Jin's Note: I had the pleasure of chatting with David Wiitala of Raintree Financial Solutions, on the topic of alternative investments. The following is a lightly edited transcript of that conversation.
Jin: Could you start by introducing yourself?
David: Yes. For sure. My name is David Wiitala. I'm a Private Wealth Advisor with Raintree Financial Solutions, and I also own a company called Investing Beyond, which does financial education events around the country.
Jin: Okay. So you are a Financial Advisor with Raintree Investments and you specialize with small business owners, correct?
David: Primarily. The majority of the people I deal with are either small business owners or I have some people I deal with who are in the medical profession—a lot of people that own individual corporations.
Jin: How did you get to have that kind of clientele because I think that’s different from normal, right? Most Financial Advisors don’t tend to target small business owners specifically.
David: Yes, it may be. The reason that I chose to specialize is I found that a number of the clients that I ended up attracting or ended up having strong relationships with tended to be a lot of business owners or people that owned their own corporations. I think that part of the reason that I’m so passionate about helping these types of people is that—. Let’s just say, for example, that someone is a teacher, a nurse, a fire fighter—a lot of professions—a government worker, for example. A lot of people have pension plans and they are not necessarily as reliant upon their personal investment portfolios, whereas a business owner has these unique needs a lot of the time where they don’t have these pension plans, and, basically, their investment portfolio ends up being their pension plan. So, there are some unique needs because you really have to pay special attention to certain aspects of a portfolio, and it’s a lot more important that you do the right thing when you are so reliant upon this nest egg that you’ve built up yourself and essentially for your post work income for the rest of your life.
Jin: What you’ve just described would apply for any financial advisor. Would you say that you have more small business owner clients than the average financial advisor, or do financial advisors in general tend to serve small business owners?
David: You know what, actually, it’s tough to say, Jin. So, I can primarily speak for myself. In the past, I tended to deal with a lot of different people, different professions, different walks of life, or whatever it may be, and it just sort of evolved to the point now where I started specialising with small business owners. Part of the reason is, I think, a little bit different. It’s sort of a niche as compared to probably a lot of financial advisors. I can’t speak for everyone else, but probably a lot will deal with a lot of different people and not necessarily create a niche or specialize, so there is a little bit of a difference there. I just tend to have great conversations with business owners—kind of thinking along the same lines—as well as just making sure that we recognize that there are some unique goals as far as business owners are concerned.
Jin: You have a different strategy from many other financial advisors in that you tend to recommend alternative assets to your clients. Would that be a fair characterization?
David: You know, I think the best way to answer that question would be to not necessarily say that I have a tendency to recommend alternative investments, but the best way to look at it would be to just give you a little bit of a sense of my background and how things have evolved to this point today. I started way back in 1993 with the traditional financial system. I was with a small firm—mutual funds licenced, insurance licenced, did retirement planning for people, didn’t really specialize at all. And then in 1999, I moved to a large bank-owned brokerage firm. So I started my training in January 2000, and what ended up happening is that—. I’m originally from Thunder Bay, Ontario—so let’s just call it, “small town boy from Thunder Bay, Ontario kind of being thrust into, let’s call it, “The Wolf Den”, if you will, which is sort of downtown Toronto, Bay Street for three weeks of training on how to be a broker. Now, I was under the impression that I was going to learn all these different ways on how I can help my clients make money. What ended up happening was that I quickly realized the vast majority of the time was actually spent in showing how to take clients’ money, and sort of wrap a fee or a commission around that—as close to a hundred percent of a client’s portfolio or wallet share. And, so what you start finding things out about the traditional system is that there is a hierarchy and the hierarchy is that the firm is at the top, then the advisor, then, many notches below, if it’s considered at all, is the actual result as far as the investor is concerned.
So, based on my own personal experience in a seventeen-year career in the traditional financial system and realizing that the needs of the investor aren’t always being put in first place, what ended up happening is that, in 2011, I joined with some very like-minded people. The motto or tag line for Raintree Financial is really putting investors first, trying to put investors first, putting investors’ portfolios first. The way that I look at a portfolio when I’m trying to help somebody is—. I find that a lot of people—and this isn’t necessarily everybody, so I can’t cast stones on the entire financial system. But, what tends to happen is that we have the cart before the horse. So, a portfolio or a solution ends up being recommended even before the client. Or, if there’s a plan that’s put together—what ends up happening is that the plan just ends up being used as a marketing piece to sell financial products. So, I looked at that and thought, “Well, that’s not really putting the investor in first place. If you are truly going to put the investor in first place what you want to do is to put together a plan that has the integrity to say: Investment types are just tools. So whether it be stocks, bonds; it could be mutual funds; it could be GICs at the bank; it could be alternative assets such as absolute return type managers, different types of assets, private or public, farmland, private equity—just take a look at investments as just tools to do a job. So, regardless of whether or not a specific product is on my shelf, I may actually recommend that somebody utilize that particular type of investment because it ends up being best for them.
Jin: Would it be fair to say a lot of financial advisors don’t recommend alternative assets because that’s not part of the product plan that the hierarchy wants to push?
David: Yes. You know what, based on my experience, it is that there are a few reasons why. And one of the reasons is that the vast majority of the financial system ends up recommending either stocks and bonds, or some kind of a packaged stocks and bonds kind of account, or some sort of a mutual funds—those types of things—what we would call the traditional investment asset classes. And they normally don’t deviate from those types of investments, and, maybe, for a number of reasons. Part of it could be less familiarity with the asset class; just the perception; or, maybe, the fact that, if you have stocks and bonds or you have mutual funds, and you’re able to charge fees on those mutual funds, you don’t necessarily see a reason to change, and you don’t necessarily see a reason to evolve. So what I’m saying is, in my opinion, probably the vast majority of the financial system doesn’t seem to be evolving to be able to provide these types of opportunities to investors that are out there.
Jin: So given that, what do alternative assets bring to someone’s portfolio that traditional investments don’t bring?
David: That’s a great question. So, again, taking a look at it from the big picture perspective, when you invest exclusively in equities and fixed income, the portfolio’s going to have a certain type of return expectation; at the same time, it’s going have a certain amount of volatility and risk.
So, if you do an analysis on an investment portfolio, you can see a very wide range of results, you know, the more stocks you get into a portfolio. So, I’ll do an analysis of somebody’s portfolio and I’ll see that some people have sixty, seventy, some people even have a hundred percent equities in their portfolio. When you do some—let’s say even a Monte Carlo type—simulation, you can see that over a thirty-year period of time, somebody could start off with a million dollars in a stock portfolio and, depending upon what happens, 30 years later, they could have 10 million, or they could have just an equal chance that they can run out of money, and that’s just due to the randomness of the stock market. So, basically, what you [can] do is you can add some [of] these additional asset classes—very similarly to the way that some of the institutional managers do, like, for example, some of the endowment funds, like Yale, Harvard, MIT, Princeton, even the Canadian Pension Plan. Basically, what they are doing is they are adding these types of asset classes on the private side; buying some individual timber land, farmland, perhaps; adding some private equity; buying their own apartment buildings or, maybe, retirement residences on a private basis, buying the bricks and mortar themselves rather than having it trade on a public exchange. What this does is this affords you the opportunity to have what we would call alternative sources of income, alternative sources of growth. But the most important part of it is that, if you look at an entire portfolio, if you have even a small slice—and I’m talking even as low as ten to fifteen percent—of a portfolio in non-traditional asset classes, in alternative investments, what you can end up doing is you can really lower the overall volatility of the portfolio, which ends up lowering the downside risk, and can allow for more consistency in terms of results over the long term.
Jin: You were talking about alternative assets as one giant asset class, but that’s not really the case. There are many different types of alternative assets. Could you explain some of the more common ones?
David: Sure. Absolutely. Again, if you take your queue from some of the alternative investors or from some of the more well-manage endowment funds, managed portfolios, you’ll see that a lot of them may have up to twenty-five percent of their money in stocks and bonds, maybe up to fifty percent. But, let’s look at it and say, “what is the other fifty percent, what is the other half of the portfolio?” And, a lot of times, what they will do is, they’ll be buying alternative asset managers like Absolute Return. That’s when you get into the speciality type of hedge funds. So, there’s long-short type funds, there’s Absolute Return type strategies you can buy on an individual private basis. You can buy farmland funds. You can buy private equity where they just go out and just buy a collection of small businesses. You can buy an investment that has individual real estate, let’s just say. So, there can be apartment buildings or commercial real estate. So, there are a number of different private investments. Anything you can really think of—even mortgages, for example. Private mortgages would fall into the alternative asset class—any type of investment that you can think of that really doesn’t trade publicly on the stock exchange. And, there can be varying levels of risk. And, various quality, as far as the investment is concerned, can be considered in the bracket of an alternative asset class.
Jin: Thanks. So, out of all those alternate assets that you’ve mentioned which ones do you tend to recommend to your clients?
David: Well, I tend to—. Our firm will have a shelf of investments, and the way that we work is that we will have a corporate finance department which will do all of the analysis and there are certain criteria that you are going to want to have before you select a specific type of investment and we can go into that. But to answer your questions specifically with regards to the areas: the idea is to create a portfolio that has some diversification to it. And so, I have a tendency—. Dealing with clients all across Canada (I’m licenced in BC, all the provinces through and including Ontario, so a big portion of the country) what I tend to see is that business owners like private equity and the reason is that they understand the way businesses work; farmers tend to like investing in farmland. Somebody that’s investing—let’s say if you’re a real estate agent you have a tendency to want to invest in mortgages or want to invest in real estate types of opportunities because it’s what you’re familiar with. And that can be a double-edged sword. If you’re familiar with an assets class that’s wonderful because you’ll be able to understand the risks and the opportunities inherent in that particular asset class; the drawback is that you can potentially concentrate a portfolio. So, if you’re a farmer and you already own your own farmland and you want to go out and buy another farmland fund–sure, it will potentially provide you diversification amongst the farmland, but you are also concentrating your money into one particular asset class. So, what I would say is that the best thing to do is, even though it may seem counter-intuitive to someone, I would tell someone to invest in an asset class that is complimentary. So, maybe, you have some of your money in let’s just say farmland, some of your money in a private oil and gas project, some of your money in private equity, some of your money in a private real estate, and, maybe, a couple of different types of private real estate, so you really get a nice well-rounded portfolio. So, if something negative were to happen to one portion of the portfolio, it doesn’t affect the overall. And, as they say in investing, the only “free lunch” is diversification.
Jin: You mentioned that you try to sometimes ask people not to invest in certain alternative classes—just because they can get concentrated. Would you then say that there are many cases where you wouldn’t recommend any alternative assets at all?
David: Yes, absolutely. There are actually a number of cases. With some people, we start the conversation, and I wind up finding out about a snapshot of their financial picture. Let’s just say, for example, someone is seventy-five years old—and it’s not necessarily just to do with age, so this is just an example—they are seventy-five years old and they might be collecting CPP and OAS, but maybe they don’t have—. They have just enough money to be able to afford their income and their living expenses, and so this is the type of person who doesn’t need to take really any risk with their portfolio. Plus, at the same time, maybe you have sometime down the road an estate-planning concern. So, if you tie up a lot of money in alternative investments, sometimes these things can be quite illiquid, so that you are locking your money in for three, or five, or even more years sometimes. And, sometimes, with these types of investments you might be going into it with an expectation of a certain outcome or maybe of a certain exit so many years down the road. But, anything can happen, and your money can actually be tied up for longer that that. So, there may be some people that having illiquid investments is not appropriate [for], and one of them would be that if you have that investment in an estate-type situation, you probably don’t need, or don’t want, a big chunk of your money tied up in illiquid investments. Does that make sense?
Jin: Yes. I guess that one of the common characteristics of buying alternative assets is that they’re illiquid, would you say that’s true?
David: For the most part. Some alternative asset classes, for example, some of the hedge fund managers, which might be absolute return type managers, they would trade on the exchange, but they would use a different type of strategy—their funds might be liquid. So, it’s when we’re talking about the private investment, the private alternative-type investment. They usually share that characteristic. And, again, it is a double-edged sword. Somebody might say, “well, I’d rather invest in the stock market because I can buy today and sell tomorrow and I get instant liquidity.” Now, let’s say you buy an investment that buys private business—so, it’s got a collection of small businesses. Your intention, generally, is to hold those investments for a long period of time. So, while the plus for investing in stocks could be liquidity, that could be a minus as well because of the fact that you’ve got so many people that are paying attention to a lot of these stocks that usually the valuation-–although the valuation is usually built in. So, you may be able to buy stocks today on the stock exchange, and let’s say its valuation today is twenty times earning–just to pick a number out of a hat. Well, what you may be able to do on a private basis, if there are higher barriers to entry and a greater level of expertise, is you may be able to buy some of these assets—whether its farmland, whether its companies, whether its real estate—at maybe four to six times earnings. So, you’d be able to create more potential upside, more value, and even potentially different levels of risk as compared to different types of asset class—the public vs. private—and so you wouldn’t necessarily mind to give up some liquidity in return for being able to buy some of these assets at a much cheaper price.
Jin: Would you think it’s true that by being illiquid, it stops some people from being emotional about their investments, because, unlike stock, you don’t see a ticker every day saying you lost or gained 2% every day? Do you think that it forces someone to take a long-term view and, you know, prevents them from making a panic decision to sell at the wrong time?
David: Yes, Jin. I think there is absolutely some merit in that comment. So, the one thing you need to realize with regard to private investments is that you need to do a lot of homework, or have someone help you do your homework on the front end. Because, let’s say, if you’re locked into a fund for three-to-five years and there’s no secondary market—let’s say it could be companies, it could be farmland, whatever it might be—that means you have to be careful with who you are selecting as the manager of the fund. You might want to take a look at their history, how much expertise they have in that particular type of investment, and a lot of different factors—the alignment of the investment, so many things that actually go into it. So, what you do is you make sure you’ve done at least as much, or more, homework than you would if you were just buying a stock. Because [with stock] if, for whatever reason, you want to change your mind, either a minute later or a month later, you can do so; whereas, when you are in a private investment that does remove that myopic nature—so that you are actually forced to become a patient investor. So, if you’ve got a term of investment of five years, then if you’ve done your homework properly and the investment turns out for you, then that patience ends up getting rewarded. Obviously, it’s not always guaranteed that that is going to happen, so, again, that’s why you want to make sure that you’ve done your homework up front, and careful research on the front end.
Jin: Is there any data on the track record of private investments?
David: You know that’s actually not an easy question to answer, but I’ll try to tackle it with as perspective as possible. I’ll give you an example: if you have, let’s say, what we would call an event driven fund. In a lot of these funds that I’ve seen, there will be opportunity: so, let’s say, farmland being a great opportunity to invest in back in the province of Saskatchewan because it was uncommonly cheap back in 2007 – 2008. Right now, we see an opportunity where there’s a lot of small businesses in Canada because of the average business owner being a baby boomer, being in their sixties, who is looking to sell. Maybe oil and gas. Maybe the price of oil drops to $30 a barrel, and you see an opportunity to go in and raise some money and take advantage of that—those price anomalies. So, those type of funds won’t necessarily have a specific track record because they are a little bit more on the event driven side and you are taking advantage of a timely opportunity. But, at the same time, that’s when you want to start relying upon management—you want to take a look at who is making the decision, how much experience they have, maybe they have a tenure—a track record—of success, maybe they have done this before, maybe they are an expert and have a certain reputation in the industry. So there are certain criteria you want to take a look at because you can have—I guess a great example would be this—you can have, for example, an oil and gas investment managed by one manager and they are in—it could be heavy oil, light oil. It doesn’t even matter, just they are in oil and gas. Then, you could have a very similar fund with an identical mandate, identical cost, identical fees, identical structure, but it’s managed by somebody who is, maybe, less experienced. Maybe, they don’t have the acumen to be able to execute. And investment A might succeed where investment B might fail, and that is why you need to be extremely careful to make sure you do your homework on who is actually operating the fund. So, as far as track record is concerned, you are not always going to get a specific long-term track record. Some funds do have track records, by the way, that you can find out about, but others are sort of more unique circumstances where you might not necessarily get that track record that people are familiar with, like, for example, a mutual fund might have a ten or twenty year history that’s published.
Jin: I see. So is it hard to get asset-wide data on how much return, how much volatility there was in an asset class?
David: Yes. While—well, personally—I’ve found it is not easy in every asset class, and part of the reason is—I’ll give you an example of where you could actually find return and volatility. I’ll use the example of farmland. So, Western Canadian farmland: they’ve got records going back probably over a hundred years, and prices, and Canada has a very modern and efficient and legitimate system as far as land titles are concerned, and those kinds of things. So what you can do, you can go back and see, in each province or in Western Canada as a whole, kind of thing, the performance of farmland over many, many years going back. And, I’ll give you an example, where you might actually like something like this in a portfolio context. And, so, back in 2008, we had the financial crisis, as you know. Globally stocks went down probably anywhere between, let’s say, thirty and fifty percent over that period of time. So, in 2008, I believe for the calendar, farmland in the province of Saskatchewan actually went up in value eighteen percent. And so, by having a certain portion of your portfolio in maybe the public side and a certain portion your portfolio in the private side, you had assets that have return profiles that are completely independent, completely complementary to each other, and you are not necessarily just reliant on the prices of publicly traded stocks. So, that’s a little bit deviating from your question about track specific returns. For private equity, for example, it’s a little bit more difficult because every fund is going to be a little bit different. Some will specialize in a little bit smaller or larger type companies. It’s actually what we would call a burgeoning asset class. So, it maybe, for example, in New York on the Eastern seaboard, private equity may be quite popular, whereas in Western Canada, it’s just starting to get a foothold, and so it may be difficult to find out some specific details.
For example, how do you track the performance of 20,000 small businesses in Canada. First of all their books aren’t necessarily open—hence the name, “private” in “private equity”. And so, that’s where you have to make sure you’re really rolling up your sleeves, and you really have to find out and discover those opportunities a little bit more on an individual basis, rather than just looking at an asset class in itself.
Jin: Given that private businesses are very different from each other as you insinuated and given that there’s probably a large disparity between the skills of different managers, how do you tell whether the manager’s good or not?
David: Well, I do know that our, for example, our corporate financial team of analysts—basically there are certain criteria that they look for. One of them—a lot of it ends up being common sense: If you are going to speak to a manager, you want to make sure that you meet them in person. You get a handle on their methodology with regard to investing. You actually find out what they’ve done in the past, and maybe a track record, if they have a track record of success. Maybe they’ve had other private funds and they’re successful and exited. And then, you also develop a sense of the team. And reputation is important as well. And, so, what you may do is actually go out and start asking people in their peer group, “what do you think about these managers”. And, then, you start to develop a sort of a consensus that these are people who really know what they are doing. They not only talk the talk, they can walk the walk as far as executing on a particular strategy. So, the cream does have a tendency to rise to the top. So, you are not necessarily having just someone come along and say I’ve got this great idea, this great opportunity. You know there might be a really good speaker, a really good salesperson coming in, and they just go ahead and list the product and, you know, provide it to your investors. In some cases our company may actually monitor an investment and take a look at how it’s doing over a six- or nine- or a twelve-month period of time, or even longer—just to make sure of what they’re doing—are they saying what they’re doing. A few other things that are important are corporate governance—so you don’t want to have just one person, for example, signing all the cheques; you want to make sure that there’s some protections in place for investors’ money. There’s a whole list of factors—criteria— that you want to make sure you check off, before you even start considering whether a private manager is the right one. And, then, eventually, as I said, the cream sort of rises to the top, and you can develop a short list that you can kind of pick from there.
Jin: So, it takes a lot of research to choose a manager and that’s partially some of the reason your clients rely on you?
David: Yes, absolutely, absolutely. There is a lot of leg work and there is a caveat that’s involved in that as well. Even if you do a lot of research, even if you think you have a manager who is just going to execute flawlessly and you’ve got these expectations, you always have to make sure that you realize there’s a certain amount of risk in any investment that you make, and you want to make sure that you’re attuned to the specific risks of the investment of the asset class, and whatever factors of risk are in the investment. And, then, what you do is you want to make sure that you are incorporating that investment into a portfolio as a whole, so that again having that diversification, having a few different layers of diversification just in case anything goes wrong. So, when you take a step back, my point overall is that, with regard, to private investment, there’s so much potential, there’s so much good there that it’s worthwhile for an investor to take a really close look at what’s available because there absolutely is a ton of quality. But, at the same time, you want to make sure that you are either working with somebody, or that you do a heck of a lot of homework yourself. I’ve seen a lot of very, very astute intelligent investors. Maybe they have traditional assets such as stocks and bonds and they’ve done very well with those, and then, all of a sudden, I’ll be talking to somebody for the first time and talking about their portfolio and they’ll say, “Oh, by the way, I’ve got this real estate limited partnership.” And my question is, “Oh, well how did it do?” “Oh, that was a mistake.” And I’ve heard that more than a few times. Even people who consider themselves experienced investors. You want to make sure that you sometimes have a second set of eyes, you want to make sure that you have a proper perspective when looking at any of these types of investment, and even then, it doesn’t necessarily guarantee you a successful result.
Jin: So you conduct your business through Raintree. Could you tell us a bit more about Investing Beyond?
David: Yes. Investing Beyond is a corporation that I set up, and I have a website, that is: InvestingBeyond.com. Basically, what I do is it’s purely educational. For example, I’ll run a seminar through Investing Beyond, and this is, usually, across Canada to, usually, less than 50 people. A couple of weeks ago, we had one in Victoria at The Victoria Golf Club. So, what I do is strictly educational. So I don’t talk product. I, basically, tell people about my experience with my first seventeen years of the financial system, and, then, I also uncover some myths that are perpetuated by the financial system that can end up costing people money with regard to their investments and their portfolios. So, I let people know about those and educate them as much as possible. And then, what I do is, for the second half of the presentation, I let them know some ways they can really get smart about their money and ways they can really take a look at things. And usually, again, these presentations are a lot different from the vast majority of presentations that I’ve seen. A lot of them will tend to promote individual products, or an individual’s managed portfolio, or those types of things. So, basically, what I’m doing is really on the educational side of things with Investing Beyond. And, as well, through Investing Beyond what I will do is I will put together the investment and retirement plan for people.
Jin: Yes, I think a lot of my readers will find that side useful. So: that’s all the questions I have for you. Is there anything you would like to talk about?
David: No. If anybody ever wants to get a hold of me, or if you want to find out a little more, you can always log on to InvestingBeyond.com – that’s my website. Or if you want to, you can always send me an email, if you have a question about investing, at Investing Beyond.com, and, again, I am happy to answer any questions. And, just as far as people that I work with, I have a relatively small number of clients that I work with across Canada. I usually like working with people whom I get along with, and we have good conversations about the economy and investments and those types of things. So, I’m very happy to answer questions. I’m very happy to see what I can do to help point people in the right direction, but there is never an expectation that someone’s going to become a client. I want to make sure that that’s quite clear. There’s no “selling” involved or anything like that. It’s just really having a discussion, and if there’s any way that I can help people, and if it happens that we have a business relationship and we both sort of meet each other’s criteria and, primarily, like I said, I deal with business owners and people with corps., then we cross that bridge at that time. So, we want to make sure that we are putting the investor and their interests first.
Jin: Great. Thank you and I will leave a link to both Raintree and Investing Beyond at the end of the post that I publish. So thank you so much for taking the time for an interview.
David: Yeah, you got it, Jin, anytime.
I would like to thank David Wiitala for the insightful interview. If anyone wishes to contact David, you can email him at firstname.lastname@example.org.