Join host Ben Fraser in this riveting episode as he sits down with Kirk Chisholm, Principal of Innovative Advisory Group and host of the Money Tree Investing podcast. Discover Kirk’s journey from brokerage houses to pioneering self-directed IRAs and alternative strategies. Hear about his client success stories, the unique investments you can make within your IRA, and Kirk’s insights into the broader economy.
Connect with Kirk Chisholm on LinkedIn https://www.linkedin.com/in/kirkchisholm/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of your favorite podcast, Invest Like a Billionaire. Today we brought on a really fun guest, Kirk Chisholm. He is a big time podcast host, Money Tree Podcast. He definitely wants to tune into this episode. So Kirk is actually currently a financial advisor and he runs this podcast, but he’s got a really unique approach to investing and is heavy into alternatives.
And so he shares in this. Interview his story kind of starting in the brokerage houses of 20, 30 years ago and making his way eventually to start his own firm into really focusing on investing in alternatives. So using a self-directed IRA, so this is something you’re not familiar with, definitely wanna check it out.
He also shares some of the alternatives that he’s invested in. Some of the cool stuff. That they’ve done for their clients and really just how the whole industry works and why he’s shifted to this. At the very end, we hit on some really cool just current event stuff, what he’s seen in the market, where he sees things going and his thoughts.
He’s got some great kinds of macro thoughts. So I definitely wanna tune in. And, hey, if you’re enjoying this podcast, we always appreciate your reviews and sharing this with a friend or two and hope you’re enjoying it.
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Hello, welcome back to the Invest Like a Billionaire podcast. I’m joined today by Kirk Chisholm of Innovative Advisory Group and really looking forward to this conversation.
Kirk, you just had me on your podcast a few weeks ago and really enjoyed the conversation. Your podcast is Money Tree Investing. You guys definitely gotta go check it out. If you’re already listening to Kirk. And just really loved some of the conversations we were having, even after the recording was over and just thought maybe I should get this guy on our podcast and just talk about some of his stories, his perspectives on investing.
And Kirk, you are an actual wealth advisor, so you’re doing the traditional path of this, but you’re doing it in a very non-traditional way. And so just really excited to chat with you and thanks for coming on.
Kirk Chisholm: Yeah, thanks for having me. This is gonna be a lot of fun.
Ben Fraser: So just for those that maybe aren’t familiar with you give a little bit of your background and how you got to where you are and how you view the world differently than maybe most financial advisors.
Kirk Chisholm: Yeah, great. So my background is probably not unlike a lot of others, although I think the timing really played a big part in it. I was in college. When I was in college. I interned at a bunch of different firms and decided this is really what I wanna do. It was at the time, it was the late nineties and this one, every, everything was easy, right?
The markets only went up. And so I interned at a few bigger firms and a lot of the older guys were like, don’t ever get into this industry. No one’s ever gonna be able to compete with discount brokers. And I’d decided I really just enjoyed it and wanted to do it. I started at Pain Weber.
My first month of being in the business was December of 99. I pretty much experienced three years of the market just going down, which is a great time to start. I’ll tell you. Everyone was a financial advisor in December of 99, and by the end of the three years, no one was. Which was in many ways a good thing.
If you can get through the hard times, everything else is easier. But I will say that, if I had started in the mid, early to mid nineties, my experience and vision of how things work would be much different. And for people who just started after basically March of 2009, in this industry, you’ve not experienced anything hard.
Going through the early two thousands, going through 2008 those were tough periods for people in our industry. And what it did was it impressed upon me very early the value of risk management. Now, risk management is first and foremost a part of our culture here. And we have a concept we call risk management first, which is most people look at performance first and they say, oh, that performance is great.
Let’s do it. Then they do their risk management. We do our risk management first. If it passes muster for risk management, then we figure out if it makes sense from performance. But if you do it the other way, the way most people do it, you end up getting convinced. You convince yourself, oh, this is a good investment ’cause the performance is good.
Ben Fraser: You got confirmation bias at that point. So you’re just trying to look for ways to confirm your previous
Kirk Chisholm: held release. Yeah, exactly. Confirmation bias is huge. So we try to nip that in the bud by doing risk management first. I worked at Pain Weber for a while.
They were acquired by U B S, went to Smith Barney and then struck out on my own in oh six and then really realized that what we wanted to do was very different. So we specialize in alternative assets, held in retirement accounts. That’s how we started the firm. We’re the only advisors that do this.
And it was really interesting and fascinating to me all these cool and interesting things you can do with retirement accounts that people aren’t even aware of. So we did that for a number of years and then we started expanding to other areas ’cause we had some success there and we got our firm subsequently.
Ben Fraser: Very cool. So you said a lot of things there. I want to get back to maybe in a little bit, but first for those that maybe are less familiar with, Self director, retirement, can you talk a little bit about what that means and how you can invest in different types of assets through retirement accounts?
Kirk Chisholm: Yeah. So when Mitt Romney was running for president, it came out that he had $104 million i r a, right? Which at the time was huge until we realized that’s not one of the biggest that’s actually below average. So the g a O came out with a study. In, oh, maybe it was 12 to 11, 12, which actually went through the statistics of re of these retirement accounts, and I think there were 318 retirement accounts that are above $20 million in value.
Do you know what the average balance of those retirement accounts are?
Ben Fraser: So there’s 318 over 20 million. So the average of those. You gave it away. I’ll say 200 million.
Kirk Chisholm: $257 million is the average. Oh my God. So you can imagine how big some of the largest ones are. And this was a while ago. So Peter Thiel, it came out that he is, I think he has one of those over a billion dollars in his Roth.
I r a. He invested in things like Facebook and PayPal and a few others, which is, you know why it was large. Imagine that tax free a billion dollars tax free. You can invest in tech. Yeah. Go. Government doesn’t like that, right? Where they can’t touch it. A year ago they, or a few years ago there was, there were hit pieces out on these wealthy people, it’s hit pieces.
’cause they’re going after them politically and they’re saying, we’re gonna get rid of this, we’re gonna stop this. Really you’re gonna stop this for everyone else because of one guy that you don’t like. Go pick another battle. Like the rest of us are gonna get the short end of the stick. But yeah, that was it. They picked out a few wealthy people and said, we’re gonna come after you. And how they got their tax data is another question altogether, which I guess came out recently that some of these tax softwares were sharing information with tech companies and the governments kinda okay, I guess the government already has it, but still, so it’s not something the public should have access to. So yeah, I love the self-destructed space. We get in it because it’s fun, it’s interesting. It allows people to invest outside of the stock market. Especially in times like this where the stock market’s a little bit iffy and people are concerned.
What we do is a differentiator. What we do is invest. We have people who come to us and say, Hey, I wanna buy this force in my I r a. Great, we’ll help you do that, right? Perfectly allowed. Or rental property or private company stock or tax liens, whatever it might be. You can do virtually, you can invest in virtually anything in your I R A.
There are a few exceptions. You can’t invest in S Corps life insurance on yourself or collectibles, but anything else you can invest in and there’s some rules around it, but effectively, I would say less than 6% of the public even knows this exists.
Ben Fraser: Why is that? That’s, that, that’s something like when I learned about this a few years ago, It was shocking to me.
’cause it’s, it seems to be common now the only thing you can do in your IRAs is just go buy mutual funds or stocks or bonds and that’s about it. You just hope and wait till you’re 62 and a half to be able to have enough to retire. But there’s so much you can do.
There’s some restrictions if it’s like an employee retirement account and you can’t. Moving from there. But if you’re switching employers, you can roll into a self-directed, or if it’s not employer contributed, you can have free reign. So why do you think it is that so few people know about it?
Kirk Chisholm: I’m gonna put on my tenfold hat here for a minute and give you the, oh man. He came with props. Look at this. I came prepared. Now I do a lot of shows and I use this a lot to illustrate a point. So if I’m wearing my tinfoil hat, I’m thinking the government’s out to get me wall street’s out to get me all these people out to get me.
They’re not telling me all these secrets. That’s what you hear. That’s what marketing’s all about. Oh, sure. However, reality is a little bit different and I can’t say whether that’s true or not because I can’t read people’s minds. But if I was a logical person, what I would think is Wall Street is not out to get me.
They’re not out to keep me away from the alternatives. Think about it this way, there are 50 companies that provide custody for alternative assets in retirement accounts 50. And you’ve probably not heard of any of them. Sure. You’ve heard of JP Morgan, you’ve heard of, Morgan Stanley, Merrill Lynch, bank of America.
You’ve heard of all these companies. The reason is that, if I think of the most logical approach, These other companies have enormous budgets and they’re willing to spend it, and their job is to educate you about investing, so you invest with them. They don’t have a budget to teach you about self-directed IRAs that they don’t provide.
They also don’t provide advice on buying shoes. Or, what rental property I should buy. That’s not what they do. They sell stocks, bonds, and mutual funds. So their job is to educate you on stocks, bonds, and mutual funds in the best way possible. Sometimes maybe a little misleading, but regardless, what they’re talking about, there’s no incentive for them to educate you on.
Oh, by the way, you can also take money out of your Merrill Lynch account and go put it over this other place and invest in rental property. There’s no reason for ’em to do that, right? These other companies that do self-directed IRAs, they don’t have big marketing budgets because they don’t make, they don’t mint money.
Like these brokerage houses. These brokerage houses mint money, like it’s going outta style. These other companies, they have a small margin of profit and they’re good companies, but they’re not minting money like the rest. So their marketing budgets are a lot smaller, so you’re not hearing about them.
They make up. I think the latest statistic I think was 4% of all retirement accounts are in the other category or alternatives, 4%, six or eight probably.
Ben Fraser: Which, if you’re including probably a Peter Thiel account, which is an alternative, right? Just buying private company stock. There’s some big numbers that are, even included in that 4%.
So the average Joe, if you exclude the outliers, is probably. A fraction of a percent. It’s just so small. So no, go ahead. Finish the thought here.
Kirk Chisholm: Basically, if you think about it that way, the reason you don’t know about, it’s because no one’s talking about it.
The people who talk about it, people like myself, you got some newsletter writers, you got people that sell this stuff and you hear about it because someone is selling something. You should do this. You should put money aside. You should put a, you should put an LLC in your 401k and you can shield it from the government.
I hear that one a lot. You don’t need an L C in your 401k or IRA. You don’t need it. You can have it, but you don’t need it. But they’re selling you the L C or they’re selling you the 401k wrapper, which is why they’re telling you about it. I really don’t care if you put an alternative in your IRA or you put stocks.
I really don’t care. That’s not my job. My job is to help educate people that it is possible. And if you wanna do it, great. If you don’t, I don’t really care, right? My job is not to sell you anything. I’m not a, I’m not a sales guy. The way I look at it, look, you have a great opportunity to utilize this in a way that benefits you.
It doesn’t work for every asset, and it doesn’t work for every person, but there’s a lot of great benefits if you do it right, like Peter Thiel did. Mitt Romney, I think actually messed up. I still don’t understand why he did it. Because if he did that outside of the retirement account, he would’ve actually had better tax treatment.
But there’s a lot of things like that just, when you really think about it, like you have to think about what is this gonna work for you or is this a shiny object that you’re just trying to chase down? Because most retirement accounts in the self-directed space that are open at these custodians are empty.
There’s nothing in ’em because people get excited about doing it and then they’re like, alright, what am I gonna invest in? And that’s where it stops. But then crickets, they have nothing to invest in. They get excited about the idea of doing it right. And then it comes to it. It’s like now what? It’s like, how about you come up with the investment first, make sure it’s a good idea, and then figure out how to put it in there.
Which is, most of the people we get are Hey, I wanna buy this rental property. Can you help me? Absolutely. I can help you. That’s the kind of thing that, that, that really we’re chasing down.
Ben Fraser: I love that. It’s funny from my side as an operator that has investment offerings, working with self-directed IRA companies, they’re doing a great service.
I love that this exists, but because of compliance reasons, they’re just a custodian. They’re not advisors. They can’t promote you. They can’t say, Hey, here, go talk with Aspen. It’s. Here’s your account and you gotta go find it. So you’re being this bridge, and showing what’s available, what’s an option, and helping facilitate that.
Which, which is a great service ’cause you’re a fiduciary. You have, client suitability standards and other things that you have to abide by that the custodians don’t and can’t, share. So take a step back ’cause I think you I think really interesting to hear what was the.
Kind of critical point for you to make the decision like, Hey, I want to do more alternatives, right? Because that’s very contrarian thinking. As much as you or I are in this world, in space, we see it all the time. It doesn’t seem abnormal, for most traditional financial planning, it’s stocks, bonds, mutual funds, and that’s all it is.
How did you get exposed to it and what was the kind of critical point for you to realize, wait, why am I not doing more of this? And then it actually became a key part of your business. That’s pretty big. Transition that I wanna hear the story about.
Kirk Chisholm: Yeah, it’s a great question.
So this actually started back when I was at Smith Barney. I had a client come to me and say, I wanna buy a company inside of my retirement cap. And I said, I don’t think you can do that. He’s I’m pretty sure you can. And okay what, how are you seeing this? Because they don’t teach you this, right?
This is the point. It’s not that I’m against him doing it, it’s that I didn’t even know it was possible. He mentioned it to me and I went to my manager. I’m like, Hey this client wants to do this. Can I do this? He’s no. It’s not possible. I’m like, no, I’m pretty sure it’s possible. I looked into it, this and that.
He’s it’s possible, but you can’t do it. And I was like, oh, okay. Now I get it. He is lying to me and saying, oh, you can’t do it. Okay. All right. I get that. The point taken. So I still helped him because he was going to do it and it made sense. So I helped him through it. I walked him through it, I talked to the custodians and, he was a client, but he was basically taking money out of my hands to go put it in this.
And I was like great. It’s the best thing for you, so if you wanna do it, great, I’ll help you. So we talked to the custodians. I did some research on the concept. Said You should think about this, you should think about this. So I really got to know the topic and the strategy. And he went and did it on his own and worked out for him.
And I got really intrigued. ’cause then six months later I had another client say, Hey, I want to take some of my money and invest it into private mortgages. And I was like, okay, I don’t know much about that, but tell me about it. And he is yeah, I’m getting 16% and loaning it to some person, do an X.
I’m like, okay, great. Here’s what you do. And we just started, I started talking through the process of how to make the right decisions. And it just got me thinking. I’m like, wow, this is such a great strategy and no one is doing it. They don’t even know you can do it. And I had a lot of clients invest in real estate.
It’s Hey, how about you invest this real estate in your retirement account and you get all the tax benefits. So we started going down this road and then right around 2007 I met up with my current business partner and we started talking about this. He wanted to do the same thing I did, which was how do we invest in real estate?
’cause we had access to a lot of good deals, even. In the middle of the bubble, we were still getting access to some great deals. And so we started looking at, we’re like, why don’t we just do this? Like, why don’t we just team up and start to provide advice for people in this market?
’cause there’s tons of people who want it. No one, legitimately there are two other advisors who are in my opinion, competent enough to do this and they don’t want this business. Like they, they’ve told me like, we don’t tell us, don’t tell anybody about us, like we’re doing it for existing clients that they asked.
We’re not doing it for anybody else. We don’t wanna do this business. So we’re the only advisory from the US that I’m aware of that actually does this, provides advice and is a fiduciary. We’re not selling anything. So we took the concept and said, this is great. Let’s become the experts, the foremost experts in this area.
And so now when people wanna do stuff, they come to us and say, Hey, yeah, you can do this, or you can’t, and we’ll talk ’em through it. And if we can, great. We’ll work together. But the, but we find so many creative people that are doing really interesting things like fishing rights, airspace rights, water rights.
You’ve got cows, horses, you’ve got all sorts of weird, interesting stuff. I’ve come across over the years, and I love the idea generation that it gives me. So if somebody wants to buy a horse and they’re irate, great. I’m not gonna sell it to my other clients. ’cause this one client is an expert in horses.
I’m not an expert. But I’ll help ’em facilitate the transaction because to me it’s if you’re making a hundred percent return on your horse investments, who am I to tell you to invest in mutual funds or ETFs or stocks? It doesn’t make any sense. Somebody’s a real estate investor and they do it for a living.
Why am I gonna tell you to put your money in tech stocks? And Warren Buffett says this and Peter Lin said this investing, what? Right? Yep. Pretty simple. So it comes back to your earlier question of traditionally if we look at traditional risk management, portfolio management metrics, what typically you would see is you should have five or 10% in alternatives.
’cause they’re really risky. But are they risky? So we’ve had conversations with regulators in the past where ’cause they said how much of your assets are in alternatives? This is something I didn’t know 10 years ago. And I was like, I don’t know, like 40, 50%. And you could have heard a pin drop like their mouth was on the floor.
They couldn’t believe we had that much. Oh my God, isn’t that risky? They said to define risk for me. Is Enron risky? Is WorldCom risky? Is a i g risky? Are all these companies risky? Yeah, they were extremely risky and they were publicly traded. A i g was one of five AAA rated companies, and yet they had problems.
So is that risk or how about the rental property down the street that I can walk up and touch, I can go to the Registry of Deeds, now I own it. I can talk to the tenants, know if they’re good tenants. Is that more or less risky than WorldCom? Enron, a i g, Lehman Brothers, bear Stearns, that goes on and on, right?
And so the question is how do you define risk? And that’s really the open question. I think most people just don’t even think about it. Think it’s publicly traded. It’s not risky. No. I’ll give you a good example. Look at the news, Coinbase. I hate to pull out individual stocks, but Coinbase, right?
Coinbase was approved, or I shouldn’t say approved. ’cause technically they’re not approved. They were allowed to proceed by the SEC. The SEC says, yes, you’re good enough to go public. What happens? A month ago? The SEC says, yeah, we don’t like your model. We don’t think you followed the rules to be like, We weren’t following the rules before you agreed to allow it.
You approved. Yeah, you approved it. We approved our business model. And now you’re saying you don’t approve of it. That’s a contradiction, right? Whatever it is, what it is. But the point being is like risk is it is defined in different ways, and the more complex the entity, the more potential risk there is.
If you’re investing in a. In a widget, if I’m investing in a hunk of gold, I know what the risk is. The risk is somebody steals it, the government seizes it. I lose, I, those are my risks. It’s not, could it go to zero? Sure. If my grandma stops wearing gold jewelry and we start, stop using gold wedding bands, maybe it’ll go to zero.
But until that happens, gold still has value. That’s a simple risk metric. If you’re talking about an entity, there’s all a bunch of risks. There’s employment risks, there’s liability risks. There’s all these risks that come into play. It doesn’t mean it’s more or less risky, it just means there’s more things to think about.
When people look at risk, you have to understand how you are defining risk and what is more or less risky? We do private mortgages. We’ve had less than 1% of them have any issue at all. We’ve done hundreds and hundreds of these things, less than 1% have had any issues. The metrics speak for themselves that are low risk based on those numbers, right?
Are there risks? Absolutely. There’s definitely risk in those. But if you do it right, if you do your research, you do your homework right, you can reduce the risk significantly. Same with publicly traded stocks. If you do your research and do the homework correctly, you reduce your risk significantly.
However, if you just take somebody’s word for it, that is a good stock, then it’s probably riskier. So it just depends on how you define it.
Ben Fraser: No, I think that’s so big, that we could do a whole episode just on that and it’s, from my background, I used to be a commercial bank underwriter, right?
And my whole job was to understand and try and quantify the risk of making loans to certain businesses. And it’s funny, coming into the investment world, many years ago and investors. Talk about it’s risky, and I, that’s the question, what is risk? How do you define risk? Because risk isn’t just one thing.
And what’s so funny to me, it seems that perception is reality. Whatever you perceive to be the risk that is, how you view everything. And when it comes to the private markets and alternatives, what I’ve seen is, The liquidity, or lack of liquidity is the biggest risk.
But the question is how much, what should be the premium that you’re paying for having liquidity? And should you even have liquid liquidity actually your friend? If you’re in a down market, if we’re emotional buyers and sellers, like that actually could be a double-edged sword to have too much liquidity.
And so it’s such a good concept to challenge your frame of. What is the risk? And it’s usually pretty obvious, right? If you like, with a goal for example, like there’s a pretty limited amount of what the risks are and are you comfortable taking those? And that’s a great way to say it.
Kinda going back to an earlier point, but you, not to put the tinfoil hat back on, I mean it seems like there’s a lot of reasons why financial advisors don’t want you to know about these things and. It’s risky and all this kind of stuff, but you said something offline, and maybe you don’t want me to say it on the air, but I’m going anyway, like you said.
A lot of financial advisors are lazy, right? And so it might not be this big conspiracy, but it might just be to your earlier point. The way that the financial system is set up, it makes it really easy just to gather assets and to stick ’em into your model portfolios and just rinse and repeat a cookie cutter.
Kinda approach for every client that you have with a little bit of nuance and grow to a billion a u m and just charge fees off that. So it’s a lot easier to do that than what you’re doing. Which is a lot of work. I’ve worked with these, some of these self-directed IRAs. It’s not as easy as it should be sometimes.
And you know why, is that really the reason and why are, you said you have other fans that you know, that say, I don’t wanna do this business and why is that?
Kirk Chisholm: So I’ll get into that and don’t worry about that. I’m happy to, I’m pretty transparent in my thoughts. I’m not shy.
So I’ll get into that for one second. I want to touch on a point you made about commercial lending and how they don’t adjust risk. And I always found it interesting that like a friend of mine who’s got $2 million cash in the bank, wants to get a house for his mother and wants to get a mortgage and can’t get one because he started his business a year ago and he and the bank won’t lend him money even though he is got cash.
Even though he’s got a huge income, they won’t lend him money because he is not W two. It’s crazy. Ridiculous. Yeah. How banks look at risk. It’s annoying. One of my friends told me at one point he was a lender and he said, there’ll be a point sometime in the next few years where if you own a business, you probably won’t be able to get a loan period.
Like it, it was going in that direction. So that to me is just ridiculous. But anyway, getting back to your point about advisors being lazy. The reality is everyone’s lazy, right? We’re all trying to make our lives easy, right? I’m not gonna lie, I wanna, I’m lazy too. It’s like my goal is to make my life easier and to be able to be lazy.
If I could flip a switch and it would crank out a million dollars a year, I would just go sit on a beach. Why wouldn’t I, right? I could work harder, but what’s the point? What, why, how much money do you actually need? Apparently no matter how much you have, the number is always 30% by the way.
So if you have a billion dollars, you always need 30% more. If you have a hundred grand, you need 30% more. I don’t know why that’s true, but across every hierarchy of wealth, they always feel like, how much money do you need to feel? Okay, 30% more. It’s a weird number. But anyway so getting back to your question though, if you consider the profession.
Financial advisors, investment bankers, whoever their job is to make money, right? Their job is not to help you and make your life better. That is a part of what they do to get to the point where they’re making money, right? We all do this. We all have a job. We all make money in some way, shape, or form. Now, the problem with the financial advisor industry is there are some really great advisors out there and I don’t mean to disparage the whole industry.
There’s a lot of great advisors. They’re typically fiduciaries. They typically have a designation. They’re people who take it seriously. They’re honest people. They are true fiduciaries. They’re trying to do what’s in the client’s best interest. They are a godsend for the industry.
And I wish there were more of ’em. Most of the advisors of the industry are brokers, insurance reps, people who just wanna make a buck and frankly, a lot of new people who are just trying to put food on the table. The challenge in the industry is when I started, I was in the broker dealer channel and basically the theme was, hit the quota or hit the streets.
Wow. Which is really a crappy way to start your profession. I had seven months to get up and running and start hitting quotas. Seven months. I just got outta college. I don’t know anybody. I don’t even network. I don’t have any wealthy friends or family. I was dialing it for dollars. I call it character building ’cause that’s basically what I was doing and I figured out something and I was able to make it happen.
Most people were successful at that stage ‘because they have wealthy friends or family and that’s how they make it through. It’s hard, and I’m not gonna lie, it’s hard and most people don’t make it. So what ends up happening in the industry is most advisors who are successful, they’re successful ’cause they’re good salespeople.
They’re really good at sales or marketing. They’ve figured something out and they’re good at it. What they’re not good at is being a financial advisor. In order to be a good financial advisor, you’re more or less not a good salesperson, and I don’t mean that they’re not, but they’re completely different skill sets, right?
Sure. Being a good salesperson is like being personable, outgoing, and you know how people work. You can manage a conversation. A good planner is more detail oriented. They’re good at thinking they’re good at being really thoughtful. They care about people in a different way than the salesperson does.
But the point is there’s certain skill sets that they have which aren’t necessarily aligned with sales. I know a ton of really good planners that just stink at sales. That’s all it is, right? You’re talking about two completely different skill sets that are not aligned. So what ends up happening? So when I was starting out, it was mainly salespeople.
The industry’s changed now so that they’ve become more team oriented. So you have a salesperson, then you’ve got planners, and you’ve got a portfolio manager. You’ve got all these different people doing it, which is the better way to do it, frankly. But there’s still a lot of really good planners that are independent and they just have to market themselves differently.
So what ends up happening is if you have a good salesperson, Really, most of ’em are not good at portfolio management. They’re like, oh, you should have these five mutual funds, these 10 ETFs, and they’re great and they’re gonna do this and they’re gonna, you know they’re gonna dazzle you with their intellect.
But the reality is most of ’em aren’t portfolio managers. They’re going on some model that somebody else told them. They’re saying, Hey, this works. Oh great, let me just do that. And it’s usually ’cause they’re trying to sell ’em on something. So for all industries, it’s really not designed properly because portfolio management’s hard.
The best and the brightest have a tough time in it. How is Joe salesperson gonna be great at portfolio management? They’re gonna follow Bogle’s indexing approach. You can, but then why do you need this guy? You can go do it yourself. So they don’t wanna tell you that approach.
They got to, they gotta, spit shine it and make it look good. Polish the turd, Hey, this portfolio is great. So the whole industry is not really well designed for the client’s best interest. If. When I started, there was a great quote that I saw, and I wish I had captured this. It was a kind of a cartoon at the time.
It was like, Wall Street is the only place where people take the subway to give advice to people who drive up in limos. I was like, that’s so true. So it’s hard for the industry’s hard. So I think the people who I’ve found who are the best are people that specialize. So we’ve specialized, other people have specialized, there are generalists who are good, but if somebody’s like really good at like self directed deniers or really good at 4 0 1 Ks, or really good at m and a work, or whatever it is or you’re a specialist in Raytheon employees, whatever it might be, there’s something that you’re the best at.
Those people are worth working with because they’ve perfected their skill and knowledge and expertise in a certain area, and they’re the go-to guy or gal that you want to talk to. And, if you need a general advisor, find somebody who’s truly looking out for your best interest.
If they’re not the smartest person in the room, make sure that they can find the smartest person in the room. Yeah, people call us, we get calls from advisors all the time. They’re like, Hey, my client wants to do this. I have no idea what I’m doing. I’m like, I love you, man, like you’re the kind of guy I wanna work with, because you’re actually looking out for your client, not yourself.
Finding an honest advisor, like somebody who’s truly looking out for your best interest, it’s worth its weight in gold. Yeah.
That’s really interesting to hear and understand. You shift more to the investment side of it, what do you find a lot of it sounds like, The alternatives you do are pushed from clients that, Hey, I wanna do this.
I’m already in this business. How do I do this? But for those that come to you with a blank slate of saying, Hey, I, I like the idea of alternatives, what’s your approach to that, right? Is, a lot of the study we’ve done at the ultra wealthy, there’s pretty big allocations a lot of times to alternatives or private alternatives, but, At a certain net worth, maybe it doesn’t make as much sense, right?
Because you do need liquidity and some of these can have long lockup periods, but do you have like certain rules of thumb of here’s the, things that you want to be looking at, your percentages, types of assets, just obviously you’re not giving any advice here, but just at a general level what’s are some things that you look at when you’re talking with people?
It’s definitely situationally dependent. Every client’s different. If somebody comes in they own like they’re worth a million dollars and it’s all in real estate. I’m not gonna tell ’em to, you talk to, if anyone, if you talk to any real estate investor, every nickel they’ve ever earned goes back into real estate.
They will never put a dime into anything other than real estate. I’m not gonna convince myself otherwise. I’m not even gonna try it. I will raise it to them. ’cause some people are open-minded to the idea of spreading things around, but their idea of diversification is just buying another property a different property. Yeah. Or a different state or a different type or whatever it is. And I’m all on board than that. I love real estate. I think it’s great. But I think ultimately, you need to invest in what you know. So if people are coming to me with something, I’ll give them a cursory conversation around risk management, how they should think about it.
I’m not gonna try to convince ’em to do something else. My job is not that. My job is to advise them, give them the best guidance and say, if you wanna put in the ira, here’s how you do it. Here’s how the math works. It does or doesn’t make sense based on the math. And then when we start looking at other things, say, look, here’s what I would think about how you handle that information’s up to you.
’cause it’s really them coming to me. I can’t really give them advice on it. I can give them guidance, but if I give them advice and technically, I’m a fiduciary on that asset and it’s not really mine to do. It’s just more like I’m giving you job guidance. Here’s how you think about it, what you do.
It’s up to you. Now there are other people who come to us and say, Hey, I want something alternative. I. We do have alternatives that we work with, that we’ve vetted. We’ve worked with investment sponsors for like over 20 years. We know them inside and out. They know us. We’ve been through up and down cycles and we know how they handle it.
And, we have faith in their risk management in part because we’re doing due diligence on all the deals that they provide. So they’ll bring us deals and say, Hey, we have this, are you interested? We will talk to our clients and say, Hey, we’ve got X, Y, Z. So we do have that as a part of our portfolio, and that has historically been a big part of our practice.
Now in the last things really started to slow down 2017, up till 2019. It got a lot slower, and then Covid hit, courts froze up for two years, and couldn’t do anything. We got a handful of stuff that went through, but almost nothing. Because the courts are frozen. Any sort of foreclosures or fire sales or anything like that couldn’t use the courts.
So nothing was getting done. So it really dried up. And it’s been dried up since Covid and it’s start. We get a trickle here and there, like we had some yesterday. A normal year we might do a hundred. This year we might have done three. That’s the degree of that. That on top of the fact that everything across the board is expensive.
Real estate across the board is still expensive. People are overpaying in some parts of the country. But look, last year interest rates went from zero, for fed funds rate went from zero up to five, or I guess that’s including this year, went up to 5%. Real estate last year went up.
Median real estate prices went up 10%. In what world does it make sense for real estate to go up 10% when rates are climbing really quickly? And yet that’s what happened. And this year it’s the same. Real estate is not declining. It is in some areas, but not declining the way people think. So I think what’s interesting in this market is that alternative assets are a great way to invest in the right way.
As you talked about the illiquidity premium, you can take advantage of that if you’re patient. In 2009 people were rushing to the door when somebody’s yelling fire. And these, all these non-traded REITs people were trying to sell at any price. And I could go into these marketplaces, pick up really solid REITs for 10 cents on the dollar, and it was ridiculous.
People just couldn’t wait to get out of them, and they weren’t worth 90% less. There was nothing wrong with it. They just, real estate prices went down for a few years, but so what? And there were still viable properties, but people just couldn’t wait to get out. And if you were sitting with a pile of cash, you just kinda walk up and just take these deals left and right and put ’em in your portfolio and sit in ’em for 10 years and make five, 10 extra money.
That stuff happens. If you’re patient, you have cash. But I think a lot of people get so anxious they need to be in something. They’ve got the shiny object syndrome. Ooh, I need this, I need crypto, I need gold, I need real estate. I need this. And it, they don’t have a long-term perspective and what ends up happening is they make a bad decision and they’re like, oh crap, I made a bad decision and it’s too late.
’cause it’s an illiquid asset, right? A lot of these are illiquid. So the illiquidity premium is really important. You need to make sure you’re investing right. And when you’re buying it, if you’re doing private equity, there’s a liquidity premium built in. But you can’t get out if we go into a recession like 2008.
You gotta sit on the stuff, right? You gotta wait until the market comes back before you sell it. A lot of venture capitalist friends that in 2008, they were like, I was like, what are you doing? We’re not investing anything new. We’re just supporting the existing ventures. And I was like, really?
Now it’d be the perfect time to go around with a bag of cash and invest in everything. They’re like, Nope, we’re just supporting the ones that we have and making sure that they’re viable and they’re. They’re staying afloat so we can, we can exit at some point. And I’m scratching my head thinking, what am I missing here?
Ben Fraser: What’s the article today actually on continuation funds are like this big thing right now in private equity where basically these private equity funds are just rolling all the assets to a new fund at a new value that they can charge higher fees on. But they’re not doing anything new.
They. Theoretically created more value so that they should be marked to market. But it’s just we’re doing the same old thing and now making more money off of it and forcing our investors to have to keep rolling. It’s really an interesting holder side topic, but we’ll run at the end of the time here.
I wish we had a little bit longer, but god give us your three minute thoughts on the market right now just as a whole and are you. Waiting for a penny in recession. Are you sitting in a lot of cash personally? Maybe you can’t say all this stuff, but just what’s your take on investors positioning right now?
Should they be bullish? Should they be bearish? Should they just be sitting on cash? What’s your thought?
Kirk Chisholm: Yes. Everything you just said. In all honesty the market we’re in a new paradigm. We entered a new paradigm, I would say probably in Covid, but realistically it didn’t start to pan out until last year.
So we’re in a new paradigm, and the old paradigm was to drop rates to zero. Print money and Right. Go into tech and growth stocks. That was the paradigm. Pretty much value stocks, no one cared about. Why do I invest in a value stock when my growth stocks go up 30 to 50% a year?
It’s just for a purpose. That was the old paradigm, which was also stupid, but it was what it was, right? Can’t argue with price. Price is the final arbiter of the truth. And so what ends up happening is you get into last year and things go down, everyone’s scared, and then all of a sudden January 2nd, people are like, oh, it’s all better now.
And stocks, the market has just gone up. So if you look back at history, if you look back in the twenties, you look at the seventies, It was especially the seventies. There’s a period of time from like the late sixties till about 81, 82, where the stock market went nowhere for 10 plus years. Nowhere went sideways.
It went a lot of places, right? It’s like two thousand. Two thousand stock markets crashed, came back up, crashed again, came back up 13 years later. We had a negative return for 13 years. If you started in January of 2000. Now if you look at the seventies, much the same way, right? Start, stop, start, stop.
It went to a lot of places, a lot of things happened. And yet it went nowhere. So what tends to happen in periods like this is you get a lot of inflation, you get a big boost, everything’s expensive, and then the stock market tends to grind sideways, right? It just goes up and down, but it works off this expensive nature.
And then once it’s cheap enough, it’ll start to rise again. What we’re seeing now is a period of time, much like the seventies, where what happened in the seventies, if you had to put one theme on it, it was mass confusion. No one had any idea what was going on with the stock market, with bonds, inflation.
That was the theme. It was mass. It was mass confusion, and you had stagflation, which people hadn’t acknowledged until then. They coined the phrase. At that point, all this stuff happened and people didn’t know how to phrase it. Now you’ve got another period. People have no idea what’s going on. We should be in recession, right?
Why are we not in a recession? Inflation’s high interest rates are high fed funds rates high. We should be going into recession and we’re not. Why not? If you’re in the old paradigm, you would think, yeah, we should be in a severe recession right now. But we’re in a different paradigm where people look at things differently.
Now, I would argue that asset prices are based on interest rates. Which is a theme that the whole financial markets are based on. They’re based on risk-free rates and other rates. But basically that’s how you price valuations in many ways. So if we have higher rates, it means it’s gonna cost me more to support debt in my household.
It’s gonna cost me more to buy a new house. ’cause the mortgage rates are gonna be higher. If I run a company, it’s gonna cost me more to borrow debt. If I own real estate, commercial real estate, it’s gonna cost me more, which effectively it’s gonna cost me more, which means the prices are worth less to accommodate it.
So if I look at 2021, let’s say I wanted to buy a property for 500,000, right? And I think it would’ve cost me about like $3,800 a month for two and half percent mortgage rates, something like that. Okay? Now, if that’s the case, Yeah. The next year median home price went up 10%, so 550,000 and mortgage rates went up to seven and a quarter.
I think they hit eight at one point. Like seven and a quarter. Seven and a half, we hit seven and a half. That means the mortgage payments you make every month double. So I was paying 3,800 bucks a month. Now I’m paying 7,600 bucks a month? I pay double the amount every month for the same house because mortgage rates went up.
People can’t afford to pay double the amount of monthly payments. It’s just not feasible. So what do you do? Either the price has to drop to equalize or you have to buy a cheaper home, which you can do. The problem is everybody’s buying cheaper homes. They go up in price. And so they’re not cheap anymore.
And the people, so if you think of the economic spectrum, like the wealthier buying cheaper homes, the next tier down, the less wealthy buy cheaper homes. Everybody’s buying cheaper homes, but at some point, you can’t buy a cheaper home and you gotta live where you wanna live.
If I have four kids, I can’t go buy a two bedroom house. I was in a five bedroom, now I’m gonna buy a two bedroom. I can’t do that. So that doesn’t work, right? So the whole, and I’m using this as an example for the whole economic system. The way you have to think about high interest rates is that they’re going to be, they’re gonna mute performance of everything, not immediately, but over time, because real estate doesn’t even get impacted right away because I’m not selling my house this year.
I’ve got a two and a half percent mortgage rate. Why am I gonna sell my house and get a higher one? I’ll just wait. Everybody’s waiting. So no one’s selling, which means the price doesn’t go down. So these, all these factors that just take a while to work through real estate down cycles typically take five years.
So if you look at that and implement it, you take that model and implement it on a company. Companies are rolling over debt now they have to pay more, which means they have less cash flow, they have to shrink. And it just totally shrinks the economy. So if you think about the seventies, the economy was this size.
Now as you dropped rates from like 20% down to two, you went from 20% to 18, it allows you to do more leverage ’cause your payments are smaller. So the economy grew this big right at the end of 2021, and then interest rates are going up. So now it’s starting to shrink because you can’t borrow as much.
And so these are the factors that implement that, that integrate into the economy and cause the changes at a big macro level. Now you asked me, where’s the market gonna go? It’s gonna go up, down, or sideways. I don’t know. I can’t tell the future. But what I can say is, in a market like this, you have to be good at being tactical.
You have to be good at risk management. If you’re a buy and hold investor, I. You’re gonna end up losing a lot of money over the next five years. It’s just gonna happen because you’re riding out the waves, you’re not making progress Right now it feels hey, everything’s great. Market’s going up.
There’s no problems in the world until something happens and the market’s gonna crack again and go down. And people are like, oh, the world’s ending. We were here last year, right? It’s not going anywhere. Yeah, we just did this cycle, right? Yeah. We’ve been here, done that, got the T-shirt.
So I think the way you have to do it is, in my opinion, You have to find ways to generate income. Right now, you can get five and a quarter percent, 5.3% in US treasuries. Hard to argue with that. If you can get 5% in treasuries, why wouldn’t you for two years, if you can find dividend stocks that are actually paying a dividend yield that you want to earn, that have a solid dividend, that’s a great alternative.
Or you can trade the markets, you can ride the trends, market’s going up, buy the trend when it’s going down. You get out or, short the trend, whatever you wanna do. It’s not for everybody. And I don’t think everybody should go to be a trader, but that’s the mindset you should have, if you should be tactical and focused on risk management.
Have some risk management procedures, whatever they may be, and use that as a way to mitigate the risk of the volatility. And so when the markets do finally start to break out and go higher, you’ll be on board.
Ben Fraser: No, I love that being tactical. Your investors are in a conundrum right now because if you’re just sitting on cash and we have higher inflation, and I think you and I both agree, it’s probably gonna be higher for longer for a lot of the reasons you said, it’s eating away the value of your dollar.
But if you’re just buying hold, head in the sand don’t. Pay attention. You might just end up where you were when you first started, or a little bit worse ’cause you get fees whenever you do transactions, right? So being tactical, being opportunistic is probably your best approach over the next several years.
Man, a lot to unpack there. I wish we had more time, but Kirk, what’s the best way for folks to plug into what you’re doing and, you have the podcast, you got your advisory and all that. Give us some ways to get a hold of you all.
Kirk Chisholm: Thanks. I’m pretty easy to find.
I’m everywhere. I have a podcast, MoneyTreePodcast.com. You can listen to the show you were on earlier. It was a great episode. You should all listen to that episode. It was awesome. I’m there twice a week once we have interviews with great guests. Another one, we just do more like just, shoot, chewing the fat about what’s going on in the markets.
And easy to find there. InnovativeWealth.com is my company’s website, so if you wanna look at our wealth management services, you can go there. Frankly I’m everywhere else. I’m pretty easy to find. It’s just Kirk Chisholm, MoneyTreePodcast.com, or InnovativeWealth.com is the easiest way to find me.
Ben Fraser: Awesome. Put those in the show notes and really appreciate you coming on the show and sharing your thoughts and going in a lot of different directions, but I think we pulled it out in a good way here and really got a lot of good stuff. So thanks so much.
Kirk Chisholm: Yeah, happy to be on your show. Thanks for inviting me.