Animal Spirits Podcast - Talk Your Book: The Financial Advisor's Cheat Code

Episode Date: April 11, 2022

On today's Talk Your Book we spoke with Josh Smith from VRGL about how his company is making it easier for financial advisors to bring in new business and understand their clients.   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 Virgil Wealth. Go to VrGLWealth.com to learn how they can help you as a financial advisor, bring on more clients. 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 Batnick and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion. of Ritt Holt's Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritthold's wealth management may maintain positions in the securities discussed in this podcast. Michael, I've seen this in a number of books, but there's a guy who's Supreme Court Justice, Potter Stewart, back in the day, and the Supreme Court was doing a ruling on pornography cases. And they were trying to figure out, you know where

you're going. What is pornography and what is not? And Stewart's famous line was, I know it when I see it. And I feel like when it comes to financial advisors looking at prospects, they kind of have this thing in the past where it's like, I know it when I see it when they find an advisor that's not taking care of a client, but it's hard to show it. Right. So they have the qualitative. They can kind of tell. Like you wouldn't be talking to me because you have another advisor if you weren't unhappy, but you don't really know how to quantify that. Right. So Virgil Wealth, who we're talking today, they can kind of help you know. when you see it and understand and quantify it.

So I don't want to step on too much of this, but the software that they've built is something that I've been looking for, asking for, literally for years. And when I saw their press release come across, I read and I said, I called Ben, I said, wait a minute. Is this what I think it is? And so we did a demo with Josh. And sure enough, it was what I thought it was. So we are super.

I have not seen you so excited in a long time as you were when we found out about this. You were on cloud nine. I still am. I cannot wait to integrate this into our wealth management business. And I'm sure for all the advisors listening, you will have a similar reaction that I did. So with no further ado, here is our conversation with Josh Smith of Virgil Wealth. We are joined today by Josh Smith. Josh is the co-founder and CEO at Virgil.

Josh, welcome to the show. Thank you for coming on. Thanks, guys. Happy to be here. All right. Before we get into Virgil and everything that you're building, which we are super excited about, why don't you give us in the audience a 30 to 60 second intro on you in your background than what you did before Virgil? As Michael said, my name's Josh Smith and co-founder and CEO of Virgil. Before Virgil, really my entire career has been an institutional investing. Before Virgil, I was

co-founder and CEO of a company called Silovus. That company ultimately from February of 2013 to March of 2020 built what is widely considered kind of the multi-asset class portfolio management system for limited partners and asset owners. It's leveraged by many of the world's largest endowments, foundations, family offices, and multifamily offices to act as their investment book of record. That company was acquired in March of 2020 by NASDAQ. So I've spent really my entire life trying to understand investments kind of across the board, stocks, bonds, alternatives, as well as building solutions that help investors make better investment decisions. That's ultimately kind of my life's mission.

That's a good intro. Thank you for that. What was it like selling a company, selling your company during the pandemic? Did you close the deal before the pandemic and March was the signature? What was that like? Yeah, it was actually very crazy because March 5th was our signature in fund release. And the next Monday is the Monday that I think the Dow fell 10%. So the funny part of the story is I actually kicked my general counsel out of his chair at 3 a.

to make sure that we finished our docu signs because he was so delirious, I'd have had him up for about 48 hours straight, knowing that the markets were starting to get volatile with the COVID risk and people starting to go into lockdown and shut down. So it was very surreal. Thankfully, the NASDAQ guys were fantastic and the investment guys were fantastic. And it was just an excellent outcome for everyone involved. So how long do you wait until you say, all right, I did that, I sold it, I got an exit. I have the itch. I want to do something else. How long did that take? It was more of really loving the fact that we had built such a great application. It was also the realization that especially as you enter a big company, there's not upward mobility

for everyone. And I built a really phenomenal team underneath me. It became very clear to me that I really love the two guys in the coffee machine situation in a garage. And while Virgil scaled, I'm sure we'll get into that pretty darn quickly. It's no longer two guys in the coffee machine. I just really like the aspects of building. And I love the aspect of starting from scratch. interacting with clients, building a business. That was so much fun. It was about six to nine months when I decided, let's give my team a good opportunity and let's try something new. All right. So what are we talking about? The winter of 2020, you had an idea. You went to your previous team and you said what? Well, it was really, I was approached. So I was approached by an

outside party, really an RIA, a wealth manager in a family office who said, hey, we've seen this idea of what Virgil would ultimately become effectively work. And really that idea was, hey, how do we accelerate kind of the client acquisition process as a wealth manager? How do we make clients understand what it is? We're trying to do for them faster. And so they had actually implemented this whole concept of what Virgil would become, and I know we'll get into that more, but when I heard about it and ultimately said, oh my God, this sounds like something that I've got experience in, in terms of data analytics, in terms of aggregating information. This sounds like something that I can really do with some of my team. And I was really lucky that once I had decided

to leave, and I actually wasn't the first one they approached. They actually approached my co-founder Josh Zimmerman first. And he said, well, I don't know what it means to be a CEO. Let's go talk to Josh. And so I went and did that. And then ultimately, the team that I brought on had gone on to other locations and helped led sales into transactions for those organizations. As an example, Shane Hopkins, and he just loved the idea. And so I've been able to proverbially put the band back together. Our introduction to you is actually through a listener of the show, which is great. We've got Nislew community here. And when Virgil was put in front of us, Michael and I took a look at it and saw the press release. And Michael's eyes lit up and said, if they do what they say they

can do, I've been looking for this company for years. Michael, you were so excited. I don't want to get my hopes up too much because if they can't deliver, then... Josh, the first time we spoke, was I excited? I'm pretty sure I cut you off. He said, all right, let's cut to the chase. Here's what I think you do. Is this what you do? Yeah, I mean, Michael definitely an intense guy. So at first he was like, let's stop. And I was like, oh, no, this has gone poorly. And as soon as we really just had a conversation, you said, I have been looking for this for many years. And that's exciting. That's when you're an entrepreneur. When you hear that, your face just goes, everything about you. That's something you cannot replicate anywhere else. Your face just, everything about

you just says, I'm in love. Let's do this. Let's keep doing this. So what is this? What have I been looking for. Not to put words in your mouth, but really the idea of Virgil and what we heard from Michael and the team is this concept of, hey, we talk to prospects all the time. We talk to people who are interested in our wealth management services all the time. Unfortunately, that process, well, fortunately or unfortunately, but it's highly what I refer to as qualitative, but it's a relationship driven process, right? It's let's get to know one another. Your buddy knows me. Your parents know me, whatever it may be. Let's go out for drinks, a beer, whatever it is, play some golf. And so what we wanted to do, and the idea of Virgil is this idea of, well, let's make it

both valuable for the financial advisor and for the financial advisor prospect or prospective client in meeting one or two. And the way that we do that is, as the financial advisor, Virgil gives you the capability to effectively say, hey, my prospect, why don't you just upload your five statements from XYZ bank or XYZ wealth manager? And we're going to run a series of analytics that you've never seen before. I can pretty much guarantee you have not seen performance, risk, diversification, taxes, and fees over every single one of your portfolios. And when I say one of your portfolios, a lot of people have multiple advisors. But even if you just have one, this financial advisor can bring all of that information together in a really consolidated way just from your statements, no touch for you, no touch for the advisor.

extract every piece of information off of those statements. Again, absolutely no touch. As you guys know, this is a process that is incredibly painful and manual. And then we run these analytics. And the beauty is, is then you can say, hey, I can see what's going on in this prospect's world. So we could just have a really objective conversation about that. But moreover, I can now say, this is how if you gave me a chance, me the advisor, the chance, to run some of your wealth and some of your money, guess what?

This is how we would do it differently. And you can juxtapose those two things side by side and generate a proposal out of it. And the feedback that we've gotten is this process is just so monotonous, so tedious, so time-consuming. And you can literally do this in less than 24 hours, all in a single application. The feedback's been really positive. So this happens all the time where we will see a prospect and we'll get their account statements. And sometimes there's three accounts, sometimes there's seven accounts. and the pages from any bank or custodian, whatever, tend to be long.

We're talking long. And even if we had the time in the day to manually upload the tickers into a spreadsheet, oftentimes there are illiquid stuff, even if it's on a Q-Sip. I mean, some of the stuff just doesn't trade. And so it was impossible, really. We had one very recently where I spoke with the advisor and I said, I honestly don't know what to say in terms of what this portfolio is, because it was 75 pages, there were 14 illiquid investments, I can't really give you a

cohesive, okay, here's what you're doing, because it was so convoluted, and stocks and funds, completely indecipherable. And so what your solution is, and all that I wanted was a piece of software that could leverage machine learning, and we will definitely get into how all of that works, where I could just upload a PDF and you just show me on a pie chart, this is the allocation, here's what we're proposing. and here's what you're currently invested in. And you guys go much deeper than what I was looking for, which is phenomenal. We'll get into that.

How did you guys build this? Part of it is just having the intellectual property of being in and around the space for years. And one of the things that the founding team here has seen, having worked with many of the largest families, many of the largest institutions, also now in the wealth management space, and we've put together a good wealth management team, is really just understanding the formats that come from each and every one. one of these banks. And the lucky thing is, is they don't change very often. What you see is additional sections like crypto is starting to show up on these statements or alternatives have started to show up on these statements. And so my team has meticulously put together a series of processes and technology that range from robot process automation and natural language processing all the way down to no technology in the world can read a scan statement

from somebody's mailbox that kicks off a series of processes that we still guarantee 24 hour turnaround on. And so for me, this really is part of our moat is the fact that we've mapped 50 plus broker dealers and custodians already. It's fully straight through, whether that be Schwab or Fidelity or Goldman or JPMorgan or several other custodial banks or broker dealers. And that's part of the intellectual property. That's part of us having gone through and literally mapped and templated it out every single one of these broker dealers and custodians and building that moat so that we have a head start on the market. And we feel really good. We basically have 100% success rates in anything that we have templated out. And when something does fail, my operations team can go

into a user experience directly on their screens, remap whatever's failed, and within a few minutes, be back up and running fully. It's a really streamlined process, and we built technology around that. One of the things you told us when we asked, well, how in the world do you do this? And you said, well, it uses machine learning. What exactly does that even mean? Like to the layperson like Michael and I that aren't technical in this. Tell me what that means, because I think there's a lot of people who who've heard this and just don't exactly know what it even means, and I'm probably one of them.

There is a lot of AI and machine learning and stuff that's thrown around that I would sometimes question. I mean, the idea here very simply from machine learning is just the idea of as we continue to feed more and more information to the system, as it sees more and more types of statements, the machine, the artificial intelligence, starts to recognize patterns. It starts to make assumptions. And what I will tell you is machine learning is fairly useless the first 20 times you do it.

It starts to learn, though, when you get to 30, 40, 50, 60, just like a person. You don't learn a foreign language by saying it one time. You have to continue with repetition. And that's the same thing with machine learning. So now that we're to statement 50, statement 51 probably takes 5% of the time statement one took us to map. So it's the continued education and the continued pattern recognition. because that, to a large extent, is what machine learning is that we have developed. And that gives us opportunities to apply that now.

Now that it started to recognize templates and statements, it starts to do correlations and things as well. And that's really when you start building this pretty cool symbiosis between the data extraction and the analytics that are capable when the machines start to recognize correlations in other forms of analytics and statistics. So, Josh, when I went to our vendors and partners on the technology side and asked them for the solution, all that I was looking for was, and you know, it's funny, the way that I described this was pie in the sky. I said to our partners, like, this might be pie in the sky, but some sort of

machine learning, I don't know what that means, where you could just upload the PDF, and all that I really, the only output that I was asking for was a portfolio. At the household level, they've got Roths and trusts and whatever they have, just at the household level, what is their pie chart? Show me that. You guys have gone so far beyond what I was looking for. And I think when I got off the phone with you, I think what I said to Ben was like, this is like a cheat code for financial advisors. So what else did you build into the system above and beyond just the portfolio? And not that this is right or wrong, but basically what you said, Michael, is really all that's kind of available to an advisor working with their prospective client because of how tedious this is.

The idea of extracting positions as they exist today, if you can even get all of them, and then saying, well, this is how we do differently and try to speak to why that is. But what we found, both as people who leverage wealth management, who've been in and around the space for a long time, is I don't just want to know what my positions are today and how you're going to do it differently. I would love for somebody to explain to me, how did I end up to where I was today?

And what's your perspective on that? And so that's something we do in our performance pillar. So we call it our five pillars, to go through those again, performance, risk, diversification, taxes, and fees. And so in performance, we're extracting positions. So you can look at the positions. But we're also going to tell you, hey, over your last, however many statements you've given us across however many banks are advisors, why have you performed the way that you have? Has your advisor done a good job based on market timing or based on security selection or asset allocation? Have you been a long-term investor? And so we're really looking

at explaining that for clients. And a lot of times they're not hearing. it from their advisor, why those things have happened. And then you get into risk. That's very position-based. But having all of this information, what happens in a financial crisis? Everybody's talking about interest rates right now. If the Fed raises 50 basis points, if the tenure goes to 7%. What does that mean for my portfolio? And so we can easily show you that. And then you talk about diversification. Well, one of the things we show is we're doing full look through diversification. And this is very unique. The idea of, I'm just not in seven Vanguard funds and seven I shares ETFs and seven other

mutual funds plus some directly traded securities. We're looking through there. You would be amazed at how many people are 10 plus percent allocated to Apple right now. But according to their advisors or according to the world that they're investing in, they're in 25 ETFs. Well, guess what? If any of those ETFs are generally market weighted, Apple's a big portion of it. And then we get into two areas that we think are real critical.

taxes and fees. So are you investing in mutual funds or ETS or is your advisor potentially trading too much? And then the fees, we find to be a massively eye-opening situation, which is, well, your advisor might be charging you 50 basis points, but then if they have you in their own proprietary fund vehicles, you might be getting charged 50, 100 basis points more on top of the advisory fees. And so we put all that data together, built a global security master with all of this information that just makes all of that at the click of a button just based on the statement information fully transparent to both the advisor and the end user to hopefully help them lower fees, mitigate costs where it's unnecessary, be tax optimized, actually understand how you're

going to perform in the future and why you've performed the way that you have in the past and make sure that you are truly diversified in the right ways. That's something that we bring to bear for anyone using the application. One of the hardest parts about this whole thing, this relationship from the client's perspective, is like they might have an idea that their advisor is not great for them, but they don't have any way to show it. And if you're a new advisor talking to a prospect, you might be able to say, like, I in my heart of hearts probably know this advisor is not doing everything for you, but it's hard

to quantitatively say that. Qualitatively, you can probably say it, but there's no really easy way to say it. And I think even something as simple as the fees, and you talk about how there's like different layers of fees, some people probably don't even understand the types of fees. they're paying beyond an advisory fee or whatever. And I think that part is simple too, where you can kind of show people easily on paper or on their screen, here's exactly what you're paying. Did you even know this?

So I think you can bring things to light that your client probably didn't even understand that they were getting or not getting. Based on the clients that we've implemented and we've seen, the feedback we've gotten is probably 50 plus percent of the clients they've showed some of these analytics to certainly did not realize certain aspects of their portfolio in many times that's fees. In terms of mapping out past performance, are you just assuming that the portfolio today is what they had held for the last three and five years? We view this as a, again, a symbiotic process. It's this idea of what we usually get to start with is one to three statements.

So you, the advisor, would go out and say, get me a statement. And people you get to a point will say, okay, here's a statement. Then the advisor comes back with Virgil and says, well, here's what we can show you off of one statement. And the person says, holy heck, here's some more. And so what each statement has in it is all the transactions, is the positions, is the realized game loss. And so whether that's an annual statement, a quarterly statement, or months going backwards, we're able to extract all of those transactions and everything over the period you get us. Now, if someone says, hey, I'm only going to give you three months, but I'd really like to kind of, or the advisor says, we can just estimate what's happened before that. The advisor actually has control over taking those positions back historically and just making it clear to the prospect, this doesn't include any buys or something.

sales from this point because we just don't have that information. If you'd like to give it to us, we can make this incredibly even more relevant to you. I'm curious to hear like how other advisors have reacted to the product. Are they as enthusiastic as I am? Or like how has the sales cycle been so far? We acknowledge that different advisors at different firms, there are some advisors that are billion dollar shops selling only 50 plus million dollar net worth individuals. There are other advisors at billion dollar shops talking to 50 people a week. So what we've seen is that For advisors who really do have this cumbersome process or are interacting with people with very complicated portfolios, this has been kind of a godsend, is their reaction.

We have not talked to a single firm who doesn't say, well, first off, they kind of say BS. The second reaction is, you know what, we'll show you. This is super easy. And then they go, holy heck, if you could do these three other things, this would be even better. But where do we sign to some extent? We've had a really good launch over the last couple of months, and we've had a really positive reception from the marketplace. And frankly, it's just boiling it down to how do we make cost work for you guys? And that's something I think we're really good at figuring out.

I'm curious the difference your past company was working with institutional investors, and that's a different subset than advisors. How is that change? And what's the difference between those institutional investors who are in downments and foundations and have a portfolio of this stuff versus advisors who are working directly for clients? First and foremost, most institutions investors are not-for-profit. So you immediately eliminate the tax equation. And so learning taxes and how they affect people, although they affect me clearly, was part of it. It was part of getting into the wealth management world. A macro hedge fund, not a great investment typically with 500% leverage, not a great investment for an ultra high net worth individual. And so the institutional

world also tends to be invested heavily, heavily. You're talking 50 plus percent in alternatives. And so those differences, the way they invest, the long-term nature of their capital, Princeton Endowment's been here for 300 years. It's going to be here a lot longer than I'm alive. You just run into situations where it's just different timelines. Alts are a huge difference. But there are a lot of similarities. And moreover, the world of wealth management is moving in the direction of the institutional space. You see alts becoming a more prevalent piece of retail wealth.

you see tax minimization becoming real considerations. You see relatively low performance expectations and kind of your normal stock and bond asset classes over the next five and 10 years. So where are you going to get yield from? Where are you going to get returned from? And so the movement into real estate, private equity, venture capital, et cetera, is becoming very real. And we think that we're on the forefront of that. And most of the other applications on the market that have been around for 10, 20 years have no concept at all as to how to even handle a private equity fund, let alone some of the more complicated alts. How do you even go about mapping those things? Since it's not like it's trading every day like a stock or a bomb, like how do you provide the analytics for something like that?

We have put partnerships in place in order to get a lot of alternative data. We also, as part of our prior lives, so to speak, worked with many of the largest institutions in figuring out to the extent we don't have access to all of your cash flows on the alt side, what are some good proxies, leveraging public market equivalence, leveraging some other data that's available in the marketplace. There are vendors who have done a lot of work around alts. They just usually sell it very expensively to data distributors or big banks. And so we've got experience with those guys. And now that we have large databases to turn to in order to proxy someone's alts or in order to get really, really close, I call it 98, 99% of where you actually are if I looked at all of your

capital account statements over the last five years. Those are things that we really worked out with some of the largest institutions in the world in their prior lives. And have brought that over to the wealth management space. And so we again think that we're on the forefront of thinking through alts without having 100% of the data necessary to calculate your actual returns and risk. Josh, last question for me. In terms of advisors come with you and using this, this is not an inexpensive piece of software. So how are they using in terms of cost?

Is it the type of thing where you've got 25 prospects cost you this much? Is it tiered? Are they using it only for their more complicated ones? Like, how does the pricing package work? So first off, on kind of your last point, I do not like to incent people to choose whether or not they use a piece of technology. I believe it is critical that technology is a part of a process and that people and the firm have to build a process around that technology. So for that reason, we really only exclusively sell enterprise licenses. So you buy from us, everybody in the firm uses it.

And we come in and basically give free consulting as part of that to say, all right, how can we help this person streamline their job? How can we improve your process? How can we take your proposal process down from a week to 24 hours or even a few minutes in some circumstances? And so our goal where we've been really successful is there are one, two, or three people who are basically dedicated to pulling data out of statements and putting together proposals. We can totally take those people and increase their output tenfold or redeploy them to better areas where their intellect can be used more appropriately. And so that's ultimately our goal. Both save you significant cost from a real cost and an opportunity cost perspective and then help you accelerate revenue. The stat that I haven't said yet, Michael, is of our clients, 50% acceleration in time to revenue

and a 25% larger check. So our system pays for itself within the first three months. That's ultimately the goal. Meaning you're able to close an account much faster by going through this process because it makes your life more efficient as an advisor. Probably. our goal is as you guys know in sales i mean how many times have you spent a year two years trying to get somebody as a wealth manager to potentially become a client and then you ultimately realize

i was never going to get this money you spend all this time energy and effort so part of sales is part of business development is get to yes faster get to know faster and then make it worth both of your time so that's what we do really really well is we really think we can help you here here's why here's some objective information we'll keep showing you it's fast and so yes getting to yes faster, getting to know faster, and where they say yes, they trust you more because they've got a real objective analysis. It's not that they don't trust you. It's that it's like, wow, I really specifically quantitatively see how you're going to add value and how you're going to continue to show me, you're going to add value. So I will even give you a little bit more money to start off

with so we can keep building this really effective relationship. That's our goal. And that's what we've seen. Josh, if people want to find out more, contact you, how do they engage with Virgil? Yeah, so our website is www.V-R-G-L-Welf.com. We're on LinkedIn and Twitter. Feel free to engage with us there, Virgil Wealth, to the extending body's in New York and wants a happy hour on the 25th. Feel free to do that as well. Awesome. We'll see you then. Josh, thank you so much for coming on. We appreciate it. Thanks, guys. Thanks for having me. Appreciate it. Okay, thanks again to Josh for coming on. Thanks to Virgil Wealth. Remember, send us an email, annalspeart's pod at g-mail.com. Thank you.