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The Alternatives Mason: Building Alts Knowledge Brick by Brick | Episode 7 | The Evolution of the 60-40 Featuring Dan Harms
5 Plays1 year ago
Welcome to The Alternatives Mason: Building Alts Knowledge Brick by Brick. Banrion Capital Management uses technology to help independent advisors scale and educate themselves on alternative investments. Since education is such a big piece of the Banrion mission and business, we are excited to kick off this series to dive into the nits and grits of the alternatives space. Episode 7 "The Evolution of the 60-40" Features Dan Harms.
Dan Harms is Founder and CEO of Third Wire Asset Management. Third Wire Asset Management provides turn-key risk managed alternative investment portfolios for accredited investors built with advisors in mind. Brittany and Dan discuss the importance of providing advisors access and education for alternative investments.
In addition to being the CEO & Co-founder of Third Wire Asset Management (TWAM). Dan is also Co-chair of the TWAM Investment Committee. Having spent 19 years in various wealth management roles, Dan leads TWAM with a deep knowledge base of portfolio construction & alternative investments, along with a healthy dose of cynicism toward wirehouses.
Prior to founding TWAM, Dan operated a proprietary trading platform across 40+ futures markets. Additionally, Dan was a Partner and Co-founder of a Chicago-based independent RIA, a firm with expertise in providing wealth management for ultra high net worth clients. He has also led a $140mm single family office, managing both sides of the balance sheet, which primarily focused on high-end investment management, complex estate planning, and tax strategy. Dan began his career in wealth management at Smith Barney advising high net worth families while also conducting equity research & trading for a resident portfolio manager.
Connect with Dan on LinkedIn: Daniel Harms
Learn More About Banrion: Banrion Capital Management
Follow Brittany on 𝕏: @Brittany_Mason
Follow Banrion on 𝕏: @Banrion_Capital
Subscribe to our YouTube Channel: @QueenofAlts
Important Disclosures:
The opinions expressed on the “The Alternative Mason Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results.
The guests featured on this program may be participants on Banrion Capital Management’s platform. As such Banrion may receive payment for their participation as a platform partner.
Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and sho
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Transcript
Introduction to Alternatives Mason Podcast
00:00:01
Speaker
Welcome to the Alternatives Mason Podcast. With host Brittany Mason, Chief of Staff at Bonner & Capital Management, you'll learn how to build alternative knowledge brick by brick. Bonner & Capital Management uses technology to help independent advisors scale and educate themselves on alternative investments. And since education is such a big piece of what we do, we are excited to kick off the series to dive into the myths and bricks of the alternative space.
Meet Dan Harms, CEO of Third Wire Asset Management
00:00:41
Speaker
Hello, everyone. I am Brittany Mason, your host of the Alternative Mason, and we are here for another episode. We're so excited because we have a very special guest on today. Meet Dan Harms, a seasoned professional with a passion for finance and wealth management. As the CEO and co-founder of Third Wire Asset Management, he brings a wealth of experience to the table.
00:01:04
Speaker
With an impressive 19-year background in various wealth management roles, Dan has an extensive knowledge of portfolio construction and alternative investments. With expertise in portfolio construction and alternative investments and a healthy skepticism towards wire houses, he brings a unique perspective to his role. Prior to starting Third Wire Asset Management, Dan operated proprietary
00:01:27
Speaker
a trading platform and co-founded by a Chicago-based IRA. He also led a single family office focused on investment management and estate planning and tax strategy. His career began at Smith Barney where he advised high net worth families and conducted equity, research, and trading.
Journey in Finance and Alternative Investments
00:01:45
Speaker
We're so excited to have you on today, Dan. Thank you so much for taking the time to do this. Thank you for having me. Yeah. Thanks for coming on.
00:01:55
Speaker
So I really want to dig deep into your background and how you really got started in the finance industry. That's something that specifically fascinates me is our behavior and our relationship to money and how it's formed at a very young age. And so I would like to know, is there a particular, one of your earliest memories perhaps that you have in regards to money and how that began?
00:02:23
Speaker
I kind of think the catalyst for me getting into finance was two prongs. One, I worked as a trade clerk in the 30 year pit in the board of trade for about a year when I was 20. And that's really where I found my voice and you can't be meek there and you get used to people yelling because that's just how business is conducted, not that you did something wrong. So that was a good,
00:02:52
Speaker
cutting on my teeth into the loud, boisterous nature of finance.
00:03:01
Speaker
And parallel to that, it was like a random weekend I happened to be home at my parents' house and saw their Merrill Lynch statement sitting on the counter and knowing how old they were and just general idea of, I mean, even back in 2000 or 99, the 60-40 existed. So just looking at that from the perspective of their statements, it was like all stocks.
00:03:28
Speaker
This isn't good, but less than it was not suitable, appropriate, and it was a raging disservice. And so that sort of led me to the financial services industry to learn everything I could, the right ways to do things, the wrong ways, and just get better and do better. Yeah, yeah. What was the most challenging experience that you had there?
00:04:00
Speaker
at Smith Barney? Oh, I mean, I started right at the bottom of the tech wreck. So morale was at an all time low. I mean, I think the biggest challenge, I don't even know. I mean, it was watching just the,
00:04:25
Speaker
of the pain, like the client attrition. But at the same time for anybody starting out, it was the heyday of generating new business and new relationships because you could poke holes in anybody else's games so easily. So, I mean, it was not your normal time. It wasn't like the go-go 80s or 90s.
00:04:55
Speaker
I don't know. I think that I guess one of the biggest challenges was seeing what was available investment wise to clients and how inferior they were.
00:05:09
Speaker
But at the time, I just saw it and thought that was the status quo. That's what was available. It wasn't until I left Smith Barney and went to go run the single-family office that really the wool was lifted from my eyes and I saw how much more was available and
Founding Third Wire and Its Unique Approach
00:05:33
Speaker
how less expensive it could be to put a proper asset allocation and portfolio together and not have the fees upon fees upon fees that people just take as business as usual. And then from there, what inspired you then to start, you know, third wire asset management to go on, you know, on your own and take that leap?
00:05:59
Speaker
I mean, my experience in the alternative investment space really began at that single family office. It was a lot of hedge fund management, private equity management, real estate management. And it was seeing how just the
00:06:20
Speaker
the fees coupled with the perceived due diligence or stated due diligence, whether that was actually being done or not. And that when you went further down the wealth spectrum more towards a credit investor status and even beyond mass affluent, that those investors were increasingly getting taken advantage of. And
00:06:45
Speaker
that space today has become one of the last untapped resources of net new assets and everybody's got their forks and knives out and they're coming for them. And I think that the third wire can deliver an alternative investment solution to that space, better, cleaner and cheaper than anybody else out there. And what do you feel sets you apart or makes you so unique?
00:07:13
Speaker
that we actually stand behind the managers that we've selected and that we allocate to. We're not just an access only platform where here's a hundred individual strategies, go nuts. You're not going to run into the paradox of choice or analysis paralysis by using third wire.
00:07:33
Speaker
an advisor or a family office executive would only need to determine suitability, which should already be done if you're any good at your job, and amount to allocate. And then we do the heavy lifting, the portfolio construction, manager selection, initial and ongoing research of due diligence, reporting, ease of investment processes, all of it.
00:07:58
Speaker
And did you always know that you wanted to be on your own or was it because you found that this was such a specific need and an untouched portion of the industry? Entrepreneur wise, I think it's sort of multi-generational.
00:08:18
Speaker
Yeah. My, my grandfather's did something similar, uh, father and now myself. And so the, the risk tolerance and appetite to create something on my own was already there. It was more finding something that jived with that, that I had the experience wisdom and more so idea that nobody had gotten to yet. And, uh,
00:08:46
Speaker
the planet sort of aligned in the middle of 2021. And here we are. Here we are. Well, congratulations. I mean, it's such a huge accomplishment. It's, it can be, you know, it can obviously be a big risk going out on your own, but with big risk, there's big reward. Like we say, that's the hope. Yeah.
00:09:08
Speaker
So, and I love hearing that it runs in your family. I mean, you know, like I said, that just always cured. It's always something that has interested me, you know, had interest for me is just our background and relationship to money, because like, I don't come from that. And I, you know, learned everything really only in the last few years. It's a totally new industry for me, but it's been exciting. And, you know, I think everyone should
00:09:38
Speaker
do everything they can to learn about finance. And so that's why we really started this platform and hopefully our listeners are gonna learn along with us.
Team Dynamics and Mission at Third Wire
00:09:49
Speaker
So let's see, what strategies do you use to motivate your team and get them aligned with what your company's values and culture is?
00:10:09
Speaker
That's an interesting question. None, I guess. Everybody's sort of motivated on their own to get to the same place. I don't think anybody that I've engaged with or who has engaged with Third Wire become affiliated with Third Wire would have done so unless we were all facing the same direction, rowing in the same direction, trying to get to a destination together.
00:10:39
Speaker
So, there isn't really a need to swing an axe over people's heads or provide a giant carrot hanging over their head to get them to move in a particular direction there's a lot of self motivation, and at the same time, once
00:10:56
Speaker
either they have already seen it or it takes very little by way of explanation to highlight and illustrate that the alternative space is more or less the Wild West. And it's really easy to take advantage and be taken advantage of. And sort of our mission is to
00:11:25
Speaker
act as the white knight for advisors and provide an educational component, sure, but also run a squeaky clean operation so that when they're allocating their clients to third wire, they can rest assured that everything is being done the correct way and without sacrificing any quality or results.
Education and Strategy in Alternative Investments
00:11:55
Speaker
And you said the educational aspect. What do you do as far as education when it comes to alternatives? Oh, I mean, like most things, it starts with discovery. And so you lead with assessing sophistication and experience in the alternative investment space. And a lot of conversations that I have with advisors and RAAs
00:12:20
Speaker
begin just like that and nine times out of ten the response is oh I'm in a couple private equity deals and it's just it's a forehead slapper because all private equity are alts but all alts are not just private equity and I tend to do alternative investments on a liquidity spectrum where you've got all private investments but still
00:12:42
Speaker
either monthly liquidity or bi-monthly liquidity on one end, and then like a 10 year long investment term, private equity or real estate deal on the other, and then everything in between. So, advisors being more apt to allocate to a private equity or a real estate deal just because that's one, they're sticky assets, which is a whole nother issue I have with them, but that,
00:13:13
Speaker
it's more easily recognizable and they get their heads around it and explain it to their clients. So it makes the client approving any allocations there much easier than branching out into the rest of the alt space. So it's explaining what there is, how they operate and what the benefits are in moderation to an overall diversified portfolio.
00:13:43
Speaker
Why are they sticky assets? A lot of our listeners won't, you know, maybe perhaps understand what you're referring to. Well, so you take any random private equity deal and there's a closed end fund. There's a finite capital raise in the beginning and then
00:14:02
Speaker
you make a commitment to the fund, and then over the first, say, one to three years, they issue capital calls, they draw down on that commitment that you made, and then hopefully in the latter half of the investment term, which can be really anywhere from five to 10 years, they start making distributions. And then as you stagger these, the idea is that the distributions are paying for the calls and subsequent private equity deals that you got into, and you end up with this J-curve looking thing.
00:14:33
Speaker
When an advisor invests a client into a private equity deal, that client stuck. Like there is no liquidity, they can't sell and get out. There is a secondary market, but they'd be selling at a really deep discount. So these are liquid assets, much like your house become the last thing that you want to liquidate and get out of. And all during that time, they're collecting fees.
00:15:00
Speaker
on these funds and the client is stuck. And so it's sort of the, a well-known dirty little secret in financial services is that for private equity and real estate deals that have these supreme liquid nature to them, the YTB, the yield to broker is strong. And so some advisors prefer to go that route.
00:15:29
Speaker
And that's so many issues I have with that, so many. Bleeding dry, bleeding them dry. Yeah. Yeah. Well, what, so what kind of factors do you consider then when you're evaluating alternative investment opportunities? It's very similar to when you're constructing an overall asset allocation. I mean, investment objectives, time horizons, risk tolerances, risk tolerance especially because
00:15:58
Speaker
when there's a downdraft in the equity markets and or fixed income markets, there are two things most investors worry about. What am I doing against the S&P and can I get access to my money?
00:16:11
Speaker
And so our wheelhouse is on the liquid end of the alt spectrum. And the funds that we have created and provide to the RAA space have monthly liquidity with 15-day notice, which is about as liquid as you're going to find in the private investment world.
00:16:33
Speaker
So I think that jives better with a long-term diversifying aspect of a portfolio. And it allows advisors to rebalance when they need to quarterly, annual, every two years, whatever the schedule is, whatever the goals-based planning they have in place for their clients are, the third-wire portfolios are designed to mesh with them.
00:17:03
Speaker
Do you think the 60-40 is dead? I don't think it's dead. I think it's evolving. I mean, as somebody that operates an alt platform, seeing the 33, 33, 33 is great, just because it means larger allocations to alts and more money coming to us. But there lies an inherent conflict of interest.
00:17:27
Speaker
it needs to be appropriate for what the overall goals of the investor client are. I mean, if they're looking to buy a vacation, pay for college or retire in 10 years, they don't need to be allocating to these very long-term illiquid
00:17:49
Speaker
investments. They need something more liquid so that in the event they reach their goal sooner they can access the cash and start taking distributions. So I think there's a place for all alts but it is really determined by the individual scenarios and situations of the investors.
00:18:15
Speaker
I'm really curious to know about how you build your relationships with your high network clients. So, I mean, you have a lot of experience in your career working with, you know, these type of individuals. So how do you go about building that type of rapport and building strategies for them for their unique needs?
00:18:36
Speaker
I don't, I work with their advisors and that's on purpose because you have a direct investor that say, Googled alternatives and comes up to third wire and calls me. They may like what we're doing and say, Oh, well, I want to write you a check for a hundred thousand dollars and make an investment. Well, that may or may not be appropriate for your individual situation. I'd like to bring in your advisor and let's look at the whole picture and what you really need.
00:19:05
Speaker
and how much of an allocation to ALTS your situation requires. So while it's nice to have the attention, working with direct investors is not the ideal. It's really working with a financial professional, with that investor in mind, and
00:19:27
Speaker
making a meaningful allocation to alternative investments that helps to mitigate overall portfolio volatility and diversify away from the two eggs in one basket, stocks and bonds. Could you maybe elaborate more on your philosophy regarding the state planning and tax strategy and how you integrate that in with your strategies?
00:19:57
Speaker
Sure, I mean, I think alternative investments relative to estate planning, when you have family limited partnerships or long term legal structures that were put in place for intergenerational wealth transfer, that's where you want to have your private equity investments, your real estate holdings. In more taxable structures, living trust, short term grants, that's where
00:20:28
Speaker
sort of more traditional hedge funds and to the liquid side, it's more appropriate. So I think, and this is another reason for incorporating your financial professional in the mix is that Mr.
Role of Alternative Investments in Estate Planning
00:20:44
Speaker
Johnson calls me and says, I love the Third Wire 6040 portfolio.
00:20:47
Speaker
I'm gonna put it in my family limited partnership. Like, no, no, that's not good. This is not where it should go, but I'm not gonna be the one to tell you that. Talk to your advisor or let's bring them in. And then collectively, we figure out where the best place to slot an investment with third player or anything else is and you move from there. So what would you say are some of your favorite products that you use, your favorite?
00:21:18
Speaker
I mean, the best results are liquid hedge funds, whether they be equity-based or derivative-based, because this is one of the filters that we run. Initially, and primarily, it's the monthly liquidity, because
00:21:38
Speaker
if we have seven strategies in one of the third-wire portfolios and one of the seven is quarterly liquidity, then the entire thing becomes quarterly. So that's one. Two, uncorrelation to major equity and fixed income indices are a requirement as well. And a lot of equity-based hedge funds out there claiming to be long and short are really just
00:22:04
Speaker
beta in disguise, and you don't get any sort of non-correlation when the equity markets take a nosedive. So you find that characteristic much more often in derivative-based hedge funds, such as CTAAs, or relative value
00:22:24
Speaker
type strategies where they take the market risk out and they're looking for a discount and premium to narrow to capture the profits. I think that is much more interesting than the illiquid side at this point because A, private equity is really just
Market Perspectives and Investment Philosophy
00:22:45
Speaker
illiquid beta that if you're going, if you want to invest in private equity deals, make it part of the 60 of your 60, 40. Uh, and then for real estate, I mean, I think there's some question as to what the market's going to do over the next four or five years with yields going up and rates going up as much as they have, uh, the magic eight ball is anything outlook not so good. Um, so I think there's, there's,
00:23:15
Speaker
increased interest on the liquid end and that very much jibes with what we do with this. And just the liquidity alone, it's the better place to have your alts exposure. Yeah, the real estate market right now, just a wild time. What do you foresee for the future of that?
00:23:45
Speaker
Really in the next year. I mean, the next year, I don't see a whole lot of new deals happening. I think there's going to be a lot of treading water and ensuring that a bills are paid and leases are paid.
00:24:10
Speaker
But I mean, there will be a time when capital rates are in a position that real estate becomes super attractive again, but you don't, when you're sitting there on various new sites and you see it, it's already too late. So you need to start getting a toe into the real estate market before the herd gets there and it becomes common knowledge. So probably two and a half, three years out, I'd start seriously looking.
00:24:41
Speaker
But in general, once you make that commitment, you're stuck in place because of the illiquid nature of it. I think going back to the liquid end of the spectrum, you have much more control. And you can have, instead of direct real estate ownership, you can have exposure to interest rates and play that same scenario without the illiquidity.
00:25:12
Speaker
and profit from it in the short term. Yeah, while I was still banking, we just kept hearing, it's going to crash. It's got to crash at some point. And it doesn't seem like that's, yeah, it's just been a slow burn. It's not going to happen. Yeah, I'm not a big believer in the soft landing. I still think there's a second leg down and that this recession is coming. But that's just my opinion. And it's worth exactly what you paid for it.
00:25:42
Speaker
but I don't claim to have a crystal ball. I'm not trying to pick market direction. This is very much.
00:25:49
Speaker
uh, time in the market, not timing the market. And you need exposures to various asset classes, equities, fixed income and alternative investment strategies for the long-term. You don't, you're not trying to pick bottoms and pick tops. It's you put them in place and you let them do what they were designed to do over the course of your financial planning.
00:26:15
Speaker
So with evolving tax laws and regulations, what do you do to make sure you're as well informed and with the potential impacts for tax strategy planning? Well, one of the benefits for the liquid portfolios that we've managed is that they have a static tax treatment. So any capital gains are taxed 60% long-term, 40% short-term.
00:26:41
Speaker
regardless of the holding period. So if you have what your gains are, you know exactly what your taxes are going to be as soon as the K1s come out, which for Third Wire are about a month in advance of April 15th filing deadline. So if an investor needs to file an extension, it ain't going to be because of us. But for overall tax strategy, I think anything
00:27:07
Speaker
Obviously, it's going to be kicking off capital gains often and in size. You ought to have in some sort of tax shelter. But at some point when you're moving up the wealth spectrum,
Future Goals and Interaction Dynamics
00:27:25
Speaker
those become less relevant and you've got a lot of your wealth in just large taxable entities. And so it's more offsetting any of the gains that you can. Hopefully there's been a lot of loss harvesting through 22 and the dip in 23.
00:27:53
Speaker
Yeah, that's about all that you put out on the tech side. So what's next for ThirdWire? Where do you foresee, you know, the company going and growing and tell me, I don't know, three, four years world domination. No way we want to continue to grow and expand and provide a, a
00:28:20
Speaker
better alternative pun totally intended to the big access only platforms out there and just continue trying to help and doing better, cleaner and cheaper and showing the investing public that there aren't only two ways to do it which also happen to be super expensive and complex.
00:28:49
Speaker
Well, what would you say are your three top goals for Third Wire for the next five years? I like the Triple RAUM goals. I want to get our body count up to probably about 30, 35.
00:29:16
Speaker
at the very least start, depending on the real estate market, think about our own office space, not that we ever need it because they're designed to be office lists. And that's not really the direction business is going. But I think in financial services, you'll never get away from needing a physical office space.
00:29:45
Speaker
knowing that I'd rather buy than rent, getting to a point where we can buy that space and have it be ours and set routes.
00:29:57
Speaker
There is nothing like face-to-face interactions and stuff. I know our world has certainly just become more digital ever since the pandemic. And now so many things are just this way through Zoom, which I do enjoy. I like that I can hang out with my dog at home on the green couch. But at the same time, I really do value that FaceTime and stuff with everybody else. So I do that. Yeah, it's irreplaceable.
00:30:25
Speaker
I mean, everybody talks about efficiency and I can have eight meetings in one day because I do it all from my computer. Sure. But yeah, there's no, there's no replacing the face to face and the handshake. And I mean, at the end of the day, we're all humans and that personal contact is irreplaceable and necessary. Absolutely. Absolutely. I agree. So I like a hybrid idea, you know?
00:30:51
Speaker
Yeah, start with the virtual meetings and then when you get closer, start doing the in-persons. Yeah. So, well, what would you say are some of your favorite educational tools or resources for alternative investments for those who want to learn more? Ooh, I'm a big fan of the
00:31:16
Speaker
the late David Swenson's books, pioneering portfolio management and unconventional success. Google, I mean, Google is a fantastic resource and
00:31:33
Speaker
I mean, I know depending on what you're searching for, the internet can be a lot of garbage. But when you're reading about all term investments, you tend to hit articles from reputable sources. And I think there is an overarching goal to educate about alts. So there's a lot of material that you can read. It's not intimidating.
00:32:02
Speaker
easily digestible pieces that take 10, 12 minutes. And you can learn a little about the space over time and get up to speed fairly quickly.
Resources for Learning About Alternative Investments
00:32:13
Speaker
Yes. Yes. All the resources are out there right at our fingertips. This is a great podcast to begin as well. So thank you everybody who is listening. Thank you so much, Dan, for coming on today.
00:32:27
Speaker
and taking the time and, you know, just digging into alternative investments and sharing all the amazing stuff you're doing over at Third Wire. So we really appreciate it. And thank you everybody for listening. We're really excited to, you know, for our next episode. So be sure to tune in and we will see you next time right here from the Green Couch.
00:32:49
Speaker
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is not guaranteed to be felt.
00:33:14
Speaker
Any indices referenced with comparisons are unmanaged and cannot be invested in suggestions. As always, please remember, investing involves risk and possible loss of capital. Please seek advice from a licensed professional.