On The Brink with Castle Island - Mark Casady on Financial Advice, Fintech and Cryptoassets

Episode Date: June 10, 2020

Mark Casady, cofounder and General Partner at Vestigo Ventures, and former Chairman and CEO of LPL Financial joins the show. In this episode we discuss: Mark's career in financial services and the path that led him to becoming CEO of the world's largest independent broker-dealer The evolution of the financial advice industry Mark's thesis on Fintech and founding Vestigo Ventures Blockchain and cryptoassets in the broader world of fintech To learn more about Vestigo Ventures visit their website, and follow Mark on Twitter @MSCasady

This week's episode is brought to you by Zen Ledger, one of our portfolio companies, actually. Zen Ledger is the best software to get your crypto taxes done fast and easy. They have friendly customer service by phone, email, or chat, and it's the easiest place to get your crypto taxes done. If you use a CPA, you can invite them and they can be part of your process. You can also do tax loss harvesting or get a full audit report. And as a special offer for our listeners, you can use the coupon code Castle 15 to get 15% off. That's Zenledger. I.O. Go check it out. Today on the podcast, I had a conversation with Mark Cassidy, the co-founder and

and general partner at Vestigo Ventures, a fintech focused venture fund in Cambridge, Massachusetts. Mark has a storied history in financial services. Prior to founding Vestigo, he was the chairman and CEO of LPL Financial, which is the nation's largest independent broker dealer. In this episode, we discuss a range of issues, including Mark's views on the evolving way that Americans receive financial advice. We also talk about the advice relationships in the context of technology firms that may be looking to enter that market and the role that fintech firms will play in disrupting a number of industries going forward. And of course, we discuss Mark's thesis around cryptocurrencies and blockchain technology. This was a fun conversation. So without further ado, here's Mark Cassidy.

Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, 85 billion dollars. 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 to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Mark, thanks so much for joining the podcast. I wish we could be doing this in person. Our offices

or a couple blocks away from each other in Cambridge. So I guess this is the second best thing. So thanks for joining. Thank you for having me on. I'm looking forward to it. Yeah, this will be a lot of fun. I want to talk a lot about kind of your career trajectory, and I'm sure we'll get into your strategy now with Vestigo Ventures

and talk about your blockchain strategy. But I'd love to just kind of set this up and talk a little bit about your career history and tell us a little bit about how you got to where you are. Yeah, happy to. So I've been in wealth management in my entire career in one form or another. and kind of classically started at a trust bank and learned all about personal trust and personal wealth management and those things, which was a lot of fun. I actually thought I wanted to manage money, be a portfolio manager, and I realized that you can't change companies. You can only buy and sell

their stocks, which I found incredibly frustrating. And so my career, for the most part, has been about finding companies that needed change, bringing that change, whether it's capital structure, management, strategy, whatever it was, and then, you know, leading it through the change. that the change was done and it was successful, then I was kind of bored and needed to move on, you know, from there. But it's always been around wealth management of one form or another, the most recent of which was being chairman and CEO of a public company, LPL Financial, which I was lucky enough to take public back in 2010 and then served seven years as a public company CEO, which is its own new excitement and fun from there. You underplayed that a little bit,

but LPL is, I believe it's the nation's largest independent broker dealer, just a massive company. It is a good size company. The founder was 27 when we formed the company, hired me, gosh, when he was probably 50, something like that, maybe a little younger. And I always said my job was to not screw up his vision, right? I think the founder's vision and really get it to go. It was there, but the first six months, and I said to founder's name, Todd Robinson, and I said, Todd, you have built a fantastic engine, a great technology, right? It was called the branch system. It's now called client works, but you've built this great technology and you put it in a two-door coop, right? Like, good for you that you built this great technology. Not so good to be in a two-door coop. So why don't we take

it out and see if we can't do what the motor companies do, which is to essentially put it in multiple models, same engine, multiple models. And so the way I sometimes tell the story is that after I left, you know, 14 years there, we were in about 12 different models. We had an SUV, a station wagon, you know, a for a store, so then the whole thing. And we just essentially took that same core technology and put it in different markets for different types of financial advisors. And that worked extremely well as a business model. And a company, when I joined it, was about $3,900 financial advisors, about $89 billion of client assets. When I retired, we're at about $650 billion of client assets and about, oh gosh, maybe 14,000 financial advisors. So it certainly

is the largest independent broker dealer. And it was number of three. three in terms of retail advice in America, but no one has ever heard of LPL financial, which is fine by me, because essentially the advisors do their work under their own name. So Cassidy, wealth management, and somewhere in fine print is the name LPL financial along the way. So we're the firm that basically took technology and compliance and support. And if you left Merrill Lynch on Friday, you can wake up on Monday and have your own practice, you know, serving your clients with your own business. A very entrepreneurial, really wonderful advisors, really great business. Yeah, quite a franchise that you built there over time. And so so much must have happened in those

14 years. I'd love to talk a little bit about just some of the changes. So you probably went through changing technology landscapes, replatforming all sorts of things. You went through changing regulatory environment. The DOL comes to mind as something when I was at Fidelity that we were spending a lot of time. There's a lot of things. And not to mention just general customer attitudes, just around preferences. So as you look back at that time at LPL, what changes had the most impact? What were the most challenging? I think it really was the regulatory environment because it would shift on you. And there was definitely kind of regime change that would occur at the regulators that would cause certain issues to be more important than the previous regime. And you had to roll with that. And we were very

fast growing. When you have that kind of growth that I mentioned before, it causes you to really make sure you're not stressing the system too much. We definitely had moments where we stressed, you know, the growth so much that we had some failures and some oversight that we did. Luckily, nobody was harmed in the film of this movie's, right? So we were okay, as it related to customer relations and those things. But we certainly had some things that were our challenge and, because of our primary regulator, FINRA, on the broker-dealer side. And broker-dealer regulation has built up with the idea of rules, right?

There's a rule for doing these things. And if you don't follow the rule, and particularly if you're the largest in the industry, you are going to be a target. And we certainly look through that. a couple of years, it weren't a lot of fun, even that. But that's contrasted by 12 years that were incredibly fun, because what you realized we were doing was if there weren't an LPL, you wouldn't be able to bring financial advice to literally millions of Americans that Merrill Lynch and Morgan Stanley and the big firms really pulled away and they've been trying to create a much more exclusive

model to wealthier consumers. And it was the LPLs and others of the world who really filled that void. And so in a typical small town, I always used the town I was born in, Columbus, Indiana, about 35,000 people. LPL actually had one of the bank programs there and had three financial advisors serving that community. And there was nobody else except Edward Jones. And so, you know, that tells you that if we weren't in business, you would not be sublime retail financial advice to really important people in terms of their needs across the country. So that's the part for me that was the most fun was meeting those advisors who work in those towns, particularly small and mid-sized cities.

Sometimes you get to meet their clients, which was a lot of fun. But you realize that we were doing public good, in addition to building a very profitable business. I want to talk a little bit about that financial advice portion. I mean, you've seen many, many iterations of advice models, I'm sure, over the years. How do you think about just the market opportunity for financial advice right now? I think there's people might not realize how much larger that market is versus the self-directed market, for instance. So how do you segment that and just think about how people are getting advice?

I laugh a little bit back because it goes back to a time that I was in the asset management business. There's a company called Scudder Stevens and Clark in Boston, very old line firm, really wonderful people there, good investors, that kind of thing. We merged with Kemper funds, which is a pretty well-known brand name in the advice site. So Scudder was direct and Kemper was through advisors. And you remember 1999 in the year 2000. That was the year that individual investors were taking over the world, right? And forget this advice by humans thing. There wasn't robo advice yet, but there was the idea that self-directed advice was going to be the way to go.

We merged those two companies in 1999, and we actually completely shifted away from the direct model and went completely to advisor sold. It was so controversial we were on the cover of Barrens. that, you know, how crazy is this idea, right? Within two years, anybody else who was trying to run those dual strategies direct and through advisors basically shifted to the advice model. So advice by humans is a very powerful, you know, trend and, as you say, quite sizable, multiples of what individually traded accounts are. And it's really very simple.

It's built a bit on human psychology. Twice in my career, we did studies both globally and the first one, I was supposed to a global company at the time, and the second time affirmed in the U.S., which is when investors save something less than their income. So they have $10,000 so they make $50,000. They're happy to play with that money, right? They will give it to a robo advisor in today's terms. They'll give it to Robin Hood.

You know, that'll all work. When it becomes equal to their salary, they now have $50,000, they will seek advice. Now, it might be your friend Matt, right, or it might be your friend Mark, and they say to them, who's the best advisor you know, and they'll typically shop. They don't usually just go to one. But importantly, they will then seek human advice. And that, to me, has been a trend that just hasn't changed in the 40 years I've been in the industry. So important to understand that.

You know, today, when we think about Robin Hood and we think about robo advice, and we think about all these alternative methods, you know, you have to be very careful and look at the average size of accounts. And they're relatively small, for the most part. And it would make sense, given that psychology, which really hasn't changed much. Yeah. Has the nature of advice changed much over your career? I mean, you often hear about these concierge offerings where it's, you know, I'll do research into

private schools for your children. I don't know. I'm just making it up. But the level of service maybe has increased at the high end. I do think you get a much broader set of services. I think you know, technology has democratized the industry. The way I like to think about it is in 1984, a long time ago. I was just two years out of college.

I had finished my MBA at night. That was tough. And I was managing money and working at Northern Trust Bank, right? And we were working with families that were worth $100 million or more in 1984. That was a lot of money. Still a lot of money today. And we would do financial plans for them. We ran those financial plans on mainframes.

Can you imagine such a thing? Today I can do that same financial plan on my phone. And that's what's changed. Technology has massively democratized financial advice, not as far as it needs to go. And there's a lot more room for it to go. But that is really one of the key things that's happened is that democracy. via technology. So really an important trend. The second trend is the nature of what I do as an advisor has changed. Originally, I really managed money. I was that person who could say to you,

no, IBM's the right stock and 3M is not if I think about it traditionally. Or today, I might say this is the way we want to asset allocate across different assets, including things like Bitcoin and gold and other things that are up in the mind of investors these days. And so that's a big part of what the industry still is today, but is transitioning away from that. And going to what I think of as the meaning of money, right? And so the best advisors in the LPL system shared one trait that was true of all of them, which was that they would go and really dig into what the meaning of money is to that individual advisor. So in my case, my wife and I put ourselves through school, right?

So we paid college loans for a good decade after we came out of school. And so we vowed that with the four children we had, right, we were never going to make them pay for school. Maybe that was crazy, but that was important to us. And so we had a really lovely event where we sold a company, create some liquidity, and it seemed like all the money in the world of time, although it wasn't that much. And the first thing we did was said, we're going to put money into college savings for all four of these kids and it'll be done. And my financial advisor said, you're crazy. Like, you need to save for your retirement, buddy, because you don't have nearly enough save for that.

And I said, I don't care if I work until I die. I'm going to make sure my kids get school paid for. And whether that's a good thing to do or not doesn't matter. but it was really important to me, really important to my wife. And that's what the best advisors do, is they know what drives you. Are you charitable?

Are you not charitable? What's the lifestyle you want to live? And that kind of thing. And they really advise you around those feelings and the meaning of money. That is actually the trend we're in now. And if I take the LPL system, that might describe the top 15 or 20% of 16,000 advisors, right?

But it doesn't describe 100% of them. It will eventually describe 100% of them. Yeah, that makes sense. That empathy and almost talking people through just very emotional situations is something that I think is probably underappreciated. And you'd brought up robo advisors earlier. And so you kind of saw the beginning and the middle and I guess wherever we are now in the robo phase. But what was your take on kind of these companies at the outset? And where have they evolved into? Were they overhyped, underhyped,

properly hyped? Overhyped. There's no doubt about that, right? And overvalued big time. And the benefit of having been in the industry so long, I actually created a robo advisor twice. once in the 90s, the early 90s, impossible idea, the technology didn't work, and died very quickly. And actually, the former president of Coinbase, Asip Hergey, was the entrepreneur who created it. You know Asap. Great guy into all the things we're into today. But he had this burning vision. And we did a little bit of funding for him as a company back then.

And it just didn't work at all. The technologies was not ready. Then the next time, for me, was in about 2012. So before the word robo was invented. we created a robo advisor out of San Francisco, right? We did it right. We built the classic San Francisco office. And what we found pretty darn quickly was that it is outrageously expensive from a customer acquisition cost to create the right combination. We found plenty of people who needed advice that didn't really have the assets to pay for it or who didn't really care

to pay for it to a level that equaled what it cost to find them. So classic CAQ LTV problem that we face every day as venture capitalist and certainly every business faces. And so So we shut it down after a couple of years. What we did learn was how to train advisors, which was the other thing we were after, because we were trying to figure out how can you bring new advisors into the industry. And this was a way to do that, but the robo part didn't work. So I've been skeptical, you know, twice. It burned me twice.

And third time I'm not going to fall for it. And so I'm not the least bit surprised that the most successful models have been something like Sigfig that has, you know, converted into a B2B play or personal capital, which really went to the management of 401K space or really while front. or Betterment or others who adopted effectively a large-scale RAA model, which has humans and technology combined. The technology is great, and Robos did something really great for retail consumers. They repriced asset allocation from 100 basis points to basically 35 basis points, and you had market leaders who were very strong like Schwab, who, of course, matched that

and then even came up with zero pricing, and that is something that they should feel very product because they really truly democratized asset allocation, you know, for consumers as a result of that work. Right, right. Yeah. And certainly it almost feels like a product maybe as opposed to a standalone segment, right? What I haven't seen is I haven't seen something that helps create two things. One is ongoing advice, right? So I sometimes use the example, although not now, sadly, because of COVID, of going to a coffee shop too much. And you can tell I'm a little hyped up today, so I've clearly had too much coffee, but I've made it myself. Before, though, I would walk out of my office and maybe four times a day, got a cup of coffee. And if a little machine reminded me that this was the third time I was

going out or the second time and then said, Mark, you know, that three bucks you're going to spend or five bucks you're going to spend whatever it is, it'll be better served in something else. And we're going to go ahead and move that for you. That technology is going to get there pretty quickly and essentially give you better habits if you'll let it. Second thing it's going to do is engage the advisor and engage you in the psychology of money in a number of ways. We've seen some creepy ways when I just saw recently as a VC where basically the monitor that's recording us now on Zoom would actually give you information if you were my financial advisor about my moot in the moment, which to me is like totally creepy.

And you would then be able to know how to pitch to me. You'd be better informed about how to think about what you want to ask me or what you want to do as a financial advisor. that isn't the right way to do it. But there ought to be a way that judges, you know, what are things that you hold dear, not risk-related, but truly meaning-related. I've been looking for that for a couple of years. I haven't found it yet.

But it will come. It's just a matter of time. That's really interesting. One of the things that I am really curious about is just intergenerational wealth transfer. If you think about the amount of capital here that is going to be in motion from the baby boomer generation to their offspring in the next 10 to 20 years, it's pretty steady. And I guess not surprisingly, people are starting to talk about this intergenerational wealth transfer in the context of large tech firms. And could some of these tech firms actually

start to provide advice relationships to these younger generation? Will they have the same financial advice relationships with the same companies that their parents do? And will that change? So that's a big question. I guess I would just throw that out to you kind of what do you think is going to happen here with intergenerational wealth transfer? And could we see some tech firms start to make a new front door to financial services. Yeah, I think it's a great question. There's no doubt that there will be an or not a wealth that passes. Again, if you just look at both just day-to-day wealth creation,

capitalism has served a fantastic purpose. Right at the moment, capitalism isn't so popular. But the reality is it's lifted tens of millions, if not billions of people in poverty. It's educated the masses. It's just created so many good things. It needs to be altered and tempered in some ways. There's no doubt about that.

As a public company CEO, the example I like to use is that I'm under a fiduciary obligation to the shareholders and nobody else, right? And that isn't the way you really run a company. You got to think about the employees and your clients, but as an obligation and a legal matter, you're a fiduciary to your shareholders and that's it. So you've got to think that through. When you think about wealth transfer, you really have the same types of issues. What is it that's going to happen? Well, number one, that transfer will occur. And people are living longer, so probably doesn't happen quite so quickly as one might think. But it still is there. And I really do doubt that the firm that manages your mom's, it's likely to be your mother, right, or your

dad's wealth or your family's wealth, is unlikely to be your firm unless you are in a very unique class of individuals, right? They're very wealthy. But for most people, it won't feel right to stay with, you know, your mom and dad's advisor, partially because of age and partially because of orientation and partially because they haven't spent the time building trust with you. And so I do spend a fair amount of time from my old days helping advisors think about. how to incorporate, you know, the children who are, you know, adults into the practice, what are annual family planning meetings about. If there happen to be wealthy enough to have some philanthropic activity, could they together, you know, do a foundation and have the children

involved. There's lots of things to do to make that work. And I think, you know, you're much better at it when you're in the upper 1% of financial advisors for those families. But I don't think that, in the most part, they'll stay with their existing advisors. They will seek someone who speaks their language and who is meaningful and trustworthy to them. That could be a technology company to come to the last part of your question. I don't think so for U.S. consumers. It could be. I think it's most likely to be for Gen Z, probably not for millennials, because Gen Z is so lived in a world of technology being on all the time and having such trust in faith in firms like Apple and Amazon that, you know, they possibly could. I actually think in the technology

world, they're very likely to take over the transactional banking type activities, but they're not as likely to take over wealth management because that's not kind of their thing, right? They're really wonderful scale players with great user interfaces, and you could do that in wealth management and do that quite well. Now, in Asia, you actually see the opposite of that. It is the tech companies, Alibaba and others who've formed money market funds and others. But remember those consumers on a very different journey than the consumer in the U.S. or Canadian markets who are coming from now multi-generations of quote-unquote wealth. I don't mean millions of dollars, but I mean comfortable lives, right? College-educated families that have wealth to pass from one or the other.

I do think that you're going to see the advent of advisors who mean something to my generation. And if you think about, you know, one of the things that we've talked about before are firms like Robin Hood, right, or Square. For my generation of boomers, there aren't as relevant, but boy, for millennials, they are very relevant. And that's actually where I think you're likely to see, you know, real winners coming from the generational transfer is to those firms, because those firms know how to really relate to and bring experiences to the millennial segment and the Gen Z segment that, you know, traditional banks and traditional asset managers and traditional retail advisors have not been able to do. Yeah. Yeah, that makes a ton of sense.

So we've talked about some of these interesting technology categories, and I think that's a good dovetail into the work that you're doing at Vestigo. So maybe just to set the stage there, you talk a little bit about just why you decided to start Vestigo and what your strategy is, what type of fintech deals you're looking at? What's your thesis? Yeah, I have to do that. So let's just start the why. My joke was after 14 years at LPL, nine years as a CEO and chairman, even I was bored with me, that someone would bring you a problem at and you go, oh, that's problem 37. You're the sixth person that tells me about problem 37. And when we have problem 37, we solve it this way, right? And the poor person would look dejecting because of course they had a

perfectly lovely idea about how to fix problem 37, and we just didn't allow that because it was faster to get to the answer. And so it was time to move on. I was not learning new things the way I wanted to learn. And I have a fantastic successor in Dan Arnold, who's now the CEO of LPL, who's done a great job since I've left three years ago. So that was time for me to move because I needed to find something that would help me grow and learn. Because I'd always had technology and change as a key part of my career. I knew that, and you can see, I've been as excited as I've ever been about the change that's coming, being driven by technology in financial services. I think this is kind of a once-in-a-lifetime opportunity that occurs and could easily be over the next 20 years as the industry digitizes.

And our thesis is it will digitize around two key themes. One is lower cost, materially lower cost, right? Not just a little bit less. And the Robo Advice example we're given earlier is a really good example of how it plays through. Zero broker charges are another. way it's played through. That opens up the market enormously for innovation. It opens up enormous coverage, right? When you can get something for free, you're likely to use it. And that you'll let you take the unbanked, right, or take people who are not invested in stocks and get them invested. So it's a really great thing. Second major theme is delighting clients. And by that I mean, we have learned, right, how wonderfully easy it is to call it driver, right? Whether that's a taxi

through Lyft or whether that's an individual driver who's sort of being an entrepreneur or Whether it's a black car, if you wanted to go that route, how easy is that? Even in a little town that I'm in at the moment that's all of 5,000 people during the winter, you can still get an Uber or a Lyft. I mean, like, how could that happen? If I called a cab, it would take an hour to get here. And here you go. So I learned that.

Of course, Amazon, we can use 100 examples that all of us know that we've been taught. Then we turn to our insurance company and our bank and our asset manager and our retail advisor and go, what is wrong year? Like, this technology is horrible. I can't even see my balances regularly. I can't understand what's going on in my portfolio. This is just really bad stuff. And so our thesis was that the intelligent incumbents will basically start to need to adopt

the ideas and innovation of startups, that they'll have to partner with them to really get the resourcing and the problem solved around lowering cost and delighting clients in that way. So we should set up a firm that really helps bring those companies to bear, right? that fosters them, that hopefully helps them grow. And we love the early stage venture worlds. I know you do because it's where real returns occur in venture, right? We did look at later stage and very seriously contemplated it. But when you study returns, returns really come from early stage.

So the general partner is Dave Blundon, who's a Siri entrepreneur, very, very smart in technology. I always say I'm the Yen do is yang, right? I'm the classic business leader, you know, strategist, whatever you want to call me. And Dave is the really smart guy in technology. So together we form a sort of nice partnership that lets us focus on this. And we've had the benefit of Ian Sheridan and Mike Nugent, who've joined us in the last few years, who've been doing the investing as part of the group. So along those thesis, we've ended up now with 18 companies in the portfolio.

We'll have 20 for Fund One. Fund one was just under $60 million to invest. Fund two, we are about halfway there in terms of raising $100 million fund. But same thesis, 20 names. just gives us a little bit more capital to play with. We've seen 1,100 business plans to make those 18 investments. So that's about the right ratio when you talk to other venture capitalists. And what's a little bit unusual about us is we have access to something Dave built about 14 years ago called Kogo Labs.

And I know you're familiar with it, Matt, but for your listeners, it's 15 petabytes of data. Now, we just watch SpaceX go into the space. How big is 15 petabytes? That would be a piece of paper for everything that's known about a consumer. right? So one pager all the way to the moon and back. That's a lot of information. We use the sort of SpaceX analogy. It is big. What that allows us to do is understand what consumers are looking for and what they're looking at to be informed. And I mean consumer both as a business buyer. I need a small plan, 401k plan, I need a health care plan, and consumers in terms of how do I invest my money in retirement

or what's a good book to read, right? The same data is there. We can't make money off the what's a good book to So Dave uses it to launch consumer companies. Everquote is the biggest one to come out of it. It's about a billion two public company now. And they launched it a number of years ago, I think about seven or eight years ago out of COCO. And then we use it to actually discover early stage fintechs. We have four out of 18 that we found in that way.

They were doing something virally. Three of them are B to C and there are only B to C investments. And then one is actually a B2B play, which is kind of interesting. The algorithms are getting smarter. The data dictionaries are getting smarter. And it works. So that Kogo Labs data really is an unusual asset. We use it to also diligence companies that come to us in the traditional way. So we sum all that up. We're a classic venture

capitalist. We've got money. We're nice people. We've got a network. And importantly, we have data that helps us gain further insights into what people are looking for. That's fascinating, especially on the data side. We have a joint portfolio company together that I know has taken advantage of some of this in Zen Ledger. How do you think about that from a sourcing perspective? Is this the type of thing where you can monitor someone is tweeting about this company. This might be a hot company. Is that the way to think about that? Yeah, it basically is going through. It's gone through a million five, I think, of websites. And now this is, importantly, this is looking at basically search terms in Google and looking at emails. And it's essentially identifying things that

are going viral, which would by definition mean it has low customer acquisition cost. And it could be low customer acquisition costs for B2B or B2C. And as you say, it could be as simple as somebody tweeting about it or blogging it. about it and that causing activity for people to go look at the website, we're picking up that activity. And it can be as low. You need, you know, anywhere from, I think the things we find are somewhere between, let's call it, 5,000 to 10,000 types of hits. So long game, which is one of the first ones we put in using this XPLR algorithm, had about 10,000 savings account clients at the time. They'd now grown to about a quarter million, 250,000 savings accounts roughly two years later.

but that early virality was what we were picking out. Got it, got it. Now, on FinTech more broadly, this is such a growing area. I mean, if you just look at the assets in financial services as a percentage of GDP, it's large, but you combine that with technology companies. You have some really large addressable markets here. Are there any categories that you find yourself naturally gravitating to within fintech?

And I guess the other side of that would be, are there any categories that you're sort of off limits to? Yeah, yeah, there are. FinTech is, it's interesting. When we raised Fund 1, Matt, we found people were like FinTech. That feels very narrow. Everything is FinTech, right? I mean, you could make an argument.

I forget who said it. Someone actually said everything is FinTech. Everything is FinTech. And particularly if we think about things like, if we come back to your tech company's point, right, is that I have no doubt that their ability to really drive payment options are huge. Transactional activity, they should play a big part in because they're good scale providers. And then in raising the second point, what we're finding is people are like, wow, what a great hot topic.

We love Fendek now. So, thank goodness for that. But long short is that our view is that there's sort of four major categories to play with. And so it's anything that relates to markets. Can we add more transparency? Can we add faster processing, that kind of thing? Second is operational processes.

There's a lot of old tech inside of financial services companies. And so can that be replaced? Can it be enhanced? You know, that's a real cost driver is that operational support. Third one is the work site. And worksite can mean both a gigster who is creating their own work site to things like employee benefits that need to be at the work site. And the fourth is wealth management, of course, given some of the things we've talked about.

And then we have insure tech and reg tech and all the other techs that sit below that. But those are the four kind of major areas we look at. The one thing we do avoid is payments, actually, ironically. And the reason that we do is none of us have experience in payments. And there's two really great firms, NICA and Pentech Collective down in New York, who were founded by executives from the payments industry and have heavy payments portfolios. And our view is they're going to be better at that than we are. So that's a good thing for them to do. And then we also do think if you look at fintech investing at large, about 60%

has already gone towards payments. And so therefore it probably has plenty of capital to it. And these other areas, particularly like operational support, it is still very early days. The kind of things we're seeing there are very basic, but doing really good things. In one case, you have a company called Kingfield that is working with custodians. They can eliminate in one department alone, dividend exceptions. There's 600 people at one of the custodians that do nothing but worry about where did the dividend go. Like, how crazy is that, right? What a surprise, they're using AI and they're using intelligence processing

so they can basically take the email that comes in from the asset owner or another custodian that says we're missing this dividend, and it can process something like they think about 65 to 70 percent. of all things without a human touching them. And so that would eliminate about that percentage of jobs. And while that may have its own social impact, the reality is that the bank has to get its cost down, right? And it's got to basically do that through this type of automation. So that to me is a classic play.

You just don't find many companies that understand operations deep enough to go in and solve for those. We have found a few, which is nice. Yeah, that makes sense. So the company that we're co-investors in together is called Zen Ledger and their tax company doing great for cryptocurrency. crypto assets. But I'm curious, how do you think about blockchain and crypto assets more generally within your fintech thesis? So it fits within wealth management in our view. And our belief is

that it will become an alternative asset class just as art or wine or investments in PE and venture, for that matter, are alternative investments, non-correlated to the things like stocks and bonds and in some cases, a store of value. And I think as we look at it, you know, it'll take whatever time it takes for the market to accept that. But I will say the current environment we're in where the Fed is creating a balance sheet that's massive in size does send a lot of people to the crypto world, particularly the Bitcoin, the granddaddy of them all, and basically says, I'm going to need to hedge my bet here, right? And owning some cryptocurrency is a way to do that. So that's one thesis. And the three investments we've made, including Zem Ledger with you,

are ones that are all in infrastructure plays, and one form or another, which we, I've like in the space. And what we haven't done is we've been fascinated by blockchain itself. You've done even more work there that are much, much more of an expert than we are. But what's important about it is it certainly is a new technology. And it by itself, and things like tokenization of traditional assets is going to be very important. We just have chosen and found one not to do a blockchain play because we just haven't found ones that are yet to quite the conventional level we want them to. I think some of your investments are really more about the blockchain itself and making it better.

And that is really important to do, but that doesn't quite fit our thesis for what we're doing in fintech. I think in fund, too, we are going to likely see more of those blockchain type plays. The example I like to give on blockchain, if you'd like it, is let's just imagine we could tokenize anything, right? And I think about somebody buying a condo in Boston that's a $500,000 condo, which means in Boston, it's, of course, a studio apartment. Yeah, that's right. Right, and they've got to put 20% down. And maybe in this market, they've got to put 30% down.

So they've got $100,000 of real money that they've saved hard for, right? And it's probably a young professional who makes $100,000 a year. So that, like, they're equivalent of their salaries in this condo. And they're worried about that, right? In particular in a market like this. And so what if you said instead was, got your $100,000, thanks very much. $50,000 is against this condo. But the other $50,000 is a tokenized baskets of condo.

from all over the U.S. or condos all over the world or any real estate or whatever you'd like it to be. Because if we could tokenize, right, I could take your $50,000, put it into a pool, mix it with lots of others and inexpensively bring back, you know, a basket of exposures. I can't do that today in the conventional world. I certainly could do that in the tokenized world. Yeah, that's a really interesting point. I mean, the way that we sort of think about this is you do have these store of value, non-sovereign value capture mechanisms like Bitcoin, obviously being the kind of the crown jewel of them all. And then you do have these other things, which are, you know, some people call them security tokens, tokenized securities.

That portion of the market, you know, my estimation has been a lot slower to catch on primarily just due to regulatory concerns, right? So you have something like 40 to 50 broker dealers that have applied with FINRA to change their designation to hold tokenized securities. And there's questions around the definition of a good control. parole location for some of these things. But in my mind, there's some appetite there, but the regulators have been slow to move. What's your take on whether or not we'll start to see that change? I think we need the custodians, the more traditional asset holders, right,

that are a record of choice to step in. We've seen Fidelity do that on the crypto side, quite specifically as a custodian of crypto assets. That obviously helps a great deal. I have no doubt that they have plans for, you know, being able to be a custodian for tokenized securities. But we also need the more traditional players in that space, you know, that we think of as the state streets, you know, in our neck of the woods or a Bank of New York Mellon or a Northern Trust where I used to work, they need to come into the market. Northern's done a bit on the custody side for crypto, but hasn't yet gotten to tokenization. When you talk to their heads of innovations, which I've done around this topic, what they'll say is there's so many choices. I don't know which one to work with. And I'm not getting demand for my clients to do it yet.

So I'm going to wait and see. And that's, I think we're in wait and C mode until either somebody decides that the example I gave is worth backing on tokenization of real estate exposure to use an example. And therefore, I want to bring that to market. The only way I can bring that to market is by working with, you know, Northern Trust to make that happen or with fidelity. So I do think that it's going to be a while. For us, we've said it's not a fun one investment. There just isn't enough time in the fund, you know, seven years from now, or to mature enough, but it could be for fun too. So going back to the public blockchain assets, Bitcoin specifically, I can't think of a better

time for something like Bitcoin to exist just given what's happening from a macro backdrop, right? You have this money printing that you referenced. You also have just some of this infrastructure being built and battle hardened really. And so the financial advisors themselves are likely getting asked a lot of questions about this right now. Where do you think we are in terms of financial advisors being able to give good sound advice on what this stuff is and how to access it. I think the time is coming back around again. When we first invested as Bestigo, which was now probably three years ago, maybe a little more than that. And Digital Assets Data was our first one, the Alfred's company, really good company trying to be the morning star of the space, a bit of a GitHub,

and doing a nice job of attracting institutional players there, but not yet getting to the advisor part. At that time, what you'd hear is a little bit of interest by a financial advisor who had millennial clients. If you look at the data I was mentioning before from Kogo Labs, the number one investment question of millennials is should I own Bitcoin? Well before this particular period of time, when we looked three years ago in the data, that's what it told us. So we said, okay, this is going to be generational.

As millennials grow up and they actually have some real savings to invest in conventional ways, they're going to bring Bitcoin and other, you know, Ethereum and other cryptocurrencies with them, and that's what'll cause it. Well, it turns out that is just too slow, right, as things go. And so that hasn't happened. But what is happening is advisors are saying, just as a matter of diversification, given the Fed's extraordinary actions,

why don't we take a percentage of your portfolio and put it in gold, gold minor stocks, maybe gold ETFs that are actually attached to physical gold, and let's put a little bit in Bitcoin. And we're seeing that for the first time just recently, and we've seen it in a startup company that we're monitoring that provides a SMA platform, a separately managed account platform for Bitcoin, where they're having really good conversations with the RAAs about doing essentially an allocation of a small

percentage of assets across hundreds of portfolios. So I do think it's being driven by market circumstances, which may give it a real push here. Do you find yourself in conversations with people that maybe were in your orbit at LPL, industry participants who are more maybe quote unquote traditional that are asking you about Bitcoin? I'm curious what those conversations are, you know, there are people saying, well, I thought it would have been dead by now. I mean, what?

You certainly get plenty of that view, like a little bit of, are you crazy? Right. You know what kind of look. And those people are respectful, I guess, but what you're getting now is, I think, is a little bit more of the what is it? And how do I think about it if I say I'm an institutional investor? And we have, of course, institutional investors in our fund like you do. And we're starting to see them ask the question about how to think about

how others are investing as institutional investors. And is there something they, should be thinking about. I've seen it in terms of traditional advisors asking the question or even making the statement. We do think a little bit of Bitcoin is a good idea, you know, for families that have means to do it. I'd say it's a super low percentage, but that's okay. You kind of get started somewhere that's there. It just has so many characteristics and so many use cases that are good, right? My wife and I spend a lot of time in South America. We have a dear friend who lives in Uruguay, which most people will ask, where is that? And it's between Argentina and Brazil, and it's a

beautiful, lovely place, particularly nice to go to a January, their summer. So we head down that way, and we've known a lot of Argentinians as a result for the last, let's say, eight years. And they live in a country that's completely dysfunctional, right? They have a government that's happy to appropriate their assets. They live in a government that taxes beyond comparison. They live in a government that's incredibly ineffective, and I'm not trying to make a political statement, I'm just making a statement of reality. This is a country that was the third wealthiest country in the world in the late 1800s and has managed to be the only country that has less per capita income today that it did 100 years ago. That takes talent. It's not just anybody can do that, right? So now I'm sitting there,

and I'm a family that's built a nice little business. And what am I going to do? I'm going to buy a condo in Miami, right? I'm going to buy a condo in New York City. I'm going to buy some Bitcoin and move it out because I've got to find a way to basically move these assets from an ineffective economy and government and a government that could appropriate them into a place that's safer. Obviously, Venezuela, where you see real breakdown. There's no doubt that there's a lot of activity going on there that you can see in the blockchain activity, as you know. So there's definitely use cases that are scary use cases, and there's use cases in which it's an alternative asset that holds value. We do need to see Bitcoin, you do some things, right? Stabilize and value, not be quite so

wildly volatile. We do need to see that it generally goes up into the right over time because it should, given that there's a limited supply, but it doesn't have those character risks just yet. Yeah, I think of it as it's an option on the emergence of a non-sovereign store of value. I mean, if it was a store of value, it would be worth something closer to what gold is or what offshore bank accounts are. It's worth less than, you know, the amount of cash that Apple has on its balance sheet, really. I know. It's quite remarkably explained to people, all cryptos together are worth less than J&J's market cap. Right. I mean, we're still in the early innings. I think the The example you use about other fiat currencies is really interesting to me.

And it also plays into the blockchain angle. And probably is under discussed, actually, is just stable coins. And so you have this phenomenon where you can have U.S. dollars essentially as a bearer asset on this technology, on this public, private key, cryptography underpinning. And so you do have this situation where if you're getting paid in a local currency and you usually would go just buy hard goods when you get your paycheck, now you might actually have the option to hold not. just Bitcoin on your phone, but maybe hold exposure to the U.S. dollar on your phone, that's pretty powerful too. Yeah, I do think that digitization of fiat currencies, whether it's the Chinese currency or whether it's the U.S. currency, is going to happen, right? For the exactly the reason you stated,

it removes friction costs that are real. And so one can easily imagine a stable coin doing that. The problem is it's been hard to figure out, you know, how to do a stable coin that really does work technologically. And the blockchain still has some fundamental issues with it that make it difficult, again, as you and your listeners, I'm sure know. But time and money will solve those problems, right? And I do think we're going to live in a day. It might be as close as five years, but certainly in 10 years,

people are going to think, well, of course I transfer money on my phone. Like, money? Like, who doesn't have digital money? It would be crazy? And if you think about it, let's just think about what the ills are. Like, what problem are you trying to solve? Why do I have to pay $30 every time I want to send a wire? That's crazy, right?

That's ridiculous. Why don't I have to wait three days for a check to clear? Why don't have to wait even a day for a wire to clear? This is ridiculous. It's horrible service. And the problem is that U.S. government appropriately wants to control its currency, right? And the way it controls its currencies by controlling the banks in any number of ways, from regulation to capital requirements to whatever.

And, of course, it then gives the bank a license to charge fees like $30 for a wire as a way to pay it for being controlled. So we create these big utilities that are out there that we call banks and credit unions. And we need them. There's no doubt about it. But we've got to start removing some of that friction cost that's there. I do think that a stable coin asset, again, other things will be the way payments start to become an easy part of what we do.

It's why I do think the tech companies to be particularly good at this kind of activity. If I'm Amazon and I essentially get a margin because I'm good at logistics, right, And I'm good at running your storefront for you. I'm really good at launching my own product. And I have a margin from that, which I do, that I'm really pretty happy to let you play around with currency or cash of one form or another within my systems and letting you then essentially access that cash, quote, unquote, for free, no transaction charges or interest rate or whatever else it might be,

because it just makes it easier for me to create a controlled system in which the payment mechanism is part of the product, right? that to me is what's going to happen in payments is that it will just become part of every single thing we do the payment will go along with it and that's where blockchain is particularly useful is because it can do that for lots of different types of companies if you're just Apple or you're just Amazon these massive companies right you can actually create your own currency you could create your own process for transfer that wouldn't actually need blockchain particularly because you're created a closed system that's probably the next iteration right lever's actually

be too big an idea for Facebook to be taking out. And they should take on something much simpler than that. And that's likely to be what will happen. You've seen it already in the credit card space for Apple. Amazon has its own payments network, as we know. But it'll keep evolving from there, you know, just no doubt in my mind. I couldn't agree with you more on the Libra point. I mean, I think people in general were shocked that they were so ambitious with their initial vision. I mean, I applaud them. I think that if they were able to launch that original vision, it would have been really interesting to see what a new currency like that would be treated like. Well, it's so classic for them, right?

It's like, I'm going to make sure I'm as big a target as I can totally be by creating a currency that might just scare you if you were a Swiss authority or you were a UK authority or you're a U.S. authority. That's what I've done with Libra. As opposed to saying what I created was a simple way for Facebook people to transfer money to other Facebook people. No one would be scared about that, right? Yeah.

So maybe they start with the ambitious thing and they're willing to settle. on what they end up on. Perhaps, though. We'll see. Well, Mark, this has been a really fun conversation. Where can people learn more about Vestigo and follow your work? Thank you so much. So you're welcome to check us out on vestigoventures.com,

V-E-S-T-I-G-O-V-E-S-I-G-O-Venture. And I'm on Twitter and LinkedIn. Always happy to connect with people there. For Twitter, it's MS-C-C-C-S-C-A-Y. And Cassie is spelled a little unusually, C-A-S-A-Y. So always happy to interact there as well. It's a wonderful time in venture in financial services. Again, I've never seen a time that has this much promise in my view.

I know we're in a time that's a little scary to say the least, right, around health issues and the country facing some long-term issues around self-identification and understanding how to get along better, all those things. So fundamentally, that stuff's scary. But in the end, I'm an optimist. And my belief is that one of the things that will happen is we'll find better and cheaper and faster ways to get more people involved in financial services. And the more we do that, the more we equalize opportunity, the more we equalize opportunity,

the better will be as a country. That is why I'm optimistic that fintech and really do some amazing things as it basically spreads out to more and more people being involved. Well, I love to end on the optimistic note. So I'm looking forward to doing this in person, hopefully the next time we see each other in Cambridge. Yes, it'd be great to see you. Thank you for joining a pod.

Thank you. Thanks for listening to another episode. episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.vc.vcelson to listen to all of our podcast episodes, please go to on the brink dashpodcast.com or just click on the tab in our website. Thanks for listening.