Trends In Structured Notes Investing, With Marc Premselaar & Brett Kunshek

Inflows into alternative investments set new records in 2020 and 2021, in a variety of segments and “wrappers.” On alternative investment platform CAIS, one of the highest-growth areas in the past few years has been the structured notes segment.

CAIS’s Marc Premselaar and Mariner Wealth Advisors’ Brett Kunshek join the show where we discuss trends in structured notes investing, and in the broader alternatives industry.

Episode Highlights

  • Background on CAIS, and how the company fits into the broader alternative investment industry landscape.
  • Background on Mariner Wealth Advisors, a leading RIA firm in the US.
  • The technical definition of structured notes, and how they function as a “wrapper.”
  • Details on the size of the structured notes market (both globally, and in the US).
  • Why the flexibility of structured notes makes them a powerful wrapper, even compared to other types of outcome-driven investments such as buffered ETFs.
  • Marc’s thoughts on the traditional 60/40 portfolio, and the new paradigm in portfolio construction that includes alts.
  • Brett’s thoughts on how structured notes can be made more accessible in the future, such that an increasing number of RIAs can practically include them in client portfolios.

Today’s Guests: Marc Premselaar & Brett Kunshek

Marc Premselaar, CAIS

Brett Kunshek, Mariner Wealth Advisors

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to the “Alternative Investment Podcast,” I’m your host, Andy Hagans. And today we’re talking about a very interesting product segment that a lot of clients, a lot of RIAs are using to achieve portfolio goals, and that segment is structured notes. I know a lot of our listeners and viewers are already using structured notes, but I think for some of us they might be totally new, or at least, you know, the term and the frame of this product might be a little bit new.

So joining me today to discuss structured notes, is Marc Premselaar, who’s senior managing director at CAIS. As well as Brett Kunshek of Mariner Wealth Advisors, which is a leading RIA firm. So, Marc, I’m gonna start with you. And I know we wanna talk about structured notes today, very exciting product. But to sort of set the table, you’re with CAIS, and I know a lot of our listeners and viewers are already familiar with CAIS, probably using the CAIS platform. So, CAIS is obviously a leading alternative investment platform for independent advisors who are looking for education, who are looking, you know, for access to alternative investments. But I wanted to kind of get the 2022 update in regards to CAIS. You know, who are your present clients? You know, what are some of the developments in the past three to six months? What’s going on with CAIS right now?

Marc: Andy, first off, thanks for being here. I think you nailed it, you know. But in terms of who our clients are, there’s really two sides to our client base at CAIS. The more obvious one, our financial advisors, namely independent financial advisors, RIAs, RA aggregators, independent broker-dealers. But then you have to think about the other side to the equation, is how are they getting access to these products that we’re making available for our clients? And that’s really on the product providers, such as asset managers for the traditional alternative side, hedge funds, private equity, private real estate, etc. And then also on the structured notes side, banks. So, we really connect both sides of the marketplace, product providers, with independent financial advisors, and that’s the CAIS platform. So, when you think about our platform, there’s really two sides to the equation, both advisors and product providers, so we really consider both of them as our clients.

Andy: Right. So, you guys are that, you know, connection in the middle, the network who are bringing together both of these sides. So, let’s talk about structured notes because, I mean, I think a lot of…obviously our listeners are familiar with hedge funds, everyone’s familiar with private equity. Not all advisors are using structured notes in their portfolios, in their client portfolios. So, could you give us an introduction to structured notes? What are these exactly?

Marc: Yeah. So, you know, you could answer that question in many different ways. I think the best way to think of a structured note, is a customizable investment that enables advisors to get downside protection in their portfolio, enhance the yield of an investment or enhance the yield of their overall portfolio, or just create a tailored or customized view of the market, such as the S&P 500, or Apple stock, or a given sector. I think the beauty of structured notes is, as I mentioned, they’re pretty customizable. And if you’re a financial advisor you can use them to compliment your existing portfolio, whether that’s in equities, fixed income, or alternatives, or you can use it to create a customized view in the market for your firm only. And I think that’s a really, really big advantage that advisors are taking advantage right now. And then naturally in this market climate with rising interest rates, equity volatility, and just a lot of concern overall, advisors are taking advantage of the attributes of structured notes that I think we’ll get into a little bit later in this podcast. But now is certainly the time that I think we’re seeing that.

Andy: So, how big is this market exactly? I know it’s gained a lot of momentum in the past few years, but, I mean, do we really know how big it is? Do you have any stats or insight on the dollar size of the market?

Marc: Yeah. So, it’s a very, very, very big market globally. So here’s some quick facts for you. In the U.S. is around $100 billion in annual sales in structured notes. That’s what it was last year, and it’s grown roughly 20%, 25% over the past five years. On the global scale, I think, you know, the number that we quote for ’21 was about $600 to $700 billion in overall sales. Again, that is new dollars coming into notes, whereas some of the stats that we talk about in terms of outstanding market value of structured notes is around $2 trillion. So, it’s a very big market. I think the number that always jumps out for me is, it’s not a huge market in the U.S., and again, I think we’ll dive into that in a little bit. But I think a lot of the sort of technologies, the product wrappers, and the way we deliver structured notes are all changing, and that really is gonna bolster the growth in this part of the world.

Andy: Yeah, absolutely. I mean, if anything, that number sounds a little small for the United States, you know, in reference to the global number. So, Brett, Marc has given us some good background on structured notes, and we know Mariner Wealth Advisors is a big RIA firm. But beyond that, before we dive into the structured notes, could you tell us, you know, about Mariner and your role there, you know, how you work in the firm? Do you interact with clients? Are you more on the portfolio construction side?

Brett: Yeah. First off, thanks for having me on the show today, Andy. So, Mariner Wealth Advisors, we’re a large national RIA. We have 80 offices across the country with a little over $60 billion in assets under management. Mariner’s been ranked in the top five in Barron’s in each of the last five years. But I think what really makes us different is our founder formed Mariner really outta that family office mold. So, if you think family office typically, you know, somebody who has hundreds of millions of dollars. Well, took that mold and applied that and said, “Hey, why can’t, you know, high-net-worth individuals without maybe hundreds of millions, but with just, you know, millions, be able to have this same service?” So, all under one roof, what we’ve done is we have tax prep and planning, we have estate planning, financial planning, and then, of course, investments.

So, it brings everything that touches a client’s life under one roof. And obviously, I’m on the investment side I head up our options team. And so when you think of, you know, high-net-worth clients, you’re not just gonna have your stocks, bonds, cash, you’re gonna have alternatives, and we’re a firm believer in alternatives. And I’ve headed up the options team. I’ve been on the option team for over 12 years now. And then, like what we’re gonna talk about today, structured notes, we also view this as a really nice way to alter that risk-reward payoff structure. And so, that’s where we create these customized portfolios to really bring what our clients want and not put ’em into, say, a cookie-cutter model.

Andy: So, you know, when we talk about portfolio construction then, this is something that’s really individualized, like, on a retail client level. Or is there, like, a company-wide kind of model to how to use a structured note? Or is it really dependent on an individual’s, you know, goals and risk tolerance, and, you know, their personal risks? How personalized is it really?

Brett: Yeah. So, our investment platform, we give our advisors, basically, we call it an open architecture platform. To where as long as it’s approved on our platform, they can go mix and match and pick what they want to use to create that client’s portfolio. So, here within our team, we give ’em a little bit of both. We say, “Hey, if you have a really unique situation, we can go use a partner like CAIS and source from issuers a specific custom note for their situation.” And we call that more of just kind of a one-off note, to fit a specific need. But we also have created strategies, so specific strategies on types of notes that we really like to achieve specific objectives. And that way our advisors, you know, they don’t have to be experts in notes. They just need to know it at a high level, and they come to our structured notes team and say, “Hey, yeah. I like that. Go create that, you know, laddered portfolio of notes for me.” And that’s where we come in and we take the operational burden off their plate.

Andy: So, I guess, could you walk me through, like, an example of how, you know, like, a specific type of structured note that might be appropriate for a specific example? Like, I’m thinking of almost something like a variable annuity, where, like, you might have a retiree who invests in a variable annuity because, you know, they need some sort of minimum downside protection, but at the same time a variable annuity lets them participate in some upsides of the market. I know variable annuities, you know, that they’re their own thing, so we don’t need to get into them, but that’s, like, an example of a prototypical end user there. So who would be, you know, a specific user? What type of problem are they solving, and then what specific kind of structured note would help ’em reach that objective?

Brett: Yeah, definitely. I think the types of notes that we’re using, they have a couple different objectives. The first type is, really to get that hedged equity exposure, like you said, clients wanting that downside protection. So, we can have notes with 25%, 30%, or even more downside protection, but give them, you know, that upside participation in the marketplace. And the specific types of notes that we like, it’s uncapped upside participation. So, there’s a lot of shorter-term structured notes out there that you get that upside, but maybe you’re capped after one year up 10%, or up 12%. Here, we typically like going out a little bit longer, out four years, five years, getting rid of that cap and getting, you know, unlimited upside participation. So, if you get in a sustained bull market, you know, you’re not gonna be capped out after, say a year.

So, that’s the first type. The second type is more on the income generation side. So, I like to bucket in a couple categories. You know, one, the risk mitigation, as far as on the downside, but still participating if not fully to very much so on the upside, but then also on the income generation, where you do have also a lot of protection on the downside, but you get high stated coupons. So, you know, in this era of interest rates that, call it 3%, 4%, where we’re at now, you know, these notes in this environment, it’s much higher. Me and Marc were just talking about that, you know, you can really get in the 10% to 12% range. So, you can get much higher rates with a lot of protection to the downside. Well, that’s very attractive in this type of market.

Andy: Got it. Yeah. Yeah, that makes sense. So, Marc, turning to you now, you know, it’s very clear to me how structured notes could fit into that individual investor portfolio. And, you know, I could see an RIA firm like Mariner, you know, having kind of models that they use, but then also there being individual situations. I could also see this type of product being very useful for institutional investors, you know, non-retail investors. So, is this product, is it being purchased at all by institutional investors, or is this purely aimed at the retail market?

Marc: Yeah. I mean, I think one of the unique things about structured notes is, one is the definition of them. So, it’s many different types of products and what’s considered a structured note. So institutions actually do use structured notes to an extent. In many cases, they’re done in private placement wrappers, and so a lot of the income funds that are out there today actually do use structured notes vis-a-vis private placement. So, when we talk about yield-oriented structured notes they’re called call-right strategies or buy-write strategies. Where rather than using options in a strategy, they could actually do a yield-based structured note, where they get a specific coupon that pays a coupon and then the downside is based on the performance of that individual equity. So, institutions actually do use structured notes, and many of the income funds, as I said, that folks invest in today are doing structured notes.

But largely speaking, you know, the structured note is driven by the retail market. And I think the answer to that is because structured notes were almost created to give retail clients access to the institutions, so institutions can do large options transactions. They have to get an ISDA set up with a bank. It’s a very big process. Investment banks don’t wanna onboard individual retail clients, so it’s very hard to do these very technical sort of institutional options-based strategies. But structured notes were actually created in many parts to enable investors to do these vis-a-vis an SEC-registered security. As we know or may not know, structured notes at the end of the day are a bond, so they’re a fixed income instrument. But rather than getting fixed coupon payments, you actually get a payoff that’s derived from whatever the underlying investment is, and that’s how they’re created.

So, it’s a zero-coupon bond plus options, created in a vehicle or wrapper that is able to be used by retail clients. And as a result of that, they can get, as I mentioned earlier, a note or an investment tied to the S&P 500 that has a 10 or 15 downside buffer to guard against losses of the S&P 500. And they could have, you know, exposure one-to-one, 1.5X, 2X, either capped or uncapped, depending on the tenure or in other variables in the note that, again, they’re gonna put that in their develop market equities bucket or the U.S. equities bucket. Even though, again, by definition that officially is a fixed income instrument, backed by an issuer, largely speaking most times a bank.

But again, they’re not gonna put that in their fixed income bucket, they’re gonna put that in their equities bucket. So, kind of back to that whole point of saying structured notes are a very flexible investment. If it’s gonna be a yield-based note, one advisor may say that and say, “Okay, depending on, you know, the expected outcome of return, I may put that in my Alts bucket next to a private credit fund, or, you know, a private lending fund or real estate,” etc. Or another advisor may say, “Okay. You know, this note has downside protection or contingent downside protection of 50%. You know, maybe I’ll put that in my high-yield bucket.” So, again, initially created to give retail investors largely the same access as institutions. And then how they’re used now are very flexible, because again, the main thing to think about here in structured notes, they’re not an asset class.

They are a product that can be used to implement an exposure in a traditional asset allocation. So, when you think about the 60-40, right, it’s the talk of the town now, or it’s been the talk, that a 60-40 is dead or coming to an end, I think we can all agree upon that. Whether it’s a 50-30-20 or a 60-30-10, a structured note is not gonna have its own little slice of an allocation, but rather it’s gonna be used within the allocation of equities, fixed income, and alternatives.

Andy: Got it. So, really, the structured note is what I call a wrapper. It’s just a regulated type of product, you know, similar to, let’s say an ETF. An ETF is a wrapper, it can hold almost anything. So, structured note it’s a wrapper, but, you know, sometimes the wrapper will be more commonly used for certain strategies, for certain asset classes. But, you know, this one strikes me. You know, structured notes, they’re a little bit more complicated than let’s say an ETF. I mean, even ETFs, they took years for advisors to really buy-in. I mean, I think now every RIA is using ETFs, I would hope. But it really took years to really penetrate into the RIA world. So Marc, you know, is it a struggle, I guess, to educate RIAs about what structured notes are? You know, is it a matter of giving them education or resources? Or, you know, does CAIS find that RIAs are coming to CAIS saying, “Hey, we need structured notes?” Is there a gap, I guess, in that education?

Marc: It’s a great point that you’re bringing up. There’s so many nuggets in your last statement that, you know, we could attack a few of them piece by piece. I think, in terms of on the education side for Alts in general, and then, you know, distilling down a structured notes, absolutely. One of the reasons why, if you think about the institutional client base, their access to, or their overall exposure and portfolio to Alts can be upwards of 20%, 30%. A retail investor, a financial advisor is only putting sub 5% of their client’s portfolios into Alts. And I think a big piece of that, obviously as you alluded to earlier when we’re talking about CAIS, part of it’s access, though part of it’s education. So, I think you had on the education side and sort of what CAIS is doing with CAIS IQ, which is our educational platform, that’s huge and that’s gonna help advisors learn more.

I think in any product, like a structured note, you read a lot about structured notes. I think it’s naturally sort of, you know, helping advisors learn pitching, you know, helping them show ideas out, and show them what’s out in the marketplace. Of course, you know, Brett and his firm Mariner is a great use case, so that’s another piece of it. But, you know, the Alts wave is here, and so I’d say historically, you know, hard to say that advisors were coming and saying, “Let us buy a structured note. Can you help us?” Five, six years ago that wasn’t the case. But I think that’s definitely the case right now, and I think you’re only gonna see that go in one direction.

And part of that, again, it’s the market environment, equity volatility, interest rates, decisions by the Fed. And the biggest thing in my opinion, and Brett, I’d love to hear, you know, you jump in here, is a client’s financial personality or behavioral finance is just the biggest thing I think out there right now. Because, you know, if you’re not sleeping or you’re staying awake because you got too many equities, and even though it’s the right move now, or selling right now would be the wrong move, you know, according to, you know, advisors so staying the course is a good way, structured notes really help address that. One, they’re designed to be held to maturity. So, you can liquidate and sell out structured notes early, but they are point-to-point investments that are designed to be held to maturity.

So, if you think of that as a reason why to stay in structured notes, you know, the sort of the fact that they’re not gonna be, can be sold in and out every single day like an ETF, that’s one thing that I think actually helps clients. But two, it really helps clients get invested and stay invested. I don’t know about you, Brett, but again, may be very hard right now to tell a client to get into the market, or take cash off the sidelines even if it’s a great idea. But what if you said, “Here’s a structured note that, you know, you have protection to the underlying indices, 30%, 40%, 50%, and then you still get an upside return potential of 8% to 10%, or even higher.” Well, that sounds pretty appetizing. So I think the behavioral psychology and the financial personality of an investor is really important. I think it’s a huge way why structured notes, again, are gonna have a huge wave and why right now’s the time.

Andy: Well, Marc, I think you hit on something there. I mean, the numbers bear this out, that behavioral risk. Even more than fees or, you know, taxes, it’s the number one thing that is a drag on the retail investor. You know, you see that chart of the S&P returns over time, versus what the typical retail investor achieves investing through the S&P over time because of that, you know, buy high, sell low, that behavioral risk. So, Brett, turning back to Mariner and, you know, dealing with all of these retail clients, is that, I mean, at a conceptual level is sort of managing risk and aligning a portfolio with a client’s risk tolerance therefore mitigating behavioral risk, is that kind of the main, you know, gist of this product, its main benefit?

Brett: That’s one of ’em, and it very much is a behavioral tool. It’s, you know, clients and even advisors. They can, like you said, you know, end up buying high and selling low and this gives clients and advisors the confidence to stay the course. And at the end of the day, you have your asset allocation and history is proven out that, you know, if you can stay put and ride through those lows, then, you know, you’ll eventually end up at a better spot. And so, by getting that downside protection, that can give the client who may be panicking and wants to go to cash or raise cash to be able to stay the course. And especially at a time like this. You’re down 20%, 25%, what have you, in the equity markets. Yeah, there’s gonna be some nervousness, but if you have that protection, you can say, “Okay. Well, you know, if it does take longer for the market to recover, hey, I have that protection on the downside.”

And conversely for the client who may already be in cash, maybe they had a liquidity event, or maybe they raised cash back in 2020 and they’re still looking to put it back to work, this can give them confidence to step into the market. I had a call just yesterday with one of our large clients who was in that exact situation. He’s looking, he has his cash and, you know, he realizes, “Hey, this is a good time to probably start stepping into the market with a down 20%, 25%.” History will tell you that, yeah, that’s probably a decent entry point, even if it does continue to go lower from here, and this will give you the confidence. Most clients, I would say aren’t willing to, say, just jump in and start buying stocks at this point in time. But if you have that protection, that can give you the confidence to say, “Hey, maybe I don’t hit the exact low, but I know this is a good time to get in. And if we do go into a more protracted downturn, then, you know, I do have that protection as my ultimate safety button.”

Andy: So, let’s talk about the risk though, of a protracted downturn. And, you know, any kind of product like this, it’s a bond, and I imagine most of them are issued by banks, maybe investment banks. Brett, you know, do the advisors at Mariner, do your clients…how do you view the counterparty risk or issuer risk? Whatever we wanna call it. You know, is it a material chance that, you know, if the market really starts doing something dicey, if there’s another 50% drawdown or something, is there a concern that there would be significant credit risk on these products?

Brett: So, there is credit risk in these products, and that’s where we only use the issuers that we feel have creditworthiness that we’re comfortable with. So, again, that’s why, you know, if you’re an advisor that maybe doesn’t have the resources to analyze that, then, you know, that’s where you could offload it to a third party to manage notes on your behalf. But, yeah, we’re definitely looking at those issuers and, you know, it’s largely U.S.-centric issuers that we use. We use some international issuers, but those we’re gonna hold to an even higher bar. Just because we feel more comfortable with where, you know, the banks that we’re using here in the U.S. are currently at. They’re very well capitalized, and not that you wanna rely on it, but at the end of the day a lot of ’em still are too big to fail.

Now in the interim, you know, if you do have a big downturn and credit spreads blow out, that can be reflected somewhat in that mark-to-market pricing of the note, but that goes back to education. And then we’re telling clients about these notes up-front all the different, you know, things that can happen with them. That’s where that piece of it comes in because we don’t want to have surprises later on. So, that’s where we have those conversations and talk about each of the risks within the note. Because, you know, at the end of the day, myself and our firm, we like notes and we like using it in the right way, but it’s just like options. I head up our options team as well, and you can go crazy. You can do crazy, risky things with options and notes, and you can do very conservative things and everything in between.

And that’s where we really distill down, “Hey, what’s the key thing? What type of notes do we like? What are the issuers we like? And what are all those risks?” And have that laid out. And at the end of the day, it’s just trade-offs, and so there’s no free lunch. You know, we’re getting this protection, we have to give up something. One of those things is credit risk. But even though we’re taking on that risk we feel like, “Hey, that is an incremental risk, but we’re very comfortable with the issuers that we’re utilizing.”

Andy: Understood. So, you know, and I understand it can be almost a feature and not a bug, like a relative illiquidity of alternatives. One thing that I always hit hard on the show over and over is, I think in a lot of ways that’s a feature, not a bug, that you’re holding an illiquid asset and the market has a bad day. The fact that you can’t just exit it, you know, based on emotion that quickly, that can actually be a good thing. So, Marc, you know, understanding that a lot of alternatives, you know, they’re relatively illiquid compared to, like, an ETF or traditional investment, but now there’s sort of this, you know, span or spectrum of relative illiquidity among all of these alternatives products, and some of ’em are actually fairly liquid. So, where do structured notes kind of fit on that liquidity or illiquidity spectrum?

Marc: Yeah, it’s a great question. I mean, and you can answer this two ways, not to take your question head-on. But in one respect, as we talked about, structured notes are meant to be held to maturity. So, when you buy a structured note you get a prospectus. It clearly tells you what you’re going to get at maturity. As long as that issuer, you know, is still in business and has not defaulted then you’re gonna get that defined payout, which is the beauty of structured notes. It’s programmed data. You know exactly what you’re gonna get. So, if the note was tied to the S&P 500, and it gave you 1.5X uncapped upside to the performance and a 20% downside buffer, if the S&P is up, you know, 15%, you know, 15 times 1.5 is roughly 22.5%.

So, you’re gonna get a 22.5% return at maturity. And again, it’s calculatable, it’s programmed, you can see in the offering doc. Now again, if you were to sell that note prior to maturity, you most likely wouldn’t get that price due to the optionality, time values, etc. And that’s more of a growth note. So, the first part of your question is it depends on the structure. You largely will always get liquidity on structured notes. I think even in the dregs of 2008, where really Lehman was the only bank that truly defaulted on structured notes, you probably could get a bid and then get outta the structured notes in mostly anywhere. The question is, with rates blown out by, you know, by 1,000 basis points or more, would you wanna get out? So you can get out, but again, you’re not gonna get the defined payout.

And the second piece to your question is, it really is gonna matter in terms of, like, liquidity and how you define liquidity based on the structure type. So, that first example that I gave of the growth note, that could be uncapped. If it’s a five-year note, you can get out in three years and your return, again, given the optionality of the structure may look very similar as if you were an ETF. So, even though it’s a five-year note and if you had 1.5X uncapped upside and the S&P was up 30% in three years, your secondary market bid may be 130 or a 30% return. It may even slightly higher because that’s the nature of the options within the structure. However, if you had a yield-oriented note that paid a fixed coupon or contingent coupon of, you know, call it 10% per annum that paid 2.5% per quarter, you’re not gonna really see that note trade up much, you know, above par or even 102. Again, because it’s gonna pay out a coupon.

So, I guess the point is there is one with structured notes you can get out if you want to, large, again it’s not guaranteed by the issuers, but I can’t think of any time where no one could get out, A. B, you know, the bigger question is, as you said earlier, you’re buying these as an alternative. So, you know, again, if it makes sense to sell for the growth note that I just talked about, great, but outside of that, like, let the note run its course. If the note’s down, let a downside protection kick in and don’t try and force it unless you have to. So. That’s why there’s zero liquidity. That make sense?

Andy: It does. It does. And so, you know, we talk a lot on this show about wrappers. I think wrappers are probably something that’s pretty boring to most people. Not to us, not in the industry. So, you know, for instance, Delaware Statutory Trust. I think that’s a great wrapper. Obviously though only when it’s, you know, appropriately being used by the target market. You know, in other words, if you want a 1031 exchange and do an asset, and you wanna be a passive LP, then a DST is a great structure. Another great wrapper, Qualified Opportunity Fund. You know, if you’re interested in investing in ground-up real estate, you have a large capital gain and you want to defer those taxes, that’s a great wrapper. So, a lot of times it’s not one wrapper’s better than another, it’s just which type of wrapper’s appropriate for your own portfolio goals.

So, Marc, I know that structured notes, they’re a type of outcome-driven investment, and in our prep call you were talking about buffered ETFs, you know. And you were kind of educating me that, you know, there’s more than one type of outcome-driven investment. So, these are really conceptually, I guess, they’re kind of in a family of different types of wrappers. How would you compare the structured note wrapper to let’s say a buffered ETF? Do you think one is better than the other? Or is it just maybe one’s more appropriate for a different type of investor?

Marc: Yeah, it’s a great question again, Andy. Another one of those questions that we can spend a lot of time on, so I’ll try and be somewhat brief here. But look, I think when you compare it specifically to a buffered ETF, look, and buffered ETFs are great. I think as you mentioned, outcome-driven investment, the RETFs, but there’s definitely limitations there. Limitations there, one, in terms of structure. So, a lot of these buffered ETFs are kind of exactly what they may sound like, and which is, it’s a note that has an embedded buffer. And the upside generally speaking is one-to-one up to a cap and sometimes that cap is low, so you’re getting capped off in equity markets. So if, you know, you see a recovery over, you know, if they’re a year-long or however long the tender is, if the cap on the buffered ETF is 10%, market’s up 20, then you’re sort of missing that upside.

But like everything in life and investments, there’s two sides to it and there’s no free lunch. So buffered ETFs for smaller investors, those sort of looking over for advisors that haven’t, you know, necessarily taken the time to learn structured notes, buffered ETFs could be a great product. But the reason why I love structured notes so much and I’m pretty passionate about it, and I think Brett too, is the flexibility of structured notes. So, when you’re looking at some of these wrappers, like a buffered ETF and other different wrappers, some buffered annuities, and again, there’s always ingenuity and creation happening, but you’re limited a lot of times to that one, specific product set. So, when you look at a structured note, if you understand it, take the time to learn it, I mean, you can do yield-oriented structured notes.

There’s structured notes out there that, as I mentioned to you, you can get, you know, the kind that Mariner does, they kind of bifurcate growth and yield. There’s other structured notes, you know, called the dual directional kind of structured notes where you can make you know, the absolute return of an index on the upside and the downside. So if a note’s up 10, you can make 10, or if the index is down 10, you could also make 10. So, there’s so much flexibility in the wrapper of structured notes that I think when you looked at certain types of wrappers like a buffered ETF, I think you’re definitely limiting yourself. And I think, you know investors that are looking at buffered ETFs, if they knew of the other types of notes out there, they’d probably say, “Hey, you know, why am I not doing that?”

So that’s one piece. But you know, on that topic, I think wrapper is extremely important. And you know, there’s a number of wrappers right now, I would say in the product manufacturing labs trying to get at, “How do we get structured notes out there to the masses? Why is it only $100 billion business if, you know, the U.S. asset management business is $50, $60 trillion or whatever that number is?” And I think the answer that big is, again, as we said earlier, access, education, and also product structure. And I think Mariner’s doing some really interesting things on the product wrapper side on the SMA side that, again, you know, coming soon to a theater near you. But when you start to put structured notes into the managed accountant wrapper, I mean, I think you’re gonna see a hockey stick-like growth because right now, if you’re an RIA, and Brett and I both, you know, focus on the RIA segment, you know, mostly if you’re an RIA right now and you wanna invest in a structured note outside of Buffered ETFs and a couple other products that are a little bit unproven, you know, a structured note is the only thing in your portfolio that you’re actually managing yourself.

A typical RIA is manager-managers. They’re a quarterback of wealth management. They’re not managing individual positions. And even though a structured note actually feels like a managed investment given the certain timeframe, it’s sort of you buy and hold depending on the structure, notes mature. Yield notes are often called after six months, nine months, or a year. So, again, it’s one of these things where we don’t wanna force an advisor to say, you know, “I love this product because it’s great for my business, great for my clients, but it’s hard for me to scale some from a true business perspective. I don’t wanna make that choice.” And so, I think that some of the products, the wrappers that are coming out, some technology, the platforms that you’re gonna see, obviously, you know, CAIS is certainly one of them, the technology, the product structure, the wrappers, that’s really gonna help grow the business. Because we don’t wanna make advisors do something that, you know, they don’t wanna do, which is necessarily manage one single or a series of single positions while that’s not how they run their business. So, that’s a very important topic.

Andy: No, I think that is, and Brett, I’m sure you have some thoughts on that, so I’m gonna get to you in just a sec. But Marc, I do wanna put you on the spot. You’ve kind of alluded to it during our conversation. I would say, you know, the 60-40 portfolio, it’s pretty much dead, or definitely if it wasn’t dead already, I feel like 2022 at least maybe totally finished it off. But not everyone agrees with me, so I wanna ask you a two-part question. Number one, is the 60-40 portfolio dead? But also number two, if it is dead or if it’s dying, is there a new paradigm that’s going to replace it? Is there a new, you know, model that you think a lot of advisors will kind of cotton onto?

Marc: Yeah. I mean, I feel very comfortable in saying that the 60-40’s dead. Again, I’m not a CIO, but I think when you look at the marketplace advisors, firms, I mean, everyone, if the 60-40 is not dead, you better look up and look around you because your business may be at risk. So, I think it’s fair to say that. And is there gonna be a new paradigm? You know, the answer is yes, but is it gonna be a 60-30-10 or a 50-30-20? No, I mean that’s like anything with asset allocation, that’s gonna depend on the client’s risk tolerance, time horizon, and everything else that an advisor looks at, you know, for their clients. But as I mentioned earlier, institutional access to Alts is 20-30, in some cases now probably even higher. But if you look at the retail space, it’s sub-five.

So, something’s gonna have to give to make that spread narrow and to get advisors more access to Alts. So, you know, I don’t think it’s a very provocative statement to say that it’s dead and to say that it’s gonna change. And again, structured notes, you know, I would say they don’t fall into your traditional alternative investment, but it definitely is. It can be considered an alternative investment. And even if it’s not used, you know, in the Alts asset allocation sleeve, it can be used, like as I mentioned, equities, fixed income. It really depends on the characteristic of the note. So, as we like to say, right, I mean the Alts wave is here and I think, you know, folks are gonna ride that wave. And if you’re not, you know, out there right now looking for that wave, then as I mentioned, I think it’s fair to say that your business is at risk because it’s gonna be, you know, a bumpy next couple years or even more in terms of markets.

Andy: Marc, I think I would agree with that. If you don’t think that 60-40 is dead or dying, you probably should maybe take a look around because your business might be in danger. So Brett, what do you think? And you know, one kind of interesting thing to me I’ve always thought is, that so much of the focus in alternatives is on the wrappers versus the asset classes. But personally, my humble opinion, you know, I would call a structured note an alternative. I mean, at least in the sense that if a typical retail client considers it an alternative, then it’s like, you know what, I’m just gonna kinda shortcut all the confusion and agree it’s not a stock. I guess it is a bond, but it’s not a typical bond. Brett, do you think that 60-40 is dead? And if it is, you know, is there a new paradigm, or does it all just come down to client first, what are the client’s individual goals?

Brett: Yeah, I think for a lot of clients, especially high-net-worth clients, the 60-40, is dead. You know, there’s always the more simple situation maybe, but that’s where we really feel like alternatives, it can be a big piece of that. Now, for each individual client, alternatives may be a bigger piece and some clients, it’s a smaller piece, but I think that’s definitely a piece. And so that’s where, you know, we say the 60-40’s dead and we really like things like structured notes, but how do we use them? What’s the biggest impediment to structured notes? Well, the biggest impediments, there’s two of ’em, I feel like. One, is that knowledge and expertise, which firms like CAIS do a great job in that educational aspect, but like you mentioned earlier, it’s complicated to a lot of clients and even a lot of advisors.

And then secondly, even if you are an advisor to really [inaudible 00:39:54.617], you know, it can be a big operational burden to manage notes. And, you know, think of if you have 100 clients and they all have several notes, you know, that can be a lot and then as an advisor you just get swamped. So, speaking in terms of structure and wrappers, that’s where we feel like, and we’re currently in the process of partnering with CAIS, to have several structured notes, separately managed account strategies. So, it does two things. One, the advisor doesn’t need to necessarily be the expert. They need to know it at a high level, but they don’t have to really go out and be the expert in notes on all the different details in it, know, you know how to go out and have an auction process with all the different issuers and buy a custom note.

They can offload that to a manager like Mariner, of these notes, and then it also offloads that operational burden as well. So, I think these new things that are coming out, you know, and ideally, we’ll get this launched here in the near future, but I think that’s gonna improve access. For a lot of advisors and clients, is those two main things, hey, let’s give it to a manager who has that expertise and can take this operational burden off my plate. At that point, I think you will see this become a lot bigger portion of clients’ overall portfolios.

Andy: Yeah, absolutely, Brett. And I mean, it certainly sounds everything I’ve heard today, that Mariner Wealth Advisors is a little bit ahead of the curve, I guess, that, you know, maybe compared to some smaller firms with limited resources, and so it sounds like this partnership is great opportunity. And, you know, I think we’re running short on time, but before we end, Brett, where can our viewers and listeners go to learn more about Mariner Wealth Advisors?

Brett: Yeah, definitely, is a great resource. And then, like I said, we also have 80 offices across the country. One probably near, you know, some of your clients I’m sure. But our website would be a great place to start.

Andy: Excellent. And Mark, how about CAIS? Where can our viewers and listeners go to learn more about CAIS and, you know, all of your resource and educational materials?

Marc: Yep, absolutely, Andy, thank you again. This was fantastic today and thanks again, Brett. You know, you can go there, you can learn of tons of things going on there, education, access, website. You can dive in deeper so you can get some information, get access to our, you know, platform, our portal, and then, of course, you know, could email product specialist to whoever else is appropriate, whoever you wanna get in touch with. But definitely go there, and, of course, Andy’s always welcome to hand out my contact information.

Andy: Absolutely. Well, we will be sure to link all the resources that we mention in today’s episode, as well as those websites in our show notes, which are always available at Brett and Mark, I can’t thank you enough for coming on the show today.

Brett: Thank you, Andy.

Marc: Awesome, thank you.

Andy Hagans
Andy Hagans

Andy is a co-founder of WealthChannel, which provides education to help investors achieve financial independence and a worry-free retirement.

He also hosts "WealthChannel With Andy Hagans," a podcast featuring deep dive interviews with the world’s top investing experts, reaching thousands of monthly listeners.

Andy graduated from the University of Notre Dame, and resides in Michigan with his wife and five children.