On The Brink with Castle Island - Chris King (Eaglebrook Advisors) on Digital Assets and the RIA Industry (EP.278)

Episode Date: January 25, 2022

Chris King, Founder & CEO of Eaglebrook Advisors, a digital assets SMA platform, join the show. In this episode, we discuss: Eaglebrook's Series A announcement Chris' path into the digital assets space and the origins of Eaglebrook Advisors Crypto penetration in the RIA and asset management space Inflection points in the market over the last couple years that have put a spotlight on solutions for RIAs and asset managers Key parts of the SMA solution that offer advantages for end clients Eaglebrook's new product launches in 2022 To learn more about Eaglebrook visit their website. Sponsor notes: Compass Mining is the world's first and largest online marketplace for bitcoin mining hardware, hosting, and ASIC reselling. Start mining your own bitcoin by visiting compassmining.io

Today on the podcast, I set down with Chris King, founder and CEO of Eaglebrook Advisors. Eaglebrook Advisors is a tech-enabled investment manager building the bridge between wealth management and digital assets. Eaglebrook offers independent registered investment advisors and asset managers, the first secure and compliant separately managed account platform in the digital assets market. Today, we're excited to announce that we co-led the series A. Without further ado, here's my conversation with Chris King. by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion.

This is a different kind of market, and the Fed is asleep! The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Conjecturee easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin. Welcome to On the Brink. My name is Sean Judge.

I'm joined here with founder and CEO of Eaglebrook Advisors, Chris King. Chris, thanks for joining us. Sean, of course. It's been a long time coming. I'm really excited for this conversation. Likewise. Well, today is a big day for Eaglebrook. We're excited to announce the Series A investment, Castle Island, co-led that round.

and I'm thrilled to be joining the board. Chris, you want to share some more details on the round? Yes, of course. So we've raised a $20 million series A co-led by Castle Island Ventures. Obviously, Sean is a GP there. He's joined the board as well as Brew Lane Ventures. John Kim is the former president, CIO of New York Life. He's the founder of Brewer Lane Ventures, so really excited to have them on board.

Also participating was civil capital, jump capital, Avon Ventures. ventures, you know, as the other investors in the Toronto. So really excited to have all those individuals invested. They're also joining existing investors, you know, heavy hitters in the wealth management space that include Rick Edelman, Mark Cassidy, former CEO of LPL Financial, Marty Bicknell, Andy Puterman, Joe Merack. So really excited to have people from the institutional VC space, you and Berlin and Sybil and Jump, as well as, you know, large, both management executives that have helped us build this platform starting in 2019 and getting to where we are now. Terrific. Very, very exciting. Congratulations. And again, we're thrilled.

I guess just taking a step back, it would be great to kind of have you share your personal background and how you fell into crypto. Yes, of course. So I got into crypto in 2014. I was a sophomore and undergrad. And I did a case study on how to tax virtual currency back at the time, the biggest virtual currency was Bitcoin at a $5 billion market capitalization. So it was pretty interesting. From there, fell down the rabbit hole because it aligned with my interest in finance, macroeconomics, as well as technology. And it really kind of fit into what I was interested at the time from there,

personally researching, investing, networking within the space. And then in early 2018, I joined the industry full time as a venture capital investor to firm called Morton Creek Capital. We raised money from institutional investors and invested in company. He's building market infrastructure for this emerging asset class, led deals with Coinbase, BlockFi, Bitwise, you know, Back to GOMI, firms like that to really, you know, build the picks and shovels and the infrastructure that were building compliance, scalable, secure investment solutions for mainly retail and institutional investors.

And then to back up a little bit, my dad's financial advisor has been an advisor for 35 years. I grew up interning for him at Maryland. So I understood the wealth management market, how financial advisors work with clients, how they invest in assets, how the compliance framework work is done. So understanding wealth management, then also cutting my teeth in the crypto space, working with some of the most successful founders. I saw a major gap in a lot of information asymmetry where everyone in the crypto space did not understand what an RA was or what an SMA stood for. And everyone in the wealth management space back in 2018, 2019, even though there was client demand and advisor demand, a lot of the executives and decision makers were basically saying, hey, we think this is a fad, we think this is tool mania, this is going to go away. This is highly speculative. This doesn't make sense. So there's a lot of information asymmetry and there's a highly underserved market. A lot of people don't understand. Everyone always talks about retail versus institutional. Well, there's a market in between that's a $30 trillion market in the U.S., which is the Waltch Management market, but it's very niche. It's not well understood. They have very specialized technology, a lot of regulatory compliance frameworks that are well understood.

So I wanted to build the technology to basically unlock this capital. And another way to think about it is that let's call it your 50 plus, you know, 50 to 80 year old client. They're not going to go on Coinbase themselves, wire over 500K, open up a trust account and then trade up themselves. They do everything through their financial advisors, especially things that fit within the all-term investment bucket. So we really wanted to build the technology and the solutions to unlock that $30 trillion of capital that was held from these gatekeepers, which are the financial advisors. So we built technology specifically for these wealth management firms, as well as financial advisors. We ended up raising our basically seed round in October of 2019, started building and writing

code in 2019. We essentially built this platform with one of the top five RIs in the U.S. Marinerner wealth advisors. So we work with their legal team, compliance team, operations team. team, investment team, client service team to make sure that this was fully turnkey for Mariner. He was a turnkey for Mariner, one of the top five RAs is going to be turnkey for the top 2,000 RIAs, right? So that took us about 12 months to build that out. We went to all the crypto custodians. A lot of them didn't even know what an SMA was. We were the first firm

to build an SMA platform in the crypto market, which is why it took so long for us to launch. We partnered with Gemini Trust Company as our preferred and primary custodian back in 2019. We launched with Mariner Walth Advisors in November of 2020. Since then, we've signed over 54 RIAs that are all over a billion dollars. Most are over $5 billion. So we really work with kind of the top 300 RIAs as it's more scalable, less blocking and tackling. It's a lot easier to work with, you know, get approval and work with more advisors. And actually, we just close the deal, which will be announcing soon with a $300 billion

$1.BD. So now we're starting the R-A space. We're crushing it there. Now we're moving to the IBD space and scaling up to that, the hybrid model. So we're really excited to continue building these solutions, kind of what our mission and our vision is. There's kind of a few different layers there. But we want a direct offering in every single financial advisor's hands in the US, which is basically our SMAs, where the client owns the assets directly in their name in an institutional grade custody account, which we think will be the vehicle of choice over the next five years as, you know, we both understand that, you know, this asset class is going to go from $2 trillion to hopefully $10 trillion over the next, you know, you know, five to 10 years. So we really want advisors to have this as a tool or toolkit. When they do go to allocate, they have the flexibility. We can get into why crypto SMAs, why they're just starting to become prominent and why RRAs are selecting our solution versus private funds, OTC trusts. hedge funds and all the other options. Terrific. Yeah, it's a super helpful background, and it's incredible what you've kind of done

in a short period of time. I remember back in 2018, I think you were the first person I met at that year's consensus. And then a few short years later, we're working together and you're building something pretty special here. So I guess just to step back, you know, what are the main products that are offered today? And like, why did you develop SMAs? And maybe it'd be helpful to just kind of understand how the SMA market has come to be over time. Like, why was it developed and where has it found success? There's a few questions in that.

I'll start with the first one. So back in 2019, when I started the company, there was not many options for financial advisors. There's the public OTC trust. That's the GBT's and a few of the other ones that have come to market since. That was one option. There was tracking error high fees, but you could point and click on your brokerage account. So that's what some advisors were doing, even though a lot of fiduciary investment advisors didn't think that made sense. Then the other option was telling your client to go put 500K in Coinbase, which is something called selling away, which is noncompliant.

If they go put 500K in Coinbase, they deal with the security, their phone or email gets hacked. They lose those assets because Bitcoin's a barrel asset. You're going to get sued or you're going to get a complaint with the SEC and it's not really a good option. So at the time, there were very few options. Some of the private funds had been spun up, but there's liquidity. issues with private funds, obviously fees, and then also integrated integrations to existing advisor workflows just didn't exist. You need to make it as easy as possible for the advisors to allocate or else your product is not going to be available. So it's ease of use, seamless

integrations, as well as wide distribution, which is really what we're focusing now, you know, what our technology is building on the API SSO and those sides. So basically, we wanted to build something where the client owned the assets directly. It was secure in an, an qualified custodian and it was seamless and integrated. So a very key thing that we have is that our SMA platforms integrated with all of the major performance reporting systems, Atapar, Orion, Black Diamond, Tamarack, you name it. We integrate it. So you can see your Bitcoin, your E, your other defy assets, your yield products right next to your fixed income and your equities. So we're doing a client performance report on a quarterly basis. You can see everything. And then also

a big thing that incentivizes that they can actually bill on it. So everything can be integrated. So all incentives are aligned with our product. So that's kind of the first part of it. The second part of it is just the general preference for advisors moving into SMAs. You probably hear about direct indexing, ESG, all these things. The SMA market is becoming a lot bigger, bigger because of technology. Previously, SMAs had 500K minimums.

I think a lot still do in the traditional kind of equities fixed. income market because they were all accounts of one, kind of think of it like a fund of one, that it was flexible, right? And you can keep things, you can take things out. So it wasn't really scalable until firms had built the technology to do the ESG, the direct indexing and managing kind of custom portfolios for, let's say, a thousand clients at a time. So SMAs are becoming a lot, very popular in the traditional market. And we think the similar things happening, but SMAs are even more advantageous in the crypto market for a few reasons. The first, one is that direct ownership aspect, which is important for a few reasons. One, it gives you the

flexibility to, you know, if you have one client that wants to go into 100% Bitcoin, you can do that if you have a client that wants to go into our multi-asset strategy, you can do that. If you want to go into just a, you know, USDC yield product, you can do that. So it's a full suite of products and very customizable for each client, because as we know, every client is different. So that's, that's a major piece of it. Also, we have no minimums in daily liquidity, which, compared to some private funds that have anywhere from seven day to 90 day liquidity, that is a big premium in that because Bitcoin, as we've seen over the last seven days, can move 15%, 20% and seven days.

So that liquidity opportunity cost is extremely high. My dad's an advisor basically said he would never invest in a single asset product if it wasn't daily liquidity because you want to be able to get in and out at any time. So that's a major piece of it. And then the last piece is the tax plus harvesting, which is the major advantages of estimates in the traditional space where you can basically do tax loss harvesting. You're not owning a mutual fund that owns 50 securities. You're owning the assets directly. And with Bitcoin and Ether, there's no wash sale rules. We have very sophisticated,

if not the most sophisticated tax loss harvesting tools in algorithms in this space. Or we'll sell, basically move the assets from custody, sell it within 10 seconds, buy it right back, you know, very little slippage. We actually also have no training fees. And then that will move back to custody. Just building that have workflow out and really strong smart order execution systems there probably took us eight or nine months. Even though it sounds like a very simple process, most people have to manually take the assets out of custody. So we can do tax off harvesting across 5,000 accounts when the market dips, let's say 10, 15 percent will execute that. I mean, just yesterday we did it in like 400 accounts to give an example because the market, their tax

also we're down 10%. So that we're seeing big reason why SMAs are becoming more popular, but not as popular right now, is there's a little bit of friction because there's a separate custodian. So our SMAs aren't available on Fidelity Schwab, Pershing, or TD Ameritrade. So really, we're trying to build technology and make this more accessible and essentially point and click because everyone agrees that the SMA structures the right structure. It's just a little bit more difficult to access. So with the $20 million, we just raised, the goal is to make this more accessible, enabled through our technology and hiring, you know, fantastic engineering team.

Awesome. Well, that's great. Super exciting. And I guess when you think about when you were kicking this off a couple of years ago, what was the market reception then? And how has that evolved even just over the last 12 months? That's a great question. When I first started, probably went to hundreds of RIAs.

And in the summer of 2019, the answer was primarily no. I have to give a lot of credit to Martin Bicknell. He saw this and saw a huge opportunity. He saw the demand, even though it was somewhat unpopular at the time. And even in the fall of 2019, I think Bitcoin was at like six or seven K. So the fact that he kind of put his name on this and Mariner put their name on this, helped the reception be increased. Even in, I would say, late 2020 when we launched and did a big press release about our launch,

with the top three independent wealth management from the U.S., there still wasn't a ton of traction. But when the market went from 10K to 20K to 40K, that's where our inbound became a lot more receptive to the point where I would say it was like July or August. We were in a lot of rooms with decision makers at large multi-trillion dollar IBDs and wirehouses as well as other large RAs. And I heard something really interesting that I'd never heard before. They said, this is a defensive play. This is not an offensive play.

We need to launch a solution. We just need to figure out how much effort it's going to take and how we're going to do it because we've never invested in this asset class. We've never built technology in this asset class. So what we're starting to see is that this is a defensive play now. Every firm is going to have a crypto offering in the next 24 months. But figuring out how to do it securely, compliantly, and as efficient, operationally efficient as possible on the technology side and the integration side is what we try to

solve as we're working with these decision makers and executives at these large IBDs, wires, and RAs, as well as TAMP's and asset managers. We kind of work with all five of those different client types, and they're all a little bit different, but our core infrastructure and technology, compliance, the security, the scalability is really important. So really excited to start working with those firms and announce a few big deal over the next few months. This episode is brought to you by Compass Mining. Compass mining is the world's first and largest online marketplace for Bitcoin mining hardware hosting and ASIC reselling. Bitcoin mining is only getting bigger and so is Compass mining.

Compass is adding 280 megawatts worth of hosting capacity next year with more to come. That's over six times Compass's current hosting capacity, meaning more people can mine Bitcoin. With Compass, anyone can mine Bitcoin. Start mining your own Bitcoin by visiting compassmining.io. today. So it sounds like a lot of a lot of the interest has been driven kind of by some of the price action. And, you know, has any, have any of the conversations really been opened up by other large institutional investors that are leading into the space or even the Bitcoin futures ETF? Like, where you have an RIA sitting there saying, okay, like, is this the right product for

our clients? Or should we think about this more holistically and figure out kind of what the best, you know, opportunity is, is it kind of all of these things in conjunction, or is there any kind of inflection point in the last couple of years that you see is driving a lot of that? Yeah. So what excites me and why I'm excited that this is the time that we decided to raise is that we have not had that inflection point yet. A few players, Dynasty, Mariner, a few others in the independent space have put their flag in the sand and said, hey, we're doing this. I think that helped get us to, well, 54 RIAs, even though that's mainly in the independent, space. I think sometime over the next six to 12 months, it'll probably be with us. A large

wealth management firm is going to say, hey, we are launching this and we think, like just how Ray Dalio said yesterday, hey, 2% makes sense. No one in the wealth management space has actually said, hey, we are going to put 2% of our client's assets in Bitcoin. That is bound to happen. That's going to be a big inflection point where all the other CRO is going to look around and be like, okay, we knew this was defensive. We were kind of waiting for someone to take the perceived career risk and actually do this. Once that happens, I think it's just going to be a huge snowball effect, kind of the reflexivity in the market. It'll be a self-cifference to where all these firms are just going to say the same thing. That work primarily with the wirehouses. One's kind of like one of them

says, hey, we're going to do this. A lot of them fall suit. That'll probably be later this year, maybe early 2023, depending on price action and just how the general market goes, like more in the equities and macro market. But I could see a big IBD asset manager or IA saying, hey, we're actually going to allocate a certain amount using these crypto SMAs, which is what we're really excited about. That inflection point has that not happened yet. That's why I think some of the decision makers are still hesitant. You have to remember 95% of both management firms do not have a real solution.

and the ones that do have a solution like Morgan Stanley and a few of the others, you cannot solicit it. The client has to say, I want to buy Bitcoin for you to say, we have a product. You can't say, hey, you should buy a Bitcoin or you'll get a slap on the wrist fired, whatever. So that's what a lot of people miss and don't understand is that advisors can't go out and sell this, even though some products are approved on MS and some other platforms. It has to be not solicited. Once it becomes solicited and even gets added to model portfolios, the capital that's going to flow through the wealth management market into the crypto market is going to be the

biggest source of net new dollars going into the crypto market, I believe, over the next five years. That's incredibly exciting. Sounds like you're bullish. You're bullish. What does the asset mix look like overall? I'm sure it's evolved over time, but are most like end clients saying, I want Bitcoin exposure or are you seeing that asset mix kind of change into some of the the longer tail assets. So this is constantly evolving. We launched November 2020. We were just Bitcoin,

the exposure to Bitcoin go from there. We launched ETH, basically mixture between Bitcoin, E, 70, 30, 50, 50, 60, 40, you choose with a tax loss harvesting overlay and then a rebalancing cadence, monthly, quarterly, semi-annually, no rebalancing at all. So once we launched that, that became our most popular product by far. What we're seeing now is that I think the number is slightly over 80% of the new advisors that we're onboarding that are investing in our platform for the first time are selecting both Bitcoin and Eath. So we're trending towards not just Bitcoin on day one, but towards Bitcoin

and Eath. And then our clients that have been in Bitcoin and Eth since February, March, April of this year and I say, hey, we want a multi-asset for collio with the longer tail assets, DFI, other layer one, skillability, entertainment, game A, NFTs, you name it. And we're going to publicly announce that we put together a kind of flagship product that answers that question. It's called Eaglebrook All Asset, where, you know, it has a allocation of Bitcoin and Eith, then it has a 30% sleeve for the longer tail assets that's fully actively managed. Bitcoin and ether tactically adjusted. And then the long retail assets basically a list of anywhere from five to 15 names that we

think are going to win in various sectors, various sectors in D5, various sectors in layer one, layer two, and then obviously media and entertainment as well as kind of how we break it up. So that's kind of how we see it. So everyone asks, hey, won't a Bitcoin ETF blow up your business? The answer is absolutely not because we are working with more financial advisors directly than any other crypto investment firm. We have more data than anyone. And we know the data is trending to these multi-asset portfolios and the only way to allocate these multi-asset portfolios on a scalable, in a democratized way is through our resume. And so when you think about just like how, who you're selling into here, it's a kind of a B2B to C

business and be great to understand like, are you hearing that end customers or demanding crypto asset exposure and in turn their financial advisors are saying, hey, we need to find a solution here? Or is this often financial advisors that are looking to, you know, accumulate more assets and stop, you know, potentially bleeding out to a Coinbase or other brokerages that people decide to go after getting crypto exposure. Two different ways. And it's actually typically not the advisor. A lot, I would say most of our deals are driven by client demand where there's so much client

demand and assets leaving to go to a retail self-directed exchange that they need to launch a solution. That's how we work with about over half of our clients. The other half we work with, we don't talk to the advisor. or clients at all. We are just working with the investment team, the CIO, the head of research, the analyst, and they are the one saying, hey, if we want to add 4% crypto sleeve in your multi-asset, Eaglebrook all-asset strategy, let's walk through how to do that. They do the diligence on our strategy, just like typical third-party alternative investment manager. So I'd say it initially

was client demand. Now we're seeing a lot more sophisticated, more kind of institutional focus, investment teams doing the work and then allocating across client portfolios where it's in discretionary portfolio. So they don't need to talk to the advisor. They don't need to talk to the client. The investment team makes the decision and then it gets allocated across. Now, the financial advisor would obviously have a conversation with their client saying, hey, we're doing this for these reasons. But because it's a discretionary portfolio, the investment team makes that decision, not the advisor and not the client. So that's a trend we're starting to see. Once that gets announced that people are actually doing that and the names that are behind that, that's where I think we'll see a part

to the inflection point in a lot of reflexivity in the market for that to happen on a larger basis. Got it. That makes a lot of sense. In terms of kind of product roadmap, team, et cetera, can you share anything around what we can expect to see from Eaglebrook this year? It sounds like we got an exciting Eaglebrook, All Assets, product coming out. Is there anything else folks should be on the lookout for? Yeah. So we really want to do. to be that one-stop shop for any wealth management firm. So kind of like if you have a client wants $10 million, we can do it. If you want Bitcoin and Ethereum, if you want a custom portfolio, we can build it. If you want that actively managed portfolio, if you want a sector-based portfolio

in NFTs gaming or defy, those are things. The defy strategy has been launched for some time. We're also launching a yield product where you can invest the two ways. One, you can invest the US dollars and get a yield by lending out those US dollars to basically, you know, market makers on the crypto side and yields there are anywhere between 6 to 8% depending on the, you know, variable yield. And then a very similar way you can do that with stable coins, USTC, GUSD, and loan that out for right now, it's about 8%. So doing this all in one portfolio, we think, is very interesting. I think at some point, we would venture out into kind of like earlier stage token deals

and potentially direct NFTs and defy yield and income and maybe some venture type things. But we're really focused more on the SMA. So that would probably be like a 20, 23 thing for the clients that are looking, you know, across the spectrum. Maybe they want some, you know, at early stage defy or income stuff. Maybe they want some yield. And then they, you know, want 70% of their portfolio to be in a multi-asset strategy. So a lot of things that are coming online, the most, the one that's,

in highest demand is definitely that yield product, USD or stable coins generating that yield. Because if you look around, you put money into bonds right now and you're losing money, right? There's no yield anywhere. I know it's raising and things like that. But 8% for over collateralized loan with U.S. dollars, like that's very attractive to me and to a lot of our clients. And it just makes a lot of sense. And more net dollars can go into that.

Like you can put 10% of your portfolio, 20% of your portfolio into that as your fixed income portion as opposed to like crypto, you know, beta, which we recommend anywhere from 2 to 6% for that. So we think a lot more dollars are going to come into that yield product. The double edge sword with that is that say we're super successful and raise a ton of money in that yield product, the yields are going to come down, you know, over time for successful and as those products become a lot more distributed. But we think over the next 12 to 24 months, there's a big opportunity to yield in those specific products. And then in the team, we primarily hire our traditional finance. So I'm really excited to announce, you know, a few, well, you know,

big players coming from the traditional finance world that are joining the Eaglebrook team to help really institutionalize this business as well as improve, you know, operations tech, as well as sales marketing distribution. Very, very exciting. Well, it's a incredibly massive market that you're playing in. And I think you and I are both well aware that the crypto penetration in that specific market is pretty low right now. So it's super exciting what you're building. And again, we're thrilled to be partnered with you here. So I guess just in closing, like, you know, where can people follow you and where can people learn more about Eaglebrook? Yes. So our website, you can go there and schedule a demo of our XMA platform if you're wealth management executive

decision maker or financial advisor. So that's one area. It's www.egelbrook Advisors.com. My Twitter is C.J. King 711. Talk about markets, what's going on the wealth management space. Obviously, what we're building and launching Eaglebrook. And then you can also email contact at Eaglebrookadvisors.com. If you're interested in getting in touch directly with our advisor solutions team to start using our SMAs or integrated to your platform. So really excited to start working with more wealth management firms. And this is a big announcement today.

And we have a lot of bigger announcements coming through the pipeline. in Q1 and Q2 that I think will be that inflection point. And I'm really excited to see this market evolve and build these investment solutions for financial advisors. Well, Chris, congratulations again on the round. And I know we're just getting started and we're fired up to be partnered with you here. Thanks so much for joining me today. Thank you, Sean.

Talk soon.