The Rise of Private Markets and Alternative Investments with Steve Zuschin

Jack Sharry: Hello, everyone. Thank you for joining us for this edition of WealthTech on Deck. I am forever trying to keep things fresh on our WealthTech on Deck podcast. I especially like to talk with people who are students of the business, people who are paying attention to what is going on today and keeping an eye out for where things might be headed. I like to talk with people who are of the business and in the business of improving outcomes for investors, advisors, and firms as we all explore how to best improve outcomes for all. I often speak with the best and brightest in our industry. I’m privileged to speak with so many just plain smart folks in our business. Today’s unique twist is I’m going to have a conversation with someone who I talk to offline often about where things are headed. He’s been on our show many times. He’s my good friend and former colleague at LifeYield, Steve Zuschin. When I want to get a pulse on things, I reach out to Steve. Today, Steve and I are going to have a wide ranging conversation I look forward to, because I’m not sure what he’s going to talk about, but we’re gonna have a wide ranging conversation on what he is seeing now and where he sees things going as he seeks to disrupt things in our industry. Steve, my friend, welcome back to WealthTech on Deck. Good to have you in that chair again.

Steve Zuschin: Thanks a lot, Jack. It’s awesome to be back with you.

Jack Sharry: Terrific. So, Steve, let’s start with those who may not know you. I’m surprised anyone who would listen to our podcast does not know you, but let’s start with you giving our listeners some background on your time in the industry and what you’re doing now.

Steve Zuschin: Yeah, sure, absolutely. Just a little bit of background. You know, I studied financial services in school. I didn’t necessarily know how I was going to use it, but I knew that I did have one goal. I wanted to make some money, and I wanted to feel comfortable knowing what to do with the money I made in any industry. I ended up working at Northwestern Mutual, and loved that experience, really helped me cut my teeth in the financial services industry. And I wanted to be in a broader position. I ended up moving to New York City and getting involved with some founders that were in an incubator at the time, and it was Praveen and Raj Udeshi who were starting Hidden Levers. At the time, we didn’t know what the market was, but were one of the early, early solutions around risk inside the wealth management space. We were one of the first integrators into TD Ameritrade when they decided to open up their API, and it kind of became this data sharing revolution within the RIA market. And I was with them at Hidden Levers for seven years. I was the first employee, and, you know, graduated from Hidden Levers to join your team at LifeYield there, Jack and, you know, going from risk to working with how to create tax efficiency and this concept of multi account rebalancing. And you know, the big thing that at Hidden Levers was multi account risk. How those two things came together in my experience at LifeYield and building that solution with you was massively eye opening. And from there, I’ve graduated into and I’m working with a couple of founders on a project called Mammoth Technology, where we focus on private markets and helping RIAs be at the center of transactions around private markets, and really help guide their clients around the investments that they want to make in the private space, and how that all comes back to wealth management at large, and how those investments are included as part of a household.

Jack Sharry: Great. So you have been around all aspects of the business in the B2B level, and ultimately for the benefit of advisors and their clients. So you’ve seen it all, whether it was on risk or tax. You’ve seen it from in terms of the private markets and really how the process all that, something we don’t talk an awful lot about in our industry is that whole back office aspect of things. It’s, as you well know, it’s challenging, because our industry was built for a single account world, and it’s really become a multi account world, not that it’s become, it always has been. We just only lately as an industry, have figured out what to do about all that. So as you and I do offline from time to time, I’d love to get your perspective and observations on some of the key issues you’re seeing advisors and firms working on now, and as they embrace… approach, trying to figure out the advice tech marketplace. So fill us in on what you’re seeing.

Steve Zuschin: Yeah, absolutely. Thanks, Jack. You know, one of the things that this always comes back to something that you and I focused on a lot of LifeYield that, as you just mentioned, around this single account structure, I think our industry was really built, all the automation was built around one single account. And you you know this story better than anybody, this idea on how our industry has graduated from products to accounts and now from accounts into households, and I really think that financial planning helped, I guess, solidify this idea of multiple accounts. And like we did at Hidden Levers, when we’re talking about risk, it’s especially when you’re talking about an individual or a couple’s risk tolerance. It’s hard for me to say, well, I have this risk sentiment around my IRA, but I feel differently when it comes to my brokerage assets. And so this idea of approaching it from a holistic view and looking at everything together, all of this underpinnings around how we start to include it is all around data availability. The thing that really put us on the map with Hidden Levers as I mentioned in my intro, TD Ameritrade was kind of a front runner when it came to, hey, we’re going to open up our API, we’re going to work with vendors for free. We’re going to allow you to use our custodial data to create solutions for advisors. The whole idea was to help advisors do a better job for their clients. That was all about data flow, right? And so all this infrastructure around managing and trading accounts, since we’ve gotten access to all this data, and we’re able to look at it holistically, from financial planning to risk assessment to product selection, asset allocation recommendations, well, how do we implement it? And you know, that was one of the fun problems that we got to solve at LifeYield and be a front runner in this idea of a UMH, a unified managed household. At the base of that, it’s around data. So how do we access the data of all those accounts to make recommendations that actually improve outcomes for people? And so today, when it comes to being out there in the market, and what I’m focused on in the private markets around helping advisors transact, it’s still this data play. It’s about, how do we get access to the data? Is that data accurate? Can I include that as part of my household? How does it involve in my fee billing structure? What do my operations team need to do? So again, it’s all about this data flow and how we use that data.

Jack Sharry: So, talk a little bit about, because I know you’ve also done some consulting work with some of the folks that you know and people who know you around the industry, just around that operational aspect. Because you not only, you clearly know the front end of the business in terms of tools like Hidden Levers or LifeYield or what have you, you understand all that, that sort of front end, but then ultimately it’s got to be figured out in the back end. And certainly what you’re doing now with Mammoth around the private market solutions that you provide, talk about what you find as you’re dealing with firms from an operational standpoint, because that’s really what makes all this stuff real or not. So maybe talk about your observations, what’s working, what’s not working, what’s needed. Fill us in.

Steve Zuschin: Yeah, you know, it’s really reminiscent of early conversations with LifeYield. What we hear a lot around private investments is firms are like, ah, it’s difficult. It doesn’t scale. It’s hard for us to scale doing private investments. The ones that have done, who have achieved any type of scale across their client accounts, they’re generally going the more traditional path where they’re using platforms like iCapital or CAIS to access big institutional funds, which is great, and it’s a good way to get a diversification, and it’s a more modern way of delivering some of these products. But when we talk to clients and actual investors, the investors say, oh, yeah, I want more exposure to real estate. And there’s this whole world that lives between me directly owning real estate and being a landlord and then getting into some institutional real estate fund. And those are the deals that are building the shopping center down the street and how that’s financed. And there’s a whole world there around how you finance these smaller, mid sized boutique funds that don’t live on these big institutional platforms. And that’s where the rub is. There’s no standardized process for any of these private investment opportunities when it comes to paperwork, legal work, onboarding investors, a lot of it is just big, big documents, you know, sometimes 50 pages that the investor needs to go through and complete. And there’s not a lot of infrastructure for advisors to help those clients complete that paperwork. So that’s where it puts a heavy, heavy load on the operations team, on how do we complete the paperwork? Are we in a position to pre populate it for our clients or do our clients seem to do this themselves? And then, once the investment’s been made, how do we stay up to date on it? So a lot of the time, the task at hand for these operations teams is they have to go out to these companies that have done these individual investments, and they have to log into some portal, they have to retrieve the documents, and they have to transcribe those documents into data. Then they have to enter that data into a reporting system, and then they have to do the accounting if the reporting system isn’t doing it for them, so that they can charge a fee or or include those, those assets as part of the household’s assets. And so you can imagine that when you throw that at the operations team, it becomes extremely hard to scale and starts to become this big ball of yarn, you know.

Jack Sharry: And my impression in talking to the various folks that are working on these sorts of issues, the help is on the way. If it’s what you do. It’s, I’m sure iCapital does it, one of our clients, SEI, is building out a capability all around streamlining what you’re talking about. So talk about the advances there, because, back to your earliest point in this conversation, it is about the data and about the flow of the data, and then using it and streamlining it so that it’s much less cumbersome. Talk a little bit about where, where you see the industry data at large, but I’m thinking specifically for now, on the private market side of the alternative side.

Steve Zuschin: Yeah. I mean, it’s fascinating. It’s at a crossroads. I think that there’s a lot of directions that this can go. And I’m trying to be a student of the game and pay attention to where innovations are happening and where there’s big changes. As you mentioned, there’s these big incumbents that have done a tremendous job of creating access. You know, in the last 10 years ago, alternatives were not something that an average high net worth RIA client would get exposure to through their RIA, the access just wasn’t available. RIAs didn’t have a place to go to do that at any type of scale. So CAIS and iCapital, they really put it on the map. They’ve made it part of the conversation. And now it’s becoming about diversification. So when we think about diversification, I mean, let’s just think about, you know, the godfather of diversification, well, Warren Buffett, right? So Warren Buffett would talk about, invest in what you know, right? Invest in what you know. Invest in what you use. Well, today, more than ever before, those opportunities aren’t investable. So when we think of companies that you and I might enjoy or use, like Ikea or Chick fil A, they’re not available for you or I to invest in, right? So as we go through life today, I think it’s less than 1% of US based companies are publicly traded. In fact, of that I was just looking at a stat. It’s in a report from the Business Review at Berkeley, at UC Berkeley, on private companies only, of companies that employ over 500 people, 86.4% of them are privately owned. So at large, our economy is becoming privately held, and in order to have diversification in these investments, we have to be accessing them in private markets. And so as financial services professionals, I think making those innovations is extremely important to the wellbeing of our clients, and again, to just have that diversification across how capital is moving, how capital markets are working today.

Jack Sharry: I love many things about our industry, but one of the things I love is that if there’s money to be made, there are people that will find out ways to make it. That is true whether you’re a manufacturer, you’re a distributor, you’re a broker dealer, you’re a wealth manager, you’re a whatever you, RIA, and there seems to be a clear shift, move toward the private markets in general. And I think it seems, because the data is getting better and better, because that what to do with it in terms of software and platforms and all that being more developed in a smarter and more efficient way. All that seems to be what’s happening. And then just sort of the backdrop, it seems just, we seem to be moving toward more private enterprise as opposed to publicly owned. But fill me in on all that.

Steve Zuschin: Yeah. I mean, there’s plenty of people who are smarter than me with CFAs and PhDs that study, you know, why companies remain private. I think at the bottom line for someone like you or me in this discussion, it’s easier to stay private, it’s cheaper, it’s more efficient than it ever has been, and I can access capital. I mean, IPOing and going public used to be a way to liquidate. It used to be a way to create capital so that we could scale a company, and we just don’t need to do that today as often or as early. And so I think that that’s the trend in why companies stay private longer. But you still have this, as I mentioned before, which iCapital and CAIS have done a good job of as as it relates to access. Now, how do we do that at scale? And the innovation that I think is happening there is, as we were talking about, it’s about data and it’s about consistency. Something that we saw in the 80s in equities markets was the fixed protocol. It created… all these big banks said, hey, we’re all going to agree on a way to transact. And I think that we’re going to see something like that in private markets, and it’s going to be led again by some of these large banks. We just saw a big announcement that BNY is backing a project they just launched, it called Alts Bridge. And you know, there’s millions and millions and millions of dollars backing this project, and it’s about stitching together the trillion dollars in assets that BNY, or Pershing, has custody over. They’re an administrator for tons of private funds. They have a transfer agent. They have all of these elements that are generally not connected, and now they have the ability to connect them. So whether that’s, you know, the first step in the direction, they’re going to create a standardized process that connects all these things. And I think that we’re going to see some of these other large banks start to follow too. There’s also a pretty fun product innovation that’s happening too around, again, how we get access and then how liquidity is created. So one of the big problems that we’ve talked about and that a UMH addresses, is how do we handle these assets that are part of a household, that are illiquid, right, something that we just can’t trade. There’s not a lot of liquidity for it. And I was talking to an asset manager the other day, and they’ve developed this tool where they go out and they’re buying an allocation into a big fund, a big private credit fund. They go out and they buy an allocation, they use their balance sheet to do that, and then they resell it to people like you or me, but they they break down all the investments inside that large fund, and they allow us to design our own portfolio using blockchain technology. And so I think blockchain technology, which is often, I think, held right alongside crypto, where, if we remove the crypto from it, it’s a pretty efficient way for us to be transparent and and do things innovative, like this company is doing with private credit, and what they allow us to do is they reduce the minimum, the investment size that I need to get exposure to that. And they also reduce, I no longer have to be a qualified purchaser to get access to these investments. I can, I can do it as an accredited investor, which is pretty impressive.

Jack Sharry: Wow. Cool. So tell me, where does Mammoth fit into all this?

Steve Zuschin: So our focus with Mammoth like, what I’ve built a career on, is, how do we help RIAs stay at the center of these transactions on behalf of their clients, so that they can continue to run point when we talk about wealth management. If I’m an RIA and I’m representing a client and they’re doing these private deals, I need to be able to know what’s going on with those investments and those transactions. So what Mammoth has done is we’ve built a platform that allows RIAs to customize a category of all their deal flow. We work directly with fund managers to digitize the onboarding experience into their fund. The thing that we’ve done that’s innovative is that we’ve been able to do that at a much more efficient method than creating new investment entities, which tend to stack fees which all add up on that client at the end of the line. And so what we’ve found is that by working directly with those fund managers and allowing an RIA to be an intermediary, we can reduce the fee that goes to the client, sometimes three to five hundred basis points, so it becomes a much more efficient method of helping an advisor transact on behalf of their client, and then we create that chassis for their operations team so that we’re standardizing the onboarding for all of these funds, so it’s no longer a new process and a new administrator for each investment. And they do all the transactions through Mammoth, we make the data on those transactions and then we reconcile it for their downstream system where they’re doing their reporting and fee billing. So we really want to remove that burden from the operations team and create a better experience for the field of advisors to learn about new deals that are available to them, that their compliance team and due diligence has gone through, as well as a standardized transaction process for them to go through on behalf of the clients.

Jack Sharry: So, I’m sure you’ll agree, but let me just make sure and see what you think about all this. And really the question I’m gonna ask is where you see things going. So clearly, there’s a move toward multi account overlay kind of technology. It’s what LifeYield does, and many of the biggest firms in the universe are doing this now. So it’s underway, not always fully publicly known, but it’s coming for sure. And you’re looking across this is, of course, publicly traded securities and other products like annuities and certain alternatives and so forth. But as we look out that is coming together, it’ll take place somewhere, I think, over the next few years, would love to hear your thoughts. So as we look as the shift toward alternatives, and what comes of that in terms of liquidity, as well as taxation and so forth, all that will necessarily wind up as a household exercise. So talk about that. Where do you, how do you see that going? What’s your crystal ball telling us about how this, this all comes together?

Steve Zuschin: Yeah, so when we think of a UMH and being inclusive of all the investments that a client owns as part of that, a big part is about maintaining the appropriate risk for asset allocation across all those accounts. And today, single account management systems or rebalancing and trading systems can’t do this. So when we think of an operations team or a trading desk, they have to do this by hand, which creates tremendous liability for a firm. So being able to automate and include illiquid assets, which just like the 80s, when you wanted to buy a mutual fund, you had to go open an account with the mutual fund manager, and then you would fund that account, and then you could make the investment into the fund you wanted. That’s how private markets work today. So all of the rails and the infrastructure, so we have to be able to include these assets as part of the household, so that we are aware of how we’re rebalancing around them. And there’s always going to be innovations around how products are accessed and how transactions are made around those products. And like I’ve mentioned, there’s daily new innovations around private markets, but if we’re not including the view in that household, we’re never going to be able to maintain the appropriate risk tolerance for the client and the appropriate asset allocation. And so going back to the beginning of our discussion, Jack, this all comes back to data. Data accessibility. We’re seeing more and more of it with these innovations, where now better than ever, you can actually implement a UMH, you can include illiquid assets. You can look at the liquidity risk that’s inside of those assets, and you can build a buffer around it so that your other accounts that you can trade in more efficiently, more tax efficiently, can offset when there’s volatility in the markets. And you know, that’s groundbreaking. It’s groundbreaking on all levels. And today it’s achievable, which is pretty amazing.

Jack Sharry: It’s a great time to be in this business, I got to tell you, it’s really fascinating. All the innovation that’s underway in real time, it feels like it’s taking forever, but frankly, it’s happening rather quickly if you really take a step back. So, Steve, as always, great conversation. Love chatting with you, getting your perspective on the world. Always very clear and understable. So I appreciate that. Any key takeaways you want to share with the audience in terms of what they may want to know from our conversation?

Steve Zuschin: You know, with the audience, I would just recommend that a lot of the times we run into firms that just haven’t really determined where those pain points among alternatives are. There’s a lot of room today, more than ever, on ways to automate and create efficiencies. And so I would just encourage you all to reach out to our team. We are happy to step in in a consultative approach and help you kind of look at your processes and procedures and see where we might be able to smooth things out for your team, whether that’s us helping you or your own team implementing some of our recommendations. So, looking at processes and procedures around alts. The other big takeaway is continuing to keep your eye on the ball. If you don’t have a team in place that’s looking at the innovations around private markets, try and get someone, whether it’s a consultant or somebody else who’s out there looking at the markets. Because whether you’re curious or interested in making these deals for your clients, if you’re working with higher net worth clients, they’re going to make these deals with or without you. And so I would really recommend that you put yourself and your team in a position to be able to help them make these transactions, so you don’t end up advising money away from your business.

Jack Sharry: Terrific. One last question, our favorite. You’ve answered a few times in past podcasts that we’ve done together, always my favorite. So what are you doing these days outside of work that you’re excited or passionate about that people might find interesting or surprising?

Steve Zuschin: Oh, man, there’s a lot going on. I’ve mentioned this before, but I’m a board member with a nonprofit called Mongol Ecology Center, where we work with national park systems globally. We help them establish and follow an internationally recognized playbook to create national parks and protected space. And one of the programs that we do is call Rally for Rangers, where we work with volunteers to raise money and buy motorcycles for park rangers. And so I’ve been able to participate in a few of these deliveries, where we take motorcycles and hand them off to park rangers working in these areas, and I get to go back, so by the time people are watching this, I’m probably already back. The first two weeks of November, we’re going to Bhutan, the kingdom of Bhutan, which is in the Himalayas, and delivering 18 new motorcycles to the park rangers that are that are working in that region, three different park systems that range from an elevation of 500 feet to 13,500 feet. And so it’s going to be a pretty cool opportunity to go lead a group of volunteers and be part of that.

Jack Sharry: That’s great. And I also understand you have achieved a milestone in terms of your running career.

Steve Zuschin: Yeah. You know, it was when I turned 40, I found that I wasn’t able to keep up with my kids the way I wanted to, and I started running. I was challenged to actually run our little town race here, our fourth of July race, and I barely completed it at a 10 minute mile. And this last year, I was able to complete my first marathon, and I finished it just over my target pace. I wanted to get in at under four hours, but I finished at four hours and one minute. And then I finished my third 3 Beach Minimum, which is a kind of a small, infamous half marathon here on the south shore of Boston, and got my personal best and completed that. And it’s been a really cool thing for me to be able to do, just as having a goal to work towards, but also my physical health and work on that. So it’s fun. It’s fun to have these little goals, these little milestones, something we can control, right?

Jack Sharry: Yeah, good for you. So, Steve, thanks as always, great conversation. Always learn stuff when we get together. So thank you for that, and thank you for our audience for tuning in. If you’ve enjoyed our podcast, please rate, review, subscribe, and share what we’re doing here at WealthTech on Deck. We’re available wherever you get your podcasts. You should also check us out on our dedicated website, wealthtechondeck.com. All of our episodes are there, along with blogs and curated content from many folks around the industry. Steve, thanks again. It’s been a great pleasure.

Steve Zuschin: Thanks, Jack.