Talk Your Book: The Alternative to Alternatives

Transcript from https://podmenti.com/t/bcee3fa9b23798c9

Today's Animal Spirits Talk Your Book is brought to you by Halo. Go to HaloInvesting.com.
Want to know more about all the structured note products they have there, as long as their brand new portfolio analysis tool called Aura. That's haloinvesting.com.
Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching.
All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Red Hull's wealth management.
This podcast is for informational purposes only and should not be relied upon for any investment decisions.
Clients of Rid Holtz Wealth Management may maintain positions in the securities discussed in this podcast.
Welcome to Animal Spirits with Michael and Ben.
Michael, can we call it
Jebon's paradox for structured notes because
Oh, then is that is that work or not?
All these new ETFs and buffers and
You find outcomes and such.
You'd think it would.
Constrain.
The actual structured note space.
But for a place like Halo, it's actually
It's grown still.
You just went full on AI brain. I love it.
Right?
Yeah.
Does that work?
I love it. It's great. We've talked to Halo for
A number of years now.
They've tried to make the the structured note.
product space easier to digest for
advisors for investors,'cause it is it it can be a complicated place when you get into the like the derivatives that underlie these things.
Right.
I think people understand.
What the strategies are trying to accomplish.
That's easy to explain.
Than what underlies them.
And as I mentioned on the show, that AI is perfect for this for helping understand
Wait, there's a lot of paperwork here. There's a lot to understand. What is this doing for me? I think AI can help a lot here.
It's like kinda like coding for investing.
To keep the A analogy going.
It was one thing to use whatever software they build to understand the different potential outcomes, but to be able to
Wrap that.
Wrap your portfolio around
A couple of products and see how they integrate with the rest of the pie is very, very cool.
Yeah. So they built a new tool that that we talked about in the show. We talked to Matt Radgowski, he is the CEO at Halo, and we talked to him before.
We get it all what's going on, how their advisors are using this, the
you know, portfolio analytics, which is a big thing, which I think AI is gonna help just a lot of advisors and the clients just better understand like what is going on here, what the attribution, how does this change things?
Um they're obviously taking a big part in this too, so here is our talk with Matt Halo.
Matt, welcome back to the show.
Thank you, appreciate you having me again.
Of course. Alright, so you guys have been on the show a bunch. I'll give you the opportunity to reintroduce yourself, but maybe I'll lead with this.
The
Derivative income space has been a huge grower in the advisor marketplace.
Buffers, overlays, a lot of the things that used to be exclusively home to the structured
Marketplace which
Which you guys play in.
Now one might think that there's some cannibalization going on.
That you guys have struggled as this new liquid rapper has brought these m these uh markets.
These
Tools to the market.
But we live in a post cannibalist
Cannibalization world.
The pie just keeps growing and
And everybody somehow there's more money.
And
Everything is just growing. Do I have that right?
Yeah, but a hundred percent correct. Yeah, no, absolutely. We we love it. You know, the attention being drawn to the space, right? Whether it's you know the the autocallable ETFs.
Option overlay strategies, of course, structure nodes.
uh you really is you bringing more advisors and the investors that they manage money for.
to the table, right? And so uh we love the attention, quite frankly. We think it's a
the right product set. And I'll use that generically, right? You know the the the the products that you you mentioned there
Each have unique characteristics, they have unique places in the portfolio, but to your point, we've not seen the cannibalization, actually. We've seen the opposite.
Volumes continue to grow, wallet share continues to grow. So bring it on, right?
I would've
frankly thought the same thing because these products are getting a ton of
Interest from people.
Is
Is it just do you think a big part of it is just advisor use? Is it because we have these whatever seventy million plus baby boomers and they have a ton of wealth and they're looking for more
products like this, what do you think is the reason for the resiliency of these structure note products?
Yeah, I'd say a combination, right, of secular trend in terms of investor behavior looking for
Definition of outcome security, right, as more
money, right, is being put to use post retirement. I think the need for security there grows. I think the newer investor though as well, the younger investor
is seeing earlier on their interest in protection there as well.
So you have just, you know, secular trends and then you have
uh access to the product.
Right. So the the ease of purchase and management, you know, through platforms like Halo and others, I think is is very important. Right. So it's a combination of technology and access, investor demand all coming together. Uh and when you can
Bye.
You evaluate buy and manage the products easier as an advisor.
Uh, it's something unique, right, from a story perspective to bring back to your client. I think all those market forces have really created that resiliency that we're seeing there.
All right, I'd love to know what is new in the world of Halo these days. What are you guys what's keeping you busy?
Yeah. So we are, you know, I mentioned technology and I think
Technology and analysis, I'll say decision support for the advisor, we think is absolutely critical.
Uh, we are super excited. We've launched uh a tool called Aura. So halo, Aura. Great. Uh
uh, you know, our marketing geniuses there, but really the the idea of Aura is to illustrate the impact of structured notes on a client's portfolio.
So instead of kind of trying to decide in the abstract, right, what impact is this growth note, this income node.
uh level of protection, what impact is it having on the portfolio.
We can now show empirically, right, here is the
uh the impact improvement or quite frankly, you know, if it if it doesn't show its value, we'll illustrate that to the client. But you know things like impact on expect a return.
a negative return frequency income that can be generated.
Right, you've uh you give Aura your current portfolio.
Uh you add notes to that portfolio, and we will actually show you uh through a Finra reviewed output, here is the impact for you as an investor.
uh based on that node allocation. And so
You think about it in that kind of
you know, TAMP investment proposal context, right? So you can actually
show the client why you're buying what you're buying.
Uh, you can go into the lab and figure out what structure types are best for your client given their objectives. And so
We're super excited to get it into market. We've actually just launched already, and this will, you know, I don't want to stray into the power of AI from a development perspective, but you know, we've been able to really iterate quickly. We actually just launched
uh the the version two of the tool which moves from
input and analysis to actual allowing the advisor to
share what is my objective
Yeah, what is my horizon?
What is my outlook on the market? And we'll actually begin to curate notes for them in a more automated way. So super excited about it. You kind of got that before I did. I was gonna ask.
These products that because they have rules, there's a lot of
Stuff to read, there's a lot right, there's a lot of fine print.
That's perfect for AI, right? To to sort through
put them together and and I guess the thing is you someone comes to you with a portfolio of these, you can you can analyze them, but also if you say, hey, we're putting these three or four different products together, here's what the output is. Is that the idea that it it does seem like a perfect marriage for AI to use this stuff.
Absolutely. Right. And you think about the the number of, you know, combinations, right, whether it's
uh underlier protection level, duration, all these things.
You used to have to kind of you know feel your way or guess your way or use shortcuts to get to product design.
you power AI, right? You can actually calculate again the combinations of those things.
And really uh, you know, again, analytically decide, is it the right product, right? We don't want the answer to always be, you know.
allocate to this note, right? You we want to make sure it's objective, but it does, you know, to your point, then really allow us to to to analyze
you know, massive amounts of data and information, sum that up for the advisor, and then present it in a packaged form that we think
Again, will really change the way uh these note you know notes are allocated to within client portfolios.
One of the things that I think is really interesting about what you guys have done in the structure marketplace is the technological aspect of it.
Making it really easy to with the
Clicks.
Few clicks of a mouse.
see uh all sorts of different strategies.
You can
Do downside protection.
Um
Which is obviously a conservative approach.
You can do you could like there are aggressive strategies that you can use.
Right. So talk about all the sorts of different things that you can do.
With the platform.
Yeah, so you know, participation, right? You talked about you if your focus is on growth and upside. And so, you know, we we often talk about you know uh equity repair strategies with structure notes. And so when there's been some dislocation in the market and you're looking to
uh to repair, right, that equity side of your portfolio, you can seek out higher participation. So
Yep.
pick your broad based underlier, whether it's an index, ETF, you know, individual security if you'd like.
And you can actually have participation rates that go above that hundred percent level. And so
If you are again uh trying to generate growth in your portfolio, if for instance, you know, back to the tool uh we were talking about in aura.
If you have a bullish outlook on the market.
uh you can in fact capitalize on that bullish outlook by taking upside participation through the structure notes. So it's
It truly is a, you know, a very, you know, it's that Swiss Army knife of investment products, right? In that
You can you can meet right the investment
objective that you have in that moment given your view of markets, uh, and tailor that solution.
Yeah, pretty nicely. Uh and so
It it's really, you know, from a mindset perspective, trying to get the advisor to see
You know, there is always room for the note inside the portfolio, the type of note.
You use
Right, and to your point, my uh you, Michael, the characteristics of it should in fact change over time given
Objective, performance, outlook, all those things.
So you said equity repair strategy. Tell me a little bit more about that. That's a new one to me.
say you have a certain asset class or sector exposure where
You you either have an extremely bullish uh outlook or you've had sudden negative return impact, right? So mean reversion would say, yeah, if it's going to go back to its longer term historical performance, there's a possibility to repair, right? That equity down, you know, that downdraw you've had by allocating to a note.
that has some level of downside risk management, but also has a higher upside participation. So you're repairing that equity down, you know, that equity downturn through the use of the note.
Hence the repair.
I'm curious about some of the other strategies that advisors are using to
One of the ones that we've had a ton of people come to us with is just hey hey, I have this concentrated position.
I wanna stay in it. I'm a little nervous about it. How do how do you have
structured products and options that can help someone with that type of situation. Cause that's something that we're seeing all the time now where people know
Listen, I know that it's risky to have so much of my wealth in this one position.
Um, but I wanna be intelligent about how I manage the risk around it or how I sell it or how, you know, I don't want to get out too soon.
It's it's a huge worry for people. Like they they don't want to make the wrong choice.
Right. So how do you guys help someone in that type of situation?
Yeah, you know, it's funny, we had uh for a period of time
advisors came to us with that very challenge, that very problem. Well we'll call it an opportunity, right? If you have enough concentrated wealth at a position, you're probably in a in a decent spot in
Yeah, the question we got time and time again was hey, can I use the structured node?
to manage that concentration risk and
The short answer, quite frankly, with the note is no, right in that if you're buying the underlying, you're compounding it, right? But
What we can do is using notes and a combination of other tools get you to a good spot. And so we went out there into the market and uh looked for uh partners to help us manage your the those types of issues. And we came up with two strategies that could that we can use to to help. So there's the variable pre-paid forward.
Right. And so where you can use derivative based strategies to effectively collar that position. Uh, we have a partnership with Morgan Stanley that's been extremely impactful on that on that uh very issue. And so
Identify the stock, right? You can put you put your protection level in.
Cap your upside, of course, but what comes along with that is
The ability to borrow against that position.
So you can actually free up capital and then what we tend to do is
With with with that free up, we can uh you purchase a more diversified investment strategy.
Using structure notes, right? So you have that downside protection, but you're now in a broad based index instead of a single concentrated position. And so
The variable prepay forward has been a great ad to our suite. We call this our advanced well solutions. And so
Beyond the structured notes in through partnership with Morgan Stanley, you can bu provide variable pre uh buy very variable prepaid forwards.
And then we have a partnership with a firm called Derivity, which would be, I'll say, for smaller balance uh clients that have concentrated stock, but still have that same issue.
that wanna use an options based overlay within that within an advisory account. And so we've two
companion tools to the structure note.
uh to you to manage that concentrated wealth.
And then again, we look to the structure note to provide.
that diversification with downside risk, uh, once you've addressed that that concentration issue there.
Matt, I have a few questions on the variable prepaid forwards. Ben mentioned that's been a
Very hot topic for advisors as people's wealth has ballooned and
Google and Apple and and the rest of these these giant names
So all right, a client has ten million dollars.
And
In uh an Apple.
Uh, they have a thirteen million dollar portfolio, so obviously they are heavily, heavily overexposed to a single name.
And they want
To diversify.
Can you walk us through how this works? So they they borrow
They get seven million dollars in cash freed up.
Their upside is capped.
The downside is protected.
And what, then they start to
Pay down.
they start to like sell down the individual holding Apple in this example or whatever the case may be. Like how does it work on a go forward basis?
Yeah, so really on a go forward basis, it is, you know.
Quite frankly, it's a risk mitigation strategy, right? Because you are, in fact, you know, you like you mentioned, you're creating a floor and you're creating a cap, right? You know, in terms of the shares you deliver there and and you set those two parameters.
And you really what it does is um you know it um allows you to there's a tax play there, of course, right? You defer the taxes on that, uh because you're not uh you know, you're not selling that security until that final future date when you allow for that.
VPF to expire and you get the cash, right? So you can borrow at so far. In some cases, the the the rates at which you can borrow against are pretty attractive uh, you know, currently through you know through Morgan Stanley or there's others that provide them. That's just our partner there. But basically what it allows you to do is again, lock in that
that upside and downside for a stated period of time, you know, typical duration of the of the of the VPF is
thirteen to eighteen months, and then you can you can roll it forward uh if you so choose.
You don't have to pay the entire balance back. You could take out another you could roll the contract.
That's exactly correct. Yep.
You can roll that contract forward. Is that what advisors are typically doing? Or I'm sure I'm sure there's a million different uses. That is exactly what they're doing. They're more n you know, normally they're rolling that uh you they're they're rolling that contract forward. What's the cost of this? Because there's no free lunch.
You mentioned like this that you have to you have to literally pay for this. So it's it's a it's a great tool.
You have to unlock liquidity from your existing shares.
you're not all the way in on a stock that has treated you very well and who knows what the future holds.
But there's
There's a price. What is it? You said Sofa Plus?
Usually yeah, to you in terms of the borrowing rate.
Yep, on the security itself.
I'm curious what other strategies people are
are administering these days because obviously we're in a bull market, right? Things are going well.
Uh yields a little higher now.
Is it
Are people trying to put their foot on the gas pedal more because hey, things are going great. I'm willing to take risk, or is it people are nervous, a little all of the above? Like where where is like the sentiment check in terms of your halo clients and what they're trying to do these days?
Yeah, it's so funny. And I'm smiling because it literally is the gamut. It's I've never seen well, I shouldn't say never, rarely do have we seen or have I seen a uh situation where the advisor base
is so disparate in terms of their point of view. I mean we have advisors that are
All in, right? You know, the promise of you know technology advancement, AI, other things that are gonna fuel this growth.
Into the distant future, right? So they are pedaled to the floor. We mentioned some of those growth strategies.
And then you do have the other side though, where you have a constituency that is
Super nervous about valuations and where we are today. From my perspective, one of the biggest advancements that I'm excited about as far as use of product is.
Yeah, we used to have, right, like in terms of
predominance of strategy was in the structure notes side was on the income side.
So really you're worse up basket income notes to generate yield.
We've really seen diversification of the product set, right?
into the absolute return notes, into the growth, you know, pure growth notes. So you're seeing now the ability for an advisor, whether it's their own view of the market.
Or their clients via the market.
Some of them would have
situations in which same
Advisor
two different clients, some buying highly protected income strategies.
others buying you know pretty aggressive growth. And so
Not to bring it back to Aura, but for us, right? Like giving the advisor the ability to say, Hey, look.
Express your view, right, in the form of market outlook.
concern, et cetera, opportunity.
we'll come back to you with notes, you know, that might be of of fit. And so we're really seeing a uh a a shift in
the advisor behavior in product utilization, which is
really encouraging to us, but just more broadly from a market perspective, we have probably as many opinions as we have number of advisor clients in that.
You know, some are some are super excited and think, you know
Again, AI is gonna fuel uh fuel the next ten years of growth.
Others are, you know, just, you know, skeptical from a valuation perspective. And the good news is we can we can help them both out um in a way that allows them to continue to participate, but but manage that risk.
Obviously it
Depends. I'm sure there's no data on this.
I do wonder the investor that has spent the last five years
Buying.
Downside protection and capping their upside.
I wonder if that person at this point is just pot committed.
And listen, if you've
Let's say that you kept your downside at
At fifteen percent
Cap your upside at seven percent.
I'm sure you're fine, right? That type of person that's nervous is probably very happy.
Getting that seven percent, whatever it is. But I do wonder at some point.
And this is obviously late cycle Michael.
Oh that rhymes.
Talking here. Uh at if at some point they're like, All right.
I don't need this anymore. No more downside protection.
I'm sick of capping my upside.
That's probably the very moment at which they need it most and it turns against the right. I mean not to not to be tongue in cheek about it, but the other thing too, though, I think that's really important and again why we are investing so much in
the education and the tools and the in you know that surround the product is
making as yeah, making you as is as sure as we can be that that advisor is communicating to the client.
Exactly what is happening.
And that there's an expectation alignment and therefore when those results are seen.
they can confidently juxtapose which with the unprotected version of that product.
And allow for the client to decide. But I think as long as you again are you can be overly conservative for sure, but I do think that with the client brought on that journey the right way, understanding what they're giving up, giving up, but for that comfort and security.
Again, I think just investor behavior in general uh is moving towards that.
I'm willing to give up and and
Yeah, there are studies out there and we can you know, I I I don't have them at my fingertips, but that have talked about that that sentiment shift.
around I'm willing to you know investor base willing to give up upside for that downside protection.
I think it's something that the advisor absolutely has to be.
ready to address and it's the job of
of our team and our tools to say look
We you know w we are comfortable showing what you're giving up. There's no free launch, comfortable showing what you're giving up, but again, for that comfort of knowing.
look, if something catastrophic was to happen, you still have that protection out you know in your pocket.
One thing that's cool about these products.
that I spoke about earlier was
How you're able to customize them to each
different clients personality.
That being said, there is something to to be said about scale leveraging your time and if
Something is good for one client, it's probably good for at least a few more. Talk about the operational aspect of this, how it
connects with our systems uh of record whether it's
The cust I guess let's start with the custodians as as an example.
Yeah. And so you we have direct connectivity to the custodians. We also have access through aggregs that are out there in the market. So we can bring those.
you know those uh account details into Halo, right? So you have that centralized
control center. So the basic information around life cycle, cash flows, maturity dates.
call observations, likelihood of call.
Likelihood of breach, right? Uh you know, approaching cap, our control center, our lifecycle brings that all to the fingertips of the advisor.
And so they can see it all there. Now, where have we invested in to make it even easier?
Uh, there's a couple of things technologically, right? So that aggregation service, so you can start to see
uh all those details in an easy way across your accounts is great.
Uh, we've launched a lot of management tools so you can start to see
uh cash balances that need to be put to work with your within your client portfolios.
You can set rules around product type concentration, issuer concentration.
So making that cash flow management easier.
Is something that we've invested with on the platform itself. And so going back to the TAMP analogy, right? Rebalancing and reallocation tools.
We've invested in the platform such that we're making that process a heck of a lot easier.
And then from there, you do have as well, we've we've talked, I think on the last last time I was on, we talked a bit about the separately managed accounts.
So we do have access
If you love the product and just don't want to deal with it anymore.
Yeah, we do have professional money managers you can hire to do that for you.
Or what's happening in our large RIA clients today is
There's CIO is effectively building SNAs that can be used
across their client base.
So kind of centralization of note decision making.
So you guys obviously have people come to you with more traditional portfolios and hey
Structure notes make up.
Five percent, ten percent, twenty percent, whatever it is.
How does that integrate with your aura?
system in terms of showing people what they're getting out of how it interacts with this other part of the portfolio.
Yeah, so it's great. I mean we quantify for them, okay, you know.
Here's your standalone portfolio now, and and here's its characteristics from a modern portfolio theory perspective. And then here is the change, right? In
Expect a return, median return, standard deviation.
Downside risk uh downside return frequency, sharp ratio.
All those things are quantified within Aura and then displayed to that advisor. So they can literally see, okay, I've added this note. Is it doing what it's supposed to be doing, right? Just given the you know, given simulation based outputs, right? But
It actually quantifies again for that advisor that is that note an appropriate fit for that client.
So I think best interest, fiduciary, right? Like
We wanna make sure that from a compliance perspective.
any product right in the wrong hands, you know, designed f with flaws can can lead to bad outcomes. We want to again minimize the likelihood of that with the advisor base that we're that we're working with today.
All right, so there's a lot of moving parts here.
Even though it's not
The most complicated thing
There are definitely
things uh it's a learning experience.
So what would you say are the most common
Ugh, I didn't realize that thing that you hear from advisors.
Oh gosh, you know.
Um
What is the most common? That's a great question. I think, you know, I think a couple of things. One is
you understanding on the callability side, right? I think you know the like the likelihood of of notes being called, I think is something that you know they need to to to definitely learn about.
Um the
The timing, right? So there is
You know, uh to to me, right, there's a benefit to the product always.
Um
If you are opportunistic and you have
your cash, uh you have cash available to you, you know, dry powder, so to speak.
the impact volatility, right? And spikes in volatility can have on the pricing.
I think is something that is you know
As much as we educate and tell the advisor.
If they have the ability to be opportunistic, uh and can you know I'll say kind of dollar cost average in
their understanding of that impact impact of shorter term volatility, I think is something that
grows on them as they use the product more.
As much again as we talk about it, right? The you the you're articulating those couple things I think are are, you know, important to that investor. I think those would be probably the biggest. It is work, right? It is work. It's a zero zero coupon bond. I would say
The other thing too is uh orienting them around the fact that today at least
And we're trying and working with the custodians.
the visibility, the way these products show up inside a custodial statement is not where the industry needs to be. And we're working on it and we generate reports within the platform, but
There are questions they get from their clients, right? When they look and see, okay, why do I own
Why why is you know five percent of my portfolio in a
Yeah.
Morgan Stanley or JP Morgan or Bamel Bond, right? Not realizing there's an equity underlier to that, I would say that's another big, yeah, another big aspect of education.
You know, it's funny you mentioned that'cause I was just about to ask
Earlier on
During our discussions and certainly
A decade ago, this is probably like the number one
Asked question was about counterparty risk.
People seem to be much less concerned with who is on the other side of this these days, and thank God.
Yeah, I you know, and I do do not mean to discount counterparty risk at all. It is something there. And I think if you're
diligently using the products, you want to make sure you you do you utilize multiple issuers. Not meant to discount the risk, but quite frankly, I mean if you have, you know, if you have a situation in which
an issuing bank is defaulting on their structured node.
I can assure you there's something that in the capital markets that has gone wildly wrong and we're probably
Yeah, unmult fighting that that that that issue on multiple fronts.
Um, we still though, and we've talked about this in the past.
We are still very much interested in supporting
uh more issuers entering into the market.
So leveraging the hedging capability separating the note from the hedge.
Right. Yeah, you've heard
Our co-founder, Jason Barcima, talk about non-bank issuers.
I think you're gonna have more banks that come into issue. I do think you're gonna have non bank issuers.
And yeah, we are at the ready there with the technology infrastructure to support those programs.
And I do think as demand grows, I think what will happen first is supply will become constrained before
counterparty risk becomes
a you know, I'll say a marketability issue and and we're at the ready to to help on on that front for sure.
That was another bull market Michael one, right?
Well is that fair. Anything else you guys are working on these days in terms of helping financial advisors?
You mentioned some of the defined outcome ETF strategies out there. We've observed, right? We've not jumped in. Um, that is something I will tell you. We've gotten a massive amount of uh interest and engagement from
other asset managers, the issuers themselves, and our advisor clients. I would expect that you you'll see
Quite frankly, you'll see Halo product in market here at some point in the future.
Uh we definitely feel there is
Improvement.
that can be made in terms of the buffered ETFs or the autocallable ETFs that are out there.
Uh and so we're being very quite frankly diligent and cautious about how we would enter, but
That is something that we're working on as we speak. And then the other thing, you know, going back to Aura, you were building on that AI infrastructure. You'll see more generative output that can help guide that conversation with the client. You know, we're excited about that. That should be uh
you know, later on in this year or early into next. And then you we talked about the supply side.
Uh so tokenization of structure notes.
Uh, you know, we've done some
Some work there. We have a partner in a group called Iron Light.
We've built out a proof of concept and you know in the lab, we've tokenized structured notes. We do think that's something that
longer term will create
Yeah, just as it is with other asset classes, quite frankly. There you there's uh I think there is a benefit in that in that structure, no worlds for tokenization, but uh
Yeah, again, it's you know the more broad trend around you know tokenization of assets. We do feel it will come to the structured oath space and we're ready there with infrastructure to help support it. I know you asked for one and I I threw three at Jeff.
Sorry about that, but uh yeah, we got some some some deep things going on here right now. We're we're we're super excited. All right, if we want to have advisors, learn more where we send them. So haloinvesting.com.
Perfect. All right. Thanks very much, Matt. Thank you. Appreciate it.
Okay, thanks to Matt. Remember to check out haloinvesting.com to learn more if you're an advisor. And then email us animal spirits at the compoundnews.com.