Henry Yoshida is a repeat fintech founder and CEO of Rocket Dollar, a leading self-directed IRA solution for alternative investments. In this conversation, we discuss the convergence of emerging and institutionalized means of investment, wealth transfer, and the potential implications of ongoing policy discussions.
A4A:
First, thanks for taking the time to speak with us. You've been in the retirement space for a meaningful portion of your career – first at Merrill Lynch, then in starting MY Group [acquired by CAPTRUST] and Honest Dollar [acquired by Goldman Sachs], and now with Rocket Dollar – what have you seen change here? And knowing what you do from founding, growing, and selling businesses in the individual retirement account space, where do you think the space is headed moving forward?
HY:
Everything that I do overlays, and is reflective of, what's happening in the real world. When I started my career at Merrill Lynch, it was normal for people to spend a whole career at one large company, whereas now, if you tell someone that you've only worked at one company, they look at you like you have a third eye. The demographic and work shifts - people call it “future of work” – have been from big companies and employment with long tenure to maybe not being too loyal to the big employer because you have a side gig at night and you’re part of the gig economy, and so forth.
This shift in employee portability has fundamentally changed the retirement account landscape. You are no longer accumulating money in this single, gigantic 401k account with a great match forever. The average person goes to a dozen different companies, half of which don't have a 401k plan. As you go to the next job, the only way you get economies of scale is by starting to roll those into an IRA, so the onus is on people to find all of their old money, consolidate it into a different account, and then manage those assets.
People [are] consolidating this IRA, only to realize that it's basically 100% invested in the public markets. And then they ask: are there other things that I can do? And options are actually pretty hard to find; people need greater flexibility.
So that shift has happened. Now what you have is people consolidating this IRA that they control, only to realize that it's basically 100% invested in the public markets. And then they ask: are there other things that I can do? And options are actually pretty hard to find; people need greater flexibility. That's the way I looked at it and what I've seen change: managing 401k plans, to managing bigger 401k plans as an independent consultant, to then creating a robo-advisor that was geared towards gig economy workers at Honest Dollar. And now saying, hey, I'm going to make these accounts do more things, be more flexible, because the world has changed.
A4A
That's great. Let’s talk about the flexibility point. There’s a prevailing narrative about the majority of Americans not having enough for retirement, which is cause for concern. It’s a problem that, like strong returns, compounds as you get older. And there's a second narrative that alternatives outperform the public market and other traditionally accessible investment asset classes.
Looking at these two narratives, how do you think Rocket Dollar, by giving people access to investments in new asset classes, will help positively impact people's retirement goals and general outcomes? And what role do alternatives have in helping people meet their goals?
HY:
I'd be the first to admit – because I grew up in the 401k industry and I've been a financial advisor longer than I've been a tech entrepreneur – that there is a large segment of the US population that does not have enough saved for retirement. For them, the goal needs to be access, automated savings plans, and so on. That's a different problem altogether that other people – really smart people – are trying to solve.
What I'm catering to is the 50% of the American population that has excess funds and can't achieve proper diversification within the constraints of only being able to invest in the public markets. What used to be the opportunity for people to invest one year after the IPO of Intel or Microsoft or Dell or Cisco Systems ... that company doesn't hit the public markets now; those investments at the early stages are now gone. Small- or micro-cap stock funds were replaced by venture capitalists and private equity firms. Retail investors today need the opportunity to put their money into different places because [venture capitalists] took that opportunity away from them for the past 20 to 30 years.
What I'm catering to is the 50% of the American population that has excess funds and can't achieve proper diversification within the constraints of only being able to invest in the public markets... Retail investors today need the opportunity... because venture capitalists took [it] away from them for the past 20 to 30 years.
Rocket Dollar’s goal is to support someone who has excess accumulated capital in their account and can't achieve proper diversification, and the only way to do so is to start to go into something that may not be in that normal publicly traded stock universe. The money inside a 401k and IRAs has a built-in timeframe: your age subtracted from 59 1/2. People need to match that timeframe up with appropriate investments, one that also has a very long timeframe – i.e. most of these private deals. You eliminate risk because you're matching up goals and [investment] timeframes.
A4A: In terms of who’s saving, Baby Boomers continue to retire at about 10,000 people per day and continue to transfer assets to their children (or even grandchildren). What do you think will be the keys to success in catering to this new generation, this new demographic of users who are increasingly digital, increasingly concerned with trying to do things on their own and having more autonomy over the decisions they make?
HY:
First of all, let's define these groups. There are baby boomers, yes, but a lot of people don't realize that Generation Xers are actually retiring in the five-figure number per day now and Baby Boomers are both retiring and passing away, which is then creating this intergenerational wealth transfer. And the oldest Millennials are actually over 40 years old now.
A4A: Agree, so we're talking about everyone up from Gen Z now.
HY:
There’s a projection I've given before that there's expected to be roughly $30 trillion of just investable assets that will transfer intergenerationally. And then there's a lot of generations: we're talking about all that are adults nowadays. We’ve got four different generations that are all adults, and there are transfers going back and forth in multiples of those generations. Because of that, what you're going to find is that, as the younger generations get access to these monies, they're going to look at the way they want to have a portfolio, which could be very different than the 60/40 portfolio that the older half of Gen X and maybe all Baby Boomers were taught to invest along. This is because whole different platforms and asset classes exist now that didn't exist prior.
Then you have another issue where the service channels – financial advisors, RIAs, and others – have not done a good enough job. They're doing a better job, but they haven't yet done the full job of getting to know the younger generations to make sure that they're going to continue to manage that wealth when it changes from one generation to another. All that goes back to a younger generation getting money - one that is more digitally enabled, which means they have access to information which gives them confidence to do different investments outside of the 60/40 norm.
That was one of the big things for us: being tech-first and being fast. [Our customers] want to be able to fund a private deal as fast as possible. These deals move fast, they're volatile, they move around... but the investment time horizon is 20, 30, 40 years. Yet you still need to be able to get money, when you make that decision, into the deal as soon as possible because it'll move 10% in a day.
A4A: Ok, so you're one of the first movers in this space, one of the first to create a digitally native and technology-enabled platform for self-directed retirement vehicles.
What does your average customer look like? Talk to us a little bit about the types of deals they're doing and how you've structured your business to be able to accommodate all of them.
HY:
I think that we're way in the early days and we're pretty good in understanding that we're catering to this mass affluent group. Within the auspices of an IRA, I define the mass affluent as individuals who have $50,000 or more in these accounts. Now, there are tens of millions of these accounts that have more than $50,000, but they're actually multiples held by the same people. Those people tend to become our customers, which average right at 40 years old and they have on average with us about $115,000 in their account. And then that amount that they have with us - because it's right now solely for alternative investing - typically represents somewhere between 5-25% of their overall wealth. So this is the “overall half a million in investable assets” crowd: middle-aged, educated, typically living in urban and suburban areas in the US and the largest 50 MSA is in the United States. That's our demographic. And between males and females, it's a pretty normal split, 65/35 between male to female. So we define that group, as mass affluent or HENRYs (high earning, not rich yet) that have the access and competence to do things outside of the traditional allocation.
A4A: You’ve mentioned before that the distributed knowledge of the crowd is special; everybody can be an expert on something, and they can now utilize and leverage that expertise to benefit themselves, which has previously never been possible in a retirement account. Conversely, when we're looking at legacy solutions for self-directed retirement vehicles, they're antiquated, stodgy, and not set up for the average retail investor – especially on cost. How have these considerations played into what you’ve built at Rocket Dollar?
HY:
We actually celebrate that people find their own investments, that they're empowered to take their capital to go do investments that are appropriate for them and they feel confident they have the ability and access to get into. So, with that, we take a step back. Since our customers are actually the ones finding those investments, it's not appropriate for us to get paid for the investments that they do. They're sourcing these investments, and they're the ones taking the risk.
Unlike most financial services – where you pay some percentage of the assets that you have with a given fund or financial advisor – we actually charge a flat fee, regardless of the size of your account with us. You pay us to help you unlock money that you already have, and to then go do deals that you feel informed and competent enough to do on your own. We charge a simple and transparent one-time signup fee and then an ongoing monthly fee, $360 and $15 a month, respectively, for us to maintain the characterization of the account as an IRA. It aligns us pretty well with our customers because the value proposition we offer to them is that you pay us to unlock your money, not take a meaningful piece of it.
We're more aligned than other financial services, where the firm is getting paid whether the markets are going up, sideways, or down. We took ourselves out of that model
As a result, I feel like we're more aligned than other financial services, where the investment firm is typically getting paid whether the markets are going up, sideways, or down. We took ourselves out of that model because we thought it aligned more with our foundational purpose, which was just the ability to let people do investments that they find on their own, with their money.
A4A: So looking ahead, you've found a really interesting market gap and one that Alts for All is particularly excited about. But I want to understand, as somebody sitting at the center of all this - the space and the transformation we're currently seeing - what needs to continue to happen, be it legislatively or among broader market players for this asset class to become increasingly democratized? As somebody sitting in your seat, what would you like to see as next steps in this transformation of the private markets with respect to access to the broader retail investment community?
HY:
What needs to happen for the continued growth of alternative investments is the continued dissemination of information that is available. Now let me overlay that with the larger theme here, which applies to many industries and many things that have happened throughout history.
Over history, more information related to science and how the universe works became available to a larger group of people. It used to be held by a very small group of predominantly male, predominantly Western European scientists and philosophers, for example. And when that information was more broadly disseminated, all of a sudden it equalized the playing field. More recently, the same thing happened with the internet and information technology. Look at what it's done to the real estate industry or the automotive buying industry. Now people are very confident by the time they go and buy a car at a dealership, or maybe online, because they have most, if not all, of the information they need.
We're just selling picks and shovels... sitting at this intersection between alternative investments and this locked up $33 trillion.
Once this information dissemination comes down into the private markets, you've equalized the playing field. Then people can make appropriate decisions; they can make better investment decisions. We're not the ones providing that information – that's what [Alts for All] and other organizations do. We're just selling picks and shovels and sitting at this intersection between alternative investments and this locked up $33 trillion.
A4A: History tells us that the pick and shovel purveyors have done pretty well. Just ask Levi Strauss, the big winner of the Gold Rush in the 1870s. That makes a lot of sense.
Looking at the tax landscape right now with the Biden administration, we're anticipating an increase for some of the wealthiest Americans on their aggregate tax bill. Obviously that has a highly positive impact for you and your business and what you're trying to do. Do you think that hastens the general adoption of alternative investments? What do you think that does to this space more broadly?
HY:
Again, this is just a matter of dissemination and general awareness around taxes. There are more eyes being put on this now – as we speak, there are multiple articles in The Wall Street Journal related to massive and large Roth IRA and traditional IRA strategies that have gone into private investments. I think that this general increase in awareness is actually a good thing for our business and what we do.
I don't know what's going to happen politically, but let's say that there is more of a crackdown. That's probably to be expected from a Democratic administration led by Joe Biden. I worked for a Democratic president [Bill Clinton] too, in the late 90s, so I was there for some of this in a different era. As long as general awareness goes up, then people are going to find or look for strategies like mine, because this isn't an avoidance strategy, this is a strategy using an IRA and then deferring the taxes due on an investment that you make on the gains associated with it. It's been around since 1974 when it was created by federal legislation. Since then, there's been Democratic and Republican administrations and probably a half-dozen major tax changes. So I actually think that, the more awareness there is, people are going to responsibly look for these types of accounts, which should be a big win for people that do what I do.
One of the things I like is that by using technology we're going to help people stay within the rules and do things the right way. That’s something all parties involved want. The economy benefits when people are able to invest. But the economy also benefits when technology ensures that people do it the right way. I don't write the rules, but I think Rocket Dollar is in a position to allow people to do both and for us to be successful at this intersection.
A4A: One final item we’d like to touch on – beyond the obvious tax considerations – is why holding assets for long periods is important with respect to the level of volatility we're seeing in the public markets. A lot of people get caught – especially at older ages – trying to withdraw their money in a downturn. The people who were retiring in 2009 got decimated. How can including some alternatives in your IRA help with volatility and increase risk-adjusted returns?
HY:
We probably all benefit from forced patience, defined timeframes that are way out into the future. IRAs are a perfect vehicle for that. At the end of the day you just need to understand that, since 1974, it's been a give and take with the government and regulatory authorities saying "Look: if you will forego the ability to use this money for personal consumption today, and hold that off into the future past the age of 59 1/2, then we will allow you to pay taxes at that point and control how much ." A lot of legislation has just been sort of a give and take and this has been a very well understood give and take and people just need to plan. I made it in my career at Merrill Lynch and in consulting starting in the year 2000. So how I survived the two major recessions, the internet bubble and the credit crisis... I think about that a lot. I never lived and died by making recommendations. What I did tell people was that, dollar for dollar, if you characterize an investment you're going to make in a different type of account, it might allow you to diversify the tax treatment and you're going to be more successful because you have optionality. I've always been a proponent of how you characterize your money, not what to put your money in. You need to think about tax diversification as well as investment diversification.
A4A: Great advice – certainly plays into the self-directed ethos. Thanks again for the time, Henry.