever it is, a 10% return, maybe 7 or 8 of that was yield and 2% was appreciation. It's quite a bit different. So, you know, to lead back something, Bob, you said earlier, why do advisors and firms look at alternatives so negatively? Well, one, they don't understand them at all. Two, 2, the broker-dealers or the registered investment advisors that they work for don't understand them. So they avoid them like the plague. And 3, when I first got in the business, the alternative world was the Wild West. You paid hefty upfront commissions to go into an alternative. I'll give you an example, a non-traded real estate investment trust, a non-traded REIT. Might have been good real estate. But the premise of the product was we're going to put it in a private fund. We're going to raise cash for 2 years. We're going to start buying real estate with that money. We're going to close it in year 3. We'll finish buying out real estate and then we're going to manage it for 6 or 7 years and then we're going to sell it in year 8 via an IPO. Okay, well, my first question would be, how do you know year 8 is the right year to IPO? What if it's a bad year to IPO? Right? This isn't rocket science. There's no real answer to that. What happened early in the industry was there was a lot of stuff— this is my opinion— there was a lot of stuff sold like that with promises that couldn't be kept. And there was people in that space, by the way, that didn't know how to properly manage real estate. Maybe they didn't properly buy it. Because here's the other thing, as a private fund manager in the alt space, if— and this is very common— you would see them raise little bits of money through year 1, let's say they're going to raise for 2 years, So 18 months in, and then in the last 6 months, they'd bring in as much money as they had pulled in in the prior 18. I saw one fund once post-2008. So this is early '09. They were buying multifamily assets all over the country. They were buying these things at 50 cents on the dollar. I mean, it was just a good timing play. This was one fund I did use. They bought up these assets, but in the last 90 days, they got $200 million in the door. Door. Now they are required and they're going to spend that money, right? At that point though, this was getting into late 2010, all those assets had already appreciated. Now they're overpaying, right, for assets, and they essentially erased all the gain on all the other assets they bought by the money they spent in the last 90 days of that fund. This is the alt space, okay? Especially back then, and this is, this was over a decade week ago. So you have clients who then 6, 7, 8 years later figure out— advisors don't understand this because they don't know how to do proper due diligence on a fund. And then you've got clients 8 years later who are throwing a fit, rightly so. And now they're filing complaints, and now you have advisors getting complaints, and you have broker-dealers and RIAs getting complaints. This is why the alt space in my side of the table is so complicated, because there's a lot of people who don't know what they're doing. And I think laws controlling alts now are based on—

pull back the veil and look, look under the hood, so to speak, right? And see really what's there, you know.

Well, we solved a lot of this problem by having funds now that aren't tied to a time frame. Perpetual life funds, whether it's credit, whether it's real estate, makes a lot more sense, right? Buy and sell assets when it's a good time to do it, not because You're tied to something you promised an investor.

So you said they don't understand them. Okay. So these are professionals, professional investors and professional advisors who are trained at the top schools, went to the top, you know, passed a test, right? Typically the Series 65, which I actually studied for and then decided not to take the test because it was so ridiculous at the end, just FYI. But there literally is not they don't even learn about alternatives. There's not even— that's not even part of the test. It's not even a thing. So is it really true that investment advisors can avoid learning about alternatives and be legitimate?

Absolutely. You're not taught— if you, when you're in college, whether it's, you know, your basic degree or an advanced degree, you're not taught about alternative investments, not really. I mean, and now granted, I was in college 20-some-odd years ago. Maybe there's more in that space now, but the, the basics of the CFP and the CFA, there's a lot of analytical work, but there's just not much of it that goes around alternatives. In the Series 65, which I have, there's really nothing on alternatives, hardly at all. But you also got to imagine a broker-dealer or a registered investment advisor, most people in that space don't manage their own money. They outsource it. Most compliance departments at these broker-dealers and RAs— not all, there are some good ones, so let me say that— but most of them, they don't know about real estate, they don't know about credit, they don't know about these alternative strategies, private equity. They're just not familiar with it. So, but they are the ones who are approving funds that they're letting their advisors advisors go sell clients, right? Yes.

So they're advising people, but they really don't know about really the largest, you know, the alts are huge and they just don't know about this, this space entirely and steer people away. And you know, the biggest, the biggest reason why individuals do not invest in alternatives is they don't feel comfortable in making their own decisions. So the investment advisory space plays on those fears, in my opinion, and basically saying, oh, you don't understand this. You know, really, they don't understand it, so they just stay away from the entire space. And, and it, it keeps people out of what can be really good.

It also seems to— I mean, I've had conversations with other advisors, and conceptually they love the idea of alternatives, right? Because you get the non-correlation, you can get way better yields in the private markets, but then it's, it's actually a business or an operational decision because it's so difficult on the compliance headaches. It's, it's not as easy.

And the operational issues, it's very difficult for the back office.

And then, well, I can just go into my Ameritrade platform and just push a few buttons and reallocate everyone's account, so it's— I can scale that really easily. And, um, and then, you know, clients don't understand it. And, you know, they're all excuses, but it, to me, it does not really serve the client first, right? When it's prioritizing business or an operational decision because it's easier, right? And you've kind of gone against that. And in fact, you've had a lot of pushback from regulators and saying, oh, you're too heavily allocated into alternatives. And, you know, talk about that a little bit.

Sure. Well, I'll say this. I haven't had any problems with regulators. Yeah, pushback. But yeah, there are hard and fast rules that regulators have in place. So you— each state has their own set of rules. The SEC has their own set of rules. But most of the states basically say you can't have more than a certain percentage of your client's assets in alternatives. And that might be 10%, might be 20%, whatever that number is. And it's, it's funny, by the way, that it varies from state to state. They're not even consistent in that number. You know, I, I think the issue with broker-dealers— the first time a broker-dealer or an REA gets a complaint about some something that they really are not that knowledgeable about, their immediate response is to say, you know what, we're just not going to allow it. We just check out. Yeah, they don't have anything to do with it.

Take it off the list.

Yeah, that's, that's one issue. The other issue is, is dealing with clients and things like liquidity. There was a lot of complaints around advisors in the early days just selling stuff but not being honest or setting proper expectations or you know, some— something simple like that. So that's another issue. But yeah, with respect to regulators, I mean, I understand what they're trying to do. They're trying to protect the client. I think the onus— some of it's on them. I think more of it's on, on registered investment advisors and broker-dealers. I mean, if you're going to offer this stuff, you need to get more educated on it. I mean, I— we do very deep due diligence. We built a due diligence platform on alternatives, real estate syndications, really nuanced areas. As an RIA, I get phone calls from broker-dealer compliance departments asking our opinion of different alternative investments, different real estate syndications. And I think to myself, you guys have 1,000 advisors that are out selling this stuff. You really should have that expertise already. That's the world we live in. But when it comes to clients and alts, and those regulations, if I could have my way, I would have a lot more allocation to alts across the board. In fact, I think some of the pushback from regulators has to do with experiences from 10 and 15 years ago. I think alts today are completely different than they were 15 years ago. I think alt structures today have eliminated a lot of the complaints from regulators. Just the fact that there's some liquidity in alts, period, should eliminate a huge percentage of that problem from regulators, in my opinion. Because there's been a lot of bad actors who sold stuff that shouldn't have, different levels of risk, or didn't understand the risk. But in my view, if you have good due diligence and you narrow down the alts to what I think are appropriate and really understand them, I actually think my retired clients or my clients closer to retirement should have more alts than my younger. Yeah, which is completely counterintuitive, which the regular—

they should have less.

Yeah, yeah. I mean, think about this. I have a couple that's retired. They're in their late 60s or early 70s. Their only goal at this, this point is cash flow to live, living expenses, and then they want to leave a legacy to their kids. That's it. The best thing I can do for them is to build a portfolio that can maximize yield and make the portfolio as low volatility and as safe as I can. That's it. And we all know you can't go get yield anywhere right now in this— in the safe world, you know, CDs, uh, short-term treasury bonds. I mean, you're not getting yield anywhere. I could build them a portfolio that would say 50-60% alts and then a very conservative stock, bond, commodity portfolio on the side, the way that we run it. And I could get them a very nice yield with very low volatility in that portfolio on an ongoing average basis. But if I build that portfolio and I go through my audits, which we go through audits with all the states we do business in, I know that would get called out. Just can't do it. Or if I'm going to do it, I run the risk of, you know, getting in trouble with regulators. So let's talk about risk.

Risk for one sec. So risk, you know, and this is, this is kind of a, you know, it's an interesting topic. So risk, you know, let's put risk in two categories, right? There's operational risk, the idea that you buy a bad piece, you buy a bad piece of real estate or you make a, you know, as an operator, you do something that's stupid and you lose money. And then there's liquidity risk, right? You know, that something is illiquid, you know, and it seems like, like alternatives, are by the establishment investors are viewed almost universally as riskier, right? But I'm thinking about the stock market and think about how many— you've been through how many elevator drops in the stock market? I've been through even more. Is that not risky? I mean, I just don't understand this idea of risk when if you look in alts, they simply have less risk. You could argue, I guess, that regulations, because a stock is registered, means it's gone through some due diligence process. But I've gone through some registration processes. The SEC is not that smart with those kinds of things. I just don't see where the establishment gets this idea of risk being that anything private is risky and anything that's public is not risky. You know, I just, I don't understand that. So it seems completely nonsensical to me. So what's your, what's your view?

Well, the problem with stocks is you have this human emotion component. It's, it's humans that drive. Yeah, it's the herd mentality. It's humans that drive price.

Exactly.

In stocks, in alternatives, and this is why I think— now let's again, let's segment. There's good alternatives and there's bad alternatives. Okay, there's good strategies and bad strategies. Absolutely. But in an alternative, the price per share is going to be driven by something specific to that strategy. Either it's the value of that real estate, it's the value of that note, et cetera, et cetera, or there's a business risk. Now, with an alternative, you can manage those risks. It's very clear how to manage those. If we're underwriting a real estate syndication, and it's a single property, we can look at the appraisal. Did they overpay or underpay right up front? My dad always said you make your money in real estate by what you paid up front, and he was 100% right. If you overpay, you need everything to go perfect for it to work out. If you underpay, everything can go sideways and you can still be okay. Well, it's the same thing in an alt. If it's real estate, what did you pay up front? What does the tenant financials look like? What is the demographics, the competitors, you name it? What are the assumptions of the pro forma for that alternative? In, in the credit space, as you guys know, um, in that income fund, what did you pay for the note up front? What does the credit look like on the person that's in that property? There's, there's metrics that you can look at and drive risk. You can take more risk or take less risk. When it comes to stocks, and this is really why I moved away from traditional modern portfolio theory early in my career, was You can do all the work in the front end, you can buy a stock and it can drop 50% tomorrow for no other reason than people panicked one day because of something else that happened, right?

Exactly.

So yes, it's very out of your control. It's completely out of your control and it's very hard to manage risk. Now, you know, our approach to stocks has really been based on some economics and trend, long-term trend, because you can't fight the trend. The trend Trend, you know, the only thing that's true in stocks is the price. Just price is what it is. Somebody's willing to pay for it and somebody's willing to sell it for that moment in time. But I agree with you, the how is that alternative more risky than that stock, I don't know. I don't think there's a good answer. So where does the mainstream get this liquidity? Let's talk about liquidity risk. Liquidity risk is a real risk. Yeah, but that's— that onus of that risk is not on the alternative investment manager. That's on me as the investment advisor to do proper planning and plan for those worst-case scenarios when you implement a portfolio recommendation. You know, we jokingly tell our clients the way that we underwrite every alt— and you guys know this because I ask you all the annoying questions all the time— we underwrite for the worst-case scenario. Forward. That's how we think about stuff. We're optimists by nature, but we build a plan from the worst-case scenario forward. We, we underwrite an alternative investment worst case forward because we want to know if everything goes wrong that we can think of, can we still be okay and then still plan for some error in there, right, at the end of the day. So I don't know if that answered your question or not. Yeah.

So where, where does the idea of the main— the mainstream's idea that alternatives are risky and the stock market is not risky or as risky. Where does that come from?

You're asking me to speculate. My best speculation is that's a narrative that's been put out from Wall Street for years and years and decades and decades. And it's strong and it still proliferates through the education system and a lack of knowledge on the alternative side.

I mean, it's interesting. We were looking at, you know, we've thought about getting into residential rentals, you know, at some point in the future.

Single-family rentals.

Single-family rentals. And so we were looking, you know, some private funds and what's the, you know, yield and the net asset value and how they trade. And then we've looked at some publicly traded comparables, right? Of the exact same strategy. Most people are probably familiar with price-to-earnings ratio, some evaluation metric. In real estate, a price-to-book is a really helpful valuation measure. These particular publicly traded funds that were doing the exact same strategy were trading at a 2x to 3x book value.

So literally, I buy $300,000 homes. And I buy 10 of them. So I've got $3 million in real estate, right? Now I do an IPO with that. Let's say that was possible. And now I'm priced at $900,000. So literally the market is pricing those homes at $900,000 each because they went public. They went public. So I'm paying 3 times what those homes are worth in order to have a stock that's, that's liquid. Is that insane? I mean, that's—

if you buy publicly traded REITs, you're not buying real estate. Just, just go ahead and say it. You're buying a stock, and it's not going to behave like real estate. It just won't. It's not true real estate exposure. You know, every, every alternative real estate fund we've ever used that did IPO, we've sold in the IPO every time.

Really?

Never held one ever.

There's two too much money chasing too little, too little product.

It's— well, it's now stock, and that's not what we're going to use for the stock and bond pieces of our portfolio at that point. We want to buy real estate for true real estate exposure.

Yeah.

In fact, in 2008, if that, if that single-family rental stock was around, it was probably selling at 50 cents of book value. Today it's only 3 times of book value, which is absolutely insane. Anybody that buys that has rocks in there.

Head.

And anybody that buys it in 2008 when everybody's panicked was a genius, right? And, and so it's just, it's just this point of that the idea that something is— if it's public, it's therefore not risky— is, is just ludicrous. It's just ludicrous.

I think we need to just take a look at— we, we just need to be realistic about risk and return on all these asset classes. You know, we never talk in absolutes with our clients. And we never say this is 100% the best thing and 100% the worst thing. We always talk to them about all the good and all the bad of every investment we talk about, what kind of synergistic effect we're going to get by combining them together, and then what the risk and return looks like as at the portfolio level. And then we talk about everything that can go wrong in the worst case scenarios, and we build forward. And it's worked really, really well for us. But I think I just think advisors in my space would, would do themselves a huge favor by just getting better educated, but spending more time with their clients, just being realistic. I, I don't think you're going to scare anybody away by being honest about— yeah, give me an example. The joke in our firm, we talk about a real estate deal with a client, sometimes I'll spend 30 or 40 minutes telling them all the bad stuff, and they'll look at me and be like, what's the good stuff? I'm like, well, you need to understand You know, what, what, what could go wrong in this deal? Now, here are the real positives, and this is why we think it's a good fit for you at the end of the day. And I've never had a client that complained about that. It's always worked for us. And don't get me wrong, I didn't understand this when I started in the business. I mean, I had to learn this lesson time and time again as I grew my business over time. But it's proved out to be a really a really good thing. And yeah, I think in our industry, we could do a lot of good if advisors got educated. Now, frankly, in some instances, Insight's become the alternative investment arm and the real estate investment arm for other registered investment advisor firms. And this was never something I intended to do, but we've begun to get calls from folks saying, hey, our firm won't let us do alts anymore. Our firm won't let us do real estate anymore. Can we bring you on and partner together to be that arm for us? Because we have built those, those due diligence platforms and a reputation for ourselves. It's a lot of work.

I mean, it's a lot of work.

It is a lot of work.

One of the things I love, I love that you do though, is it's, it's not pigeonholing. This is the, the world that I live in, so that's only what I'm going to look at. But you, you really take a, an objective approach when you're looking at all the different available options, right? And I think it feels like— I mean, the goal of this podcast is really to bridge the gap between those that are only stocks and bonds and those that are only real estate. I know you kind of are the same thing where you're working with clients kind of in this in-between mode, right? Where there's good things about being invested in the public markets, right? You're not against that. You obviously do that. But there's really good things about being in real estate, right? And trying to bridge this gap. And nothing's off the table. You also— there's a lot of things that don't end up on the table at the end because you really, you know, take it to the nth degree on diligence. But kind of the last thing I'd love to hear from you is it feels like there have been kind of tide changes, you know, broader in the move towards alts. I mean, it seemed like the, you know, the mainstream is, is becoming to accept alts as a possibility, or at least conceptually, and moving towards toward that, even some of the regulation changes, probably almost a decade now with the JOBS Act of like our funds are 506 offerings, which allow us now to publicly advertise and can share with accredited investors, which didn't exist before that. And a lot of these were not available. And so there's obviously some shift there. There's still a lot of the hurdles, but are you seeing at a broader sense more movement towards alts or is it kind of hit or miss or what are you kind of seeing even from the client's standpoint?

To be honest, I have not seen a big shift really towards alts. Yeah, yeah.

It's the rate amongst the readers or the customers.

Now, let me preface that the higher net worth folks that we work with when they come in, statistically speaking, have matched up to what you've said. By and large, they have the bulk of their assets in alternatives, real estate, hard assets. Stocks are always the smaller portion. The amount of stocks tends to ebb and flow along with whatever the stock market's doing. When we've had a good 4, 5, 6 years, everybody thinks stocks are great and they'll own more. And when we've had a bad 3 or 4 or 5, they own less. It was kind of crazy. But the wealthier, the most wealthy people I have ever met in my business have owned real estate, alts, and businesses. The bulk of their assets by a large margin. You know, in those cases we will use stock and bonds appropriately to diversify alts. But unfortunately, no, I, I haven't seen a bigger move towards alts. I feel like as we've seen the proliferation of ETFs and more strategies getting shoved into an ETF, yeah, it's more use of that because of the liquidity. My problem with that— I love liquidity, but my The problem with that is once we get into a public market, we begin to lose the characteristics of the alt. You know what I mean? Low volatility, yield, et cetera, et cetera, et cetera. So I think maybe some of the reasons wealthier folks understand this is maybe one, they have less of a liquidity need to start with. They have more income, more cash flow sources. That might be a driver to it. I mean, stocks and bonds are a great way for folks who aren't uber wealthy to get return. But even in the alt space now, there's a lot more options at smaller dollars than there used to be. Yeah, I think unfortunately there hasn't been as much of a move there and I wish there was, but we're happy to lead that charge. So everybody come on over to our shop, we'll help you.

Yeah, what's the best way for folks to kind of get ahold of you or if they have interest in learning more about what you guys do? And we didn't even get into it, but it's a huge part of your business. Is helping with 1031 exchanges for clients that have real estate that they're selling and want to go passive. So what's the best way for listeners to get in touch with you or learn more about what kind of things you're doing at Insight?

Sure. They can check out our website, which is investwithinsight.com. So that's Insight, I-N-S-I-G-H-T, investwithinsight.com. We've got all of our information there. We've got a whole page on 1031 exchanges. Exchange and passive real estate work that we do. But yeah, we're happy to chat with anybody. You can contact us right through there, and one of our team members will get right back to you, and we'll start the conversation. We'd love to talk to you about real estate, by the way. That's a whole fun side. Yes, to, to our story we haven't even discussed, because I grew up in the, in the motel business as a kid, and that was an interesting experience.

Yeah, I'm sure that's to be a part too.

I'll tell you, I'll tell you about scraping gum off of concrete at the motels. That was my first job.

Mine was peeling onions in a Japanese restaurant. I got you beat, maybe.

When I left for college, I told my dad, I'm going to go to college so I never have to work in a motel again. And he looked at me and he goes, my job is done.

It worked.

So all that horrible stuff you made me do, unclogging toilets at 3 in the morning for motel guests, that was on purpose.

Oh, that's Incredible. Well, thanks so much for joining on the podcast, and I mean, this is always so insightful, and pun intended with your name, your shop. But yeah, guys, reach out to Josh and his team if you guys have, you know, questions, and I would love to get in touch with them. They're awesome. We love working with, uh, with you guys and your clients, and hopefully back for part 2 eventually here.

Yeah, thanks for having me. Would love it. By the way, we do have offices around the country and work with clients all over the country. So we're happy to work with you wherever you are.

All right, awesome.