Animal Spirits Podcast - Talk Your Book: Locking in Higher Yields on Your Portfolio

Episode Date: May 14, 2022

On today's Talk Your Book, we spoke with Jason Barsema from Halo Investing about structured products and defined outcome investing.   Find complete shownotes on our blogs...‍ Ben Carlson’s A Wealth of Common Sense‍ Michael Batnick’s The Irrelevant Investor‍ Like us on Facebook‍ And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.‍ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Halo Investing. Go to Haloinvesting.com to learn more about their platform for advisors to create structured products to earn yield for their clients. Haloinvesting.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holtz wealth management. All opinions expressed by Michael and Ben, Ben, or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be

relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. On today's show, we had back on Jason Barsima from Halo. We've had him on, oh, this is third or fourth time. So we've spent the last six to 12 months working with their team to actually bring the income solutions to our Now, prior to rates rising only recently, this has been like a search for yield, has been like one of the themes for the last 10 years. And oftentimes, the risk associated with the reach for yield, in our opinion, was not justifiable, was not worth it.

What we found so attractive about creating our own situation, our own structure notes is to be able to define the risk, to say, okay, at this level, not interested. At that level, not interested. At that level, now you're talking. And so how do we do that? We're just leveraging the technology at Halo to define, set different risk parameters, different potential rewards. And so to be able to do that with the team, and we're going to get to all that with Jason today, was a really good experience on our end. It's also been kind of cool because our whole line of thinking was, okay, these are price on options and interest rates. And if interest rates rise a little in volatility spikes in the market, then these things should

pay out more. And we didn't think that both of those things were going to happen at the same time where rates are going to rise and volatility blow out a little bit. Now you're seeing some for the stuff we're doing, which is pretty bland and nothing too exotic, pretty good rates of return that you can lock in on that stuff right now. We're putting target date funds and structure nuts. I mean, yeah. But the thing that people have been looking for forever is what do I find in between stocks and bonds? Since bond yield were low and stocks value is why, what is that? I want some coupon, but I don't want to buy MLPs. Yes. You have to understand. understand what you're getting into here because there's a lot of different ways you can go.

But Halo has been really good about sort of laying this out for us and helping us define what we wanted to get for our clients. All right. With that, here is our conversation with Jason. We're joined by Jason Barsima. Jason is the founder and president of Halo. Jason, thank you for coming back on today. Yeah, thank you guys so much for having me.

I appreciate it. All right. This is a good time for you to come on, given the market environment that we find ourselves in the S&P 500, off to the worst start of the year since 1970. the bond market off to the worst start since 1342. It's been a rough year for the traditional 6040 investor. And I suspect a theme for the rest of the year, maybe another one, two, three, who knows, is going to be people searching for alternatives. Although bonds are actually giving yield, but we'll tie that back to the conversation. So you tell me, as somebody who offers a

structure note, which I don't know how you bucket that. I would bucket it as an alternative investment because it's not a stock nor bonds. It's somewhere in between, I guess, depending on how you think about it. What are you seeing in terms of advisor adoption, advisor uses? What's going on in your world? As you said, Michael, certainly a good time to be on giving market volatility. And from a business perspective, the business is doing great. We're up about 300% year over year as a business.

So certainly more than the quarter. Yeah. So that was through the first quarter. And we're very excited about that. And obviously, we're very blessed. And I think even better than that number is 50% of our client. are new to structure notes. So I've never bought a structure note before. And that's been pretty constant over the last four years. So what we've done is just continue to grow the pie and

reality, just grow adoption for the product. Now, given what you're saying about equities and bonds, this is a story that the three of us have been talking about for two or three years now, where we needed a new tool to be able to risk that bridge gap. We needed a tool to be able to generate yield in the portfolio and ultimately get more uncorrelated returns within the portfolio. And that's what people are using structured notes for. So the primary two things that we're seeing out in the market is, number one, hey, is this a pullback that we should be buying, or is there more room left on the downside? And that's kind of the benefit of structured notes. They can be great, passive with protection in the portfolio, as I call it. So if you do see this as a buying opportunity,

buy a structure note with a level of downside investment protection while still getting some of that enhanced upside. Now, case and point, actually, I was personally, and so this is my personal account, but I was personally just buying one on Friday. It was a five-year note linked to the S&P 500. I started to want to put some cash to work in markets like these. I have 40% downside protection on the S&P 500, so another 40% from here. And I was getting about 110% of the upside on the S&P.

And so really the way that works is I bought it on Friday. I should go to sleep for five years because the terms only matter at maturity, as we all know. And so in five years, as long as the S&P is not down by more than 40% from where I bought it. I get my principal back. If the S&P is down by more than 40%, I'm fully exposed to the loss of the S&P, just as I would be if I owned it. But that's exactly what I'm talking about is that I want to get access to the broader market right now. And so this was a

great way. I would own the S&P anyways. So that's a great example. What happens if the S&P is flat over the next five years? You would get your principal back? Because 100% of zero is zero. Okay, got it. That's exactly right. Just as I would if I was, within the S&P excluding dividends. So the risk that I paid. What's the catch? Okay, so there's no dividends. That's my risk. At the end of the day, I just sacrificed five years of dividends on the S&P 500 to get 110% of

the upside of the price appreciation of the S&P. So let's fast forward. And just for a round number, say the S&P rips over the next five years and the S&P is up 100% on a price appreciation basis, so not including dividends. My note is up 110, which I really like because then I just made up for the dividend. right there, obviously. And if at maturity, it's down 39%. I'm down nothing.

I get my principal back. For people that didn't listen to one of the previous episodes that we've done on Structure Notes, let's take a step back and just reintroduce them because they might have a negative connotation. What are Structured Notes? Great question. So Structured Notes are investments that are issued by large major banks, like Morgan Stanley, like a Bank of Montreal.

These big banks issue structured notes. They're ultimately obligations of the bank. So why I say that is you're taking counterparty risk. When you buy a structure note from BMO, you are taking the counterparty risk of BMO, meaning if I bought this note that I'm just describing from BMO, and actually the issue of a city group on this one, but let's say I bought it from BMO, I'm taking the bet that BMO is going to be in business in five years to pay me, just like a bond.

When we buy a bond, we're taking the bet that they can actually pay us. And so that's what a structured note ultimately is, is it's an investment that's manufactured by a big bank. When you unpack what is a structured note, it's not too good to be true. At the end of the day, it's just a zero coupon bond that's issued by that bank. Let's keep with BMO as my example. So they would issue a zero coupon bond. And then it's a derivative package on top. So they would be selling 40% out of the money puts on the S&P, 40% out of the money binary puts on the S&P and buying at the money calls. That's how you would replicate that strategy. I like structure notes over the derivative strategy because number one, this is kind of long term core. within my portfolio, I can't buy five-year options. And number two is that going further out in the maturity of five years, you might be saying, why would you want to buy a five-year note? Well, the longer that I go out, the more upside that I'm getting. Again, this is a core part of my U.S. large-cap core exposure, which is why I like this. I'm replacing SPY to be able to buy this structured note. You and your team have schooled us a little bit on how these things work over the

years. And I think it's interesting to think about these during a volatile market. So obviously, if you held one of these, you have some downside protection. That's nice. But in terms of pricing a new one, two things going on in the market right now. The markets are volatile. They're falling and also interest rates are rising. So maybe we can look at those two things. How does the volatility, higher volatility impact the pricing of these and how does higher rates impact the pricing of these in terms of the yield investors can expect? And now's exactly the point that I want to bring up. And then let's make sure we touch upon the yield types of structure notes because those by far are the most actually popular trading right now on my platform. Eighty-five percent of our flow is in these

income notes, as I call them. So one's that. And we are customers. Red Alt's wealth management as a customer. Yes. And thank you very much for your partnership, obviously. And with that and disclosure, of course. But with that, the income side is very popular right now because people are kind of locking in that return and then getting a nice quarterly yield deposited into the account. But Ben, to your question about volatility, interest rates, and I'll even say inflation, how does that go into the pricing of a structured note? Well, I just told you that 85% of a structure note is a zero coupon bond and the rest is a derivative. So as interest rates go up, that's actually good for pricing of a structured note because now you're getting more upside. There's more interest on that zero coupon bond

at the end of the day to be able to provide the terms of the structure note. Obviously, more interest on the zero coupon bond, the better the terms are going to get in the overall note structure. Does that make sense? Yeah, can we just think with that for a second? So when you said 85 cents on the dollar goes to fund the upside, what I thought was if interest rates right now... 85% on the dollar goes to fund the zero coupon bond, not the derivative side. So about 85% is the zero coupon bond of a structured note on average. The way that I interpreted this was that if interest rates go up, now it only takes 82% to fund it. Exactly. So think about I'm a man who likes to focus on simplicity. So say you want to invest $100 in a structure note for round numbers. On average, $85 of that

goes to the zero coupon bond and then the rest goes to the options. Now, let's say now interest rates are rising, as they obviously are. Now, $82 would go to the zero coupon bond. And now I have more options. Exactly. And so that is one big component of a structure note, which is what I really like in this environment, because by definition, zero coupon bonds can be a very efficient way to be able to mitigate inflation within your bond portfolios. They usually have very low duration with the zero coupon bond. But now getting to your other question, Ben, in regards to volatility, now as Michael and I were just talking about the other 15 or so dollars, depending on the market, goes to the options. More volatility, the better that the option pricing gets. Because in the structure that I

just talked to you about, I'm selling puts and I'm selling binary puts. As volatility goes up, I'm actually getting more premium for that, which allows me to buy more call options on the upside. This sounds too good to be true and counterintuitive. I know it's not. But just walk through this. Okay, so you're telling me that the more attenance. attractive the terms get, I don't know this is circular logic. They get even more attractive. So, for example, I can buy protection on the S&P 500 at $100, for example. I buy 20% downside protection. So now my line in the sand is $80. If the S&P 500 goes down 20% to $80, and I buy 20% protection then, now I've got protection all the way down to $60 and I get paid more. Correct.

And that's kind of the interesting thing about structured notes is why I think that they're so elegant, is that, and this is the age-old discussion, Michael, that I always have with our clients. Number one is we get a lot of clients when we were first kind of introducing structure notes to the market over the last four years that really wanted to use market opportunities like these to be able to capture the opportunistic value of structured notes saying, hey, I'm going to wait till volatility picks up, hey, I'm going to wait till the market pulls back, and then boom, I'm going to get a lot better terms. And remind me to talk about an income note in a second and how you can really see the change with volatility interest rates in this market.

But before I do that, a lot of advisors were trying to hold these and manage these opportunistically, which I think is cool. Hey, absolutely, go do that. But as I always say, we want to buy insurance before the house is on fire. So there's a core part of your allocation that should be in structure notes to prevent and help us feel a lot better when the market's down 15% year-to-date, and some markets down 20 to 25 and then some year-dates. So we can cushion against that. loss. And then we want to use some of our dry powder to be able to buy more structured notes because we are taking advantage of a really nice market in regards to the pricing of the product. So you want to look at using these products two ways. One is core. Have that consistent

exposure within the portfolio to protect against the house catching on fire, but then have some dry powder to be able to deploy like I'm doing in markets like these. And again, this is just my personal account. I'm not giving you investment advice, but this is just what I'm doing. When you think about times like these when the market could always get more volatile and fall further, does it make sense to think through this like a dollar cost averaging where you're putting a little bit over time to kind of spread your bets a little bit? I do. And that's the way that I managed my own portfolio. So I put some money to work on Friday. I want to put more money to work as I wait to kind of see where this market's going. But for me, it's like, hey, if that's the last dollar I put to work on

Friday, I feel really good about it because I have another 40% from where we are today and I'm getting enhanced upside. Market continues to fall. I'll buy so. more, Ben, but maybe I won't buy it to Michael's earlier point. Maybe I won't buy 40% protection because now as the market keeps on going down, that's a lot of protection and more protection less upside. So maybe I'll... So 20% you get more juice. Exactly. So maybe I'll buy something with 20% protection if we fall another 10% more. Does that make sense? And I kind of dollar cost average into these things, just as I would any other long equity. Jason, tell me about how you think about diversifying across banks. If city goes under, they all go on there. But just, I don't know,

talk about that. It's something that I take very seriously, both obviously from my own portfolio and for our partners. And so I've always said, and I've been working with structured notes for the last 15 plus years, I've always said is that diversify your counterparty exposure. So what I do is that I have no more than three to five percent of my total portfolio allocated to any individual counterparty. diversification is really important because Lehman Brothers went under, but others didn't. We can't always make that assumption. And a lot of advisors say, well, geez, City Group and JPMorgan, which are two issuers on my platform, if they go under, everything else goes to pop. Well, you're probably right, but we don't know at the end of the day. So be smart, be safe, diversify your counterparty exposure. In my own portfolio, I have about 20 to 25 percent of my portfolio allocated to structure notes. These are equity alternatives within my portfolio. So I use equities to fund. these products. And so at the end of the day, I keep about 20 to 25% of my portfolio allocated as structure notes, which I take from my long equity exposure. Here's how I'm thinking about structure notes as a potential use case. In theory, you will, at least for the income ones,

in a perfect world, we would love for them to just be bond replacements. You turn on the guaranteed income. You've got your income monthly, quarterly, however you want to take it. And God willing, we're not below the, wherever you're lining the sand is at maturity. However, there's always the chance that at maturity, you are below your line, whether it's 20, 30, or whatever it is. So, okay, for example, let's say that you're getting 5% of the year for the next four years. I'm making this up. And you've got 23% guaranteed income. And then you're at 41% at maturity. Your 40% protection disappears. You're down 41%. You've taken 17% worth of income. You net those out. You're down whatever. I'm getting the numbers messed up. But you down 23%.

I'm following you, yes. My point is, at that case, okay, down 22% when the market's down 40, that's a little bit better than what a 6040 portfolio would do anyway in terms of downside. You got to look at it from the portfolio perspective. I mean, look at quarter one, where we were down 15% across the board in stocks, around 10 to 15% depending on which bonds you own across the board. That model is significantly stressed as the Fed is going to continue and will likely, I should they continue to raise interest rates. And so where I worry for the market right now and worry for the

average investor is that most people are not buying outright bonds. They're usually not buying bonds and then they're holding the bond and they can clip the coupon, they hold it to maturity and then they can reinvest at higher interest rates when that bond matures. With most people who are buying bonds, most Americans, they're buying mutual funds. And mutual funds are taking a lot of interest rate and duration risk. You never really have that ability to reinvest at higher coupon rates, which makes me nervous because as interest rates ultimately go up, you're just taking the huge bloodbath within your bond portfolios. I like these types of products because number one is that ultimately, why do I have bonds my portfolio? It's really three things. It's to generate income.

It's to have that sleep at night money. And it's to be able to have uncorrelated returns to the equity markets. Well, right now those correlations are really high between bonds and stocks. Structure nodes can be a good way to be able to have that uncorrelated return within your portfolio because you have that such a deep level of downside protection that you can have. And you can use the Halo platform to model all of that out. You can see the probability of breach. You can see the expected returns of all these things. And that's the really importance of what we do is that we allow fiduciaries to be fiduciaries. So you can actually see what your preferred level of risk is because it might not be yours. It might not be mine. Everyone's unique.

And I think that that's the last maybe point that I'll bring up in regards to this is when you look that structure notes, what's so elegant about them is they can be whatever you want them to me. I might have 40% protection. You might want 10. I might want a five-year maturity. You might want a one-year maturity. That's your prerogative. There's no other wrapper, at least that I know of, outside of a structured note, that you can truly customize your risk and reward. And my software, our software, allows advisors to be able to do that in a fiduciary responsible way, not only from risk, but also in regards to the analytics, to the price competition, and ultimately, ultimately the life cycle management and secondary liquidity, which I think is key.

That life cycle thing is something Michael I've been talking about lately in terms of providing retirement income and people having this bucket of money for retirement and figuring out, like, what do I do with it now? How do I spend it down? And so are there a lot of advisors using this for their clients as a way to say, we're going to take this 20% or whatever it is, and the five or six percent you get on this is going to be your spending for a couple years or part of your spending. And they look at it as a retirement income strategy, or I guess it's kind of like an annuity in the sense that, but it's an annuity with an end date on it. Is that how people are using these in some cases? There's a lot of different annuities out there, but from a broad

stroke, then absolutely. So what we see some advisors doing is that they're shaving some of their bond portfolio because they don't want to take that interest rate and duration risk, and they're moving it into income structure notes, and they'll put them within IRAs, because then that income is tax deferred within an IRA, and I'm not giving tax or legal advice, but that's just what other advisors do. And so what's really nice about that is that you move a portion more into that defined outcome sleeve, which I really like because I don't have a crystal ball. Neither do you guys. We don't know where this market's going. And so what I really like about those income notes where instead of giving a percentage of the upside, you lock into a fixed

return. It's a great way to generate yield. It's a great way to manage kind of the uncertainty and kind of the sideways of a market, which is what I'm worried about. Like what happens if we're in the same market that we're in today for three years and we just, again, go to sleep and the market hasn't moved. I like those income notes because I'm generating that income that hits my account quarterly, which is really nice for advisors and their clients. We all need to generate income no matter what your net worth is and allows us with reasonable certainty depending on the level of protection that you have to be able to have that kind of defined outcome, that defined return within the portfolio. So you're seeing a lot of people actually moving some of their fixed income assets, which again, that's

their choice, but moving their fixed income assets into those income structure notes, specifically within IRAs as a retirement planning solution. And those income notes can really be impacted by volatility. As we've talked about on the show, a number of times, the staple within my own portfolio, I'm very popular within our advisor community. And we serve 7,000 RIAs across the United States alone, literally. And so what they're buying is a three-year note linked to the S&P, Russell, Eurostocks 50. So it's global equity within their portfolio. They're selling long global equity exposure and buying the structure note. It's got 30% downside protection. So you're protected against the first 30% of losses, again, at maturity on the principle. And normally that product yields

about 9 to 10% per annum. I just went and priced that out yesterday because I'm looking at it for myself. That's now pricing 20% per annum, only because of all three. I didn't pay you as a per annum guy. Well, you know, most entrepreneurs are not per annum. case, but I do manage an investment portfolio. 20% per year for three years on that now? 20% for three. It's callable every quarter. So you can't get called.

If all of those underlines are up on a quarterly basis, it can be callable, but a non-callable structure, a non-callable structure. So it cannot be called through the life of the product. A non-callable structure is yielding about 12 to 13% per annum. That's solely a function of volatility. And again, I don't give investment advice, but I feel like that can be. I see the gears turning. I see Ben Zagir's turning.

All right, I'm sorry. I have to admit, I have to admit, I tuned that for a second. What were the terms of the end of the line? Don't worry, Jason. For those who are just joining us, it is a three-year note to the S&P 500, the Russell 2000, and the Eurostocks 50. So this is global equity in my portfolio. Three-year, what's a downside protection? 30%?

Soft or hard? Soft. 30% coupon protection. 30% principal protection. If you have no call, so I hold it for my four years, this was actually a four-year. this was actually a four-year note. If I hold it for the four years, I'm getting around a 13 to 15% per annum coupon, depending on the issuer. If I have a quarterly call feature, which means if those are up, and if all of them are up on the quarterly call date, you get called, and I get my coupon

for that. But if you have a quarterly call feature on that, it's yielding about 20% per annum. Hey, later for that, nods. The best case for that not being called would be like a sideways market and not a huge bull market, right? Precisely. Jason, what do you do with call because that strikes me as a huge pain in the ass? No, I mean, not necessarily. You just have to have the right systems, and that's where Halo can really come in with our advisors. So we've got our platform, but we've also got relationship managers who will help our advisors like you, make sure that you get in front of these things saying, hey, Michael and Ben, there's a 90% probability of this being called. Our platform calculates that for you.

So the advisor on the platform and on email will be alerted a week before that call date. And then my team here will help you auto-roll that, or you could just do it through the platform. but if you like to be handheld, my team will auto roll that for you directly on the platform. So that's kind of the benefit. If you didn't have Halo, yeah, it's a super big pin in the ass. One more thing on this one. So you have three different stock markets are tracking, the S&P, the Russell, and the Eurostock. Just one of those has to be down 30% to hit the trigger, right?

Correct. That's why it's global equity in my portfolio. I sell some in my international develop, sell some small cap, sell some large cap core and buy this note. But, Jay, can you also do like an average of or is it only the worst stuff? Yeah, you certainly could do that. whenever you do an average, obviously it's less risk. And so whenever you do an average, obviously the yield will be lower, but you can do that on the platform too.

You can even do say, hey, I want 75% S&P 500. I want 12.5% Russell 2000, 12.5% Eurostocks 50. Cool. You can do that too, all in the platform. Interesting. All right. So I want to give a shout out to your team. Jay, the other Jay has been great to work with. You've all been great to work with. Thank you. Talk about operationally how you guys work with advisors because we definitely started slowly with this thing. And one of the considerations that we have is, in terms of customization,

having a bunch of clients with different notes, operationally, what does that start to look like the more expansive what the relationship is between advisors and HALA? Yeah, we can be as expansive as you want, as you guys felt firsthand. If you want to go on to Haloinvesting.com and click the sign-up button, it can be self-driven. You don't need any of us, but I have 25 professionals all licensed here at HALO, which will handhold our advisors not only on the platform and getting you onboarded to Halo, and we deliver into every major custodian, as you guys know. So we'll handle all of the operations and all of the delivery. But I have 25 people who will handhold you not only on the platform, but also on the product. We recognize this

is a new product for many individuals. So while we are a tech company, we're also humans. And we want to make sure that people feel comfortable working with this product because I think my beef with the industry before Halo was that these products were always sold and not bought. They're always hawked. Like, hey, this is a can't miss opportunity. Hey, think about this product and people are hawking structure notes off of these monthly calendars. And no, 90% of the flow that we have on our platform is folks like yourself who go on and customize their own payoff. And actually, I make less money doing that. And that's what I advocate doing. And our fees are very transparent, as you know, because customizing the product allows you to be you. It allows you to execute when

you want. Get your exact risk and reward profile, which is really nice. But getting back to the operations is ultimately, I always encourage people start slow. Start slow. I have every incentive to tell you to start fast, but don't do that. Start slow. By one vanilla note, have it be 2 to 3% of the portfolio, and then work your way in, as Ben and I were talking about, of either dollar cost averaging or just getting to be bigger parts of the portfolio.

So ultimately, they can work themselves up into being 20 plus percent of the portfolio because it does have a big positive impact in regards to the risk reduction. and obviously the sharp enhancement, depending on what structures you're obviously buying. People are going to ask, how do you get paid? We embed a small commission into the terms of the note, so it's all baked into the pricing the note. We charge 20 basis points per annum on that note, so very transparent, 11 basis points more than SPY, and obviously a lot less than the 75 basis points per annum on a typical alternative investment manager and 2 and 20 for hedge funds. But if you went and bought a liquid alternative

manager, the average is around 75 to 100 basis points, we charge 20. We keep ours fairly bland, I guess, I would say. We're looking for yield enhancement again. We look at this as somewhere in between stocks and bonds, I think, is kind of the best way to think about it. On your platform, you have tons of different options and stuff that's way more exotic. So maybe go through some exotic stuff. You can do these things on like individual stocks, say. So maybe we'll walk through some of those more exotic products.

Especially as we're in earnings season right now, very popular right now. People will make a tactical call on Netflix. And they say, hey, maybe I think Netflix was going to beat earnings. So instead of just trying to put the tinfoil hat on and hold your fingers and pray that Netflix beats earnings, you should consider buying a structure node on Netflix. Buy a one-year product on Netflix, if that's your time horizon or a two-year product on Netflix. Buy it with some downside protection. So if Netflix misses, you have the downside investment protection.

If you're right, Netflix beats, you're still participating on the upside. And so that's the way a lot of people buy these things as regards to playing earnings season, because it's anybody's guess right now. So it gets back to the fundamental philosophy is that I believe that people should have protection on every investment that they have because we just don't know. We just don't know from a market perspective

and obviously from a macro perspective in regards to new laws and wars and everything else that's going around the world. From a more unique structure that we see a lot of people having interest in right now is what's called an absolute return note. So an absolute return note, and bear with me for a little bit

because it is cool, but it's new to you guys. an absolute return note works like a growth note, but you also participate on the absolute return on the downside up to the protection amount. For example, you might buy a three-year note linked to the S&P 500 and it might have 30% soft protection. And so with an absolute return note, say in three years that the S&P is up 50%. Typically, absolute return notes give you one for one on the upside, so you'd be up 50% on the price appreciation. If the S&P is up 50%, on a price appreciation, you'd be up 50%. Are you tracking so far?

One for one on the upside. Now, let's say the S&P is down 20%. You're actually up 20% because you haven't breached the protection amount and you get the absolute return on the downside. Say the S&P is down 29%. You're up 29%. Now, let's say the S&P is down 31%.

Well, now you breach the protection. It's soft protection. You're fully exposed. You're down 31, you would be if you own the S&P 500 excluding dividends. So people like those types of structures in this uncertain market because they basically say, I don't know where this market's going. Could go up, could go down. I don't know. This is a great way for me to say, if the market goes up, I participate. If the market goes down, I participate as long as it doesn't breach the

protection. So advisors go into this thinking, I'm pretty confident it's not going to breach my protection amount, whatever that protection amount is, 30, 40, whatever it is. I'm pretty confident that's not going to breach the protection amount, but it might be down, and I want to benefit if the market is down. Does that make sense? Yes, to the extent that there is a catch, because that would be the logical question. I guess maybe the catch is no dividends, number one. Number two, no liquidity. I know you can get it if you need it, but you would take a small haircut. So would you say those are the two catches and maybe you could touch on liquidity if you want to.

I always like to come back to liquidity discussion. I mean, prior to HALO, to your point, Michael, is that you could only sell the note back to the issuer and you get your face ripped off, usually three to four points, baked in the issuer, which candidly I thought was bullshit. And it's not the issuer's fault. Honestly, they issue these things so they can hold it to maturity. And the treasurer of Morgan Stanley doesn't want to deal with a $100,000 clip of a structured note. It's kind of like your redemption fee of a CD or an annuity. What we did is that we brought independent market makers into the market, which is totally collapsed spreads in the secondary side on most structures. That's from like 25 to 35 basis points in the spread. So we do give you

liquidity. Now, to that point is that there's still a cost. And the cost is not our cost. It's really the market cost. It's a bond and it's an option at the end of the day. So you're not going to realize the full benefit of that enhanced upside until it's maturity day. Does that make sense? Just like with options. You buy a call option and the next day you want to go sell it. You're not going to realize the full upside because there's time value within that option. It's the same thing with the structure. No different. I'm just proud to say at Halo is that we give you daily liquidity. And more importantly, is that we collapse that secondary spread in the market because we introduce independent market makers and a lot more competition. The advisors,

listening, what do you want to leave them with? For us is that it's a product right now that at the end of the day, I think is very relevant in a time of uncertainty. All of our clients, no matter what type of book you manage, whether it's a multi-family office or managing a book for your local firefighter union, we all have the same three objectives within our portfolios. The three of us have the same three objectives. We need to generate income. We need to preserve our wealth and we need to grow our wealth, right? Especially in a high inflation period. And so structure notes can be a really good way to be able to tick all three of those boxes. And when I look at kind of the more standard asset allocations of stocks and bonds, I don't see that anymore in the traditional 6040 portfolio

to grow my wealth at a reasonable rate to preserve my wealth and a generate income. Because what happens if you're one of those 10,000 people, Michael, who retires in this country every single day? Now you're forced to flip and rotate your portfolio in the majority of bonds. And that's a very dangerous cocktail in this market. As we saw with interest rates just over the last six months and who knows where they're going, structure notes can be a great way to mitigate the diversification failure that we're finding right now in the average stock and bond portfolio. And again, be able to kind of preserve your wealth, grow your wealth and generate income. And that's what I want advisors to think about is that the complex of today is the vanilla of tomorrow, as I always say.

And so once we understand these and use our platform, use our people, and they'll be able to help you really understand what's appropriate for you and not just selling and cramming these products down your throat, which has really been the bane of my existence for the last 15 years and why exist. I will say, I don't know who came up with it, but the term defined outcome as a way to sell a strategy, whoever came up with that, that was really smart. That's a very good way to sell it because retirees are so scared of uncertainty because they have one shot at this. That's exactly right. And I think that that's ultimately what we want out of our portfolio. Find me any one of your customers who would say, hey, their mandates aren't, make me 5 to 7% of my portfolio and try not to lose my money. At the end of the day, that's their two mandates for you. It's not about your equity risk and your bond risk and all the other stuff that goes into it.

That's your job. All I care about is, what are you making me and how much am I worth? And that's the elegance of these products because you wouldn't drive a car without insurance, would you? I mean, it'd be illegal. but you wouldn't own your home or your apartment without insurance. So why do you invest without insurance? It doesn't make any sense. It truly doesn't. And so that's why I encourage advisors to explore, start slow, and realize that Halo is on the same side as you. I'm independent. I'm for the people by the people. I was a financial advisor. I did this for living. And so that's, I think, the benefit of

working with Halo. All right, Jay, we're going to leave it there. That was awesome. Thank you so much for coming on today. We appreciate your time. Thank you, guys, as always. Thanks to Jason coming on again. Remember that's haloinvesting.com and send us an email Animal Spiritspod at gmail.com.