Eric Satz, Founder and CEO of Alto — Expanding access to alternative investments
In today’s episode, Nate Gee hosts Eric Satz, founder and CEO of Alto.
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Nate and Eric discuss:
How the idea for Alto came about
Eric: …We started an online organic home delivery grocery business, which was going just fabulously until 2008…but that led me to start Tennessee Community Ventures, which was a Tennessee based venture capital fund where the state of Tennessee was the sole LP. I started out with a couple of partners. And while I was doing that, I was investing alongside the funds. I wanted to use my retirement money to invest in these companies. I had this lightbulb moment from a duration matching standpoint, and from a risk reward and tax advantage standpoint, I should be using my retirement money.
The only problem was I didn’t know if that was a legal thing to do. I knew you can take your IRA money and give it to Fidelity and invest it and public stocks. I didn’t know if you could invest it in private companies or private equity funds or venture capital funds, or things we call real assets like real estate or artwork or antique automobiles. And the long story short there is that you can, but going back to 2013, it was really hard to do; it was hard to figure out and it was super expensive. And so I just had this, I don’t know, personality disorder, which caused me to want to solve this thing.
Fast forward, we now have 30,000 plus clients and 1.2 billion in assets under administration.
Why alternative investments in an IRA, and why now
Eric: Nate, you catch me on the tail end of having come from a lunch in which Jamie Dimon was the speaker. And by the way, you only have to listen to him for about 30 seconds, and you can understand and feel his charisma and energy. And you know why he leads the largest financial institution in the world. But someone asked him a question about public equity returns over the last 15 years and where he thinks public equity returns may be over the next 15 years. Aside from the fact that nobody really knows, statistics suggest that we will not see the same level of returns over the next 15 years that we saw in the last 15 years — the growth in the S&P 500. What we expect is maybe 0% return. There are a whole combination of factors that are going into that: interest rates, of course, inflation as well. But what’s become somewhat understood today is the need for alternative assets as a means towards portfolio diversification.
When we first started talking about this, you know, in 2016, and the need for portfolio diversification, you got a lot of blank stares; most people were still of the school that 60/40 is what you do, meaning 60% public equities / 40% public bonds. That provides balance, and that’s going to reduce overall portfolio volatility and and optimize for returns over x period of time — call it 20 years, 30 years.
Because of the way that public markets have developed and the proliferation of ETFs and mutual funds, everyone has become this passive investor. Now when we add to our public securities portfolios, because most people don’t pick individual companies (nor should they by the way), but when you purchase one more ETF or mutual funds, you’re not getting any greater diversification; you’re just getting one more mutual fund or ETF. The reason being is that, give or take, only ~400 public companies matter of all the public companies that we have. And all the mutual funds and ETFs are comprised of some sub-segment of those 400. So the only way you actually get diversification is to include assets that move independently from the public markets. And private companies will move independently from the public markets. And the value of things like real estate and artwork can move and work independently from the public markets.
But where we are today is trying to figure out, how do you invest in alternative assets? What are the questions to ask, what kind of diligence do you perform? And what’s in your sweet spot? That’s different for every single individual. But what are you attracted to? What do you want to learn about? What’s going to help you do the necessary amount of homework to figure out what it is you should be investing in?
Alto’s strength in a space of growing competition
Eric: I think this may surprise some people and not surprise others: I believe the single greatest differentiating factor for us is our people. And they care. They care about each other, they care about the customer. There’s a lot of heart and soul that goes into what we’re doing. This is people’s money, it’s their retirement, it’s their future. And we take that personally; we take it seriously.
I say that people because at some point, the technology that we’ve been building — which I do believe is hugely differentiated from any other platform out there, and it makes it way easier to invest in alternative assets than it did when I first started doing this, by the way, which is exactly why I built the company — at some point that technology will be table stakes and everybody will have it. And I think if you’re trying to build a culture of care and heart, and grit and resilience, you know, after the fact, when everybody else has also identified the opportunity that you’re going after, I think that’s just too late. It’s got to be part of the culture from the beginning. And at least I think it’s part of our culture. I think if you asked our customers, if you asked our clients, and maybe most importantly, if you asked the people who work here, I think they would agree with that.
Investments in the Alto platform and recent trends
Eric: It’s not that the composition of investments in the Alto platform has changed as much as the desire and willingness of both the investor as well as the financial advisor community; the registered investment advisors have embraced the objective of adding alternatives to the portfolio. And that new open-mindedness is really what’s different, more so than the exact composition of what you find invested on the Alto platform. It’s private equity. It’s venture capital. It’s funds of both of those ilks. There’s more private credit today than then we saw previously. That is somewhat of a change. But that’s not a big surprise, given what the Blackstones, the Ares, the KKRs, the Carlisle’s of the world are doing. Real estate is always popular.
I think art, by the way, may be one of those surprise categories that I wouldn’t necessarily have named five years ago. People like wine, you know, people can relate, they know what they like, whether it’s whether it’s wine, or art, or other real assets that kind of fit into that category of consumer collectible. That also can be baseball cards, Michael Jordan sneakers; these are things that people feel like they understand and know. And what’s really important about these real asset classes is that their returns and their price movement has almost nothing at all to do with what happens with the public markets.
Crypto legislation and Alto CryptoIRA
Eric: There is very little overlap between the CryptoIRA customer and the Alto IRA customer. And, you know, it’s obviously a tough time in the markets when just last week, the SEC sued Binance and then a day later turns around and sues Coinbase. Now, I really have no comment on Binance; I don’t know the folks there. I don’t know how it’s operated. But I find it hard to believe, hard to understand, how in 2021, the SEC, under the current Commissioner, blesses a company called Coinbase to go public, and then however many months later turns around and accuses them of operating an illegal securities exchange. Those two things don’t add up to me. I think it’s going to be a really long legal battle, which will be a little bit interesting to follow from the sidelines.
…I think the early crypto customer is in it for the long run. I think they believe in the value of crypto, which is, of course, different from blockchain and what blockchain technology means. And I certainly am a big believer in blockchain. So I think the early crypto customer is not abandoning the space, and I don’t think we’re going to see it be abandoned over the next few years. I don’t think Bitcoin and Ethereum are going away.
Possible staking functionality in the future for Alto CryptoIRA
Eric: So there’s a very simple rule of thumb, which is that there’s no such thing as a free lunch. When something’s too good to be true, it usually is. And so if you’d looked at what was happening in the staking markets, there is a reason those rates were in the high teens to, in some cases, low ~20%, when rates elsewhere were close to 0%. And that’s because it was too good to be true.
For me, the question of whether or not we allow staking has to do with an assessment of the system, and making sure that the assets that are being used as security for other assets being borrowed are real assets. Without that, I don’t know when we will, or if we will launch staking.
Alto’s goal to expand access to alternatives to more investors
Eric: The majority of the client base is accredited investor, qualified purchaser. There are really four categories of investor. There’s what we refer to as the not yet accredited investor. Then there’s the accredited investor. This has a specific definition…and based on the majority of the opportunities that are available to investors today, because of SEC rules and regulations, it makes sense that the majority of our of our client base is accredited investor…If you’re not yet accredited, we do bring different types of opportunities to the table and you can bring your own through regulation crowdfunding platforms, places like Republic and Wefunder. There are other types of securities deals, Reg A, Reg A+…where non-accredited investors can can participate as well.
The vision is alternatives for all…the number one goal for us is to build the number one alternative asset marketplace in the universe.
What I like to say is that wealth does not beget smarts, right? It doesn’t beget knowledge. But knowledge can beget wealth. And so the idea that only rich people can invest in alternative assets is both paternalistic and outdated. And there should be, at the very least, a test by which anyone could qualify to be able to invest in alternative assets. And I think it may take some convincing of folks that this is a worthy endeavor, but if we can take the data from the investments that our clients make, and we show the returns over time, hopefully, our legislators and and those who are are commissioned to run the SEC, can understand the importance of this opportunity for everybody, not just those with a big wallet.
The role of catching a break now and again, and controlling what you can
Eric: There are a lot of really smart people out there who fail all the time. And it’s not because they’re not working hard, or they didn’t know what they were doing, or they built a bad product. Sometimes you just have to catch a break. And, you know, I’m old, right? I’m 53 years old, and part of making mistakes and part of failing—if you’re paying attention—there are takeaways that you can use in the next thing that help you to not repeat that mistake on the one hand, but also help you keep an open mind and vision for what it is that’s actually happening in front of you.
I say that because there’s the saying that luck is the intersection of hard work and preparedness…I believe there’s a third vector that intersects with those, and and it’s awareness. And it requires that you are seeing the luck happen. From experience, I think it often lends itself to this ability to see something breaking your way. Or if you just make this little adjustment, the tide may turn. And look, I’ll be the first one to say that we’ve gotten lucky a few times along the way at Alto, with our own development and evolution. And I think anyone who’s never failed doesn’t realize where they got lucky. Because it’s part of it. Part of this is just outside of our control.
I had a soccer coach in high school who used to say you can’t control the fields, the weather or the referees; all you can do is play as hard as you can play. And so in business, both investing and operating, the field, the weather, and the referees = the competition, the macro environment, and the consumer. In large part, they’re beyond our control. But if we’re paying attention, we can find product market fit, and build upon that in a way that leads to success.
And, by the way, success, to me, means a sustainable business—one that doesn’t require external funding or financing. That doesn’t mean your business is a success or failure or you have succeeded or failed if you don’t get there. There are lots of moments in between that can be successful moments, and moments worth celebrating. And I think it’s really important, whether you’re doing this with a team of one or three or 30 or 80, to celebrate those small victories along the way because otherwise it’s just a really long journey.
About Alto
As a self-directed IRA custodian, Alto launched its original Alto IRA platform in 2018 to simplify the process for individuals to diversify their retirement investments beyond stocks and bonds into a range of assets from private equity and credit to real estate, art, and wine. Supplementary to its original platform, Alto launched its CryptoIRA in 2020 to facilitate tax-advantaged crypto trading.
About Eric Satz
Before founding Alto, Eric worked as an investment banker, serial entrepreneur, and venture capitalist. Among his prior ventures, he co-founded Currenex, which was acquired by State Street for $564M. Eric graduated from Amherst College and currently resides in Nashville, Tennessee.
About the Author
Nate Gee is an MBA and MA Candidate at the Wharton School and Lauder Institute. He’s a member of the Wharton FinTech Podcast team and is excited by fintech’s capacity to improve the efficiency and accessibility of financial services across the globe. Don’t hesitate to reach out with questions, comments, feedback, and opportunities at ngee@wharton.upenn.edu.
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