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- [00:00]
A
Foreign. Welcome back. This is talking wealth. Today I'm joined by Joseph Wang. Joe is a co founder with CRO of SyntheticFi, a company that helps advisors and their clients borrow against their portfolios for lower financing rates using box spread loans. We're going to cover how box spread loans work, how to use the options market to borrow more competitive rates, use cases, how synthetify works with advisors and more. First, a quick word from our sponsor. Today's episode is brought to you by WisdomTree, WisdomTree portfolio consultants. WisdomTree portfolio consultations are for advisors looking to supplement their existing portfolios with expert insight. The customized approach, which factors in each client's unique objectives as well as evolving market conditions, provides a comprehensive report offering in depth analysis, risk deconstruction, portfolio stress testing and more. Visit wisdomtree.comport portfolio consultations. That's wisdomtree.com portfolio consultations to schedule an indirect recall today. Joe, welcome to the show. Thank you, Ben.
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B
Wow, that was quite a read. That was very impressive. Never saw how the sausage was made before.
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A
And I do have to give a quick disclosure. We are an investor in synthetic fi. We use them for clients at Ritholtz. I personally have and we'll get into that a little bit today. But here's I want to explain to you how I first heard about box spread loans and how I heard that they worked. And you can correct me if I'm wrong and then because it almost sounds too good to be true. Okay, so this is how it works from my perspective. So with a box spread loan, you could borrow a certain percentage of your taxable brokerage account up to five years at rates that are consistent with risk free rates like Treasuries. Okay. There are no monthly payments, there's no interest due until expiration. And the interest I quoting here is paid on the loan is actually considered a loss for tax purposes. And then at expiration of the loan, you can choose to either pay it all off with the money you have in your portfolio or roll it over into a new box spread position. So this all sounds too good to be true. Why is that not too good to be true?
- [02:07]
B
That's a great first question, Ben. I got asked that question like ten times a day. So it does sound really nice, right? Like it's flexible, it's cheap, it's time tax deductible. It is great for planning, like what's not to love? Like why, like why hasn't advisors hear about it for a very long time? And the truth, it seems like it's
- [02:27]
A
just now coming into like the lexicon of people understanding it. And you told me and Michael, listen, this thing is. This stuff has been around for a long time. This is just the options market. But why is it still such a new thing to people?
- [02:38]
B
It has, it really has. And honestly, hedge funds has been. The wealthy has been using it for quite a long time as well. Like, I can tell you my story, how I even first discovered it, and maybe that can shed some light into like, why it hasn't just been around. Like, I used to work for a family office. That office is trying to buy like a $20 million ranch. We had a prime brokerage at a major Wall street bank. And at the time they were quoting something like SOFR one and half SOFR two. And it just doesn't sound right. It's a family office. It should get really good rates, but doesn't sound great. So I went kind of just Internet sleuthing. I caught up my friends at de shop previously where I worked at Deutsche Banks Race trading desk. Just all around. And also honestly on Reddit and just all around seeing what's the best financing method if you already get some asset to back it. And box matches pops up from time to time, especially for financial insiders. Right. And I was asking them, hey, like, why hasn't been people being using it just for themselves? And I was checking the rates, I was calling cbo and I see the rates. I can finance the family's ranch for around less than 1%. It was like 0.7 something at the time.
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A
And what year are we talking about here?
- [04:02]
B
2021. So not sure we're getting back into that environment ever again.
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A
Yeah, rates were very low, but still that's. I mean, that's even lower than you were getting in the mortgage market at the time.
- [04:11]
B
Obviously quite a bit at a time. Mortgage is to something so like high, like low twos, even mid twos. So like it was quite a bit cheaper. And I got a little bit jealous myself. Was like, hey, how can I use it for me? And the guy was like, do you have $50 million, $100 million trying to borrow against it? It's like, no, I'm sorry. And you. Yeah, that's kind of what's been gatekeeping it. Right. Like, it was a traditionally such a complex trade that only family offices who have, like a trader like me that can call up Siebo, call up the hedge funds can do. Right.
- [04:45]
A
So you needed scale to do these trades. Like it needed to be a much bigger amount.
- [04:50]
B
Absolutely. And what we do here at Synthetify is to break the trade up so small that even if you want $10,000 to remodel your family kitchen, you, you can use us, you can use it to get the 4% rate.
- [05:03]
A
So what's the mechanism in the options market that keeps these rates so low? Because again, it's right around the treasury rate. Depending on how long you're borrowing for, it's pretty close to whatever the Treasuries are at that maturity. So what's the mechanism in the options market that you put on this options trade and that you're able to borrow through the options market at these risk free rates?
- [05:22]
B
Great question. So just for reference, the interest rate is right around SOFR plus 20 to 30 BEPS. And there is actually a working paper from the National Research Institute of Economics or something like that that looks back all the way to like early 2010s, sorry, early 2000s. And that spread hasn't been, hasn't widened even through the financial crisis. So it's a really, really good rate. And it's really, because this is such a large and liquid market, first of all, it's very competitive. You can think about everyone's trying to lend each other on this institutional market to compress to make sure that there's no arbitrage. So everyone's basically giving out and receiving the bare bones rates they can be. And secondly, this entire market is backed by the occ, the Options Clearing Corporation. They guarantee all the index option trading in the us. All of these box rests are, almost all of it is SPX index options. Also it's all going through the occ and that eliminates the most important risk here, which is credit risk.
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A
So that makes sense because like you said, if rates blew out then someone else is getting that. So who's on the other side of these trades that you're doing? Right. Who's the one that's coming in and arbitraging it?
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B
I can tell you the technical answer is all occ, everything's going through occ. But the real answer is the other side, just real money players in the market. By real money I mean like pensions, I mean like corporate Treasury, I mean like insurance companies. We're just using it as a better alternative to regular Treasuries. Right. Why don't you want something that has some tax benefit on the buying side as well, that yields slightly higher than Treasuries, that has effectively the same risk profile. So it's just really advantageous on the other side as well.
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A
Okay, and you decided when you built syntheticfi, that we're gonna work with advisors who can implement these strategies. I wanna get into the idea about how you work with advisors later. But I wanna talk about use cases first. I'm gonna talk you through my personal experience. So Michael and I decided to be the guinea pigs at Ritholtz Wealth. And we're gonna be the ones to try it out. So we can see how this process works before we let our clients use it. And I borrowed some money last year. Cause we did a big house renovation, right? We did new flooring, we got new furniture. I didn't wanna sell any of my investments to do that. So I use the home equity line of credit, right? But I'm borrowing at 7% essentially there. And each month I've got to pay a minimum payment, which is just the interest. At least I have to pay at least some interest down on that payment. And then I look at. I get to know the box spreads a little more. I look at synthetic fi, and I'm able to borrow. I think I did this three months ago. I borrowed for three years at 3.8%, right? So I take the money that I borrow, I pay off my home equity line of credit, right? My interest rate is more than 3% lower. And now I'm not making monthly payments. So I effectively refinance like that really easily. What else are people using this, these for? What are the other use cases that advisors are finding with their clients. When they borrow this money against their portfolio? Because it's not, I'm sure it's not just people borrowing money to then invest more. And they're adding, you know, margin to their portfolio. You could do that. I don't. I don't know how many advisors are actually saying you should do that. But. But there's other use cases for this as well, right?
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B
Absolutely. And Ben, you gotta send me the photo of your refurbished home. We gotta add it to our library of success client success stories. But yeah, we really pride ourselves in kind of facilitating anywhere from the short term use case to the longer term use case. Then you fall onto the more longer term ones, right? You have a three year fix and you don't really want to pay anything off. And we can go as long as five years, six years, and even longer than that. There are also like pretty prominently some bridge loan financing use cases, right? Like especially in wealth clients, they are buying house, selling a house. They're a couple months or to a year they want to bridge. This is a great opportunity to use a box spread to Finance it.
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A
We see that all the time with clients. Yeah, I haven't sold my house yet or I'm not going to sell it. I'm going to rent this one out. But I need a down payment. Right. I need to use that equity somehow. Before it was using an S block, but now, guess what, those S block rates are much higher. This is the perfect, you know, avenue for a bridge. I thought the other one, you guys had a blog post recently talking about the ways people are using them. I thought the interesting one was people with variable incomes. Right. Because sometimes if you're trying to get a mortgage and you have a variable income, they might not lend to you as much because you don't have that fixed like W2 paycheck. And so people would then borrow against their portfolios to take a mortgage out essentially. Right. And then they don't have to sell anything. And obviously that, I think that's the big selling point for most people is just like, I don't have to sell my investments, I can let them continue to grow and compound. And I'm also borrowing against this. That to me is like the big selling point for most clients of advisors. Correct?
- [10:16]
B
Absolutely. And I can't tell you how I'm using it personally. So I don't have a regular income and my income could be quite uneven. And I also have a pretty long time horizon. Right. I don't need retirement, I don't need like to pull out cash for a decently long time. So what I'm doing right now is I put all my income into my investment account and every month, every month I put all my expenses on my credit card and I take a box spread from my investment account to cover whatever my credit card spend is. So in effect what I'm betting on is I'm currently borrowing at like 4%, 3.8%. I'm betting that my investment account is going to grow more than 4% a year, which I think is a pretty safe bet for me.
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A
Joe, you're doing a triple arbitrage here. The credit card points, the box spread loan.
- [11:03]
B
Exactly.
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A
Investing more money. Obviously there are some risks here. This is not a risk free proposition because for me, I'm the same way. I look at this as the money that. Because I was, I'm paying off my heloc, Right. I wasn't just going to let it sit there forever. I was paying off a monthly payment. I'm slowly paying it down. But now what I'm doing is I'm taking those payments and I'm putting That money that I was making in a monthly payment and I'm putting it in the brokerage account, right. So it's allowing me to increase the money that I save in my investment account, which I think is great. The thing though that I think that can get people. It's almost like these loans are out of sight, out of mind because there are no payments at expiration. Right. Like that's a risk is hey, the rates might be higher, right? If, if, if this war drags on, interest rates could be higher. You're, you have interest rate risk. And then there's the other thing about if, if you're not planning to pay this off somehow, then hey, you would have to roll. If you're going to roll at expiration, you have to roll that interest in again and that's going to be compounding against you. So there are some risks here. I guess the biggest risk is probably a margin call, right? So why don't we talk about that?
- [12:05]
B
How much? That's by far the biggest risk. Yes, sir.
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A
So let's talk about how much can people borrow and then maybe think about how advisors think about how much people should borrow. Depending on what's in their portfolio.
- [12:16]
B
People can borrow. Really is a pretty big number, right? Like we technically can help anyone borrow who wants to borrow up to something like 85% by using something called a portfolio margin. That is for the ultra like risk seeking clients who knows exactly what's going on. And it's almost like more trading client. Our general recommendation is to conform with Reg T regulation T which is enforced on margin for most people's trading accounts. And that means 50% of equities, 70 to 70 to 75% of munis and bonds and 90% of treasuries. Borrowing to that limit, the portfolio can fall by around 28.5% before a margin call, which is, you know, it's not the safest thing in the world, especially in a volatile environment that we're seeing right now. But if you have a diverse time.
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A
Yeah, that's a kind of a run of the mill bear market that might happen every seven years or so, right? Exactly five to seven years, something like that. So you have to plan for that. And so I think the thing that we've been thinking through as advisors is what are our guidelines here? Right. You probably let people take out a different amount if it's individual securities versus diversified ETFs. Right. And you have to take into account are they still making contributions to this account or is it fully mature and they're not taking anything out. So I think that's the kind of stuff you have to think through. So my question to you is, let's say worst case scenario does happen, someone borrows up to that limit and we get a 35% bear market. That happened in Covid not that long ago. Right, right. How does what happens when you get a margin call like that?
- [13:53]
B
So we were actually building a risk detection system. So even when you're like 10% out from that margin, from that margin call line, I will actually call you, say, hey Ben, your portfolio is looking a little bit shaky. Let's plan this out.
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A
Right.
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B
And what can we plan out? One of the biggest thing we can do is to contribute more money into the account to bring it up to the margin call line or a place that is comfortable.
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A
Right, right. So you're sending out signals in advance. Hey, you're getting pretty close. Let's start planning on this ahead of time before it gets there.
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B
Exactly. And there are different things we can do here, especially depending on how you're using that money. For example, let's say, hey, my co founder used it to buy his own house. Use a box spread to buy his own house. So he already has some house equity, home equity built in. So the worst case scenario for him is that he will just put his HELOC aside and when the market goes down by like 30%, 35%, it would just take out like a $5,000, $10,000 HELOC and put it in. So he doesn't get margin called.
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A
Right. But yeah, but so if you're going to borrow a higher amount, you need to have some sort of backup plan like that.
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B
You do need to have a backup plan like that. That's why a lot of our clients and we can help you enforce 30% borrowing line that would protect against 60 to 65% drop in the market, which we just haven't seen in since like 1930s, like since.
- [15:21]
A
And that's kind of like where we're trying to figure out draw the line. Because yeah, that's the last thing I wanted to do is have a client borrow money and then also have to put more money in and go, wait a minute, I didn't sign up for this. So I want to walk through the process of how you make this easier for advisors. Because obviously you said when you tried to do this it was very hard, like executing these trades. So I guess I wanted to, from that perspective, walk through trade execution. This isn't something that we need operations people on staff and an advisor to execute these trades. SyntheticFi is executing these trades on behalf of the clients for the advisors.
- [15:54]
B
Absolutely. So we consider ourselves just like best partner that you can ever have. We want advisors to think about liabilities. We want them to think about planning. We want to think about cash flow, how the clients want to manage their money. Everything else from the onboarding, from the proposal generation, from the actual trading to the rolling to the repayment, we basically built all of them into our platform. And all of them basically is one click. Some of them might obviously involve your ops person to get some swap paperwork or paperwork through, but almost everything is entirely present to you and your client as a loan selection process or a liability planning process, which is really what we're trying to emphasize here. Because, Ben, I mean, like, from your experience, I think for my personal vantage point, there is a lacking of liability planning tools on the market. Right.
- [16:51]
A
Yeah. No, you're right. Yeah. Yeah. There's not that you kind of just go with what you have, and there's not that many options. You mentioned Schwab right now. What. Which custodians do you work with at the moment? Because advisors obviously have, you know, their different custodians they work with.
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B
We currently work the best with Schwab and Pershing, so we are on a pilot program with Trade, PMR, and Fidelity as well. So those will be rolled out more officially in the. Later this year.
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A
Okay. And then the. I guess the one piece of, like, heavy lifting for advisors is that for the clients, obviously we said, this is a taxable account. You're not borrowing. It's retirement accounts, but you need to have a margin account turned on. Right. So with your custodian, there's a certain type of account you have. I had to go through that process with my brokerage account. And then we built the one. I went through a pretty easy one. I didn't do anything fancy with mine. I set out three years. I like the rate I. We hit. This is what I want to do. You guys checked with me to make sure, hey, this is what you wanted. Yes. And it was executed almost immediately. And then the next day, our CSR went in and said, hey, Ben, do you want the money? Can we pull it out? And the money was there the next day. So the process really is very simple and easy. It's not hard to do. That part, I think, for clients is great. You're not going through the mortgage department and filling out a bunch of paperwork. Right. And earning that, you know, such a. That can be such a pain. Send us your W2 and send us your, you know, all of your income and everything about you and fill all this paperwork out. The paperwork is relatively minimal. So the, the process itself of borrowing is easy. Now I think the interesting thing is for most people that might not know that I've ever done this is that those options, that, those options positions, right, there's four option positions, two puts and two calls then show up in your account. Right. Because you have, you have these options positions and they show up in your brokerage account as a negative balance because that's what you borrowed.
- [18:43]
B
Right, Exactly. So we generally separate them into account that we control, that is cross collateralized with your client's main account or ban your main account. So while we borrow in this separate account, you can do really whatever in your main account without being affected. Right. You can actually distribute money, you can still put in some money into your preferred investment. You can do all the planning, you can do rebalancing. We don't really touch anything. And that's actually one of the benefits of working with us is this is some kinks that is very custodian by custodian. And we have been here long enough to figure this out. And what's the best way to present, to manage and to present to your client?
- [19:23]
A
And then do you have a minimum account size that you will do one of these loans for?
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B
We say our minimum is 50k and our minimum loan size is 10k. But it's really not that strictly enforced. It's really adaptable, but it's not a
- [19:36]
A
huge amount, it's not a very high amount.
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B
It's really at that point, the paperwork process, you have to balance. Hey, the paperwork process versus kind of just taking out a margin versus how much you can actually realistically borrow on the option market without running into kind of like pricing discretions. So those are really the practical issues. We were looking at that low amount.
- [20:00]
A
Right. But you, you figured out the way to do this. Like you said before, you were having to do these huge loans to get it done in the options market. You figured out a way to do that at a much smaller scale for clients.
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B
10K versus at least like 20 million, 50 million. So you got to just crazy. Yeah.
- [20:15]
A
All right, so advisors have a bunch of these set up with their clients. They're, they're ready to go, they understand the platform. Eventually they have some of these come to expiration. Okay, what's the process look like at expiration? Because I haven't gone through that yet, you know, in 33 months or whatever my loan comes due. What does that look like? You come to me with some options about what I want to do. Like how, how does the advisor handle that process?
- [20:36]
B
We put all the options in front of you on a platter, essentially. Like you can choose to roll it forward forever. Like what I'm doing right now. You can choose to have amortization schedule. Like what Tony, like my co founder is doing with, with the home he's buying with box spread.
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A
Right. Because he wants to make sure that he's paying some of it off like he would for a mortgage.
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B
Exactly. He wants to have just like a mortgage experience with a box spread. And that's really what we do here. We construct box spread in such a way that your clients feel like, oh, it's just a credit line. Oh, it's just a mortgage. Oh, it just works just like a bank loan. Right. We don't want your client to think about, ooh, what's this weird security that's on my account? We want your client to think about a cash flow, Think about the characteristics and do you.
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A
So if someone is going, like you said, I'm going to keep rolling this thing forever, maybe my account's bigger and I can take a little more money out or not, or I just want to keep that same amount borrowed. Do you think it makes sense? And you're not, you're not giving advice here, but could it go against you if you continue to keep rolling the interest too? Because right at the end, you know, it's like a zero coupon bond. Right?
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B
Right.
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A
You borrow a hundred thousand dollars and your rate's 4%. And this isn't exact, but maybe you owe 12 grand in three years. Right. So it would make sense to at least not let the interest keep compounding against you. At least pay off the interest if you're going to keep these loans rolling. Right.
- [21:55]
B
I am an iar, so like I can technically get advice as well, so don't know where it's here. But yes, we do recommend paying off at least interest that will stop interest from compounding, that will keep your finances a much healthier, healthier place. But we do also see this movement from, I know it's a little bit more retail. It's the buy, borrow die strategy that you basically not pay off anything. And when you pass on your assets to the next generation, they get a step on basis. So basically you kind of avoid paying capital gains tax for the entirety of however long you hold a security. So for those people, they basically just don't pay off Anything, even including interest. It really depends on how the client wants to use this tool as a planning tool, like what their objective is, what they want the cash flow to look like. And we have flexibility across the spectrum.
- [22:51]
A
Well, listen, if rates get back to 1% again, like you said, screw the grandkids. I'm borrowing as much as I can.
- [22:58]
B
Ben. At that point I was like, I'm going to take as much leverage as I can. Like, I missed those times, man.
- [23:05]
A
Yeah. And again, there are, there are risks taking leverage. You have to work with the right clients who understand how this works. Right. This isn't, this isn't like something that's free just because it's a low rate. It's still a form of leverage. You have to be, you know, communicate with your clients about it. I'm curious. So you run a business here, right? You guys have managed to figure out how to do this for financial advisors and their clients at scale. So you're not doing, you're not doing this for the love of the game or anything. You run a business. How do you, how does synthetic.
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B
That's part of it, man. Like, like, I had a pretty cushy job at a family office. I mean, like.
- [23:36]
A
But how do you, how does synthetic find. Make money? And of this.
- [23:39]
B
Yep. So we essentially charge a spread. Right. And I don't know, like, Ben, I don't think I've told you this before, but whoever is listening to the pod and mentioned this mention. You're listening and you get a special talking wealth discount if you reach out.
- [23:55]
A
What is it?
- [23:56]
B
Yeah, yeah. So we essentially charge anywhere from 20 bips to 50 bips on the loan amount. So let's say, hey, you borrow 100, like you have a million dollar account. Borrow 100k. We charge a percentage on that 100k.
- [24:15]
A
Gotcha. That makes sense. Okay, so if advisors want to learn more and they want to get that talking wealth discount, where do we send them to learn more?
- [24:22]
B
Yeah, just go to our website, syntheticfi.com or you can reach out to me, josephentheticify.com happy to like connect and see how we can be helpful. But yeah, really, like, we are pretty active on social media as well. So just reach out wherever channel you can.
- [24:40]
A
You guys have a great blog on the, on the website. It's great. And I ask advisors who are uncertain about this to reach out and learn more because it does. For a lot of people who see that for the first time, they say this seems too good to be true. It doesn't make any sense. It's but it's a really interesting way to use your assets more efficiently. If you need the money. Right. For if you need the cash. If you need the money. Yep. All right. So, Joe, thank you. You're the man. We appreciate it. For all advisors listening, sign up for our Talking wealth newsletter. That's talkingwealthpod.com thanks to Joe and we will see everyone next time. Appreciate it.
- [25:16]
B
Thank.
- [25:21]
A
You.
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B
It.