First and foremost, I want to make a disclaimer: I am not an investment advisor. I have been an entrepreneur for the past 25 years and am a person with some success who questioned the traditional forms of investing (i.e., Merrill Lynch, TD Ameritrade, Edward Jones, etc.).
The traditional way of investing is when you give your money to an investment advisor who then passes it onto a portfolio manager. That person then invests your money in a formulaic portfolio with thousands of other investors, hoping to beat the S&P 500, which generally will not happen. Then, you get monthly reports that look beautiful, but you don’t know how to read them, so you have no idea how much they are charging you or how much money you are truly making. Sound familiar?
As a 58-year-old man, I wanted to use my entrepreneurial spirit and innovative processes to find a better way to control my money with the highest possible return and the lowest risk.
When I sold my last company within my Family Office Private Equity Firm in October 2018, I was sitting on a bunch of cash. The banks at the time were paying 0.75% interest on a 1-year CD (known as a certificate of deposit, which has a set maturity date and interest rate), a savings account was paying 1.52%, and a 1-year money market account was paying 2.40%. These returns were not exactly setting the world on fire, and although very safe, they were not for me.
As an accredited investor (a person or a business entity who can deal in securities if they satisfy one or more requirements regarding yearly income and net worth even if they may not be registered with financial authorities), I had access to deals that most of my friends did not. The returns were high, but the risk was even higher. The investments were mostly in start-up companies coming through an Angel Investor Network (providing seed funding for start-ups). I did well in this space, but as I turned 50, the risk was too high for my comfort level.
What were my options?
I could pay expensive investment advisors broker fees whether my investments increased or decreased. That’s not a bad gig, being one of those advisors, if you can get it, because you’ll be getting paid whether you win or lose. While most financial advisors won’t lie, many will obfuscate clients to keep you from finding out how much you are actually paying. You could go to a discount broker (for example, Vanguard) and purchase low-cost, index Exchange Traded Funds (ETFs), which Investopedia defines as “a collection of securities—such as stocks—that tracks an underlying index.” It’s not difficult to do, and there are a plethora of different types of fees and sales charges that advisors will collect: front-end loads, contingent deferred sales commissions, 12B-1 fees, mutual fund management fees, operating expenses, asset-based fees, the list goes on (learn more about these different types of fees on Investopedia.com).
Since the S&P index is the gold standard, I started tracking it and found out the following: the S&P 500 Price index returned a negative -6.59% in 2018 and 6.793% over the past 10 years (DQYDJ, 2019). Now you need to subtract out your investment advisors’ fees (the average is 2%) and inflation of 1.951% over the past 10 years (Stat Bureau, 2019), and you are left with a whopping 2.843% return on investment. Now, these are rough numbers, but they still did not interest me. So, what was I supposed to do?
Solution
In 2002, I had the pleasure of meeting Eric, a hard money lender (a person who makes loans on properties and does not rely on the creditworthiness of the borrower, but instead, looks to the value of the property). Eric taught me a lot about finance, debt, and investing. He talked about being in control of your financial destiny by investing in what we today call, “alternative financing.” I started investing in hard money deals and was making a 12.5% return on my investment, which I would then reinvest (compound interest). Now my money and interest are making interest. Although there was a little risk of the borrower defaulting, we never made a loan that didn’t have at least 40% equity in the deal. For example, a house would be appraised for $100,000, and we would lend $60,000 to the borrower. What I’ve learned over the years is that it’s all about the underwriting of the borrow that will save you in the end. Although we have had two people default on our loan since 2002, we were protected by the equity in the house and made more money than the loan and interest amount.
This brings me full circle. As previously discussed, I was sitting on a bunch of cash. I liked the model of hard money lending, but I wanted to see if I could make more than 12.5% year over year—with no fees.
While having dinner with friends, I learned that one of them, Gayle, was a broker for a company that made merchant cash advances (funds provided to small business owners in exchange for a percentage of the business’s income, usually credit card transactions, over time. Payments are generally made daily or weekly using a percentage of the business’s daily credit card income). As a small business owner, I know how important cash flow is to the survival of a company. As Gayle told me about the unscrupulous companies in the industry taking advantage of the small business owners in need, I thought I could create a better and safer transaction experience for small business owners while at the same time providing them with much-needed and affordable cash. Here was a type of alternative financing that I could sink my teeth into. I would buy future credit card sales between $5,000 and $25,000 for no longer than six months and supply small business owners with much-needed cash flow.
The business model was perfect; I was helping companies grow while making a nice return on my investment. As I learned from Eric, it was all about the underwriting of the client. My wife, who was Senior Vice President for credit risk at one of the big Wall Street banks, knew exactly what type of client we were looking for. The process went so well that my friends and family asked if they could lend money to our clients for a nice return. Before we knew it, we were financing small businesses and helping friends and family enjoy returns that only accredited investors previously had access to.
The company my wife and I started is called the Family Business Fund. We ended up hiring Gayle as our full-time broker. She is amazing at making sure our clients DO NOT overextend themselves.
If you are tired of the standard 3%-6% return on investments and are interested in alternative investment opportunities while helping others, please feel free to contact customerservice@familybusinessfund.com and mention this article. I am also able to consult with my clients on the importance of using good, safe cash flow methods in order to make their company flourish.
If you’d like more information, please feel to contact me directly at dmuir@muirandassociates.net or go to my academic web site for more white papers and research at https://douglasmuir.academia.edu/