Tax Mistakes Costing Entrepreneurs Thousands

CPAs will claim they will do tax strategy, but if they're not talking to you in July, they're not doing tax strategy.

Three-quarters of all businesses go out of business not because of lack of revenue or lack of customers, it's purely lack of cash flow.

We don't see the same drawdowns when we have a nice allocation to alternatives in the mix, and so it's like, all right, great, let's lean into that.

Welcome back, future billionaires. Most high earners are focused on making money, but the wealthy are focused on keeping it and compounding it. Today, Ben Frazier sits down with Patrick Lonergan of Vitawell to talk about tax strategy, cash flow, in the hidden mistakes costing entrepreneurs hundreds of thousands of dollars that can be avoided with proper tax planning. Let's dive in.

Awesome. Well, super excited to have you today, Patrick. Um, this is gonna be a fun conversation. So we, we know you through some mutual connections and heard about what you do and thought it'd be great just to have this conversation online with, with, uh, with our listeners here. So thanks for coming on the show.

Yeah, thanks, Ben. I appreciate you having me. I I love the work you guys are doing. I think it matters. And so I'm looking forward to our conversation.

Well, it's been cool because we've had other folks maybe in kind of your world of the private family office, micro family office, whatever you want to call it. Family office seems to be a very popular term these days. And it's funny, whenever we have an episode around that topic, it gets a lot more listens and downloads than most. And I think it's because this idea of what once felt elusive to most people, unless you got $100 million, you don't get the resources available at that kind of true family office level, are now becoming a lot more available with firms like yours that are structuring around particular clients with the particular problems. And you guys really focus on entrepreneurs, right? So, Give us a little bit of background on you, on why you started your firm, and kind of who you help and what you help with mostly.

Yeah, thank you. So I got started in 2010, and I've been an entrepreneur my entire life. I'll say I was a real estate entrepreneur before I got into financial advisory. And if you think about the timing of when I started, real estate was kind of melting down a little bit in the late 2000s. And, uh, I, I had a full ride to law school. I was late for my very first class on the very first day buying a piece of real estate. And, uh, I'd actually decided I didn't want to go to law school, but then they gave me a full scholarship and I was like, geez, I don't know what to do about this. My dad was a small-town attorney. He's like, don't do that. I was like, Dad, I'm gonna go be a corporate attorney, it'll be great. I, I worked for a year, uh, for this publicly traded company that was filing bankruptcy in what was called the data room. I had to Anybody that needed a contract had to come to me to get it. And I quickly figured out that I didn't want to be a corporate attorney either. Their lives were somewhat miserable. And I'll never forget, there was a conflict of interest. They switched law firms. And in the elevator up to the data room, all of these first-year attorneys— there's probably a dozen of them, just graduated from the best law school, Stanford, Harvard, Yale— they all said to a person like, we don't care what you do, don't do this. Best law schools, had the best job, and they were like, don't do it. It's not worth it. And I was like, oh, okay. Uh, so I took that to heart and, um, I'd read a book called Rich Dad Poor Dad. It sort of changed my, my whole perspective on, uh, uh, money and entrepreneurship. And so, uh, I, I didn't make it, uh, to midterms in law school. I dropped out and we started building a real estate business. I was making money just about anywhere I could in real estate. And then I eventually included, uh, recruited my wife into that business. Uh, And that's when it really took off, you know, put some real intellectual horsepower to the thing. But it was my job to find the deal and raise the money. And we had migrated the business to large multifamily projects. And well, there wasn't many deals to be had. And there wasn't much money chasing real estate after, you know, the sort of mortgage meltdown. And so I was like, okay, what's next? And I had some friends that were in financial advisory business. And so I reached out and I was like, I think this is the next path for me. But I had financial advisors that would come talk to me as an entrepreneur and they didn't understand me. You know, they were, they're trying to sell me a better investment where from my perspective, my better investment was my business. I needed help with, we'll call it cash flow planning, liquidity, and also tax strategy. And, and nobody seemed to be operating in that space. So when I got started, I sought out mentors that were in the business doing that type of planning. And, uh, so it, that was the genesis 15, 16 years ago when we, uh, just started. I would fly people in, I'd be like, hey, I've got a network, but I don't know how to serve these people, uh, other advisors. And they would, uh, help me sort of serve this, those clients. And that's, that's really how our firm evolved. And right now we're a virtual financial advisory firm. So I'm, I'm sitting in Clinton, Iowa. Most people have never heard of Clinton, Iowa. We've got 25,000 people. I'm 2 hours straight west of O'Hare Airport. In Chicago, so I can get just about anywhere in the world direct, which is, which is pretty nice. And then our team is spread all over the United States. And, and really, we're serving entrepreneurs that have a net income over $1 million that are frustrated by their tax bill. And so most of our clients come to us because of their tax planning. They're— the problem is CPAs, they're, they're amazing. We love CPAs, but their, their business model is to get the right numbers in the right boxes, not do tax strategy. They actually don't have the capacity to interact with the entrepreneur on the level that needs to happen to, to be able to really do tax strategy. And so that's how our firm has, has evolved. And we, we really look at sort of 4 areas of planning. It all starts with cash flow planning. From our point of view, the number one reason businesses go out of business is they run out of cash. And so it's like, let's, let's protect liquidity at all costs. And then second, it's let's create a tax strategy. And when we're not sending money to the IRS, And our average tax savings, we've gone back and done the math, we save our clients on average $280,000 a year in income tax. So our goal is to be one of the best investments they make all year. And then when we're not sending it to the IRS, now it's invested. And we think some of the traditional portfolio investments make sense. We think real estate makes sense in the right case. And then once you're kind of across that financial freedom level, it's like now we can start looking at some like more moonshot type investments. But I I'm looking forward to getting into, you know, we'll call it portfolio construction and how alternatives fit into that and sort of bring down the volatility and increase return. That's always, I think, a fun conversation.

Well, it's— yeah, very, very cool path to where you are now. And actually, I didn't know all that. And very rare to find financial advisor that started, you know, syndicating real estate. So that's pretty interesting because in a lot of, a lot of ways, you know, I Back a long time ago in college, I interned with a wealth manager. I was planning to go on that financial advisory path, and then that didn't work out, and then got into banking, got into real estate, and then really been in this whole world of private syndications, private funds for over a decade. It seems like they're these two completely separate worlds, where the mainstream wealth planning is 100% public markets, stocks, bonds, mutual funds. And it's like the whole world of real estate and private funds, private investments is just a completely other world. And it does seem that there is this kind of, you know, shift of the tides, which I'd love to hear your perspective on down the road. But what was the path for you going from real estate into financial advising? What was the thing that drew you to that? Because it seems like a unique leap Given my experience in a little bit of these, both of these industries.

Yeah. So it was one of the, one of the reasons was, you know, when we were taking on a fair amount of risk as investors, right? We had recourse on the debt. We had, we had cash flow, we had appreciation, we had, we had a little, you know, the depreciation, the tax benefits, all those things. That was, that was great. But the thing that drew me to this business was, I'll call it the the recurring revenue model, right? Like, I didn't have to go take on a bunch of debt to create recurring revenue. And I think we could, we could probably have a whole discussion on our industry and how we charge fees and some of the issues with that, because I think it creates some conflicts of interest that are problematic. And I don't want to go too far off on a tangent, but we charge like a consulting fee We have a consulting entity and we charge a consulting fee. We think a flat fee makes a ton of sense that will quantify our value. And if we're not delivering the value, we'll start refunding money and then we'll offset that fee with assets under management. So it's like, I don't really care if a client is investing money with us or not. I think real estate deals are great. So please go, go put your money into that and we'll help you analyze that opportunity and make sure it's a good deal. Private investments are fantastic. For some of the reasons we've already alluded to. But it's like, let's— I think part of the problem and part of the reason people aren't getting good advice on the private investment side is the compensation models, right? Like, if you want to know the advice I'm going to give you, all you have to start doing is looking at my— how I'm compensated, and you'll be like, oh, this, this starts to make a lot of sense.

Yeah. Let's get there in a second. First, I want to hit on what you said, which is kind of the carrot that brings a lot of your clients in, which is the tax planning side of it. Um, so you said on average you're saving your clients $280,000 a year. Um, so you're obviously targeting higher income earners. You said a minimum of $1 million of income a year. Was that kind of your target?

Yep, yep. Of net income. So that income, dollars they're paying taxes on. Yeah.

So, so talk about that. So what, what are you finding are the biggest kind of holes in the approach that they're using with, you know, from a tax perspective in their businesses that are leaving a lot of money on the table?

Yep. So we look at tax strategy has 4 levels of planning. So level 1 of tax strategy is the IRS gives us guidance, but it doesn't take any investment. And we always want to start here. Let's just make sure all the administration and bookkeeping pieces are buttoned up. And I'll give you one example. We had a client making $2 million a year. I'm going to nerd out just a second.

Oh, please do.

Let's do it. It'll be— it won't be too far. But he was filing— he was a pass-through LLC filing on his Schedule C. Okay. If you're filing on your Schedule C as an LLC, it probably stands for catastrophe if you're making a lot of money because you're paying payroll tax on, on every dollar that comes through there. Now, over about $170,000, the payroll tax comes down, but still, when you're making $2 million a year, you're paying a very healthy amount of money to payroll tax. So we just made an S election there in that scenario.

And because a Schedule C is a single-member business, right? So no partnership, sole proprietorship. Flows through if you don't have a unique election.

Yep. Yep, exactly. So we were like, well, let's just go make the S election. You know, now we have to file our own tax return, which cost us probably a few hundred bucks, maybe a few thousand bucks to get that filed. But we're saving, I don't know, $50,000, $60,000 in payroll tax by just making that one. And it's almost criminal that we're typically not out to replace people's CPAs, but like that CPA, they could have done that paperwork in 10 minutes and they just were fine. Having the client, A, filing on your Schedule C creates some audit risk. B, it also has a ton of payroll tax. So it's like, okay, that, that needs to be cleaned up. So those are examples of level 1 items. Like, let's just do good administration and bookkeeping. You know, we think taking advantage of home office deduction. If our kids are doing work for us, let's put them on payroll. You know, they can be at the 0% tax bracket for the standard deduction amount. So like my kids, we're in a 15,000 square foot office building. They clean that for us. We own it. My oldest daughter pays some bills and does some bookkeeping and that type of thing. And so we pay her for it. And so it's like, I would rather my kids spend, you know, basically pre-tax dollars versus my post-tax dollars. So we're just looking for opportunities like that. And we document all of it. It has to be legitimate. Then we move to Level 2, and the IRS gives us guidance, but we have to invest dollars. So now, now we're, we're getting into Level 1 is kind of the tax magic, like, You know, this is where we can do some things that like make the tax bill go away.

Low-hanging fruit, right?

Yeah.

Can I pause you real quick? Because I think this is really important, right? You said a point earlier that CPAs, their goal is to check boxes and, you know, do what the IRS says. But in a lot of senses, like, people assume CPAs are doing tax planning, and most of the time it's not. It's just reactive to what's already they're under a time crunch to hit the deadlines and there's no forethought into thinking of, in that case, how you can save $60,000 by a very simple change. And that's not uncommon. We see this all the time. And I think a lot of investors, high net worth folks assume that this is what CPAs are doing. And this is very, very, very different.

Yeah.

Why do you think that is? Like, what is the challenges with the way CPAs are compensated or the way they're taught that limits their ability to do these kind of things?

Yeah, I do think it is a— it's technically compliance. Like, they're just complying with the code. They are looking back at your last year going, okay, what happened? Let's get that information in the tax return as accurately as possible. And if it's not accurate, they get audited. The IRS says, hey, you should have known better. You should have got this in there. You should have known this wasn't compliant. The, the tax filer can be fined by the IRS. So like their job is to make sure that everything is, is buttoned up and recorded accurately for what happened last year. Now, the reason I think they don't do it is like we meet with our clients monthly. So we are in tune with what's going on in their, their lives. We are, again, the first level of planning was cash flow planning. We are dialed into their P&L. We're dialed into their forecast. We're dialed into their free cash. And so we're looking at in July going, okay, what is the forecast for the net income this year? And what is the tax strategy to bring that down as low as we can? And then we're executing from July through December 31st. Uh, we've got a— we had a client this year, uh, working with a really nationwide, uh, tax firm, and they were closed for the last 2 weeks of the year around the holidays. For us, that last month of the year is the busiest time of year, getting all of the tax planning across the finish line and done before December 31st, because that's when it needs to be done. They mentally don't see their job starting until January or February next year. Next year, you know. So, uh, I, I think there's just this shift in Um, what you expect. And CPAs will claim they will do tax strategy. They will, right? Right. And they, they do a really good job like finding all the available opportunities and getting those on the tax return in a compliant way. But they're not— if they're not talking to you in July, they're not doing tax strategy. It's, it's more, uh, operating in the rearview mirror, just making sure that the right numbers are in the right boxes.

Yeah. Yeah. Sorry for the aside, but go back to the level 2, uh, tax savings.

Yeah, so level 2 is IRS gives us guidance, but we have to invest money. So, uh, we can think of IRAs, 401s, uh, SEP IRAs. We can even start venturing into a cash balance plan, which is effectively a pension plan, uh, works really well for entrepreneurs, can get hundreds of thousands of dollars into a, uh, a cash balance plan. And then we can also look at opportunities like, uh, we'll call it an oil and gas fund. You know, the IRS is very clear on the deductions that come with with oil and gas investments if you're a part of the general partnership there. And that's, that's a whole different discussion. But, you know, there's some unique opportunities on the oil and gas side. So that, that's level 2 planning. Again, straight down the middle of the fairway. There's no, there's no gray area. There's no real areas for abuse in, in level 2. But, and again, we're starting level 1, we're filling up that bucket as soon as we can, then we move to level 2. Fill up that bucket. And then that takes us to level 3. And level 3 is we're combining sections of the code to create tax efficiency. Uh, and I'll give you an example. So as an entrepreneur, my general liability coverage, um, is tax deductible to the business. You know, the, the liability insurance premiums I'm paying, uh, I get to deduct as a business owner. When the dollars come into the insurance company, they're not taxable because they can— they've got potential claims out there. So the government says, hey, insurance is for the general good. Let's let's not tax those premium dollars. And so that works out nicely for the insurance company. We think about Warren Buffett owning GEICO, like, you know, is a pretty cool, cool thing. Well, as an entrepreneur, in the right scenarios, you can set up your own insurance company. Okay, now this is managed by State Department of Insurance. It's referred to as a micro captive. You need a third-party administrator that manages that really well. But it's also on the IRS Dirty Dozen list. And the reason being is it's been abused because people have gone, you know what I'm going to do? I'm going to set up this, this cool captive insurance company. I'm going to put money in there. I'm going to get a tax deduction for it. And then I'm going to use it like my personal checkbook. You know what? I'm going to go buy a boat. You know, I'm going to go put a pool in my backyard, none of which are legitimate insurance expenses. And so it needs to be priced by third-party actuaries, creating real insurance with real pooled risk. Um, but that's a good example of, of, of a level 3 strategy where we're combining sections of the code that, uh, allow the entrepreneur to not just go spend a dollar to save 37 cents on tax, but to, to spend a dollar, get a tax deduction, and then have it contribute to wealth building. So, uh, that's, um, that's level 3 planning. I'll pause there, see if you have any questions about any of that before we go to level 4.

No, I love it. Let's keep going.

All right. So level 4 is tax fraud. And the reason we bring it up is we, once you enter into this space, you start to see all sorts of, uh, unique strategies pop up. And I'm putting strategies in quotes there because, uh, uh, there's, there's people out there that see how frustrated people are with the tax strategy and they go, you know what, I'm going to create this thing. And I'm going to give you examples of a few that are almost hard to believe. Um, We've seen cantaloupe seeds. Uh, you can spend a dollar and get a 5x deduction on cantaloupe seeds. Uh, so if we think about that for a second, if I put $100,000 into, uh, my cantaloupe seed investment, okay. Uh, and I believe it gets donated to charity somewhere on the backend and, uh, somehow it becomes worth 5x the value. If I'm in the 37% bracket times, you know, I'm saving about $150,000, $160,000 there. for my $100,000 investment. So it's got net ROI. Uh, so cantaloupe seeds, volcanic ash, um, we've seen software, uh, that, um, and then probably the most popular one that, uh, was really mainstream, I was syndicated, uh, was conservation easements. And we've seen some, uh, some, some of these strategies in the news where I would, I would put money into this this fund, then they would take the land, buy some land, and donate it to a conservation easement, and it would create a large deduction. But what happened was everybody was in cahoots, and the appraisers getting paid. And so I put money in, I got a 5x or more deduction, and the IRS came along and said, we don't, we don't like this. They came back and limited a lot of those to 3x, which made it, you know, I put a dollar in, I got a dollar out, there was no financial benefit to doing that. And then there was lots of lawsuits involved too. So So we look at those types of strategies and we even look at, you know, things like if I put my kids on payroll and they're not actually doing any work, like that's fraud, I shouldn't do it. We've also seen some really interesting— there was a strategy from one of the Native American tribes that were selling tax credits, and I think they sold about $100 million of tax credits. And if you read the opinion letter, it was like, hey, this, This, this may not work. And, uh, I think there was advisors out there sort of pitching it, getting a kickback, and it just, uh, uh, it's just really kind of messy, uh, ugly work. From my point of view, if, if we think about what the tax code is designed to do, it's either an incentive program. So if we think about the big beautiful bill, it incentivizes investment, right? So we're going to give you accelerated depreciation to go put money into the economy to Uh, sort of drive this, this, this forward. So like, that's, that's an incentive piece or it's a disincentive piece where when we think about like the tax on tobacco, right? Like, hey, this isn't good for public health. We're going to disincentivize this. So if there's not one of those two things tied to this, then, uh, we should probably stay away from it. So if we're going to invest in cantaloupe seeds, they somehow are some unique thing that gets donated to charity. Like, be very, very cautious of that. Um, because it may look really good right now, but then when the IRS comes to unwind that, unwind that strategy, and the Department of Justice is knocking on your door, you don't want anything to do with that conversation.

So it's not worth the perceived benefit on the front end.

No.

So Level 4 is all about the things to avoid, it sounds like, right?

Right. And, uh, you know, if it sounds too good to be true, it probably is.

So, uh, well, it's interesting too because I would assume that these, uh, conservation taxes meant pushback is somewhat more recent. Is that, is that right? Because I've never seen those for years and years, and it did kind of have that sense of this seems too good to be true. It kind of makes sense, but then, you know, at some point, if you're doing this for the purpose of just getting a tax benefit, is it really the spirit of the, the rule? And is that going to have gray area?

Yeah, I would say last 4 or 5 years, maybe 3 or 4 years, those, those have started to unwind. Uh, so that's And I want to be careful, like conservation easements are a very, very effective tool done properly, right? Like if I own property and I'm like, you know what, I never want a shopping mall in my backyard, so I'm going to— I'm going to put this into a conservation easement so it can never be developed. Okay. Like that, I get a legitimate tax deduction for that. And I think that's a fantastic use. We've explored that for some clients. But to go buy into one of the syndications where the only move is I put a dollar in to get a multiple tax return, Those, those, those might have some problems.

Yeah. And I mean, to your earlier point on oil and gas deductions, I mean, you kind of can get some of the same benefits through a completely, you know, blessed, you know, deduction in the tax code that also has some potential upside if it, if it works out. So to me, it seems unnecessary. I mean, but let's shift a little bit to So you said earlier was one of the biggest challenges. So you do tax planning and then secondarily, another big component of your planning comes to cash flow planning. Talk about that because it's interesting. In my former life, I was a commercial banker and one of the stats that always stuck with me is from the SBA. They published something like 3/4 of all businesses go out of business, not because of lack of revenue or lack of customers. It's purely lack of cash flow. They don't know how to manage the cash flow cycle. And it's kind of incomprehensible. You think, how can a business go out of business if they have paying customers? Right. But it's a real, real problem. And so talk about how you guys help with that.

Yeah. So it is interesting. The thing we found with the entrepreneur is they have more ideas than they have time and money to execute. Okay, so I'll just give you an example, real-world example of a client that came to us. They had a really good year, made about $1.5 million, had $1 million of like cash sitting around. And they said, you know what, we're going to— we want to buy that building. So they just paid cash for the thing. Well, what they didn't have in mind was like, oh, even though we've made our safe harbor payments, okay, and safe harbor payments are based on last year's tax. We still have a tax bill and we don't know what to do about this tax bill because we don't have any cash because we put it all on this building. And so we paid cash for the building. And so one of the things that we do is we build out what's called a cash flow calendar. And so we're looking forward 12 months and we've got everything on that calendar from— we forecasted the tax liabilities to the tax, the tax bills there, and we usually err on the high side. We've got clients' lifestyle expense in there as well. We've got net income coming out of the business, and then we've got everything on the bottom of this sheet from like the home remodel to the business acquisition to real estate purchases to tax strategy. Because the worst thing I can do for an entrepreneur is create some amazing tax strategy that runs you out of cash like terrible. And then what we do is we create upper and lower limits for cash on hand. And the, uh, the upper limit, anything above that's inefficient. We should get those dollars to work. And anything below that is danger zone. We are going to fix that first and foremost. We're going to go find a line of credit. We're going to go borrow some money from friends and family. We're going to do something to get that sort of cash position secured because we, we talk all the time about the number one reason businesses go out of business is they run out of cash. And so. Let's just make sure that that is— that piece is secure. Now, it might be unsexy, but we talk about it every single meeting with our clients. We've got access to their QuickBooks, we've got access to all of their investment account statements, or, um, everything from bank statements to investment accounts. We go, okay, we're going to prioritize our liquidity as well. So like IRA dollars are on there. Now, it's in red because it's the last money we want to go get because, you know, tax and penalty and all that other fun stuff. But like, it is a source. If we need it, we're gonna go, go get it. So So we put all those things on the cash flow calendar. And so a client can make a decision today and see that 9 months from now, like, uh-oh, when I make that first quarter tax payment, I don't have enough money to put me in a safe spot. So I need to do one of two things. I need to either make some adjustments now, or I need to go like make sure I'm shoring up my cash position 9 months from now. And that could be like lines of credit. It could be— and again, we don't like using debt, but we, we do see debt as a source of liquidity if we need it. So, um, yeah, that's, that's how we really focus on the cash flow planning.

I love that.

So you're—

you kind of have like a little formula you use to triangulate all these different things going on and then create the kind of range of minimums you don't want to go below. And then there's also too much cash, right, where you don't want to just be sitting on too much, and then manage to that. Do you have any kind of rules of thumb that are helpful to think about just You know, for a business that's, you know, say doing a million dollar, you know, net income, you know, is it too, too specific for that particular type of business and all that?

Yeah. Yeah. So I think there's, there's kind of two rules of thumb we look at, um, because we've got businesses all across the board that, that come to us and need this type of planning. We have some that are very, uh, low overhead, right? They don't have a lot of employees. They don't have a lot of inventory. They might be a service-based business and they are very profitable, you know, they might be 40, 50, 60% profit margins. And it's like, okay, cool. You— in that scenario, we're going to look at their lifestyle expense and go, okay, the minimum cash on hand we want for you is 6 months, maybe 12 months, depending on where the client— like, we let the client dictate a lot of this number. But rules of thumb, 6 to 12 months on the minimum. 12 to 24 months on the maximum, uh, depending on, on where they want to be. Now, if somebody's got—

of your overhead expenses?

Of their personal lifestyle expense. So, yep, a lot of times we'll see clients that, uh, um, you know, are running a very lean business, and, um, they might be spending— a lot of times our million-dollar entrepreneurs making about a million dollars a year have about $30,000 a month lifestyle spend. They spend about $30,000, I say, spend. They, they give the IRS about $30,000 a month and they save about $30,000 a month. So it divides nicely into those, those buckets. So it's like, okay, if that's the case, let's, let's make sure we have anywhere from $180,000 to $360,000 of cash sort of on hand, uh, to just make sure that any bumps that come along, uh, we're, we're in, we're in good shape there. So, so that's, that's the first rule of thumb. The second would be if I've got really large payrolls, I'm going to have a number of payroll cycles on hand. So I'm going to have 3 payroll cycles, 4 payroll cycles, 5 payroll cycles. Bill Gates is famous for having 12 months of payroll on hand at Microsoft. He was like, I am just going to have enough money on hand that we can make some big bets and we'll still be able to pay our people and keep this, this ship running because the, the human capital is the most important capital we've got here.

Let's shift kind of the last portion of this conversation here to portfolio allocation. So I mean, I mean, making the point, this is really interesting that you guys charge more like a retainer fee that then you net against AUM fees as that grows. But it does, it does make you pretty independent, right? Because you're not incentivized to gather the assets like a lot of advisors where you get paid more the more assets that you get of those, of those clients. And so it can make you more neutral third party. when you're looking at this. But what do you guys generally target for, from allocation perspective? So you've got the tax, you know, planning solved, you got the cash flow reserves in a good spot. Now you're thinking about investments out in portfolio. What do you guys generally look at for these types of clients?

Yeah, so again, we do look at some of the portfolio assets as an additional liquidity buffer. We like to keep that in mind. And so it's like, okay, we have a little bit of a bias towards liquidity, but I think that bias can get too expensive if you're not careful. And so we look at some maybe bond and stock allocation, but then we do like alternatives fitting into that mix. We think private credit's interesting right now. Private credit's in the news. Uh, and but private credit is like this enormous like asset class, right?

It means a lot of different things.

Yeah. So it's like, let's be, let's be really mindful of the, uh, type of opportunities we're looking at there. We think that can make a lot of sense. Going back to my, my real estate background, it's like, man, I, uh, you, you find the right type of, uh, mortgage debt or hard money opportunity, you know, with the appropriate collateral, like those, those things can look, can look really good. We also like, you know, this can be sort of unsexy at different times. It looks pretty good right now. But like hard assets, commodities, I remember a number of years we were, you know, we had commodities and hard assets in portfolios. And people are like, why is this here? And it's like, now, now it's like, this is why it's here. You know, and when we think about what these things do to a portfolio. Uh, one of the things we like to talk about, and people don't think about this, is like, um, let's, let's think about drawdown for a second. Okay. If my portfolio is at 100 and I lose 10, I'm at 90. Okay. To get back to even, if I get 10% gain, I'm only at 99, right? And so it's like, wait a minute. So I need 11% to get back to even. If I'm at 100 and I draw down 20%, I now need 25% to get back to even, right? And so when I'm at 100 and I draw down to 50, now I need 100% gain to get back to even. So the cost of, of that volatility is massive. Like the, to, to catch that up is, is really big. And so what we found, and I think you guys agree with this, is like alternatives bring that volatility down, right? It, it, we don't see the same drawdowns when we have a nice allocation to alternatives in the mix. And so it's like, all right, great, let's lean into that because it's too expensive not to, because the drawdown is just so hard to come back from. And so we really just like the alternatives. Then I think then the next question is like, okay, the cool thing about where we're at is we spend a lot of time helping our clients vet these strategies. Like, let's go look at where the opportunities are, because, you know, alternative is only as good as, we'll call it, the, uh, the operator executing on that, that alternative investment. And so, uh, again, looking at the, the good work that Aspen Funds is doing, it's like, uh, you know, you guys are, uh, doing a nice job filling this gap in the, the marketplace to, uh, to, to bring those alternatives to, uh, to help people with all those problems we just highlighted.

Yeah. Man, you're speaking our language. Yeah. In the book, we talk about the hidden cost of liquidity and the volatility. People like the idea of being able to sell their assets whenever they need to, but that also is a double-edged sword. If you're selling at the bottom, you can sell, you get the liquidity, but you might not like the price. So it's in some ways a protection. In other ways, what we've found through the research is if you pick the right operator, right sponsors, you can actually outperform publicly traded benchmarks on a return perspective, not including the risk. So yeah, totally agree there.

And I think you're onto something that's really important. The premium for liquidity is, I think, way overvalued, especially for, I'll say, our clients. They have so much healthy cash flow. They have the cash on hand because of the planning we're doing. It's like, look, right? We don't need these dollars. Like, if we did, we would have them over here. Uh, so like, let's just let the, uh, the wealth-building machine sort of run and we'll be okay with it. Um, and, and we, we think about the emotional decisions when it's liquid, right? I can see— I don't— I can't see the value of my house, right? There's not like a ticker symbol on top of my house that You know, I, uh, because what happens when the markets start going down, our brains are wired to run away from danger, and that looks a lot like danger. And so we're like, crap, I got to get out of this thing, where it's actually the opposite, right? Like, it's opportunity. We should be moving money into it versus running away from it. But, uh, um, so I think that, that insight into the value when liquidity is present is a problem. And so it's like, if we can start eliminating that, it'll just give people peace of mind, their wealth can continue to grow. And it's like us in our real estate portfolio. It's like, how did we get here? You know, it's just like, well, slow compounding between, you know, loan amortization paying itself down, the appreciation from forcing the cash flow and generating more income, you know, and then the depreciation along the way that creates some fantastic tax benefits. It's like it all just combines to be a really great wealth-building tool.

Patrick, this was a great conversation. Really enjoyed having you on and love your perspectives. For those that may want to learn more about Vital Wealth and what you guys do, what's the best way for people to find out more?

Yeah, uh, you can go to vitalwealth.com, uh, if you want to have a conversation, you can schedule the time. We also have a number of resources at vitalwealth.com/resources that, uh, give you a lot of those level 1 strategies you can just download if you're like looking to save 10 grand in, in tax. Uh, we give you all the guides to how to do that compliantly. So we think that's a great place for, for people to start. And we've got a number of other resources from cash flow planning to strategic planning, all of those things that just help the entrepreneur.

Awesome. Thanks so much, Patrick.

Thanks a lot, Ben.

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