Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. Today we’re taking on two listener questions.
First, how should you think about triple net lease investments when you’re working with a $5 million budget? Then we’ll turn to gifting and irrevocable trusts for families whose net worth exceeds the estate tax threshold.
What’s the smartest way to start transferring wealth to the next generation?
And in our From the Field segment, I’ll be joined by Scott Silver and David Chase, co-founders of SEC Whistleblower Attorneys, to talk about investor protection and what families should know before investing in private deals.
Let’s get started with question one.
Question 1 – Triple Net Lease Options
Listener: We’re considering adding real estate to our portfolio and looking at a few triple net lease options, specifically three small Starbucks locations versus one Walgreens. Our total budget is around $5 million.
How should we think about the trade-offs here?
Stephan Shipe: So we look at these types of properties from a Walgreens or your Starbucks scenarios, you are looking at the triple net lease property. So for those of you who are not familiar with that idea, a lot of times when we think about a real estate investment, we’re thinking about buying the single family home and renting it out to somebody else.
So you’re in there changing out light bulbs, fixing toilets, dealing with all of the maintenance around the property, which is generally the headaches that a lot of people run into. A triple net lease means that the lease payment that you receive is net of taxes, insurance, and maintenance.
In other words, the tenant that comes in pays the taxes, insurance, and maintenance, and you as the investor or the owner of the property, take what’s net after that. What’s nice about that is it removes a lot of the complexities that you see when it comes to real estate ownership. Bad part, if you wanna consider a bad part, is that the returns are generally lower.
As is the case with many investments, the more of a headache or the more risk that’s associated with an investment, generally the higher the potential for return. So when you’re dealing with these triple net properties, you’re dealing with tenants who—ideally Starbucks or Walgreens—don’t call you at the end of the month saying they want an extension for another week on their rent.
You’re just gonna get a paycheck in the mail for that rent payment every single month, and the length of terms are not generally six months or a year. These are going to be five to twenty-five year leases.
Now for Starbucks locations, in this case, you’re probably around that high ones close to $2 million per location, which is where comparing here to that $5 million Walgreens. A lot of that value is going to depend on how much lease time is left on there.
In other words, if you have a twenty-five year lease on a Walgreens property but it only has five years left, the value of that property is gonna be a lot less than buying Walgreens with a twenty-five year lease still in place.
Now $5 million to your budget—what worries me is we would be with the Walgreens scenario, and this is not a knock against Walgreens at all. They’re very well-known triple net properties with very good history, high credit rating. The issue I have is that you’re taking your entire budget and you’re throwing it into one property.
What I like about the Starbucks scenario is you’re throwing the $5 million into three different properties. The only bad part is we’re still concentrated in a bunch of Starbucks locations.
So the ideal scenario I think here would be to try to diversify away from the number of properties and the types of properties you’re dealing with. And I would even throw in geographic diversification as well. In other words, if you’re buying three Starbucks all in the same town, that’s a lot riskier than buying three different Starbucks in three different towns.
You don’t have that opportunity with the Walgreens because you’re gonna be locked into one property.
So in this scenario, what I would think would be a good mix for you with your $5 million is to look at scenarios where you pick up maybe a Starbucks, and then you do something like a Dollar General—maybe a little bit higher in that scenario—but some of these discount retailers come in, or convenience stores can also be mixed in, or different types of fast food or coffee chains as well that you could pull in that would still be around that one to two million dollar price range.
Now, that’s assuming you’re taking your $5 million—and I don’t know from the question whether or not your $5 million is all cash or if that’s $5 million all in and you’re leveraging some of this—but another option is you could go and leverage that $5 million to get you somewhere around maybe you go for like a seven or eight million dollar investment.
That way you could invest in four or five different properties as opposed to three, to allow you to have a little bit more of that diversification.
What I worry about there is if this is your first opportunity to jump into some of these properties, there’s gonna be a learning curve associated with it. So whenever you’re investing in any type of alternative investment, it’s always good to also diversify out the vintage of the investment.
What I mean by that is we don’t want to jump in and say, alright, Stephan, I have $5 million, I’m gonna start buying today. So I’m gonna buy X, Y, and Z. Now I have my real estate portfolio.
What you just did is you locked in the interest rates of today, the type of economic factors that you have going on today. What would be better is if you said, alright, I have this $5 million budget, I’m gonna buy two or three properties over the next few years.
So maybe you do pick up one now, you pick up another one next year, the year after, and you pick up another one later down the road. If these are all long-term leases and we’re focused on this for a long time, then the idea is to truly invest the $5 million, not in a rush, but to have this as a long-term component of your portfolio.
And unlike stocks, you can’t just get out of this stuff. So it’s gonna be a lot harder. It’s gonna be a lot less liquid for you to jump in.
Now, I would argue that there’s a lot more liquidity in these properties than you would in a random office building that you’d be purchasing. But we still have to consider all those different types of diversification—the types of place, the location of it, the industry, and even the vintage of when you’re buying in.
So take all that into account. I think you’re on a good path. $5 million is a good budget to get into this, whether it’s leveraged or not, because you have opportunities to buy into properties that many people don’t and have a lot of that stability.
And in some of these scenarios, you’re talking about fifteen to twenty-five year leases. So I think it’s a good option to go into, but be very careful about not getting too excited about jumping in on the triple net game and just buying a bunch of properties right now.
I’ve seen that go wrong many times in the past of just wanting to get into something and then buying a bunch of different properties at the same time. Take it slow. Realize that this is a long-term investment process, so there’s no rush on buying any of these.
Let’s go into our second question.
Question 2 – Gifting and Irrevocable Trusts
Listener: Our kids are teenagers and we’ve never gifted to them before, but due to a large increase in our net worth, it’s very clear we need to start using our lifetime exemption. We really need to gift to our kids, but not sure they are ready. What is the optimal way to start?
Stephan Shipe: Given the large increase, and a recent increase at that, the first thing to do is to take a step back on any financial decisions.
This is very common. Whenever there’s a large increase in net worth, whether it’s from a windfall or a sale or just a large increase in stock price, it’s really easy to start jumping in and say, well, we have to make decisions because there are tax implications, or there’s this implication, or we need to jump into these investments.
Take a step back and slow down on the whole scenario. Especially when it comes to taxes. Everyone hates taxes. I hate taxes. You hate taxes. We all hate taxes. There’s no question about it. The only issue is, because we hate them so much, it’s really easy to look at them and say, well, if there’s a way for me to optimize getting out of these taxes, we should do that.
And that’s not necessarily wrong, but we have to be careful that that’s not our first decision. The first thing that you have to evaluate now is whether or not you actually need this money before you start giving it away to your kids.
So your large increase in net worth—what you’re likely talking about with having to use the exemptions and what we commonly talk about on the show—are things like gifts to your kids, right? You should gift to them regularly, start building up this financial acumen, this financial experience, and use that gift tax limit every year.
The issue is imagine a scenario, which may be your case—it sounds like it’s probably your case—where you have now a net worth of $50 million for whatever reason, and you look at it and say, well, I’m definitely going to be above the estate tax limit of currently $30 million. So I would love for that money to grow in my kids’ accounts as opposed to growing in my accounts, because if they’re teenagers now, we’ve got a long time before they have any inheritance in the traditional sense.
So it would be great if we could move over $30 million into their name, use the exemption happily knowing that they’re gonna have decades of growth in their account, where that $30 million could turn to $60, $90, $120, $150 million out in the future. That’s not included in your estate, which means it’s not gonna be taxed at that 40% plus level that we have, depending on what state you’re in.
So from a tax perspective and a planning perspective, you’re absolutely correct that if you are above that, it likely makes sense to start gifting in a bigger way than $19,000 per year to your kids. Because $19,000 a year isn’t gonna move the needle at all. You’re gonna be making more in interest on your account than you are in the $19,000. You’re never gonna get rid of it. The money’s still gonna grow in your account.
This is where irrevocable trusts start to come in. This is where you have the fancier estate planning that tends to come into play. But before you do any of that, the first question that you really need to ask is how much you need for your goals.
And it seems so obvious, but this gets overlooked so often. Someone comes in and says, I wanna start gifting to the kids, we have way too much here, let’s start moving it out. And we take a step back, start having a conversation about their goals and what they’re looking for, and what ends up happening is they start mentioning things.
“Well, what would be nice is if we could travel more than we’re doing now,” or “It would be nice if we could buy that second home,” or “It would be nice if we could purchase a family member’s home or be able to buy a larger vacation house for everyone and start this type of gifting.”
So all of these goals start showing up, and all that means when we’re looking at it is I look at that and say, well, now that we have all these goals, that’s more and more money that we need to make sure remains in your name so that way you can still use it to accomplish all of these goals.
Now, there are plenty of ways where things like charitable giving can be done and still remove money from the estate, and there are special ways to handle that with CRUTs and everything else for these different types of trusts. But the first step is before you can even get into having those types of conversations, you have to start at the very beginning and say, how much do you need for your goals?
So you need to start looking at what spending looks like now, what spending looks like in the next decade or two, any major expenses that are gonna come into play. Let’s pull all that together first.
Once we have all that in place, then you can look at it, work backwards to say, alright, based on all of these goals, we actually need somewhere around $25–30 million. Okay, based on that $25 or $30 million, add a little bit of a buffer for anything that changes, and then look at it and say, now we’ve got $20 million left over that we don’t need.
That’s the first step. Now the question is what to do with that $20 million, because if you don’t need it, it’s the kids’. So you have two options: either keep it in your name, and that $20 million keeps growing every single year, which means it’s gonna be taxed at a higher amount later on, or you can get rid of that $20 million now and shift it over to the kids.
The problem is we don’t want to hand a bunch of teenagers $20 million and just hope that it goes well. This is life-changing money. This is going to be a scenario where you are talking about true legacy scenarios for not only this next generation but generations after, especially when we take into account the compounding aspect of this money.
So unlike a revocable trust or unlike a regular gifting where it needs to be a gift that you give to your kids every year and they can use it however they want, because this is all irrevocable, you can set up scenarios where you put the money away and you put different terms on the trust to avoid early misuse of the funds.
What I mean by that is: when are they likely to make bad decisions about money? Probably now, right? If you were to give them $10 million, the likelihood of bad decisions is likely higher now than when they’re 35 or 45. So fortunately, this isn’t the first time someone’s had this type of question of saying, I don’t wanna give my teenagers millions of dollars.
So there are plans in place. You can have terms available that allow you to structure the disbursements only under certain circumstances or at certain time periods. So if they give it to them as milestones—when they hit a certain age, a certain amount of money becomes free; when they hit another age, another amount of money comes free; if they want to buy a home, another bucket comes open.
So there are a lot of options there. And this is the one thing that I really enjoy, that I really think is neat about trusts and the estate planning aspect—you can really structure things however you would like to structure them: rules that need to be met, milestones that need to be met. Do they need to earn a certain amount of money first before they reach another level?
You can add as much complexity as you want to these. I would argue not to add too much complexity, but you could as much as you wanted to in these scenarios, especially early on.
But the first step in this is going to be figuring out what you’re going to spend, then looking at what truly is excess that you don’t need—with a good buffer in there—and then going and saying, now that we have that, then start to coordinate with your estate planning attorney to say, based on this, what is the most tax-efficient setup that we can do with this money that we don’t need for our personal goals?
And then allow them to start coming up with a process for where that money should be given, what types of trusts, what are those different terms that need to be added into the trust to avoid any of those issues that you’re worried about.
So it’s a great position to be in. Unfortunately, you don’t have to reinvent the wheel here. There are a lot of great processes in place that you can follow to make sure that you’re talking to the right people to put a plan in place that could ideally focus on a lot of these goals that you have.
From the Field – Interview with Scott Silver and David Chase
Stephan Shipe: And finally, in our From the Field segment, today we’re joined by Scott Silver and David Chase to discuss how the SEC Whistleblower Program works, the kinds of fraud they’re seeing in alternative investments, and what high net worth families should keep in mind when evaluating complex opportunities.
Scott is the managing partner of Silver Law Group. He is a nationally recognized securities attorney who has spent decades advocating for investors and SEC whistleblowers. David is a former SEC Enforcement Division attorney and now represents whistleblowers and investors in high-stakes enforcement matters.
Scott and David, we’d love to start with you telling us a little bit about yourselves and your background—in your words, as opposed to mine.
Scott Silver: Thanks. I appreciate you having us on. I’ll go first here—Scott Silver. I’m the managing partner of Silver Law Group, which is a boutique plaintiff-side law firm primarily handling securities and investment fraud cases.
We’re well known for really handling three types of cases. One is investor disputes with financial advisors, investment advisors, stockbrokers—you name it—primarily handled through FINRA arbitration claims.
And two is class action claims where we represent victims of Ponzi schemes, primarily pursuing claims against third parties for aiding and abetting the schemes. I’m sure we’re gonna touch on this a little bit more during the interview, but Ponzi schemes don’t happen in a vacuum, and we’ve been very successful over the years helping investors recover their losses in these various Ponzi schemes.
And then finally, about a decade ago, the SEC announced the formation of the SEC Whistleblower Program, which has become very successful and really a model for whistleblower programs for other governmental agencies.
David and I have been close friends, colleagues, and have worked together in many cases over the years, and we formed what we call a strategic alliance—working together on these SEC whistleblower claims, which involves representing anybody with material knowledge of misconduct that violates the federal securities laws.
Our clients run the gamut from analysts, due diligence experts, insiders at the company, to investors and victims themselves who come forward and report these various violations over to the SEC. And with that, I’ll turn it over to David to introduce himself.
David Chase: Thanks, Scott. Glad to be on. My name is David Chase. I’m the principal of my own law firm, the Law Firm of David R. Chase.
Formerly, I worked at the Securities and Exchange Commission in its Enforcement Division for approximately four years. I spent a year on loan to the Department of Justice as a Special Assistant U.S. Attorney, criminally prosecuting securities cases that were referred over to the Justice Department by the SEC.
For the last twenty-two years or so, I’ve run my own firm. My area of practice is defending SEC investigations and securities regulatory and DOJ white-collar securities investigations and prosecutions, and that is what I do day in and day out—along with, as Scott explained, representing SEC whistleblowers.
Along with Scott and his firm, as part of this strategic alliance—which really has tremendous synergies and benefits because we take my experience having worked inside the SEC and defending SEC cases and his experience as a plaintiff securities lawyer—and we really have an interesting perspective when we put our heads together and try to analyze and assess what will be or will not be a compelling whistleblower case.
So it’s a nice intersection of our experience arising out of really all securities-related fraud work. It works very well, and we have numerous investigations that are ongoing by the SEC that we believe were caused by, and originated from, whistleblowers we represent. We continue to file with the SEC Whistleblower Program.
And just so your listeners understand, the SEC Whistleblower Program, as Scott said, is relatively recent, and it is designed to incentivize individuals to come forward with original information that can lead to an investigation that ultimately leads to either a settlement or a prosecution.
Whistleblowers can receive between 10% to 30% of what the government actually collects, assuming it’s a judgment of a million or more. So a whistleblower, if they provide information and it leads to a settlement—let’s say of $10 million—depending upon the quality of their information, its timeliness, and the extent of cooperation, can be entitled to up to $3 million by way of a whistleblower bounty.
And so the government, the SEC in particular, has created great financial incentives for individuals to come forward with information. It’s not an easy thing to do—it takes some courage—but we protect our whistleblowers and guide them through the process. So it’s a very interesting, very niche area that Scott and I do actually very well together.
Stephan Shipe: A great partnership between the two of you. It’s a very interesting perspective on a lot of things we cover and talk about in both of the podcasts, just for clients. They see it from the investor side—what are the warning signs? But you all are seeing it from the other side, saying, hey, there’s something weird going on here I don’t think is right, and they’re coming to you.
So when investors are looking at this—and the listeners out there are thinking about these types of scenarios—we always hear these stories of bad practices from brokers, and I’d love to get into the difference between that suitability clause and how all of that starts to come into play as well. But what are some of those red flags when you start?
David Chase: I’ll just say, you know, there’s one or two that always consistently strike me. It’s the old adage, but it’s true: if it sounds too good to be true, it probably is. And there’s a reason why that has such longevity, right? Because in the investing world, as we know, there is nothing guaranteed.
There’s always risk, for the most part—with the exception of insured products. Anytime someone is promising you significantly above-market returns with little or no risk, that’s a huge red flag. And I always ask the question in my mind: if this is such a great deal, why is this company seeking retail individual investor money and paying 18%, 32%, 60% per annum if they can go to a commercial bank, get a loan at commercially reasonable rates—6%, 8% even?
If this is such an amazing deal, fully collateralized, it never makes sense. They wouldn’t need to. And typically, you can start and end there in the analysis.
Scott Silver: I would also add onto that some of the red flags that we’re consistently seeing these days. You’d mentioned you hear horror stories about these free lunch seminars. I think the first question that investors need to be asking themselves is: who are they dealing with? Why is this person qualified and experienced to be giving financial advice?
So frequently I see those free lunch seminars being given by—I’m putting this in air quotes—financial advisors, yet they’re not registered with the SEC, they’re not registered with FINRA. Investment advisors and stockbrokers are required to be registered, regulated by government agencies, and held to a very high standard.
So I think one of the first red flags is you have to wonder, who am I taking financial advice from? Why is this person qualified? And if they’re not registered with the SEC and/or FINRA—and I could teach a law school class on the various registration requirements—but if they’re registered with nobody, it’s a big red flag.
And two, as a fair warning, that was heavily discussed with Madoff but I’ve really seen it throughout my career—everybody thinks everybody else is doing their due diligence, and there’s a large amount of FOMO. Everybody’s talking about an investment you think you need to get in, and everybody thinks, “Well, if there was a problem, somebody else would’ve seen it.”
Unfortunately, in many of the Ponzi schemes that I’ve worked on—and the SEC refers to it as an affinity fraud—it’s where a community is taken advantage of. Race, religion, and creed are irrelevant. I’ve seen it from synagogues to MAA churches to various different communities to businesses. I did a case a few years back where all the doctors and nurses within a particular hospital in a small community were all investing and all talking about the investment.
So you need to not rely upon the fact that other people are investing. And another consistent red flag we see is the promise of consistent income streams. “Well, it’s paid the dividends or rent rates every month for years.” Very few investments that are especially risky pay consistent income streams because they tend to go up and down in value.
So there are quite a few red flags, but the first few to look at really are the who, what, where, and why of the investment.
Stephan Shipe: Bad question—why is this person qualified to be selling it now? Is there a size effect there? Because you’ve both worked in high-profile cases where it’s not the small lunch-and-learn in a small community, but this is also an issue at large banks and large organizations as well. Is it more pervasive in these smaller organizations, or is there a wide range there?
Scott Silver: I think it’s a great question, because the bigger the bank, the bigger the opportunity to take more investor money—but certain things maintain consistency. We’ve seen a lot these days of what are generically referred to as alternative investments being sold to retail investors.
And my favorite question is, ask somebody: what is an alternative investment? An alternative to what? Generically, my answer has always been there’s stocks, there’s bonds, and everything else is an alternative—which might make a lot of sense. An alternative could be investing in gold; it could make a very logical investment.
But I think these days, we’re seeing a lot of big banks promoting alternative investments, saying they don’t have the ups and downs of the stock market because they’re not priced daily. That’s not necessarily a positive.
We’re seeing these multi-billion-dollar offerings being made to retail investors, and some of them end up blowing up—and the answer being, everybody was selling it and it was the thing of the moment.
We’ve seen one recently I’m involved in down in Texas that I’m not getting into the names of—and probably 99% of the audience hasn’t heard of—but it was a $2 billion raise. It was a massive amount of money that, when it collapsed, went into bankruptcy, disrupted a lot of lives, and unfortunately, most of those victims were people investing $50,000 or $100,000 when it represented a substantial part of their net worth.
So the damages are devastating on the investors.
Stephan Shipe: I’m sure we could talk all day about the issues of mark-to-market and how that gets toyed around with when it comes to volatility and correlations there. How do cases like that—how does that misconduct actually come to light, to go from these pretty large operations, like you’re talking about—there’s billions of dollars here—to coming to your desk and you bringing this up?
David Chase: Well, it depends in what context, because this is the interesting part of the varied aspects of our respective practices and then our joint practice.
In my world, an individual who’s involved with the Ponzi allegedly will receive a subpoena from the SEC and call, because I defend those cases. Scott will get a call from a victim of the Ponzi scheme and will do what he does on his end. And those are separate worlds, right?
My firm and his firm, respectively, are separate. Where our worlds and firms combine is to represent the individual who is working inside the Ponzi, who blows the whistle and comes to us and says, “I am witnessing and have evidence of a massive Ponzi, and I want to do the right thing and report it to the government—to the SEC. Help me do that and represent me.”
That’s what Scott and I do collectively at our law firms together—represent those whistleblowers. That is one way in which frauds can be discovered or the SEC alerted.
Others are when investors complain to the regulators—and if enough investors complain, sometimes it gets momentum. It alerts the SEC, for example, and they’ll get involved. Sometimes it’s through a bank that’s actually doing what they’re supposed to be doing and will notice suspicious activity, report it to the regulators, and it’s found that way.
So there are various ways in which these frauds can be uncovered and discovered.
Stephan Shipe: When you talk fraud, one thing that’s always been interesting to me—and I would love to get your opinion on it—is where is that line of suitability and fraud?
I’ll give the example of somebody who comes in, they’re working in finance, they have no experience in finance whatsoever, and they start selling something that makes absolutely no sense for an individual—but the commission’s high or it’s going to be great if they sell it. Or maybe it’s just pure incompetence.
Where does that line get drawn? There’s almost an incompetence bucket and a fraud bucket. How do you sort those out?
Scott Silver: Frequently, it depends upon what hat I’m wearing or bringing that case. An investor might have a claim against their financial advisor for recommending a high-risk investment that wasn’t suitable for them based upon the risks or the concentration level within their portfolio.
It certainly might not rise to the level of a fraud case. It wouldn’t be something that would rise to the level of a criminal case, but they might have a claim to pursue there.
But then, what happens if it turns out that the advisor’s due diligence wasn’t negligent, but what he failed to tell his client was, “Just so you know, the company put $10,000 in cash in an envelope for me, and that’s why I’m recommending it to you”?
Now we just jumped the shark from suitability to fraud. Why was it an unsuitable investment? Not because you failed to disclose all the material risks, but because you failed to tell me you were getting paid off to push it on me.
What might be a totally appropriate civil litigation matter might not be something that the SEC would pick up because it involves one customer or a one-off situation—for the same reason that the SEC prosecutes cases that might not rise to the level of a criminal case.
Stephan Shipe: Those words get thrown around—“suitable” and “suitability”—so what is the difference between someone who has the hat where they have suitability that needs to be taken into account versus a fiduciary duty?
Scott Silver: We now end up suggesting the question. I think we’ve got to throw in a relatively new term called Reg BI—or Best Interest—but suitability has been a rule that’s been around for many years.
It’s a FINRA rule that was used to govern the stock brokerage industry that says what the word basically implies: that a financial advisor needs to look at a client’s financial picture, what are their financial resources, and also talk to them about what is their risk tolerance, what are their objectives.
Fifty-year-old Scott Silver, still earning a living, might have different financial needs than my parents, who are retired and living off a fixed income. And so, based upon the client’s risk tolerance and investment objectives and other factors, a financial advisor has to make what’s called a “suitable recommendation” for them.
Over the years, we’ve seen both a practical shift and also a shift in the rules. A lot of advisors now are no longer traditional stockbrokers, but are investment advisors working with registered investment advisory firms—and they owe a fiduciary duty to their clients. They must be acting in the client’s best interest at all times.
This is a higher standard. And over the last 18 months, we’ve seen an implementation of what’s generally being referred to as “financial advisors have to act in the client’s best interest.”
But I’ve represented investors and gone through these rules, and while Reg BI sounds very good in title, it is a very complex rule that has as many exceptions as there are sections to the rule itself—saying what really constitutes a client’s best interest.
To me, ultimately, one of the biggest questions always becomes: what are the fees, costs, and commissions associated with the recommendations that are being made? It’s something every investor needs to take into consideration in their overall portfolio.
Every advisor is entitled and deserves to make a living, and financial advice is incredibly important. Nobody should ever take financial advice from me, because if I recommend a stock, it’s guaranteed to go down in value tomorrow.
I think I’d have a hard time arguing that I am not a sophisticated investor if I ever got called out on it. However, I work with what I think and hope are great investment advisors to help me maintain the portfolio that I want and need, because that is their expertise and their specialty.
No different than I work out with a trainer at the gym, even though I probably know I should get there and keep going. Having those experts around me keeps me on the best path forward.
Stephan Shipe: You mentioned alternatives earlier. What are the big things, in both of your respective practices—what are the big trends you’re seeing now? Where are the ones that investors should be particularly cautious about when they start looking outside of stocks and bonds, or even within those financial markets?
David Chase: I think the alternative market certainly has a value and has a place in a portfolio—within reason, within limits. And it takes on more significance now, I think, either with pending or enacted legislation with respect to allowing IRAs or qualified vehicles to invest in private alternative asset investments.
The danger with those is that, number one, you have potentially valuation issues if you’re dealing with illiquid assets—right? Including potentially real estate, including esoteric financial instruments that are not marked to market. You can’t look up and see that, like, IBM closed at $82 today, and you just don’t know the underlying asset value.
To a large extent, you’re relying upon the issuer or the company to tell you what that valuation is. And so there’s a potential for tremendous abuse in terms of determining fair, reasonable market value of otherwise illiquid, hard-to-value assets.
That’s always a problem, particularly if assets are being used to determine not only the value of the investment but also the fees that are paid to the advisor, right—for AUM, assets under management. And so that creates potential conflict and additional issues.
There’s also a lack, generally speaking—depending upon the particular investment relative to more traditional investments—of transparency and clarity as to the operations and the financials. You may not get audited financials like you would with other investments.
That’s not to say it’s per se problematic. Certainly, audited financials can give you a bit more comfort than unaudited ones. It doesn’t take much to provide an unaudited financial, so there are certain safeguards, generally speaking, that are in place with traditional investments that you don’t find in the alternative or nontraditional investment space.
That’s not to say they can’t be great investments—but because of that, you entail potentially greater risk.
Stephan Shipe: Any final thoughts—final words or advice for our listeners out there?
David Chase: Spend more time thinking about where you’re going to invest your hard-earned money than the time you spend on buying your new car. I mean, really think about what you’re doing. Understand the investment. And do not let the greed glands take over.
Make sure you understand that it makes sense to you and it’s not too good to be true. There is no easy money. There is nothing of significantly above-market rates that doesn’t entail the commensurate risk. And those basics should always be kept in mind before taking hard-earned money and entrusting it to someone else.
Scott Silver: You said something earlier about distinguishing between the whistleblower practice and some of the plaintiff litigation, and it really got me thinking about why I love the whistleblower practice.
A big part of it is that David and I have shut down frauds in their tracks by reporting them to the SEC, and I take great joy in doing that. Because at the end of the day, I’m an investor advocate—I want to help investors move forward.
We know we’ve saved some investors from being defrauded. So, you know what I would say is sort of like when you’re at the airport—see something, say something.
When you are seeing something that doesn’t make sense, something illogical, speak to your financial advisor. Speak to counsel. Try to understand—whether it be simply making sure you understand what you’re investing in or understanding the fees.
Talking with whistleblower counsel like ourselves—we do a lot of work upfront when a whistleblower comes to us before we file anything with the SEC.
The reality is that there are a lot of frauds and schemes out there. The SEC is not going to get to all of them. We had one that we looked at a little while back, and the client came to us and didn’t have a lot of the granular detail. Nothing that was being promoted to them made any sense.
Within a half hour, my first question to the client was, “Were you aware that the promoter of this investment had gone to jail seven years ago for securities fraud?”
He’s what we refer to as a recidivist—he’s run schemes his entire life. It ultimately helped us put together a package to submit to the Commission, to say, “Look, here are all the facts that we’re now aware of to help demonstrate that something here is being done improperly.”
We were able to demonstrate that there is an ongoing fraud. And the hope always is that we protect the investors and move forward, helping improve Wall Street’s practices.
So, most important—rely on the professionals around you, but know who they are. And if you see something, say something.
Stephan Shipe: Thank you so much. A lot of wisdom was shared here, and if people spend a little bit more time—like David said—looking at their investments, they’d be better off.
To both of you, Scott and David, I appreciate you being on today and sharing some of your experiences with us and the audience. Thank you.
Scott Silver: Thank you very much. Thanks for having us.
Outro
Stephan Shipe: That’s our show. Thanks for listening, and we’ll see you next week.
Hey, this is Stephan Shipe. Thanks for tuning in to the Scholar Wealth Podcast. If you have a question you’d like us to tackle on a future episode, share it with us at scholaradvising.com/podcast. We’d love to hear from you. Until next time.
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.