Animal Spirits Podcast - Talk Your Book: Preserving Your Capital

Episode Date: April 1, 2024

On today's show, Ben Carlson and Michael Batnick are joined again by Jason Barsema, Co-Founder and President of Halo Investing to discuss: investing in notes structured around single stocks, the difference between hard and soft protection, what the Catapult Note is, Halo's annuity and annuity servicing capabilities for advisors, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Halo. Go to Haloinvesting.com to learn more about their structured notes, annuities, fixed income, way they work with advisors, 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. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridthold's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, this is a trend you and I have been talking about for a while, this defined outcome, understanding your risks. I'd say it's bigger than that. It's customization. Yeah, customer. I actually brought a blog post about this. a couple years ago saying how the 2000s were index funds, 2010s were ETFs slash robo advisors, 2020s is going to be the decade of customization. And I think that's where we're at, where people can name their parameters much easier

on their investing strategies and portfolios. Yeah. So let's just get right into it. This conversation went long and went deep. When, I don't know, pick another adjective. It was good. It's always fun to talk to Jason Barsima, president, co-founder at Halo.

We are joined once again by Jason Barsima. Jason is the co-founder and president at Halo investing. Jason, welcome back. Thank you guys so much for having me. Okay, I want to talk about a bunch of stuff. I actually am glad we're talking to the timing is good. We talked to someone a couple weeks ago who brought us this whole basically book of structured notes that here's what I'm invested in.

Help me understand this. I was with an advisor. here's the rate they're promising me. I can get, you know, 10 or 12% on this book, but I don't understand it at all. Walk me through this. And most of these structured notes were tied to individual stocks. It was one or two individual stocks, and it was a lot of tech stocks, right? Apple and Tesla and some of these high-flying stocks.

So I was just curious to get your take on the additional risks you take when you're tying a structured note to an individual stock like this. And obviously the yields are much higher because the yields on some of these structured notes were 12, 15% or something. And I was just about to ask, are they all yield, you know, bearing structured notes? So no participation rates just yield. Right. They were yield-based. And it sounded like that was what they're going for. So I'm just curious from your side of things.

What are some of the additional risks there when you're talking about individual stocks as opposed to using indexes like we've talked about in the past? It's a great question. And I'll answer it in a few different ways because, you know, every advisor has the own unique perspective. Number one, HALO can help you review all of those products, too, as my plug for the platform. But getting back to the risks and the considerations, when you're looking at kind of those, I call those tactical structure notes. So when they're off of tactical ideas, whether they're tech stocks, whether the commodities, whether their interest rates, all very popular tactical ideas on our platform. You know, some advisors like to carve out a sleeve of their

portfolio. They kind of call it the Jim Kramer Mad Money sleeve, where they put it under alternative investments. And I see that very common within the advisory space. I actually used to do that too, where 5% of my own portfolio is allocated to tactical trades. And the way I kind of look at that of using a structured note, and this is what I used to do at Credit Suisse was if I or my clients got a tactical thesis, at least wrap a structured note around it because they're usually a higher ball, right? They're a little bit more risky. So at least you have that downside investment protection in case, you know, your tactical call is wrong. I remember I had a client who wanted to trade Alibaba, you know, at 150 bucks a share or 130, 150 bucks a share. It's like, let's buy a

structured note around that because I'm not so sure about, about Baba stock and that turned out to be the right call. Wait, what do you mean by a structure note around it? Do you mean like buy the stock, but also buy notes on top of it or just buy the notes instead? By the notes instead. So why? So why? Whying Baba long? Buy Baba with protection by buying a structured note. Does that make sense. Yeah, but would you buy, so for individual stocks, would you be more likely to buy one with the income feature or where there's like participation caps with downside protection? I do a little bit of both, right? And so like if I'm super bullish on the stock, and it's a high ball stock, I would buy a growth note because you're going to get really nice participation

rates. I'm bullish on the stock. So I'm going to get more than one for one on the upside, of course, depending on the level of protection. But with something that's got a lot of volatility to it, you can get that really nice enhanced upside, plus a deep, you know, deep level of protection on the downside in case I'm wrong or I'm early. People do this a lot around earnings, actually, is that they'll buy structured notes around stocks that they think are going to perform well post earnings and allows you to, again, get that upside advantage if you're right on that tactical call with the comfort of that cushion on the downside. Wait, I have to, I have to, but what's the catch here? Because you're telling me that in some

cases you could do you could have more upside with downside protection that sounds like a free lunch and we know those don't exist there's no free lunch there's never a free lunch well so let's think about let's unpack that for a second right like what is a structured note at the end of the day it's a wrapper and inside that wrapper is a zero coupon bond in a derivative package so there's really two major opportunity costs with structured notes we're sorry on the zero sorry to interrupt on the zero coupon bond side, is that a zero coupon? Is that a treasury bond? Or is that on the, on the underlying security? So, let's just say the, so an issue of a structured note is a bank, right? Let's say that bank is Citigroup, just using them as an example. And you're buying a structured note linked to

Nvidia, right, to go back to Ben's tactical, you know, theme. Ultimately, what a bank would be doing if it's a growth note is that they're issuing a zero coupon bond. And that's a city group zero coupon bond. The bank is issuing this. Okay. Correct. It's a city's zero coupon bond. And then city would be going out and doing the appropriate derivative package to give

you that upside participation and the downside protection. So back to your question, Michael Levewell, how the heck can you get downside protection and enhanced upside? Well, you can do that based off the derivatives package and the zero coupon bond. What's really interesting is in a higher interest rate market, which we're in right now, the discount on that zero is wider than it normally is, especially. as the 10-year treasury and rates have picked up, you know, year to date. So let's say a zero coupon bond traditionally is 85% of the package with interest rates that are higher. It's lower.

Now it's 75, right? And you have more room for the options to get that enhanced upside in the downside protection. But getting back to that opportunity cost is saying, let's say you want to buy a structured note on Apple, which has a dividend yield. Well, you're trading that dividend yield, that cash money yield that you'll be receiving from owning Apple stock, you're trading that cash money yield for that downside and the enhanced upside. And I always tell listeners, you're not sacrificing. You're not losing it. You're trading it. You're trading the income stream for the enhanced upside and the downside protection, which can be tax advantageous for a number of clients depending on their tax. So that's always the case. It's basically, okay, you're not getting

the dividend, but instead you're using what would be the dividend effectively to buy more leverage. Exactly. And what I always educate advisors on, and I look at the same way with my own portfolio is dividends are important. No one is saying that, or no one's saying that they're not, right? But ultimately, you have to look at the yield of your portfolio. So if my family wants to derive a yield of three and a half percent of my portfolio to support our lifestyle and our taxes and everything else, great. We have to look at that in a portfolio-based approach. don't look at it on an individual security by security approach. So if you are already generating enough yield within the entire portfolio through your long equities, through your bonds and other

alternative investments that you may own, it may be advantageous for you actually to buy the structure note from a tax perspective. Forget about the downside protection and the enhanced upside because long-term capital gains tend to be more tax advantage than dividend income, depending on which tax bracket that you're right. So that leads to my next question. I was going to ask about the duration of these notes. So you're saying that you would go out over a year. And then a follow-up question is, hmm, what's my follow? I don't know. Answer the first question first. I'm asking the questions here, Jason. Where are you? And so, you know, from that perspective, I also like to loop your question and Michael back with Ben's original question of the why, right? Why do you want to do this

and is it prudent to actually think about it? But ultimately, when you look at the maturity of these notes, Michael. They can be three months to 10 years. The financial advisor picks it. Now, I don't give tax advice. And so please consult your- Wait, they write these notes up to 10 years sometimes. Oh, yeah. Yeah. And we've got, I mean, we've got notes, you know, more interest rate linked notes on our platform that are 15 years. Those are more kind of traditional fixed income. So there would be like a fixed yield and then it floats after one year. But yeah, you can do structured equity-linked structure notes out to 10 years and some- I remember the second part of my question. It was on the protection side, or do you have the choice of using harder soft?

And if so, what would you be more likely to use? This came up in the example. So I looked at my biggest risk that I was talking about when I saw this, all these different structure notes, was they were all soft protection. But it was like 50%. But I looked at Tesla is in a 60% drawdown now. So that's, do you look at more hard protection for these? Because these high fine growth stocks could have an actual, it's much higher likelihood that

they're going to have that kind of drawdown as opposed to the stock market overall. And that's what I wanted to get back to that exact question, Ben, is that ultimately it depends on the advisor's thesis. So let me position this a separate way. If you, Ben, are bullish on Tesla, super bullish on Tesla, right? And as the financial advisor, right, you're naturally positive on the future of Tesla. So you might buy the stock of Tesla, which means you're one for one on the up and you're one for one on the down. So from an advisor's perspective, I might say, hey, Ben, I know you're super bullish on Tesla. But let's get some nice protection on the downside just in case you're wrong.

And at least it makes us feel a little bit better. Now, on the soft protection side, naturally, you could breach that protection of the 50% Tesla is super volatile, but you would have owned Tesla long anyway, right? So you're actually taking a lot less risk by, you know, by having this 50% downside protection on the soft side because you would have bought Tesla long anyway. Now, that's the way I look at it. That's just the way I look at it on the growth side. Now, when you're looking at the market right now, I would actually suggest advisors looking at

hard protection because hard protection is really cheap right now. If you actually look at put premiums out in the market, which is what you're doing when you're having a hard protection, you're buying out of the money puts, it's super cheap. And so take advantage of that right now and consider hard protection versus soft protection given where valuations are at in the market. Now, Ben, it goes back to your original question. It depends on the client. If you have a client who's really worried about the market and Ben is recommending Tesla to his client,

then I would say from an advisor's perspective, if it's advisor driven as the idea, think about hard protection to cover yourself and to cover your client if your client's a little bit more conservative, especially given that hard protection is relatively cheap in the market. Those are growth notes. Now, on the income side, income notes are traditionally just a trade. It's a bet. And when you're using those income notes on stocks like a Tesla, you're just betting that Tesla's not going to fall by X amount, right?

It's usually not, I'm really bullish on Tesla. It's just I'm betting that Tesla is not going to fall by X amount. So you'll see if a lot of advisors. So you're like selling puts. Exactly. You're selling puts and you're selling binary puts when you're using soft protection. And that's the premium plus the zero coupon bond premium that ultimately derives the yield that you're getting.

We can move off this topic in a second, but I do have one more question. just structure notes in general. So in terms of getting back to like the catch or the free lunch or anything, what do the banks get out of this? Why are they so eager to issue these notes? Banks issue these notes for three reasons. Number one is clearly they make a fee, but the fee is not as much as you think that it is. And so typically a bank's margin will be about 50 basis points on a structured note, which is traditionally the average maturity, you're asking that earlier, Michael, the average maturity for structured notes is around two to three years in this country. So when you annualize that fee, it's nothing to write home about for the bank.

All right. So that's not the reason. Reason number two is because their clients want it. $100 billion of structured notes are bought in the United States last year. That's up from $50 billion when I started Halo in 2015. The market has doubled. It is the second fastest growing asset class, according to Suruli, which I don't agree that it's an asset class. But it's the second fastest growing asset class behind alternative investments over the last seven years. And so, and you're seeing that growth. In Europe, it's a $400 billion a year market. So clients want these products.

But really, why banks issue these structured notes is it's really cheap funding, right? The interest rate on that zero coupon bond is cheap compared to going out to the market with just a normal bond that it's, so that's the crux of it. It's access to cheap capital. Like 95% of structured notes are held to mature. not to be too specific. Right. And so for a bank, it's super sticky deposits.

It's cheap deposits and their clients want it. And so when they're packaging these derivatives, that's not where the money is made. It's really cheap access to capital or cheaper than the market would bear otherwise. We're making money, obviously, but that's not really the major driver. It's something that's differentiated for their clients and that the clients want and it's cheap funding. I know we spoke on this last time, but just walk us through this what if scenario. what if the bank that issued the zero coupon bond is not there when the note matures? Yeah.

So before I answer that, I just want to go back to one more thing that Ben said, right? Because we are seeing a lot of interest in single stock structured notes. But given where volatility is for a lot of these underlines and where interest rates are, on our platform, Halo, you're seeing a lot of demand for growth notes. so ones that don't provide the income, but upside participation rate and a fully capital protected wrapper. So on our platform, I've seen fully principal protected notes on Nvidia, on Microsoft, on Tesla, on Apple, individual names too. And I think that those are quite compelling, right, because you might not get all of the upside that you want by owning Apple outright,

but it gives you that comfort of the cushion of the full capital protection. And the annualized returns, like if you cap out on the upside, right? The annualized returns obviously vary between underlying, but Ceteris paribus, it's around 10 to 13% per annum. That's not too bad to have the full capital protection. So I don't know, man. That sounds really good. So my antenna goes up, please.

Well, think about the volatility in Tesla, right? Like, okay, so, you know, as Ben just said, Tesla can fall by 50% in the span of three months. Tesla can also be up 50% in the span of three months. So you are sacrificing that potential upside, right, that Ben was just talking about. Stop thinking about the downside. Start thinking about the upside. So let's stipulate that nobody cares. Let's say that somebody says, okay, principal guarantee or principal protection guarantee 10%, give or take for an individual security. If it caps out, yep. Who says no? Oh, oh, if it caps out. Okay, got it, got it, got it. So it's not a guarantee 10%. No, it's not. It's a growth note that caps out at a 10 to 12 percent annualized

return. Got it. So if you have someone who's super bullish on Tesla, it's like, well, geez, you know, Tesla was up 50 percent, you know, over a two-year period. You're up 20 percent. That's your tradeoff for the full capital protection. So advisors, the punchline is think about buying the structured note and pairing it with the stock, right? So if you want to put $50,000 in Tesla, think about $25,000 in this capital protected product and the other 25,000 long in Tesla stock or in video stock, whatever stock that you're looking at as a nice little insurance around the equity. So does that make sense? Yes, totally. So are people using these wrappers or different vehicles to hedge the downside? Like, let's say that you're like, I own a video forever. I'm never

selling. However, it's gone parabolic and, you know, I'm afraid that it's going to fall 30%, but I don't want to I don't want to sell it. Would they use a, like, why not use, why not just use an option? Why use a structure known instead of a simple option? Well, in that particular case, it all depends on the client's tax situation and it depends on their view of the stock. And the, in the view that you're saying, I was saying you've got a huge unrealized gain and they don't want to sell because they don't want to recognize that game, which is

totally normal. I get it. I had a lot of clients that were like that as well at Credit Suisse. What you can do is you actually can create an option strategy around that to your point, like a variable prepaid forward. and other types of derivative packages to help protect the downside, right? And a lot of times you can have those costless collars, you know, around the stock. And we can help you with that.

So we have partnered with a third-party firm to be able to help advise you on these strategies and implement those strategies on concentrated positions. So the main takeaway here is like there's a lot of different routes you can take for this stuff. Think about ultimately, this is what I always tell you, advisors. What do you want to do? What do you want to do for your client? If I'm your client, what do you want to do for me?

I'm going to say, I want to grow my wealth at a reasonable rate of return. I want to preserve my wealth because I work my ass off, right? And ultimately, I want to generate income for all the needs that we need to generate income. Start from there. And then ultimately, when you're looking at structured notes, think about them as when you drive a car, you would never drive it with insurance, right? That would be reckless. So what I always advise advisors to consider, say that 10 times fast, is take 30 percent,

of your long equity exposure, whether that's to Tesla or whether that's to the S&P 500 and put a growth note right on top of that. So you have the comfort of a cushion. Valuations are not cheap right now, right? There's a lot that's going on in the market as we continue to hit all-time highs. Protect yourself, protect your book, protect your client, protect yourself from the markets by using this downside investment protection while still getting enhanced upside. What's the risk, as Michael said, for you to consider is kind of party risk. What happens if one of the banks goes kaput, right? We saw that with Lehman Brothers in 2008. And, you know, knock on wood, I didn't have any Lehman Brothers exposure. So that was, so that was really good. Structured products really helped save my

business in 2008 and helped me make a lot of money because of the capital protective products that I was using. Now, ultimately, what is a structured note? It's a combination of a zero coupon bond and a derivative, as we just talked about. But it's a debt obligation of the bank. And so with Lehman brothers, you got in line with the rest of the credit holders within the bank. Do you have an idea how many structure notes they had offered at that point? I don't. I don't know the answer to that. I can tell you that at the beginning.

So when Lehman collapsed in the fall of 08, you were getting 33 cents on the dollar as all Lehman bonds at that time were about 30 cents on the dollar. Now, over time, the course of a few years, people recouped the vast majority of all of that because, you know, there was obviously the bailout by Barclays, and there was a lot of things that were going on with Barclays assuming Lehman's assets. It wasn't as clean as JP Morgan's takeover of Bear in March of 08. And so there was a lot to work through with that deal. But ultimately, people got the majority of their money back, if not all, on those structured notes.

So I'm going to butcher this story, but Howard Marks tells a story about risk and betting at the horse track and handicapping which horse was going to win. and he said, the horse said he bent on jumped over the track and ran, ran away. That's like sort of the risk with these things. It's not necessarily like, yeah, if the stock goes down and it's below the floor maturity, you know, investors understand all of that. It's the counterparty risk. Like that's what blows this up catastrophically.

Well, so what I always think about, right, and it's important to consider all considerations. There's counterparty risk. There's market risk. There's liquidity risk. We give you liquidity on a daily basis at Halo. which is great. We've really pioneered a lot within the secondary liquidity space or market within structured notes. But the terms only matter at maturity. So you're only going to get the full benefit of the upside and the full benefit of the protection at maturity date.

When you get back to your question, Michael, is I look at it in two ways. Number one, if you're new to structured notes and you're not a bank credit expert, which is totally cool and reasonable, stick with the majors, stick with the JP Morgan, stick with the city groups, stick with the, as I always joke, they're not too big to fail. Now they're too big to save. Right. So think with the too big to save banks. Think about UBS. It's twice the size of the Swiss National Bank, their balance sheet, right? They're too big to save. So think about the two big to save banks. And what are those banks do? They're the ones who ultimately fund and support the FDIC. So if you're worried about those banks are going under, then you should be worried about the

FDIC. And if you're worried about the FDIC, then God help us all. All right. So we've done a pretty thorough examination of structure notes. One of the things that's appealing to me about the structure of these structure notes is that while there are potentially a lot of moving parts, you can control your risk, which is something that obviously you don't get in a lot of places. And of course, there's tradeoffs, like obviously, but the fact that you can decide, no, I don't like that tradeoff or, oh, I actually, that sounds attractive. That's the part of it that I enjoy. Structure notes are, that's a very important point. Structure notes are a vehicle. I was recently on TV and they were asking, well, how did structure notes do in 2022?

Yeah, it's not an asset class. It's a rapper. So I said, how did ETFs do in 2022? And they're like, well, what kind of ETF? I was like, what kind of structure note? They can be linked to whatever you want them to be. They can do whatever you want them to do. That's what's so beautiful and elegant.

And always start with a thesis of what do you want to do, come to Halo, and we will help you both through our technology and through our personnel to be able to put on that investment or that trade and construct something that matches. your investment thesis. Now, let me give you an idea, right, of some of the things that I'm looking at right now, structured notes that we have not talked about to your listeners. If I can, it's your show. Please, no. Ben's a big idea guy. Just thought out of them. Yeah. Well, no, before, so one of the things Michael and I have been talking about for a while is just you have 10,000 baby boomers retiring every day from now until 2030. So there's going to be 70 million, 70 million of them that are

retired. They have more wealth than any older age cohort ever, especially for that size. So they're going to want this kind of risk control, or a lot of them are at least. And so you have these other products that aren't maybe as exciting as putting a structured on at Nvidia or Tesla, but things like annuities and fixed income that they're going to want to look at as more of a wealth preservation or more certainty on their cash flows. We can talk about some of that stuff. Wait, wait, before we get to that part of it, I do have one thing. So it's not Nvidia, but Bitcoin. Bitcoin's gone parabolic as well. I don't really feel like selling. You have anything for me? I have a lot of opinions on Bitcoin for you. Any structured notes around that yet?

Not in the United States. So we do internationally. And for our international issuers, they are comfortable issuing structure notes around Bitcoin. We have been approached. Halo's been approached by a number of Bitcoin ETFs, given our distribution, our size to create structure notes around their ETFs. All right. So maybe, maybe one day. We're trying. I, as I am publicly on record. I am not a long-term believer in crypto assets for... Make Michael the guinea pig for your first ever Bitcoin structured. No. Well, we've got the demand. It's really about the issuers comfort, right? And, you know, it's still kind of this gray area with banks and the OCC and the SEC of creating these products

on Bitcoin and FTC would have done it for you if they wouldn't have gone under. Yeah. All right, fine. So back, all right, so fixed income annuities. What are you guys doing there? Let me talk about so, and this is kind of a good point is let me bring up a new idea that that you probably haven't heard of before on the structured note side because it's a new type of trade. And then that's a perfect segue into Ben's comments about how do we preserve wealth and how do we ultimately generate income, not just for people who are retiring, but for young people like us, too, right? We all have our own savings and investment needs. And so a popular note that we've been seeing is called a catapult note. Have you guys ever heard of a catapult note

before? I hate the name. I hate the name. So don't spare me the judgment of the name. But you haven't heard of it yet. No, it could use some work. It's so good. Good. I really, I really enjoy. All right. Hit us. And so one note, it's on our calendar right now, our monthly offerings. You can buy it for $1,000. And I'm not giving investment advice. I just think it's interesting.

And so it's an 18-month note linked to the S&P 500. Okay. Go on. And so in one year, if the S&P 500 is up a penny, you get a 9.5% return. It gets called. As long as in the positive, by any means, you get that return. From the day you buy it. it. If it's a positive, you get your principal return and a nine and a half percent return for that

12 months, which is pretty good, right, the historical average of the S&P. Is that like a year and a day? So it's long-term gains? I don't give tax advice, but it is long-term capital gains of what I have experienced. All right, so go on. And so that's the that's the upside. So in one year we're going to look, right? If it's up, you get the nine and a half percent. If it's not up, the note rides on for another six months because it's an 18-month note. Right. And ultimately, it converts into a growth note. So now you get 150% of the upside of the S&P 500 uncapped. From which point in time? From the day that you bought it. And so let's say that the S&P in 12 months is down 10%. Right. Now, okay, great. Still from the day you bought it,

you're getting 150% uncapped upside, which usually when the S&P is down over a six to 12 month period, the S&P has got a very high probability of being up. So you get that in enhanced upside to make up for those losses that you're occurring in the rest of the portfolio, by the way, because this isn't your only investment. You've got long equity exposure in your portfolio. You're getting that enhanced upside. Does that make sense? Uncapped. So the S&P then rips like it did last year. Awesome. Now you're getting that enhanced upside. So let's just say you bought this note in 2022. Markets down 20%. Oh, gosh. So I'm not going to get called. Market now rips another 20%. You're about flat from where you were, but you're getting 150% of the

uncapped upside. So you would have, you would have outperform the SMB. But the upside starts from the 12 months, not from the beginning. So you're not like having to make up for your initial losses. It starts from the beginning. It starts from the beginning. It starts from the initial date. But usually when you have those downward moves in the market, you get those snap back. Right. Sometimes. Now you can go, well, to your point, right? It doesn't need to be 18 months. there's ones out of there three years. Okay. All right.

So what happens if, what happens if it mature, what happens if after 18 months, the S&P is still negative? You die. No, no, no, no. You win. You've got 10% hard protection. And so on the downside, you're, if the S&P is down zero to 10 from the day you bought it, you're down nothing.

If the S&P is down 15%, you're only down five. So you've got the 10% hard protection on maturity. You've got 150% uncapped upside at maturity. and at the one-year point, if the S&P is up, you get called with an above market-like return. I don't hear it. I love it. I do. As a compliment to my long equity, right?

So again, it's not the only thing in my portfolio. Now, to your point, Michael, like maybe you want to consider going out two years. There's one on the Russell 2000. That's a three-year note on the Russell 2000, 20% hard protection. If you get called, you get a 10 and a half. half percent return. And that's after 12 months or three years? After 12 months. Okay. And then then if it doesn't get called, you write on for another two years and you're getting about 250 percent uncapped upside on the Russell 2000. But so again, this is, I think the best part about

something like this is just that you can lay it all out. Regardless of what happens, you can't predict what's going to happen in the future, you have some parameters. But that's what I love about this. It's like you know what's going. You know what your return is. Right. So it's like, okay, if the S&P or the Russell, whatever. If this happens, I get this. If that happens, I get that. If that happens, I get that. And you could say, no, I don't, I don't like any of those, but fine. So pick something else or don't. Exactly. And that's where our conversation start, right? Because your listener might say, well, I really like that note because my three scenarios are I get called after one year and I get above market return. I write on for another two years and I get uncapped upside, which would

ultimately outperform the passive ETF that I would buy at that same point in time. At the same moment time you're making investment decision. Structured note or passive ETF or mutual fund. So if you choose the structured note route on March 22nd instead of the ETF route, you're getting the 150% uncapped upside that you wouldn't get from your SPY. You mean you're catapulting? I still don't like the name. But I don't work at the structure notes issuance desks anymore. And you've got the downside investment protection, which gets into Ben's point of this is where you want to talk to Halo because maybe you're super tax sensitive. Well, you could create similar structures like that within the annuity wrapper. To Michael's earlier point, it's a wrapper. Same thing with annuities.

And Halo, about nine months ago, launched our annuity platform. It's been very successful for us. And it's been very successful for two reasons. Number one is that people are tax sensitive, right? They're income sensitive. They have income means as we're getting older, as Ben was talking about. And so these annuities look really attractive because they're fee-based annuities. That's what Halo deals with. So we get all the part of my language, all the bullshit commissions out of these products that made these products just unpalatable. And I'll raise my hand.

I've never, prior to Halo launching annuities, I've never bought an annuity in my life. And I was on record at Credit Suisse to say, I'll never buy an annuity because it wasn't relevant to my practice. And now when you're looking- So even though you like structured notes, you were anti-annuity. No, because of the fees and all of the, just the garbage. stuff that went into them. What if you have a structured settlement and you need cash now?

All of J.G. Wetworth? But I'm sure you see this as a big growth part of your business because there are going to be plenty of people who just say, either for part of my portfolio or for all of it, I don't want to take market risk. I want to create my own pension plan or whatever, however you view it. Exactly. And so ultimately, back to both of your point is we're all unique as individuals. And it starts with what do you need?

both from a science perspective and from an art perspective, right? And portfolio management is not just a science. Well, from a science perspective, Jason, I need more hair. No, you don't. You have a very efficient haircut. It looks great on you. I love you, brother. Thank you.

And so, you know, to that point, right, is you have to start with that in mind of what's the science, meaning what does my client ultimately want to achieve from a risk and reward perspective on the portfolio, but also what's the art? How does Jason feel when Volta? volatility rears its ugly head, right? And can I withstand those down drafts of 2008 and 2009? Barton Biggs is right. Put all your money in the SPI and go up over time. But Barton Biggs also says that at the end of the day, most of us don't have the metal to do that, which is why he always talks about the importance of investing with protection, even though he doesn't mention

structured notes. But he does talk about annuities and other protective investing products all the time because of that thesis, right? It's the sequence of returns risk. We don't know when we're going to start investing, and we don't need liquidity. We don't know when we need liquidity. That's what I like about these annuities because there's annuities on our platform that are buffered structure nodes. There are one year product, three year product, five year products, seven year products, linked to the S&P. So these aren't like annuities that you're buying forever then in some cases. We have that as well, but there's new annuities, which I really like. They're just, wait, wait, hold on Jason. Are these, are these like an insurance company based annuities?

Or are these something totally different? The counterparty is Alianz, the counterparty. is Jackson. The counterparty is AIG. Allian said, I'm not pitching anybody, but Allianz does a great job with their RILA offerings. So does Jackson. So how does what you're doing differ from what people are used to thinking about when they hear the word annuity? Well, so A, RILAs are a new product. And so most people are not even familiar with Rylas. They're used to hearing, oh, I'm going to invest my money. I'm going to ultimately recoup my money and hopefully some return over a lifetime benefit. Is that, does that stand for something?

Is that a, is that an acronym? So those are usually fixed annuities or fixed index annuities are typically the traditional types of annuities that you would be thinking of. No, I'm sorry, Jason, the word, are you saying Rilik or what are you saying? It's called a Rila, R-I-L-A, and ultimately it's an acronym for a buffered structured note. And so, you know, everyone's got their own jargon and we don't need to go into all of that. But with these Rilis, what's interesting about them is that if you like buffered structure notes, So forget about traditional annuities for a second.

This is an annuity. It's an insurance product. But if you like those buffered growth structured notes, you should think about these types of products because they work the same way. There's a maturity date. And you get to pick it. One year, three year, five year, seven years. There's an underlying.

You get to pick it. The SMP 500, Eurostocks, 50, real estate index, gold index. You get to pick it. There's a buffer. 5, 10, 15, 20, 25. You get to pick it. and ultimately that's and then there's an upside subject to a cap and that upside changes on a monthly basis and you can go into halo and see all of that how is that an annuity well because it's

under an insurance wrapper so what's really cool about that michael is that when that annuity matures right you can actually roll that annuity and not have to pay the taxes into the next annuity which is really nice because you can't do that in a structure in the world you get your money you pay your taxes and then you roll it in the annuity world Instead of getting your money, you can roll that or trade that into a new annuity and just let it roll on, which is what I like because those types of growth structure notes with the buffers, those are staples within my portfolio. As I just mentioned, I always have protection over my long equity in my U.S. large cap core and my

small caps and my international developed and my emerging markets. Why not consider doing it in a tax-efficient way and diversifying your counterparty risk? Maybe Michael feels more confident in insurance companies than he does in banks. So these are insurance contracts, but they're not traditional annuities in the sense that I give you a giant pile of money, then you start paying me back my own money plus interest. Now, we do offer those as well, though, right? And so we do offer fixed index annuities. We offer fixed annuities.

We offer fixed annuities. We offer migas, which migas are relatively new. They're basically bonds in an annuity wrapper. They're super interesting. They work just like bonds. They just pay you a yield on a quarterly basis or on an annual basis, however you want it. And they're very attractive. And those rates, you can usually get, you know, 10-year treasury plus 100 on those miga products, which are quite interesting. And so ultimately what

I'm trying to tell advisors out there is these aren't your grandfather's annuities. I was the first one to say I'd never buy an annuity in my life for all the reasons that we know and you hear Ken Fisher, you know, talking about on TV about annuities. I was with him. I was with them. But now with these new fee-based annuities with technology and just the adaptation of the annuity market, they're getting a lot more interesting. They're getting a lot more relevant, whether you're a high net worth investor, which traditionally annuities would not be relevant to you. They're now more relevant to that market, as I just described, and to the person who needs that lifetime death benefit income of why we traditionally bought annuities. The thing that I'd like to highlight, though,

is it's not just technology of what we built. We built something really unique, which is called an outsource insurance desk. And Michael, I see you raising your eyebrows, so thank you for listening. But wait, there's more. Yes. And no, and I'm being serious. It's actually super cool, especially for breakaway advisors like my former self. No, you need the support desk.

I do. Well, in the yes and, as we say at Halo, there's no yeah buts. It's yes and at Halo. And so when I leave credit suites, right, to go to a Schwab, let's just say, for example, or do our Persian as an independent advisor, if I've got brokerage annuities, I can't take them with me because now I'm a fee-based advisor. I no longer have my Series 7, right? And I no longer have my Series 66. I can't get paid on those. This happened with us recently. So I'm very interested to hear more. Well, great. I'm so glad, but wait, you said, but wait, there's more.

And so on the OID side, what we did is we created an OID, which think of it as an outsource insurance desk, which made me nothing to you. Think about it as a broker dealer for annuities. And so if you are a, if you are a broker who is making the migration to a fee-based advisor, Halo can be your new agent of record on your policy, okay? And why that's important is that you no longer can because you are now a broker. You can't collect those commissions anymore on those commission-based policies. And for many advisors, and that was one of them, we don't like to hold licenses, right, for a variety of different reasons. I don't want my insurance license. Right. You don't have, with Halo's OID, you don't have to have your insurance license anymore. We are the agent of record.

We then enter into an advisor agreement with Ridholtz. So can the advisor still get paid, though? Yes, they can because we can convert those products into a fee-based trail with our carriers and ultimately pay you those fee-based annuities on that legacy business, which is very popular with Halo and it's extremely popular. Yeah, our technology is sick. Everyone loves it. But honestly, as much as I love to talk about the tech, the operations are really what people love about Halo situation. Very interesting. What's also cool about that is that we all, and

myself included, I had clients that had legacy annuities from before I started managing the relationship, right? And they're floating around because one of their relatives sold them an annuity policy 30 years ago. And those usually, those annuity policies, given where interest rates are, may not be attractive anymore. But whether they're attractive or whether or whether or not, we can host those annuities on our OID so Michael, the advisor, can get paid on it, manage it, know what the heck his clients has, centralize all the performance. So you weren't getting paid in the past. Now you're getting paid. And then we can do a full review to say, hey, Michael, your client's annuity, not so great. Here's something that we can exchange. Or,

holy smokes, they bought this annuity when interest rates were super high. Don't even think about selling this, right? But you could still get paid. So that's kind of the, big bang in regards to ROID and the annuities. And whether it's broker dealers out there or RIAs, a lot of people outsourcing their entire OID. So all those advisors changing platforms are moving on. They need to call you if they're dealing with this stuff. That's huge. What an unlock. Yeah, one major insurance company just outsource their entire OID desk to HALO for the RA market, just to put that in perspective. So if you're at a wirehouse and you've got a decent portion of your income tied to these annuity sales.

that you've done. And you're going to an RAA and they want you to kill your seven. That makes the transition borderline not feasible. Exactly. And that's why I always say about structured notes, though, too, right? Like, look at me. 20% of my book on average with structured notes, my family office, 25% on that side. If I was going to a independent firm, you have to support structured notes or you are not getting me. It's 20% of my book. Right. And so same thing with annuities. And so that's a really popular trend in the market. To Ben's earlier point, we also have just fixed income, just bonds. And we've seen a ton of demand from our advisors because they like the Halo platform. So why would somebody buy a bond through Halo versus the other million options out

there? It's a great question. So why Halo and not Schwab and Fidelity outright? Well, number one is it's the user experience, right? None of us want to use 100 different platforms. If they're already using Halo for structured notes and annuities, maybe they're using Halo's new structure note SMAs, then they want everything centralized and manage in one spot. That's number one. They love the user experience. They love our filtration. They love the bonds that we now have on the platform. Number two is that we work with our partners to launch exclusive primary offerings on our platform that you can't find anywhere else. And so there's an exclusivity factor, just like we do with structured notes, right? Halo creates its own structure notes with our issuing partners. You can't

find them anywhere else, right? Same thing with the fixed income side. And number three, it's the personnel. It's our team. People like working with our team. They like working with our sales support and like having that knowledge base where it's not just going into the abyss and no offense to a Schwab infidelity because there are partners and nothing against their platforms, right? But it can be overwhelming. You just see a huge run. Yeah, sure. And like, what the hell am I even looking at? Right. That's the whole point of the customer service and the platform that we provide. So we've got like fixed the floats, we've got Ranger Cruels, we've got steepers, we've got just cash bonds that pay you a quarterly coupon. It's super

cool. Jason, we covered a lot today. For people that have their interest peaked, where do they go to find more? Haloinvesting.com. And so when you go on Haloinvesting.com, it's not just about clicking the sign up button. I really want people to check out the Halo Journal because we take great pride in the content and the education that we produce. 52% of our customers have never bought a structured note before. And that is what I take most pride in is because we don't hawk, as you guys can attest to you, I don't hawk anything. I give you ideas, but more importantly, we give you education.

We give you training because ultimately we don't want to relive the sins of our past of 2007 when people are just jamming structured notes in people's portfolios for the commissions and they didn't have a clue of what they were doing. Those days are over and those days are over because of us, but we do need protection. and so go and look at the education, the content, and of course, you know, contact us to sign up and you'll have a dedicated rep to cover you. Appreciate it, Jason. Thank you.

Yeah, appreciate you guys. Thank you. All right. Thanks again to Jason to learn more if you're an advisor haloinvesting.com. Email us, Animal Spirits at the compound news.com.