Hello, and welcome to the Life By Design podcast, brought to you by Strategic. This podcast is all about helping you live your great life.

Each episode will feature insights from our Chief Investment Officer, Doug Walters. Hello, and welcome back to the Life By Design podcast.

I'm here again with Doug. you doing, Jay?

Pretty good. Good.

So, this week, we're gonna kind of, um, dive a little bit deeper into your Insights article about complexity and avoiding it. Uh, but first, before we get to some of my questions, why don't you kinda give us an overview of this past week and, and what's to come?

Okay. Yeah.

We had, um, you know, more trials and tribulations on tariffs, and I think, you know, at the risk of sounding like a broken record, that's going to be what's going to drive markets in the short-term. You had a court saying these tariffs aren't legal, you had another court saying, "Well, we're gonna put that on hold for now." And you, you know, it drove the market up and down for a few days.

Uh, the reality is, this is just going to continue to play out over the next few months. We mention it because it is important, even if it is that same message week by week.

We talked last week about how we had a, an important company reporting, NVIDIA, and really, what we were looking for there is there any, you know, major negative signs that they're seeing from tariffs or otherwise, and nothing- uh, significant hit the wires. Stock did all right, so uh, nothing really to report on that front.

And as we're looking at this week, it's really just a little of, you know, a few economic data points, probably the biggest one is non-farm payrolls, which comes at the end of the week. This is notorious- notoriously volatile.

So in fact, we used to have a little guessing game here in the office about who could guess closest, but it is nonetheless important when you're looking at it over time. Mm-hmm.

So yes, you know, Friday's print isn't going to be make or break, but it's important to understand what's going on in the employment market over time. Yeah, and I think that's the same with all of this week.

Yeah. We say it every week, uh, we're not just looking at this week or last week, we're, we're looking from a much broader lens and, and over time, and, and adjusting accordingly.

Exactly. So, uh, yeah.

So sorry for those of you at home that were hoping for something a little bit more, uh, controversial, but hey, that's where we are. It's, it's just kind of a little bit of a repeat, but I'm very excited about this next topic, um, and kind of diving deeper into, uh, into the topic from this past week's Insights, which was talking about avoiding complexity and kind of some of these things that start to pop up, you know, when there, when the markets are volatile.

Right. Um, and so, you know, you opened the Insights article this week by noting a surge in less regulated high-fee products.

So what were some of the signals, uh, that were tipping you up that this complexity was becoming a, a front burner issue? Yeah.

I think what was the tipping point for me, uh, is that, is the prevalence of these in my inbox as well as headlines in the paper, headlines as you're, you know, perusing the internet or whatever your favorite social media sites are. These things have been around for a while.

Obviously cryptocurrency isn't new, st- uh, stable coins are not new, private equity, uh, private credit, these are not new things per se. Some are more new than others, but what is really catching my eye, and the reason especially I'm watching my inbox is we tend to get hit in our industry by those trying to sell us things.

Mm-hmm. And the prevalence of these instruments trying to be pushed down to us ultimately trying to get them to our client base is really what caught my eye.

Things that traditionally w- were for very high net worth individuals, private equity, private credit, I'm seeing it every day in my inbox. And then I think, you know, a slightly, you know, a separate category obviously, cryptocurrency, stable coins, falling into, you know, a very different category of, of, uh, clients and, um, you know, targets, but still, the, the, when you put them all together, what do they have common?

They're sort of in a way, uh, not a way, uh, not sort of an illegal way around things- Mm-hmm. but it's just a different way of doing things that has less regulation.

Mm-hmm. And that, you know, sort of puts my radar up, sort of throws up fr- some red flags.

And so, you had talked about a debate in the Financial Times in regards to stable coin, and it was the, in plain English, I was hoping you could, like, explain this to me, but wh- what does it matter whether stable coin, how stable coin behaves? Like whether, I, I think your examples were like a bank, an ETF, or a money market fund, like what does that matter?

Right. And you know, I'm not sure I'm going to give you-.

the answer that, that you want to hear- Yeah, sure. but for me, there's, there's 2 reasons, or there's 2 layers to this answer.

Okay. One is just generally the, the complexity or maybe opacity of it, which is driving the conversation.

Mm-hmm. So is it a bank?

Is it an ETF? Is it, um, you know, is it something else?

Is it a money market fund? Is, this conversation's being driven by experts in the field who are experts on what a bank is and what a, you know, money market fund is, and they're having trouble agreeing and answering this question.

Mm-hmm.And part of the trouble is understanding what, you know, lies behind these stable coins, what is the, the, uh, backing collateral, all of this. And that, to me, that just raises, again, raises the red flag that if they can't answer this question, the experts in those particular parts of the market- Yeah.

then there's a layer of complexity here that is concerning. Or maybe, again, maybe it's not complex at all, but it is very opaque.

Yeah. So that's, that's number one.

And 2, from a more practical reason, if it is determined that, "Yeah, hey, these are and, you know, they act like a bank, they basically are a bank," then at some point, you would think bank regulators need to take notice and step in- Right. and start regulating them like banks.

Well, and in regards to regulation and stuff, uh, of that nature, you know, cryptocurrencies are pitched as kind of democratizing finance, right? So, what are your feelings about that?

Yeah, I would say democratizing at what cost- Mm-hmm. It is There are other ways Take stable coin for example, there are other ways to transfer money, ways that we've all become famil- familiar with through receiving a paycheck, sending money to a friend.

These channels exist. Yeah.

And one of the primary differences between say s- stable coin and, you know, a Swift transform or ACH is there is, you know, one is unregulated, unprotected, there's no protection for fraud, stealing, whatever, versus one that has gives you some imp- protection, some insurance protection, some, you know, a, uh, you have, you know, legal boundaries there for what can and can't be done, you have legal protections. So, that's the difference.

So, democratization perhaps, but you're, you're giving up all of these other things. And if you're, if you're touting the ease of it, the, you know, it's free, I don't have to pay anything, well, there's a reason why you have to pay for the others, you're paying for protection.

And maybe if you don't want any protection, that's fine. Yeah.

The If you think about what happened, it was, it's, like, very obvious in hindsight what happened- Mm-hmm. You know, great financial crisis and it wasn't obvious at all at the time.

Right. But for me, it i- again, it is the culmination of evidence coming through my email box, seeing, you know, articles in the paper, being hit by commercials on the TV, whatever it is, and they all are touting items, products, things that are less regulated- Mm-hmm.

have less con- less internal controls, and to me that's dangerous. And the, the parallel you think about the financial crisis and you had a loosening of, of standards, individuals were able to get mortgages for, um, you know, with very little, little to nothing down, second mortgages covering- your, your down payment, and they were able to do that because no one thought, you know, about the correlation risk of putting all of these risky assets in a basket.

They thought, "Hey, you know, we're gonna spread out the risk. All right, Jay might default, but Doug's not going to or vice versa, so we'll put them all in a basket and we'll be fine." But those assets are like 100% correlated.

So when they start to go bad, they all start to go bad. Um, yeah.

Yeah. And, uh, just as a side note for listeners, um, if you maybe you were around for it, but you just don't know, like, a ton about what happened in 2008, probably the best movie, uh, The Big Short.

Mm-hmm. Great movie.

And for me- Yeah. But then, they would have somebody explain it to you- Right.

about what they were talking about. So I highly recommend that movie, if you haven't seen it.

Right. It's a good little Yeah.

So, yeah. It's really good.

N- Maybe there is, maybe there isn't. Right.

But- Just a lesson that we can take from that. Yeah.

It's the lesson of, you know, as you loosen regulations, as you, you know, sort of let, you know, mar- give markets a little bit maybe too much freedom, somebody's probably gonna pay for that in the end. And speaking of that, and then kind of in line with some of the stuff that you might see, and this is, you know, high fees, hidden fees, stuff like that.

And so, you know, when we see H- high fees seem easy to kind of spot. Hidden fees aren't as, as easy to spot.

So like w- what's kind of some fee traps, I guess, that are buried in some of these alternates that we, we need to be aware of? Yeah, and it's obviously totally different depending on- Yeah.

the alternative we're talking about. But let's take, you know, private equity, for example.

You have, you p- you h- usually have a couple layers of what we'll just call management and operation fees. These are just flat fees that come off- Mm-hmm.

uh, br- straight out of your returns. Often, there's a performance fee.

And those are, I would say, more the obvious fees. And they're not so much hidden.

They're written right in the, you know, you're, you're offering documents. But it is not obvi- obvious necessarily to the layman how quickly those add up- Mm-hmm.

You know, a drag of several percent in performance fees, and then if the fund does well, you know, y- you know, possibly, you know, 5%, an additional 5% off. A typical private equity fund is gonna end up having fees around 7% or so.

Mm-hmm. And that is just an enormous bar for those managers to get over versus, you know, just buying an ETF of equities and getting what the market offers you at a very small, uh, fee.

So those are, I would say, the obvious fees. "But actually, right now, we just need 250, okay?

And then we're gonna have, at some point, we're gonna have a need for additional funds, and we're gonna call up to, to $1 1000000." You basically have to have it sit in cash, earning a small, you know, single digit per- Yeah. you know, return.

And so, it's one thing to look at, "Oh, how much did my $250,000 do and whatever else I eventually put in?" You have to take into account all that cash sitting on the side- Mm-hmm. for however long.

So there's these other hidden costs that just make it really hard for us- Mm-hmm. the end buyer of these funds, to make out.

Mm-hmm. Managers, they tend to do quite well.

Um, yeah. And so, so that's great to know.

A- and I know, you know, we talked a lot in your article and a little bit today with crypto and stable coins and stuff. But we talk a lot about, uh, the technology, and I know you said this in your, in your article, you know, you didn't want to come off as a curmudgeon and like- Yeah.

talking down about innovation. It is hard to tell the difference sometimes, but it's really, I like to think about it as what problem are you trying to solve?

Well, there, there are complex ways to reduce risk and have a better outcome for that client than having them just hold that Microsoft until- Mm-hmm. either they have to sell it or pass it down.

and sophisticated, but we're solving a problem with those. Mm-hmm.

Right? We are The client in the end is better off as a result of applying this complexity.

So we're not anti-complexity, but we wanna make sure we're solving a problem and not just filling someone else's pockets. So, as a, as a listener, like what's something that we can look out for that'll help like g- get things on my complexity radar to know whether it's something that's truly beneficial, like you just explained, or something that's just being complex, uh, for the sake of being complex or needlessly complex?

Yeah. One is, you know, if you can't understand it or you can't talk to an expert and have them explain it to you in a way that you can understand it, then it's probably too complex.

Mm-hmm. Fine.

Did it help? Yeah.

Well, thank you so much. And, uh, join us next week.

All right. Thanks, Jay.

Take care.