Ep. 215: The Chicken and the Egg Problem with Alts by Eric Satz, Alto IRA

Come on in and sit back and relax. You’re listening to Episode 215 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, founder of Ezra Group Consulting. This podcast features interviews, news and analysis on the trends and best practices, all about wealth management technology.

My guest for this episode is Eric Satz, founder and CEO of Alto IRA. Alto provides investment access to alternative assets. Eric’s been running Alto for the past nine years. Before that, interestingly, he ran an online organic home delivery grocery business, which was going just fabulously until the 2008 financial crisis. Before that, he co-founded an online foreign currency exchange platform for large corporations which he sold to State Street in 2007. Eric’s an entrepreneur and former investment banker, having in the past worked for Credit Suisse First Boston. Eric also served on the board of the Tennessee Valley Authority from 2015 to 2018. He was appointed by President Obama.

Eric is a Miami native and a diehard Canes and Dolphins fan and went to Amherst College. After years in New York City and then San Francisco, he and his wife moved to Nashville to raise their kids. Eric is on the Forbes finance Council and you can check out more about his company at AltoIRA.com.

But before we get started, let’s talk about tech stacks. At Ezra Group, we’ve seen tech stacks of hundreds of RIAs and let me tell you, most of them are loaded down with tech debt. So you shouldn’t feel too bad about yours. But let’s face it tech debt is like a giant anchor, holding back your business growth. If you want to free your firm for exponential growth, you should run, not walk to our website EzraGroup.com and fill out the Contact Us form. Our experienced team can evaluate your current tech ecosystem, deliver targeted recommendations, optimize your existing systems and operations or run an RFP and help you implement new software to take your firm to the next level. You can take advantage of our free consultation offer by going to EzraGroup.com.

Topics Mentioned

  • Exploring Alto’s Journey from Launch
  • Challenges in Traditional Investing
  • Understanding Investment Restrictions
  • Financial Advisor Integration and Future Growth

Episode Transcript

Craig: This is a treat I get to introduce our next guest. It’s Eric Satz, founder and CEO of Alto IRA. Eric, thanks for being here, man.

Eric: Craig, thanks for having me.

Craig: I am excited to talk to you, where are you calling in from?

Eric: Nashville, Tennessee also known as Music City and also known as the healthcare capital of the world.

Craig: That’s cool. All those are good to know. I can’t wait to go there next year. I think have a conference there. So I’m excited to be in Nashville for the first time.

Eric: We like when people visit and spend money.

Craig: Oh, yeah. It’s always good. So can you let’s just jump in on this, can you please provide a 30-second elevator pitch for Alto?

Exploring Alto’s Journey from Launch

Eric: Absolutely, Alto has evolved since 2018. When we first launched purely as an alternative IRA provider, which means that you can access your retirement funds and invest in alternative assets, so non registered non publicly traded securities. About six to eight weeks ago, we launched the Alto marketplace. So it used to be that you had to have the alternative asset that you wanted to invest in with your retirement funds. Now, you can come to Alto and find alternative assets that you want to invest in with your retirement funds, that’s the platform in a nutshell today.

Craig: What are the trends in the market that you saw back in 2018 when you launched the original product, what was it that drove you to see the need for this particular solution?

Eric: So we have to go back to 2013 when I first used my retirement money to invest in a private company that I was involved with, and I had this, let’s just say terrible or suboptimal experience. So I did what any other individual would do, which was I repeated the process two more times and unfortunately, the the experience got worse. I was trying to figure out whether the problem was an Eric problem or systemic industry wide problem and fortunately for me, I concluded the latter rather than the former. There were $25 trillion, sitting in retirement accounts at the time, and basically, none of it was getting invested in alternative assets. And I thought that was crazy because if you look at wealthy people and if you look at professional institutional investors, they’re going to invest anywhere between 20-80% of their portfolio in alternative assets. And here we are the rest of us investing almost nothing in alternative assets and I felt like that needed to change.

Craig: I was very interested in your product for a personal reason, because I’ve got some private investments and it was a real pain in the ass, I wanted to invest with my IRA money and trying to do it was it wasn’t easy, even though there was a provider that I’m working with that claimed it was all going to be smooth. The paperwork was annoying, it was all PDFs, it was technically digital but I’m still filling out PDF forms. I don’t understand what they’re asking me for. They’re asking for copies of the paperwork like my agreement, because I’ve been I’ve invested in a couple of private businesses or investments.

Eric: And you’re doing all the work, too.

Craig: I’m doing a lot of work. Yeah. So anyone who wants to know what I’m invested in can look at our website. But yeah, so I’m interested in any ways to make it easier to invest in private investments in an IRA okay.

Challenges in Traditional Investing

Eric: So that’s a great question. And the first investment I made all the way back in 2013, took me about 10 weeks to complete. And as you know, having been through this, like, at least for me, if it weren’t for the fact that I was on the board, the company would have just said, round’s closed. Thanks, but no thanks, next time just write a check out of your checking account. And so fortunately, each time I did this, I was involved with the company I was investing in, and so I had some wiggle room some flexibility.

Eric: What I concluded was that if this opportunity were to become real, then we would actually have to do for alternative IRA investing what TurboTax did for self filing, which was take this people paper burden, time consuming, expensive process, and eliminate all that and make it super easy for anyone to participate. This was known as the self directed IRA industry, which is kind of like saying natural food, because you can have a self directed IRA account at Schwab or Fidelity, which just means that you get to pick the public equities that you invest in on those platforms, so long as they’re approved by their investment committee.

Eric: We set out to build the alternative IrA industry which says you can actually invest in anything you want to invest in so long as it’s not against the rules laid out by the IRS. Turbo Tax was the northstar if you will, and if we could take technology and rip out people and paper and put in place a scalable platform that allowed tens of millions to participate instead of tens of thousands, then we thought that was an interesting opportunity because we’d be we’d be releasing or enabling trillions of dollars that are sitting in retirement accounts to participate in the alternative assets sector. that previously was walled off from participation, for all the reasons that we talked about earlier. Time consuming, too expensive, too complicated, I have no idea what the custodian is asking me for.

Eric: What I discovered in my process of getting ready to launch Alto, was that most of the things that were being asked for, weren’t required. It was not actually part of the regulatory or legal environment. What we set out to do was to explain those things that were actually needed, and to only ask for those things that are actually needed. By doing that, we seem to have hit a nerve or a vein if you will, 30,000 accounts and $1.1 billion later it seems to be working.

Craig: I think so. Is there anything that I can’t invest in, so any private investment like a preferred stock, what about debt or what if some investments are structured as debt, can we hold those?

Eric: You absolutely can. So the restrictions, I’m going to say fall in two major buckets. The first is that you can’t use your retirement money to invest in anything that’s controlled by you, or your direct descendants or descendants. So that’s the big no, no. And by the way, when you go to the Alto platform, and you say, hey, I want to invest in this thing. We ask the questions that you simply answer yes or no to. And if you’ve set off a red flag, we tell you, No, that’s a bad idea. Can’t do that. So that’s one bucket.

Eric: The other bucket is investing directly in what’s referred to as collectibles. So what you can’t do is go buy a Picasso with your retirement money to hang on your wall. You can’t go buy an antique automobile and put it in your garage. What you can do is go buy security interest in these things and having a slice of fractional ownership interest in these things. That’s legal.

Craig: If someone tokenized Picasso and put it on the blockchain.

Eric: Yes.

Craig: How about SAFE notes?

Eric: All good.

Craig: Alright, I’m having trouble poking holes in this. So forget my problem, which are many, let’s say I’m a financial advisor, which I’m not. But let’s say I was, how do I take advantage of your platform?

Eric: So if you’re a financial advisor, and you have clients who want to invest in alternative assets, right now, the first thing you can do is refer your clients to Alto. We’ve made this stupid simple so that someone like me can open an account and transfer funds without too much intellectual burden. Either your client can come to Alto and create the account, or you can go to Alto and create the account on on behalf of your client. The advisor specific features on the platform today, I’m just being honest, are limited in scope. But we have a significant advisor roadmap that we’re operating against, such that if you have discretionary investment power for for your client, you’ll be able to execute in that way on the platform in the future, 2024.

Craig: Can you expand on that? What do you mean execute on the platform? Will you integrate with existing portfolio management systems? How easy is it going to be for me if I was an advisor to say, Okay, I want my client to invest in this private security.

Understanding Investment Restrictions

Eric: The Holy Grail, right is to be integrated with all the TAMPs that are out there. That is a long process and there are companies that are formed simply just to try and do all that. That’s not our objective. That’s not our end game. We’re trying to make it easy for advisors to help their clients diversify their portfolios, but how that financial reporting and how that financial relationship continues to exist between the advisor and client is between them, not us.

Craig: Of course, we’d love to see some integrations with TAMPs and, and other platforms as well.

Eric: You and me both.

Craig: Do you have any in particular you’re looking at to start with? How would it work if I was running on the one of the most popular RIA platforms, in your on your roadmap in a perfect world, how would I access Alto’s private funds?

Eric: We’re in discussion right now with a couple of different platforms who are already integrated with BlackDiamond, Orion, Envestnet, Addepar, and that seems like a good shortcut for us. I can’t tell you which we’re going to do first.

Craig: Okay, well, forgetting which ones you were you would do first, how would you envision it working? Would it just see it as another line item in the portfolio?

Eric: So you would get a direct report from Alto, into your reporting platform. That’s it. For right now, all that you would do is download a report from the Alto website and have to incorporate it into your portfolio discussion with your client which, it’s an additional step, it only takes a couple minutes, but if we all learn anything from Amazon, one click is better than two.

Craig: Indeed, I mean, the way I would see it would be you’d want to look like the custodian.

Eric: We are a custodian.

Craig: I understand, but if you were to present yourself as a custodian, then they would just plug you in that way and then that’s something they do all the time.

Eric: Who plugs us in all the time?

Craig: I’m saying if you were to look like a custodian to any of the companies you mentioned, any of those vendors offer tech platforms that support many, many custodians, and they’re used to pulling in custodial data. So if you were to say, look, we’re just another custodian, but we’re a custodian of private assets, here’s our layout, file format, they could then bring that in and show that to a client. They’re all multi-custodial, all those platforms you mentioned, and they can show whether you’re at Schwab, Fidelity, Pershing or at Alto, here’s your accounts, here’s your total holdings.

Eric: Yeah, it’s a little bit of a chicken and egg because right now, we don’t have a lot of RIAs holding alternative assets. And so those platforms are saying why are we going to spend time integrating with you if we don’t have any of our existing customers holding alternative assets? So there’s a little bit of a chicken and egg that way and so instead what we’re doing is we’re going to market to the advisor community saying, hey, as we build momentum, then we’ll be able to pull in the tabs. But there’s there’s so many chicken and eggs out there. You just have to solve for one side and then let the other develop after the fact.

Craig: That is what we’ve seen with a lot of the startups we work with. Sometimes you got to build it and hope they come.

Eric: Well, Craig, I don’t want to build it and hope they come so if I were to, to do that, then I would go ahead and really build an integration first to the TAMPs and I’m focused on trying to build an integration first to the TAMPs. Instead, what I want to do is focus on the demand side, which is the advisors because we do have a product that is important for portfolio diversification, and that is alternative assets. We see a growing demand coming from advisors themselves, but more importantly, those advisors are getting asked by their clients, how do I get exposure to alternative assets so that I can reduce overall portfolio volatility, and of course, increase long term returns. And so we’re going to focus on the demand side and then let you know supply fill in after.

Craig: Excellent point. Thanks for bringing that up. On your website, you have a couple of statistics, 36% of financial advisors indicate lower volatility from alternatives, 44% report alternatives and differentiating them from other firms. So we talked about diversification, do you see that as driving additional demand and will you be providing any tools for advisors to better understand how their volatility is changed by alternative investments?

Eric: I’m going to go back and up a level for a minute. I think the first thing that most advisors are looking for today is educational material to help them get smart in alternative assets sectors. They know the public markets, and they’ve been at it for a while and they’ve had lots of educational material that’s that’s been available to them. The private markets are, they’re a different universe. I think it’s our first responsibility and objective, to provide the necessary materials for advisors to understand how to evaluate alternative asset opportunities.

Eric: I think the second level is okay, was volatility reduced by how much and did performance go up? But when we put this in the context of a public marketplace that has 60% of the public companies that we used to have and of which only 400 really matter for for positive returns in the markets, those 400 you can find some combination of them in almost every ETF mutual fund or index fund. Which means at some point buying one more ETF mutual fund or index fund doesn’t get you any more diversification, just gets you one more ETF or mutual fund. The real way to add diversification is in the alternative asset world. Whether that’s real estate, private equity, venture capital, artwork, crypto, and by the way, it’s not a “bet it all on red” approach, there’s a power law involved. You have to have lots of investments the same way you do in public markets, you have to have lots of investments, within given segments of of the verticals.

Financial Advisor Integration and Future Growth

Craig: A recent survey came out showed there was over $12 trillion invested in private markets at the end of last year and that advisors who are investing in private investments, alternative investments, almost 100% said they plan to maintain or increase their allocations. Do you see that as a strong headwind for your future growth?

Eric: Did you mean tailwind?

Craig: Yes. Depends which way your tail is facing.

Eric: I feel like the last 18 months is has been one big headwind. So the short answer is yes. Major tailwind. I can’t remember the last statistic I saw but I think that $12 trillion dollar number may be expected to double over the next five years. And I think I read that recently. I could be making it up too.

Craig: Well, whoever published that statistic made that up right, where’d they come up with doubling like they just pulled it out of their you know what.

Eric: I am sure they are a highly paid consultant somewhere who published that number, which works for our purposes for this discussion. So yes, I think it’s a huge tailwind. I think more and more advisors will be embracing the alternative asset opportunity as a way to differentiate themselves from their competitors, right, especially in a world where there are more, robo advisors whether you’re at Fidelity, Schwab, Betterment, Wealthfront, pick a traditional broker dealer platform, you’re gonna find a robo advisor capability. Why do I necessarily need to pay a human being to pick mutual funds in ETS for me and pay them more than I would otherwise get for next to free. So the way to differentiate is going forward in my opinion, is by understanding, exploring and introducing your clients to alternative assets.

Craig: The past few years, has seen a rush of startups in the alternative investment space, some of them we’ve had on our program, since a lot of advisors are interested in this these platforms and we get asked by our RIA and broker dealer clients all the time about alternative investments. So firms, the big ones like iCapital and CAIS and lots of up and coming firms like Halo and Luma, Simon Markets, Opto from Joe Lonsdale, Fundrise, with all this competition in the segment is getting crowded, how does all to differentiate yourself?

Eric: Well, first of all, I think there are a number of really good companies in that list. And certainly iCapital and CAIS have been at this for a long time. I think both of them have carved out and I’m not going to say niche, I mean, iCapital in specific very large market opportunity with what is known as the white shoe firms, Goldman, Morgan Stanley, Merrill Lynch, UBS, etc, where their bread and butter comes from qualified participant participation and some of the largest traditional capital call funds on the planet, the Blackstones of the world. For those who don’t know, qualified participants are individuals who have $5 million of net worth and therefore qualified to participate in in the Blackstone funds and and similar funds.

Eric: We’re really focused below that radar. Companies like Blackstone get approved by UBS’s Investment Committee and Morgan Stanley’s Investment Committee and Goldman Sachs’s Investment Committee. They’re enormous players in the space, trillion dollars and in assets under management. We’re really focused on private equity funds and venture capital funds, who are going to be billion dollars and below, and you’re not going to find them available on the UBS platform and the Morgan Stanley platform, and yet, these are some of the best fund managers in the world. They’re just doing it at a different scale that works for them.

Craig: Indeed, so you said under a billion?

Eric: In terms of funds, yes.

Craig: So if your company takes off, things are doing really well, you’re bringing in a lot of money, all these other competitors are bringing in a lot of money. Do you see this becoming possibly too successful if things do double, as you mentioned, to $25 trillion in the next couple of years, will that dilute the market and reduce the opportunities for outsized returns from alternatives?

Eric: I think private markets by their very nature are inefficient. And when you have inefficient markets, you have opportunities for outsized returns. That’s not to say that over time, they won’t become more efficient. I just don’t think that’s in the next 5 to 10 years.

Craig: So you’ve got at least 5 to 10 more years of runway before we have to start looking at how to expand the alternative space.

Eric: I think that’s right.

Craig: That’s good for you guys.

Eric: That would be good for us.

Craig: We’ve covered not as much as I wanted to cover but we’re out of time. Where can people find out more information about Alto?

Eric: AltoIRA.com is as good a place as any to go.

Craig: Fantastic. Eric, thank you so much for being on the program. Very informative and enlightening, especially for me.

Eric: Craig, thank you for having me. I appreciate it.

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The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com

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