ADISA Video: Using Alternatives in Up and Down Markets
Hundreds of sponsors. Hundreds of offerings. Hundreds of portfolios that weigh heavily on equities but rarely utilize alternative investments.
“They should absolutely be repositioning,” Rick Chess, managing partner at Chess Law Firm, said in an interview with ADISA board member Greg Mausz. “One of the beauties of the alts space is that there’s so many sponsors in so many places… get some diversity… different asset types, different structures, different sponsors.”
Video Transcript
Greg Mausz 00:10
Welcome to another edition of focus on alternatives brought to you by ADISA, the Alternative and Direct Investment Securities Association. For more educational content like this, please visit adisa.org and check out the resource library. My name is Greg Mausz, I’m your host today. I’m joined by Rick Chess, he’s an attorney, he’s a due diligence officer and you’ve been in a space a long time working with clients and alts. And so today we’re going to be talking about kind of smart moves in challenging times. You know you’ve seen the different market cycles through the 80’s, 2000 the Great Recession, pandemic and now we’re here in this period of kind of big volatility. What do you think financial advisors should be doing to work with their clients and their clients’ portfolios?
Rick Chess 01:03
First just listen to them Greg, because sometimes what we think they’re worrying about is not what they should be worrying about. And then try to get some of it liquid, one because you don’t know how turbulent will be but there’s gonna be some wonderful opportunities, if they leave a little dry powder, you’re going to be a hero.
Greg Mausz 01:22
Yeah, absolutely. It’s all about that dollar cost averaging on down. Any more specific advice other than dry powder, should they also be repositioning?
Rick Chess 01:34
Absolutely they should be repositioning. One of the beauties of the Alt’s space is we have so many products from so many sponsors and so many different places. That’s why I’m saying if you listen first to the most part where are their fears where do they have had success. Don’t assume that because what you know is what they know but spread their it’s in diversity. But it isn’t diversity of I have apartments in Seattle now I’m gonna get apartments in Richmond. It’s different asset types different structures, different sponsors. You know show that you are aggressively creatively working on their portfolio.
Greg Mausz 02:12
Could not agree more. So many people put a diversified portfolio together of equities and they should really be doing it on the alternative side as well.
Rick Chess 02:20
Right, absolutely. I think then the good news is you know you’ve been president of ADISA I’ve been president of predecessor to ADISA. The whole industry has evolved where now we have hundreds of sponsors and hundreds and hundreds of different offerings out there. Sometimes it’s overwhelming but it’s well worth it. And again, you have due diligence officers in your firm, lean on them saying look I have clients that are a little bit concerned about this. What is available, what is coming out and the due diligence officer on top of that.
Greg Mausz 02:50
Yeah 100%. So, you know alternative investments immune to market volatility and market downturns as well. So how should advisers be thinking about which alternatives to use depending on the market cycle?
Rick Chess 03:05
Well let’s step back for a second, saying you know we have to protect ourselves our broker dealers and registered Rep’s. And one of the things I’ve seen some folks now doing is putting a document in front of the investor saying yes, I understand what I’ve just bought. Get the investor to write why they bought it, what they liked about what they were concerned about. Therefore, if ever there is an Issue is like well this is what we talked about. But you know one thing I do a lot of DST’s and one of my common questions are what would you do if taxes weren’t an issue? And there’s some variation of that question you could ask every investor because you want to get them out of you know cash flow only or tax savings only. Getting an investor to think long term big picture. It’s really difficult but you got to do it.
Greg Mausz 03:53
Yeah, that’s such a good point is to document why you when you had the conversation and why that recommendation was made. That the rationale behind it all. And It’s oftentimes good to pull that back out if ever there’s a question like why did we do that? And you can reference it and that’s just part of good practice management to protect yourself as the advisor but also to remind the investor here’s exactly why we did this because.
Rick Chess 04:21
Another way of taking that is when I’m in my Rep role and say you’re my client and we’ve had a conversation to discuss something. And there’s always a few questions will you remember later I’ll send you back an e-mail and I’ll have a first paragraph that’s fluffy the second paragraph almost word for word goes over what we said. And then I set up another meeting or ask you something that you have to respond to. So, there’s never any question that’s what you said it’s in the e-mail FINRA has kept a copy of it and oh by the way you did agree to the meeting. Think about that yes, the investors are critical but they have very short memories, you can be doing exactly the right thing for them. Sometimes things don’t work out make sure you have something there what they really were going after and as your great point Greg is help remind them.
Greg Mausz 05:13
Yeah, absolutely. So as your role in attorney and kind of an industry veteran you’ve been able to participate in FINRA arbitrations. So, when something’s gone sideways between a financial advisor and their client and a recommendation. What are some of the lessons learned from those arbitrations that you can share?
Rick Chess 05:32
First one is a little scary, and there’s usually a 3-judge panel, and generally only one of them have any clue whatsoever about alternatives. So be prepared you’re going to educate your attorneys have to educate when you’re on the stand you have to educate them. Two, if it’s something that’s easy to find like go on Google for 30 minutes and you didn’t do that on a deal, that’s gonna hurt you far more than anything that’s in a 300 page document. Again remember, it’s what that investor could have should have understood what you as a Rep could have should have understood. And also, statue limitations no matter what they say doesn’t apply. So, you’re not going to be saved on that one.
Greg Mausz 06:11
Right well due diligence is so important. You know it must be done kind of at that corporate level but then that financial advisor must do his own and make sure that the suitability is really there. So yeah, you can’t not do it but you also need to document that due diligence.
Rick Chess 06:28
But you hit on suitability, every one of the seven cases when it really came down to what swung the case, it was suitability it wasn’t the investment per say it wasn’t the due diligence. Those are kind of you know they’re important you’ve got to be doing them on regular basis you’ll get singed on an audit if you don’t do it right. But If you think it how you get this three person panel they’ll be looking at this person your investor this deal was it suitable? Do everything you can. One of the tricks of the trade I did I have I work as an attorney, who’s two brothers late 70s in Atlanta and they were investing in some TICs going back aways. And after the fact the Rep was like who I wonder if they really understood so I had I had a video conference with them and I talked about the Braves and I talked about all the teams and just to establish that they were coherent. And I have on video them saying well cash flow really not you know not the value in the back end is really not interesting to us it’s the cash flow today. That’s pretty strong stuff, yeah so you know if you don’t want to do it or you haven’t done it hire an attorney, hire somebody who could then be brought in as a witness to say you know not only do we have this e-mail not only we have this thing inside, but you know we talked to them. It all, I mean at that point that slams the deal shut, you’ve won. You know I’m saying you should never have to get there but sometimes it happens.
Greg Mausz 08:00
So, what is it about suitability? So, if that’s if suitability is really the hinge point here what is it about it that’s going sideways?
Rick Chess 08:08
Ugh, number one is does the investor understand, I know that sounds pretty simple. One case was in where husband and wife were acting like we don’t know how to read. And then you find out that both had very high-end jobs where like one particular she reviewed financial statements for students, that was her job for 30 years. So, she knew finances really well. So those things that you know you think your client has you know. Document you know get them to show you something they do in their job but ask them about their job having it’s not just that they have a good paying job make sure they really can talk about it intelligently because that’ll just help you, so it also helps you sell the product in the first place. So, the very things you’re trying to do to be a good, registered Rep, are also the things you can do to help you protect yourself down the line.
Greg Mausz 09:01
Right, right… agreed. There are though some bad actors out there. You know some sometimes it’s on the financial advisor side sometimes it’s on the sponsor side. You know what can clients do to try to protect themselves from bad actors?
Rick Chess 09:16
Well, most of the time of the 35 years I’ve been doing it. It’s not that the quote bad actor, could be a sponsor could be a broker deal that could be goes into this business with an intention to do evil. But they start getting too much money they start having too much it’s the same in politics it’s the same it’s just nothing unique to our industry whatsoever. They need to monitor, so if a sponsor buys a jet usually a bell should go off. If somebody who was a paralegal now is being made who was making 50,000 a year now making $500,000 a year as a chief operating officer these are real cases. You know so don’t assume that because something or somebody was right, they still are. And I would tell you that about the investors too, investors change. You know what’s going on in their life one through divorce they get hooked on drugs etcetera. You know you once you’ve made that investment you have to monitor the sponsor with help from your broker dealer. You have to monitor your clients as part of your ongoing follow up. And the more you do that more you have that in the file, and you can bring that up in arbitration the other side just folds.
Greg Mausz 10:35
Yeh, that’s it really comes down to doing the right thing.
Rick Chess 10:38
Absolutely.
Greg Mausz 10:39
Um and just and documenting what you’ve done.
Rick Chess 10:42
Well, you say that I mean one of the when I’m when I’m meeting with folks who want to become a sponsor and my phrase to them is you will do the right thing because of who you are not because of the regulations not because of any white papers whatever. You know those are what you should aspire to that’s what the due diligence officer should be using to say do we do work with them or not. But morals, ethics, background, experience those personal things, you know are very important. And some of the same things that you would use on do I want this family to be friends with our family? It’s a little more complicated but, a lot of it is stuff you already know how to do. And unfortunately, a lot of reps are reticent oh… this is big company yeah, so what.
Greg Mausz 11:27
Right so on your experience, are there any security structures any asset classes that should always be avoided?
Rick Chess 11:39
You were going well until you said, that always before. I don’t think there’s any structure asset type whatever you should always avoid, but there’s a difference between let’s say there’s a company that’s bought existing apartments for 30 years and they’re going to develop shopping centers. It’s a different rhythm. I mean I was at United Dominion Realty Trust, and we were really good at apartments. I bought 50,000 apartments for them. And we thought we were hot, but we started buying RTC products. We went from old which was clean safe and cheap that was our mantra. To newer stuff where we had to push rents, we don’t know how to do that. We kept controlling expenses and eventually all the senior management got laid off.
So, when you’re looking at your sponsorship looking at the offering, it’s nice if somebody there has done that before. It would be great if even if they’re not some they’ve done before is the timing short term leases, self-storage, hotels versus 20 yearlong industrial leases are a very different rhythm. So, if somebody’s a tango dancer right doesn’t necessarily hire them to go with you on the foxtrot or something. I mean it is that kind of… you know, and I use those analogies one because it works in court it works in arbitration your clients understand them. And it’s easier for you to remember. So, you know think about what you’re doing in terms of stuff you’ve already experienced, and I think you’ll be much more successful.
Greg Mausz 13:07
Now and that’s right you also have to find that right strategy based upon where the market dynamics are. You know you try to buy on that dip and not at the peak of the market so thank you so much for sharing these valuable perspectives.
And thank you for watching another edition of Focus on Alternatives. We hope you enjoyed it. For more information like this please visit adsa.org, thank you.
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