Facet CEO Anders Jones on the biggest heist in finance, how advisors really sell permission, and the great boomer wealth transfer

Anders Jones is the CEO and co-founder of Facet, a fintech company built to bring high-quality, flat-fee financial advice to an underserved market: the mass affluent. Facet has raised over $250M and manages more than $7B. Anders has seen the real finances of tens of thousands of households. In this episode of Summation, Anders and Auren discuss: why the percentage-of-assets fee is the greatest heist in financethe retention data showing people stick 3x longer when you help them act, not just a...

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Auren Hoffman?

  Hello, data nerds. My guest today is Anders Jones. Anders is the CEO and co-founder of Facet, a financial planning company that has spent the last decade trying to bring good financial advice to an underserved market, the mass affluent. Facet has raised over $200 million and is currently has over $6 billion under management. Anders, welcome to Sumation.

• 0:21Speaker 01

  Hey, Orin. Great to be here. Thanks for having me.

• 0:23Auren Hoffman?

  Now, you and I have known each other for a long time. You look like a young guy, but we started working together back in 2008. By the way, how did you get so old? So I remember you as this like young kid.

• 0:34Speaker 01

  Funny how that works, right? Yeah, you're my first boss, first, first experience out of college.

• 0:39Auren Hoffman?

  I really sorry that that like, that's like a terrible way to start, by the way.

• 0:43Speaker 01

  I learned a lot. I don't know if I learned all the right things, but I learned a lot.

• 0:46Auren Hoffman?

  Exactly, exactly. I'm good at teaching people the wrong things. Just do like the opposite. That's how, that's how I roll. It's a good, it's good to have counter examples in your life. Yeah.

• 0:55Speaker 01

  The thing that I really loved about working for you is that you basically hired a bunch of like young, smart people and you're like, just go figure it out. So like, you know, like, I don't like, I actually tell a story a lot where it's like, I have no idea how to build like an advanced spreadsheet. Like I had no idea how to like do PowerPoint very well, like all the like intro stuff that you're supposed to learn. You go like go spend your first two years in Goldman or McKinsey. Yeah. But like, I know how to like walk into a room full of executives and like, you know, hold my own because that's what I was doing at 23 and you know.

• 1:23Auren Hoffman?

  Awesome. All right. I want to dive into like wealth stuff. So just, just like you've seen like the actual finances of tens of thousands of households. Like what are just some of your non-obvious learnings from that?

• 1:35Speaker 01

  I would say the, the biggest one is that people come for to financial advisors and work with financial advisors for permission. Like it has nothing to do with, that's all right, it has a little bit to do with like the sort of quantitative aspects of financial planning and like, there's definitely things that we, we help them with and that we help them understand that like, you know, a part of the tax code or something like that, that like they wouldn't otherwise figure out themselves. But the number one thing that we do is basically give them permission to live their life the way that they want to live. And it's like, it's the most interesting sort of like psychological fishbowl because you see all this, you know, you see

• 2:17Speaker 01

  basically people come to you with a certain amount of anxiety about something. Whether it's like, is my money invested in the right place? Or is it like, I'm about to have a kid, my first kid? Like, what do I, like, there's so many financial decisions that you have to, that you have to make that come with that. That it's just, it's like, you have no idea where to start. And so they, they basically come with a, with a level of anxiety. And then they come to us looking for permission to spend or save money in some way. And, and that, that's probably the, the biggest thing. It's like, we, we're in the anxiety relief business more than we are in the actual like quantitative, like money management business.

• 2:56Auren Hoffman?

  What are the common ways that maybe we went to thought that people lose wealth?

• 3:00Speaker 01

  Well, we see this all the time where it's like an investment that sounds too good to be true. And, you know, it's like, and, and it's, it blows my mind that people still fall for this stuff. Cause like, I feel like you, you read about this, like on almost like a daily basis where it's like, someone's guaranteeing 30% returns. And it's like, I like, I don't know anyone like in my own life who's like, oh yeah, like 30% returns. That sounds reasonable. Like, you know, or it's like, oh, you know, I got, I have a friend who's like, got a friend who's got this, this, this trading strategy that's never lost, you know? But we see that all the time that people come to us and they're like, they're like, look, you know, my, you know, my cousin's neighbor has a, you know, has a deal and I'm going to put some money in it.

• 3:39Auren Hoffman?

  But in some ways, like if you're putting 1% of your net worth in that, like, I mean, whatever, like it is what it is. It, it's the problem comes if you put like 50% in it.

• 3:49Speaker 01

  That's exactly right. And so like the number one thing that we help people with is like, how do we make sure the rest of your life is fine? So that you can, you can kind of do this stuff and experiment. Like the, the sort of more like mainstream version of this is, you know, a bunch of our, our members have Robinhood accounts. And they, they like to play around, you know, with, with day trading and all that. And we say, look, you know, whatever you're, you know, maybe $10,000 is the right number for you to like, if you lose it all, it doesn't really impact your life. Uh, and, and go have fun. I don't think anyone's ever like created a vast amount of wealth that way, uh, at least that we've seen, but it's, uh, you know, it's, it's, it's more, it's more like an entertainment budget than anything else.

• 4:32Auren Hoffman?

  Some non-obvious findings about how people will create wealth is it is it just like is it's because I assume a lot of your clients is kind of a long compounding over time, right? And they're saving a little bit more than than they spend essentially and you know, just kind of compounds over time.

• 4:48Speaker 01

  Well, I think one of the the most interesting things that's sort of it's been this trend to watch for a long time, but it's kind of it's sort of unfolding in in slow motion is the equity value in small businesses. And so you get people that are in their 50s and 60s that have built businesses over, you know, 20, 30 years, like my landscaper, I was talking to him the other day, he's not a facet client, but you know, he was like, you know, we were talking about his his portfolio. And I'm like, so you know, like, what like, what are we talking here? He's like, oh, I have $9 million. And I was like, whoa, this is a guy like, literally, he's like, he's like a one man shop who is like cutting grass in Florida and and he, you know, he's built up

• 5:31Speaker 01

  that level of wealth. And so there's going to be this this small business wealth transfer that happens and like an asset transfer that happens. And some of it will go to private equity rollups, right? I mean, like the sort of, you know, proverbial, you know, HBS guy kid who graduates and roll starts rolling up HVACs in the Midwest, right? A lot of it's going to get passed on to spouses. Like, this is one that's maybe a little non-obvious is people talk about this sort of like baby boomers dying off and all the money going to their kids and, you know, Gen X and millennials. The reality is it's the first stop in that is going to go to the spouse. Like, and there's actually a much bigger horizontal transfer that's happening than a than a generational transfer. And so like, that's a really interesting thing where, you know,

• 6:16Speaker 01

  for like traditional wealth advisors figuring out how do you maintain that relationship with the spouse and with the kids? Because, you know, all that money is going to kind of, you know, flow flow out in the next, you know, 20 ish years.

• 6:29Auren Hoffman?

  And how do you think people should be or how are people thinking about passing wealth on to their kids?

• 6:34Speaker 01

  What we've seen is that, well, actually, first of all, 80% of Americans don't have an estate plan. That's a huge problem. You know, the really wealthy people do, but like the rank and file, you know, if you have a few hundred thousand dollars or, you know, even like low single digit millions, the vast majority of people don't have an estate plan.

• 6:50Auren Hoffman?

  And that could cause a lot of chaos and cause a lot of wrinkling and cause of a lot of other so it's probably, and they're not that expensive, then it'll take that much time to put together.

• 6:59Speaker 01

  No, and also now with AI, like there, it's so kind of like ladder, rinse, repeat. It just, it's such a rote document that you can, you know, you can crank out. And there, there, this has been like a huge investment area in wealth tech. Interestingly, there's like five estate planning companies that have started in the last three or four years that are either like direct to consumer estate plans, which I haven't found one that like the unit economics really work because it's not really like an ongoing thing, or you sell through advisors. And so there's a couple, and we work with one called wealth.com, but like there's a couple of other companies out there that are basically selling through advisors. And, and this is actually a trend that's happening, I think, across wealth. And I, I

• 7:42Speaker 01

  think we're kind of at the forefront of it, but we're seeing it elsewhere. The idea of like all these sort of ancillary services around financial advice are, are sort of coming together in one spot. So like before you'd go to your financial advisor and your advisor would be like, hey, you don't have a state plan. Here's a card for my guy who does estate planning, like, you know, go see him. And then you start all over with that guy. And then it's like, oh, you need a tax attorney, like here's a card for a guy, you know?

• 8:06Auren Hoffman?

  Right. And then you have to like resend them all your docs and you have to do all this other type of thing. It's super annoying and they have to get up to speed on your situation.

• 8:14Speaker 01

  And also it's like really expensive, right? Cause they all sort of have an amount of money they need to like get out of bed. And, you know, what we found is that like bringing it all together in one place is being the hub of someone's entire financial life and having the data to be able to move back and forth across. You know, like I said, I think we, we started that way, but I think we're not the only ones like that. And the world is moving in that direction. And there's just like much more consolidation around the different services that are happening. And I think that's a good thing in general. Like it's very good for the consumer. I think people make a lot of money doing it and like, you know, it's, it's kind of the way the world is, is moving.

• 8:49Auren Hoffman?

  Assuming the mass affluent may also need things like bill pay or expense management or other types of things, other types of services are a little bit like, like next level down.

• 8:58Speaker 01

  No one has figured out a good way to do budgeting help. And it's mostly like a plumbing problem more than anything else, like the account linking and the ability to get data from and you know, some across someone's credit cards and bank accounts. This should be the next business you start being the data guy that you are, right? Like, you know, like Plaid is probably the best example of a company that's doing it. And like, they do a really good job, but there's this long tail of like, I don't know, you know, 20,000 institutions out there that, you know, like the Iowa Farmers Credit Union and like, if you have an account there, like you're never going to get good data through Plaid from that. And then you have like a categorization issue, right? Where it's like, okay, Starbucks is pretty clear that that's coffee, but then you have

• 9:41Speaker 01

  these like weird things that come through that like, it's like a bunch of like letters and numbers and you have no idea who the vendor is and like, you know, what, where did this $11 come from, you know, like what is this charge? And so it's just like a very, very difficult thing to automate and to create.

• 9:57Auren Hoffman?

  When I was younger, I would go through like my credit card statement line by line and each one, and I would go, okay, just make sure. And I would just go, okay, is that, is that still there? Is that $20? It's just like, as you get older, you maybe spend a little bit less time on those kind of expenses, but like, you know that like, there's a lot of random things that are happening that you're, you're, you're doing that you probably shouldn't be doing. It'd be great if there's some other AI to help you do all that stuff.

• 10:21Speaker 01

  This is, this topic is a holy war at Facet between our financial advisors and our product team. Because you have a group of people that basically our product team is like, we should be looking at expense by expense and helping people, you know, like figure out the, you know, the like, where the money is going like line by line. And by the way, like, when I was younger, I used to have a spreadsheet where I'd literally write down everything I spent every single day to do that. So I'm like more team daily expense tracking. And then our advisor team is like, look, that's actually totally useless. You're going to send people into like a mental, you know, meltdown. What's way more impactful is just looking at how much is coming in every month, how much is going out? And if you need to like kind of nudge behaviorally, month over month, that's actually like people

• 11:05Speaker 01

  are, are good to make their own decisions. And if you just sort of give them the guideposts, it's a better way to figure it out. And so traditionally, we've been, we've sort of gravitated towards the latter approach, and that seems to work fine. But there's definitely some people who are, they need help. Like they're, you know, like, like overspending is actually like a psychological problem that they have. And so, you know, we need help with that.

• 11:26Auren Hoffman?

  It also depends on your spending versus your net worth, right? If your spending is a high percentage of your net worth, and sometimes for many people, spending is more than their net worth, right? That they spend every year is more than their net worth. If you could reduce that spending in some way, and that could just be like calling up AT&T and getting $20 a month less on your bill or something like that by just negotiating with them. If you can do that, like, that's amazing, goes flows right to your bottom line. And it's obviously, it's not, it's, you don't, you don't pay taxes on what you save, right? So that's like a huge benefit for people who, who their net worth is like way more than their spending, like significantly more, 10x more or whatever. Well, then, okay, like focusing on your spending maybe doesn't make as much sense.

• 12:09Auren Hoffman?

  Maybe you should be, you should focus on investing to, to kind of grow the top line pie.

• 12:15Speaker 01

  You're exactly right. I mean, different financial situations require different approaches and different treatments, I guess.

• 12:21Auren Hoffman?

  How much does wealth drive happiness?

• 12:23Speaker 01

  I think it's probably more of an inverse, which is like lack of wealth drives a lot of unhappiness. We had this thing where we play member calls, you know, every month or so, and like kind of highlight across the whole company, what are, you know, what we're doing for our members. What we found is that as soon as you kind of solve the unhappiness problem, then, then that's when you basically have like a member for life, right? That's when the retention goes through the roof. It's like, if you can give them relief from anxiety, that that's actually the most important thing. What's it saying? It's like the, there's no greater pleasure than the absence of pain. That's kind of what we, what we solve for, you know, an incremental dollar over a certain point, I don't, I think has very little marginal, marginal utility. The, the other thing is that like, we put people through.

• 13:07Speaker 01

  Kind of like a Myers-Briggs version, but for money. Since we call it the money mindset quiz, where basically, you know, different people have very different psychological approaches to money, right? Some are afraid of it. Some view it as a tool. Some view it as like a scoreboard that they want to rack up, you know, the highest, highest number of points possible. You know, some basically want to die with zero and say, what, you know, I've taken, you know, every resource that I possibly had and like, had, you know, blown out my set of experiences that I can have with it and like, I got nothing left. But it's really, I mean, the different people have very different approaches to, to how they think about money and, and like, whether they're, you know, fearful of it or embrace it and, and how they want to use it.

• 13:49Auren Hoffman?

  Problems that people have, like so many of them do revolve around money. Even just if you think of like most marital, marital disputes have something to do about resources or resource.

• 14:00Speaker 01

  It's a number two cause of divorce behind infidelity.

• 14:03Auren Hoffman?

  One spouse wants to spend it on X and the other one wants to spend it on Y and/or we should save it versus spend it or the, you know, yeah, I could, I could see that being, or even a simple vacation, like, should we spend it, spend all of our money on this versus that? Like, I could see all these disputes happening, you know?

• 14:19Speaker 01

  Yeah, or like, should, you know, should we, you know, pay for our kids' college or should we make them get a job? Right? That's a big one that, you know? And we actually laugh, we, we call our, our planning team therapists with calculators because like, that, I mean, that's really what we're doing, right? It's like the, the actual financial planning piece is pretty straightforward. It's the, but like the behavioral and the sort of like, understanding people's motivations.

• 14:41Auren Hoffman?

  If you think of a married couple as your client, right? First of all, like they have values that you have to understand and then they may have differing values and they may not even know that right away until you start asking the questions and they may realize, oh, well, you have to create a will and like, one person wants to leave a lot to their kids and one person wants to leave less to the kids and more to charity or something. And you're like, oh, interesting. Like now we're having a discussion and that might be, they might be like 20 years into marriage before they ever even had that discussion.

• 15:08Speaker 01

  By the way, this is why I am very bearish on AI replacing financial advisors anytime soon. When you're actually sitting there having a conversation with someone and like, kind of reading the room. Like AI can't do that. Like they were a long ways away from, from AI being able to do that. AI is also like pretty bad at math. And so like you don't really want AI like doing your financial calculations. Like, you know, like there's a pretty good chance that it'll make a mistake, uh, which when you're dealing with your life savings, you really don't want it to.

• 15:36Auren Hoffman?

  I mean, obviously it's just computer AI, whatever, but like computers are pretty good at math. So, um, you know, in some ways like you would think they are pretty good at making those types of high level decisions and stuff like that.

• 15:48Speaker 01

  If you want to get really into the weeds, right? I mean, the, the actual sort of like calculations, you can have deterministic software like do that, which is quite, which is quite good at. The thing that we've talked about is like, okay, do we build an agent for each one of our members that then sort of like monitors what's going on, you know, sort of like an always on financial advisor that can then flag things. And so the answer is yes, we do want to do that. And like, that's a great value add with a big caveat that it's like, it's going to stop short of opening an account or moving money or actually making a financial decision on behalf of a member or on behalf of one of our advisors. And so, you know, so that, that's where you draw the, the guardrail. It's like, it's basically like a sort of suggestion, you know, prompter on steroids, but it's not

• 16:31Speaker 01

  going to actually, it's not going to actually fulfill any of the, the actions that it's, that it's recommending.

• 16:36Auren Hoffman?

  The standard kind of wealth management fee is usually some sort of like percentage of assets or assets under management or something like that. And it does seem weird because a lot of assets is just like, we're going to put it in S and P 500. We're going to put it in this random bond portfolio and not do anything around, maybe once a year, like think about like slightly rebalancing or something like, why has that, uh, fee structure persisted so long?

• 17:01Speaker 01

  It is the best scam. It's, it's probably the biggest heist that's ever, that's ever happened. Right? You know, I mean, look, it's, it's certain, for certain types of financial products, it makes sense, right? Like, I mean, you and I are both LPs and venture funds and like, those are people who are actually like managing money and like making investment decisions and like actually trying to generate alpha. And it's like, okay, giving them a percentage of what they've, you know, of, and, and their job gets harder the more money they're managing. So like, it makes sense for them to earn more.

• 17:32Auren Hoffman?

  And also like you're only giving them a tiny percentage of your assets. Like no one gives a venture manager like 20% of their net worth or something.

• 17:41Speaker 01

  Yeah, exactly, exactly. At the retail level, it makes zero sense because you're not actually matching like cost paid with value received. You know, if you're an advisor and you know, you're basically saying, hey, like, like the traditional sort of like pitch on this is like, well, you know, we're, our interests are aligned because you do better, I do better when you do better. But the thing is like the, I mean, you said it, right? The advisor is putting you in like an S and P index fund. And if, if you have like a sort of like traditional advisor who's, you know, like hanging a shingle on Main Street who says they're going to beat the market for you, you should run the other way. Cause like they are not, you know, I mean, the average advisor has this sophistication. It's like slightly higher than your like dry cleaner. You should not be putting your money with, with, with that person.

• 18:26Speaker 01

  But the, the reason that it works is because the way in which advisors charge is they deduct their fees straight from your account.

• 18:35Auren Hoffman?

  They don't even have a line usually like it usually don't even have like the fee line there that you see, which is so like, almost, almost like should be illegal. Like at least, at least when the banker charges you a fee after you sell your company, it might be a massive fee, but at least they're like, you have to like wire it to the banker, you know?

• 18:52Speaker 01

  Exactly. Right? And so it's a, yeah, no, it's a, it's a total, it's, it is like this, this incredible obfuscation that they've gotten away with for, for decades. But like, here's a really interesting, I'll give you a counterpoint to this. So we manage $7 billion at this point. About 85% of our members manage some money with us. And so, and, but it's not a requirement, right? So you can come in and just pay a flat, flat fee and you know, we'll do planning for you. The retention dynamics are mind blowing. So if you are just doing planning with us and you don't manage any money with us, you retain about 30% a year.

• 19:34Speaker 01

  So fortunately that's like the vast, it's a, a, a, a very small percentage of our members do that. But if you manage like a dollar or more with us.

• 19:45Speaker 01

  That retention jumps up to 85%.

• 19:48Auren Hoffman?

  So it's just like, it's a psychological thing or is it, what is it?

• 19:51Speaker 01

  Yeah, well, cause here's, here's the crazy thing. So you would think they're like, oh, okay. So you're managing money. You're deducting fees from their accounts. So like, they don't see it. It's the same thing that is going on with the rest of the industry. No, if we are managing $5,000 for someone and they're paying us $7,000 a year. Uh, obviously we're doing a lot of other stuff for them besides managing five grand, right? But we're charging their credit cards $7,500 a year and we're managing $5,000 for them. So they're still seeing, they saw that psychological impact when the credit card statement hits. But because we're doing something for them, they retain at like almost a three X rate. And that, that is something that has, was a huge surprise to me when we sort of uncovered that data that, that just the fact of like, do like helping someone take action on the advice.

• 20:36Speaker 01

  Instead of just giving them the advice is actually, that is the sort of binary retention driver that, you know, has, is like the number one lever in our, our retention story.

• 20:46Auren Hoffman?

  It is kind of interesting, like all of a sudden, let's say the S and P 500 goes down 15%. Then it's like, it's almost like, well, you're like, you have a discount now on this thing. Or the S and P 500 goes up 15%. Okay. Now it's like, but like, didn't do any, it's like the advisors haven't done anything differently during that time.

• 21:02Speaker 01

  Yeah, no, it's ridiculous. And I don't know. I mean, like I'm, you know, I'm a, as you know, I'm like a very much like a free market guy. And like, I do believe that over time, this, this sort of like weird incentive imbalance will correct. But like, it's, I mean, you know, we've got tr- tens of trillions of dollars that are sort of held wrapped up this way. And so like, I don't, I don't see it reverting anytime soon, but you know, I mean, that's what we're trying to do there. A couple of other, you know, flat fee companies that are out there that are sort of gaining momentum. And it does seem like, you know, a couple of years ago, Charles Schwab started doing a, a flat fee approach. The problem is, is that the, the big sort of legacy players can't convert to, to a flat fee model. Cause it'll totally cannibalize their existing business.

• 21:45Auren Hoffman?

  Yeah. I mean, they could do it if they're charging, let's say they're charging 200 grand a year. Today, just, just, you know, on the side, they could just take the flat fee of 200 grand instead.

• 21:59Auren Hoffman?

  And then their customers might balk at it because like before it was like a little bit more hidden. And now it's like it's more overt, but they they could do it in some ways like it'd be like more predictable revenues for them. And anyway, now now they have to like then they have to then go back and say, okay, we're actually giving you 200 grand of value. And you know, for for maybe a super wealthy person like, okay, well, they can't hire their own person for for that. They'd have to, they may have to spend 600 grand to get their own team or something to do that kind of work. So like, maybe it is a value for them, maybe it isn't like, but then they would have to be proving it just like you guys have to prove it like all the time.

• 22:38Speaker 01

  Well, I mean, think about it this way, right? Where it's like, you know, you've got a company out there like Fisher. I love to pick on these guys and you know, they basically charge 185 basis points for like a pretty bad rap fee program and like.

• 22:50Auren Hoffman?

  They provide 185 basis points on your money?

• 22:54Speaker 01

  Yeah, I mean, it's scaled depending on how much, you know, how how much you have with them. But you know, if you have a million bucks, they're charging, they're charging about that. And so you're paying them close to 20 grand a year and you basically get a PDF in the mail that says like, you know, here's your performance. And like, if you want to talk to us, like, here's the 800 number. You know, whereas like you can come to us and I'm obviously talking about a book here, right? But you can come to us and you know, pay us is, you know, 7,500 bucks a year. We'll manage your money, we'll give you access to alts, we'll do your taxes, like literally file your taxes, we'll do your estate plan. And you'll have a dedicated CFP that you can message anytime. Like the value is pretty misaligned.

• 23:31Auren Hoffman?

  I don't know anything about Fisher, but like a lot of these guys, like they're a lot of what they're doing is they're pitching their own product. And their own product has all these high fees and hidden fees, and they have all these incentives to, or they're pitching other people's products. So they're getting like kind of almost kickbacks and fees from. And so they're they're like they they're they're the advice that they're giving you isn't always like a great fiduciary advice. Because they have a lot of other kind of incentives that are hidden from the customer.

• 24:00Speaker 01

  That's true. I mean, this is actually the the founding story of Facet you just hit on is there is in 2015, the Obama administration tried to pass. This rule called the fiduciary rule, which basically is a little more nuanced than this, but basically said, if you're a financial advisor, you now have to, you're now legally obligated to act in the best interest of your clients. And it didn't pass. And to this day, there is no like blanket fiduciary rule for financial advice, which is insane. And you have this thing called the suitability rule, which, which basically says like, is this product suitable for the person's, which like you can, I mean, think back to like, you know, mortgages in 2008, right? Like, you know, you can, you can figure out a way to make just about any product suitable for any person, if you squint hard enough.

• 24:44Speaker 01

  And, but the reason that the rule didn't pass was the industry pushback was, if you do this, you're going to have eight million people that lose their advisor relationship, because the advisor can't afford to both service them and act in their best interest at the same time, which is nuts, right? It's like, they're like publicly admitting like, yeah, it's like, we're screwing eight million of our, of our clients. But like, it's better that they get screwed a little bit than like, don't get any attention, you know?

• 25:05Auren Hoffman?

  Just morally, it seems like a financial advisor should do what's in always what's in the best interest of the client. Like the client should be the customer, not another fund. The fund shouldn't be their customer. They shouldn't be getting unknown kickbacks from the fund. They shouldn't be getting anything like that. They should never, if they're getting a kickback from the fund, they should give that to their client. If the fund's going to give them a discount in fees, they should then pass that discount on to the client and say, great, I, I worked hard for you. And this fund normally charges, you know, a 1% management fee, but I worked hard for you and I got it down to a half a percent. I'm giving that to you. And that's, that's the value add that, that, that, that wealth advisor does.

• 25:46Auren Hoffman?

  That's great. But if they keep that for themselves, that just seems very morally wrong.

• 25:51Speaker 01

  A hundred percent. I mean, it's a version of what Robin Hood did, right? Which is like, you know, I mean, they got paid, they, they get paid on the backend for all their order flow.

• 26:01Speaker 01

  But they pass that on to their clients and let them and they trade for free. So, and you know, we can debate whether or not like Robin Hood gamifying trading is like good for society or not. But like the, the general idea behind that, that you can, you know, that like they sort of disintermediated this huge sort of like rent seek this rent taking, you know, a set of agents, like that's a, that's a very good thing, I think.

• 26:25Auren Hoffman?

  Yeah, I, I would, I would probably say Robin Hood would be like net good for a society, whereas like some of these wealth advisors could be not bad depending. Obviously they're all different, but some, some of them are, uh, it's, it's, it's a little bit too sort of a spot, swath to say everyone's in that. But in general, they might be like taking more advantage of their customers than they should be, whereas Robin Hood's probably like doing a good, better job.

• 26:47Speaker 01

  I mean, there's also like this sort of wisdom in the, you know, conventional wisdom in the financial world, which is that, um, you know, financial products are sold, not bought. Like, like no one ever goes into, like no one ever wakes up and is like, you know what I need to buy today is an annuity. You know, like, like that, you know, the, the only reason people buy annuities is because like some, someone has sold it to them. And like, you know, you, usually they're very bad products and like they lock people up.

• 27:12Auren Hoffman?

  I don't really even understand exactly what an annuity is. You, you basically put like some money there and you get, you, you, unless you put a hundred grand in and you get a guaranteed X number of dollars a year. Then when you die, like the money goes away type of thing, or you just get a first year or whatever. What's the typical annuity?

• 27:29Speaker 01

  Yeah, it's, it's basically that, right? Where it's like, it's, it's a contract that says, I'm going to give you a bunch of money and you're going to guarantee me an into, an income stream of X amount for, you know, for the duration of.

• 27:40Auren Hoffman?

  It's like a reverse life insurance kind of thing.

• 27:43Speaker 01

  And by the way, like typically there's like a very high fee upfront, you know, like I've seen up to like seven percent upfront. To just like write the annuity and then the the insurance company is also making money on the float, right? So like whatever rate they're giving you, you better believe they're making more than that, um, you know, in there. So it's a great product for insurance companies to sell, but it's a terrible product for the vast majority of individuals.

• 28:08Auren Hoffman?

  Okay. But I mean, in some ways, like eight, depending on the product, like that could make sense. Let's say you've got, um, you have a million dollars and your, your total expenses in your life are a hundred grand a year or something. So if you gave that million dollars and you're getting a hundred grand a year back now, obviously inflation and might, might inflate it away and you, because you don't know how long you're going to live for. You might live for, um, you might live for 40 more years or something at the point you're 60 years old. In theory, it could, it could be good. It just depends on how it's structured, right? It's just like life insurance, like life insurance also is usually a bad deal for people, but like it could be good in, in those, in those situations. I don't have life insurance, but most people do.

• 28:47Speaker 01

  Yeah. I mean, I guess you just have to think about it where it's like, you know, consider your counterparty, like who do you think is more sophisticated, you know, like the rate, like your average retail investor or like the insurance company is writing to do it. You're like, you know?

• 28:59Auren Hoffman?

  I mean, if you think of any insurance product, like I have insurance on my home and stuff, right? Uh, yeah, it's like the, the, the company that's selling the insurance is like they're selling to me with the hopefully with the express goal of like me never collecting on that insurance, but I, I have it just in case there's some like terrible event that happens just in case, right?

• 29:18Speaker 01

  The other thing I would say too, though, is that like we, we now live in a world where there are much better ways to accomplish what you just described, right? Which is like, how do you have like a guaranteed sort of stream of income that's going to last? Like, you know, it's now pretty easy for the average retail investor to access like private credit interval funds, which are liquid, they're much lower fee, you can trade in and out of them. You know, I mean, now we're standing in a moment that we live in right now with private credit, like, you know, they're generally pretty good investments. So

• 29:47Auren Hoffman?

  Right. If you had, if you had a million dollars, you could put a hundred grand in 10 different ones and spread your risk out or something like that or whatever.

• 29:53Speaker 01

  You know, you, you, you always ask the question like, what's something you've changed your mind on recently? This is something that I've changed my mind on like pretty strongly in the last year or so is access to alternatives for, for like rank and file retail investors. I used to think that, that

• 30:11Speaker 01

  It didn't make, you know, it's like, look, S and P, you know, like, you know, low-cost ETFs in like, public funds is like, that's all you, that's all you need. But, you know, we live in a world now where we have twice as many millionaires as we did 10 years ago in the US. There's about 25 millionaires in the, 25 million millionaires. And you have half as many public companies as there were 20 years ago. It's to think about it this way, right? So, you know, of the, the 25 million millionaires in the US, 24 plus or minus are single-digit millionaires. And so probably not like qualified investors for, for private stuff.

• 30:49Auren Hoffman?

  What's top 1%? Like 15 million is top 1% or something like that?

• 30:53Speaker 01

  Yeah, I think it, it used to be eight, but now I think it's gone up.

• 30:56Auren Hoffman?

  Probably gone up 7%. Yeah, yeah, okay, yeah, yeah. So it's probably, probably 15. Yeah, okay.

• 31:01Speaker 01

  It's actually less, I think it's less than one still from an income standpoint. I think it's like 800,000 or something like that. But so like, think about like, in the next couple of weeks, like as we're recording this, you know, we're about to have like, probably close to $4 trillion of IPOs. Between, you know, 0 and $4 trillion, none of those 24, or very few of those 24 million single-digit millionaires got to participate in any of that value creation. And so, you know, so it's like, you almost have this thing where I, I've called, you know, like, you have like the K-shaped economy where it's like, you basically have the rich getting richer and the poor getting poorer. I actually think it's, looks more like an E at this point where it's like, you have the, you know, the high net worth that are kind of doing their thing. You've got the, the lower net worth, which are, you know, just kind of fighting to survive. And then you've got this like weird middle band of folks that there's a lot of wealth

• 31:45Speaker 01

  there, but they just don't have access to, like, really any kind of sophisticated investments that frankly, like, as they age and are going to be relying on living off their assets instead of income, like, they need to be able to access that stuff.

• 31:59Auren Hoffman?

  And what do we do about that? Like, how do they, because, you know, there, there are tickets in, a lot of times the funds will have like some sort of ticket size. And if you have, if you have a net worth of, of $3 million, like, you're probably not writing a 200K check into one of these. It may be irresponsible to write such a big check into, to one of these funds or something.

• 32:21Speaker 01

  I really like the idea behind what Fundrise is doing. You know, I mean, they basically started like a closed-end mutual fund. That got allocation in these private companies and then like, you know, anyone can, you know, I mean, you know, I know a guy who, you know, is, is like an hourly worker and he, you know, put 5,000 bucks into the growth fund. And, uh, and it's, I mean, at its peak was worth like $600,000. I mean, he's unfortunately locked up.

• 32:47Auren Hoffman?

  Yeah, that's great. Like I, I love fun rise. Like fun rise is awesome. Like the show, we just, we just like need more fun rises of the world. And, and I think like Robin Hood is doing something similar. There are a few like in that, in that world that are, that are trying to do like similar type of things.

• 33:00Speaker 01

  I'm required to say from my compliance, and this is, that was not a product endorsement, but, uh, but I like the, I like the idea behind it a lot. I think it's very expensive, right? You know, I think they're also 180 basis points or something like that. But also, I mean, like the, I mean, they, they have a public, you know, they basically have a public company infrastructure that they have to support, right? And so like that gets expensive, but you have to imagine that that will scale and the cost will come down.

• 33:26Auren Hoffman?

  Yeah, that's their goal too, right? Like their expenses are fixed. So if they have a billion dollars of management, their expense is X. If they have 10 billion, their expense might be like less than 2X. So all of a sudden you can start dropping those costs over 100 billion. It might be 5X or something, right? So you can see those costs as a percentage dropping pretty quickly.

• 33:44Speaker 01

  Interestingly, a lot of the large alternative asset managers like Blackstone, Apollo, KKR, like those guys are all trying to figure out how to build retail channels. You know, I was talking with one of them a couple of weeks ago and they were like, yeah, like, you know, one thing we could do is like take our website and have it be, you know, like, like you can just go buy alternative products like on our website. Like you can do a fidelity and, and I was like, that's probably not going to work, but like, you know, it's a good, it's a, it's a good idea anyways. Right?

• 34:10Auren Hoffman?

  Especially if you have like a basket or something. It's just hard for someone to go in because there's not a lot of information. So, so it's, it's just hard to go in and say like, I don't know, someone just deciding they want to invest in Databricks or something right now without the information that exists on like, let's say the comparable of Snowflake. There's tons of information about Snowflake. It's a public company. But Databricks like just, who knows if it's true. It's out there. There's rumors or this or that. So it'd be harder for like a public, uh, like a random Joe investor. To invest in it. But if it was a basket and then there was like a manager overseeing that they can get in at the right price, et cetera, then maybe that makes it a little bit more sense.

• 34:48Speaker 01

  You're a very sophisticated venture investor. Like, how many deals do you pass on because you just don't know enough about the industry to like make a judgment?

• 34:55Auren Hoffman?

  You know, all the time. Yeah.

• 34:57Speaker 01

  Yeah. So like to think that someone with 500 grand is going to be able to pick like the right Blackstone fund, you know, to put all of their net worth, like, forget it. Yeah. So no, I agree. The basket approach. I mean, you're basically building a private index fund, right? Is where you is what you need to do.

• 35:10Auren Hoffman?

  And one of the most important, if you just think of like an average person who's like either this mass affluent, you talk about mass affluent, so like, like, what was it? Like 1 to 10 million net worth type of thing? Or what's the?

• 35:21Speaker 01

  We define it as like 100,000 to 3 million.

• 35:24Auren Hoffman?

  If you think about the mass, like one thing is like, okay, you shouldn't be like diversifying your risk. So you shouldn't put all your eggs in one basket. You shouldn't have all, you shouldn't even, you know, even if you like the S and P 500, you shouldn't put all, shouldn't put 80% of your net worth to S and P 500 because you could see that go down by 40% in a year. Like, it's not crazy to think that will go down. So you need to diversify a little bit and you shouldn't. And like, some of these might be a fraud. Some of this might be other things. You have to have ability to like lose the money and not have to sell as well. That's another thing, like you put, people put all this money in S and P 500 and like, yeah, in theory, if you had like 100% of your assets in the S and P 500 over the last 30 years, that goes well.

• 36:03Auren Hoffman?

  But like, what happens one year when it goes down and you need the cash? Like, are you forced to sell then when it went and psychologically? So having some money in treasuries, even if it doesn't perform as well, like could psychologically help you ride it out?

• 36:17Speaker 01

  Yeah, I know 100%. And like we do, you know, we've got, I don't know, maybe 150 or so different model portfolios that are available to our members. And like, there's a lot of nuance between is it a taxable or non taxable account and that sort of thing. But time horizon is the number one thing that you you look at. And so like for someone. You know, my, well, I guess I'm getting up there, but you know, someone my, you know, the age when you and I first met that I was, you know, it's like you should, you should be in a hundred percent equities and just like let, you know, like, cause like, cause like you're not, you shouldn't be living off of your, you shouldn't be touching your portfolio.

• 36:50Auren Hoffman?

  But obviously you need some cash, like you need to pay your rent, you need to pay these other things. You need, you need like some percentage of your, of your net worth, liquid.

• 36:58Speaker 01

  I mean, for most of our members, it's there, it's that, that's the, the paycheck, right? So like, like we actually work with a ton of people who have like zero or negative net worth because they've got debt, whether it's a mortgage or a, you know, right? But they make, you know, 300 grand a year. And so like, you know, for a lot of what we're doing is like, there's actually no assets to really, you know? And so the first conversation we're having is, hey, let's get a, a six months of, of emergency savings in a high-yield savings account, or you know, six months of expenses in a high-yield savings account.

• 37:29Auren Hoffman?

  Yeah, exactly. For you can tell like one month first and then two months and then three months. If you get all the way to six months, like having six months of buffer, which is so few people in, have, but if you got to that point, like there's so much freedom that you have. You have a freedom to make a mistake. You have a freedom to leave your job. If you don't like the job, you have, you have all these other types of things you can go do. And of course, like emergencies happen in life, like something, your refrigerator breaks down, your car breaks down, you have a health emergency, you have all these other things. So having this like, like even if it's not the biggest nest egg, you have some sort of, and six months seems like a good goal. Like it's a goal that's achievable, right? It seems like for a lot of people, a huge percentage of their liquid net worth

• 38:13Auren Hoffman?

  is in their retirement account. How should they be thinking about those types of things? And sometimes even just like a random salary person, not even earning that much, could have a huge nest egg sitting in that retirement account for them.

• 38:25Speaker 01

  Well, it's a vast majority of people's wealth. I mean, the number two, the, the two biggest pots of people's wealth are home equity and, and retirement accounts.

• 38:35Speaker 01

  The interesting thing about retirement accounts is that the vast majority of them are in a workplace, a plan that's sponsored by your employer. A financial advisor can't actually manage that money.

• 38:46Auren Hoffman?

  Well, they could help you allocate it, or they could say, hey, you're okay. Show me what funds you're in and maybe, maybe even within those, like we can go into a lower fee fund, or maybe change some of the things around on that, et cetera.

• 39:00Speaker 01

  Yes, but they can't charge money, they can't charge you for it.

• 39:03Auren Hoffman?

  Oh, you're saying like an older school one can't, obviously you don't charge as a percentage of assets, so you could help them.

• 39:09Speaker 01

  We have this thing where we actually do, we basically take the plan documents, say, okay, like of all the available funds, if we were managing this money, this is what the portfolio would look like to kind of most closely mirror our portfolios. We do that all the time, but like, it's a really interesting thing because a traditional advisor can't charge a fee off of it. And so, so you, you often have this sort of like weird imbalance where you got this big pot of money over here that's being, you know, it's got, it's in some, you know, allocation. And then you've got this, this other pot of money that's being managed, but like the two aren't really cross-referenced to each other because the advisor just doesn't really care about that one.

• 39:46Auren Hoffman?

  Let's say someone's a little bit higher net worth. Okay, they've got a, they've got a taxable portfolio and they've got a, a taxed advantaged thing because they have, it's in their retirement account, which either it's a Roth or a traditional, but has more tax, tax advantage kind of things out there. Sometimes you also need to think about across, like maybe you want more of your bonds than the taxable one or more, you know, you could start to a non-taxable, or you can start to think about like how you allocate, you using those things in your head.

• 40:13Speaker 01

  We talk about, there's asset allocation, you know, which is like, you know, what's the mixer of stocks and bonds and that sort of thing. But then there's also asset location, which is like, what are the types of accounts and, and the various places where the different assets are. And that's like a whole different layer of strategy that you do, you know, you do around it. And that used to be something that was a very sort of ultra-high net worth. You know, service that you would, that you would think about like similar like tax loss harvesting, right? That used to be something that like only like, you know, really sophisticated advisors or investors would think about. And now it's like very mainstream, which is, it's awesome. And so, you know, you get a ton of tax advantage when, when you do stuff like that.

• 40:54Auren Hoffman?

  That is a huge thing that a wealth advisor can do is just help you on the, the taxes. If you can, if you can do something that's a little bit more tax advantaged, that's out there, that, that, that pays off extremely well. And if you just start thinking about like taxes as part of your net return.

• 41:12Speaker 01

  That's a big thing. And I'd say that's, that's a, any innovation in the last decade that people have really started paying attention to is like, how do you think, for the average retail investor, like, how do you think about, you know, minimizing your, your tax bill? And, and like the technology has gotten way better at that too, right? Like we use a tool called Orion or a platform called Orion for the actual like trading. And they have like this built in rebalancer where anytime, you know, you basically say, okay, anytime that there's a, you know, 10% drop or, you know, 10% decline, decline event across any account, we're going to automatically do a tax loss harvesting exercise. And, and Orion has already picked out, because you know, you have these like wash sale rules, right?

• 41:54Speaker 01

  So it's like, you can't like sell Coca-Cola and then buy Coca-Cola back. Like you have to sell Coke and buy Pepsi. And so like that sort of thing is, is, um, you know, really like, uh, like, like it's, it's amazing. This is, you know, such a great, like new set of tools that's available just in the last decade.

• 42:10Auren Hoffman?

  If you have like 40 grand in an account, you can get access to that today. Whereas before that would be $4 million before you get access to it. Where, where are you like super excited about AI in this kind of like helping people manage their money revolution?

• 42:26Speaker 01

  I mean, the very unsexy applications, right? So like, we're really, if you think about it, we're a labor business, right? Like we have a team of financial advisors and we charge a fee to access their time, basically. And so when we first started the company, we thought that, you know, the, the industry average advisor works with about 75 clients. And ours, when we first started the company, we, we thought like 225 was kind of like, you know, with better tech, we can get them there. We're, we're now at 450. And so, you know, and we're, you know, we're, the contribution margin of one of our advisors is like 80, 88% or something like that. So like, we look like a software business. You know, more than anything else. And but like, we've been very thoughtful about applying AI where,

• 43:10Speaker 01

  you know, we basically laid out the entire customer journey. And then we looked at each sort of process or workflow or whatever it was and said, okay, where, you know, what can we automate? And then we stack ranked it based on what we thought would drive the most margin or retention. And then we just keep building and like that work is never done, right? I mean, we're, you know, we've had a data science team work on this for four years. And we just keep building and building and building. And that's how you get these incremental improvements. Like the thing that I think is not going to work is, you know, a big financial services company is saying like, hey, everybody, here's Claude, you know, go forth and token max like that's not gonna, that's not gonna, that that's not gonna work. And I think that's like a bear case for the L L Ms. You know, so I think the very unsexy labor productivity that you get from it and and labor

• 43:55Speaker 01

  but also client delight. So that's the stuff that I'm really excited about. There's other companies out there that are like building AI financial advisors. That like are not, you know, like, I don't think that that they're gonna. Well, I don't know. I think it's a very hard problem to solve. I do think that the market is big enough that like some subset of, you know, people will be very comfortable with that.

• 44:17Auren Hoffman?

  Is there a super popular piece of money advice that you think is just actively wrong for most people?

• 44:24Speaker 01

  I don't know that there's like any one piece of like conventional wisdom that's like, you should do this. And like, it's actually like largely wrong. I mean, I would go back to this idea of like, selling financial products, you know, like, I think that there are a lot of salespeople out there who are, you know, are basically like, here's a financial plan. And the, you know, I'm happy to do this financial plan for you for free. And the answer at the end of it is like, buy this annuity or buy this insurance product. And like, that's probably wrong.

• 44:52Auren Hoffman?

  How are you using a couple of personal questions? How are you using AI in your personal life? Like, what are you doing personally with AI outside of facet?

• 45:00Speaker 01

  It's interesting. My usage is kind of, it's, it's kind of coming down the other side of the slope a little bit. I don't know if you've noticed this, but like AI is like so sycophantic that like I was, I was a power user for a long time, asking about everything. I'd ask it for like relationship advice. I'm single. So like that didn't work out. Like obviously like the, you know, using instead of Google for like research stuff, like all that. Um, I, I use it a lot for, um, like I'll write down a bunch of like sort of disparate thoughts. Like we were looking at a, at a, at a deal, you know, to potentially do like some, some M and A the other day. And I like went through all the diligence, but you know, like wrote down a bunch of disparate thoughts and then was like, okay, turn this into a memo. I'm like, it's pretty good for stuff

• 45:40Speaker 01

  like that. But then, I don't know, like, like the, I, I found that, that the utility is actually kind of dropping off for me a little bit.

• 45:47Auren Hoffman?

  I'm on the crazy side, but, but maybe, maybe too crazy, uh, depending on who you ask. So.

• 45:53Speaker 01

  I, I'm not technical. Like, so I, you know, I haven't really gotten into Claude code. Like I played around with it a little bit and I built this like nutrition app and I sent it to our CTO and I was like, why do we have an engineering team? And he like, like basically like ripped it apart and was like this, he's like, if you, if you unleash this to like, you know, 15 people, it would break. And I was like, okay, all right, well, there you go. Yeah.

• 46:12Auren Hoffman?

  Last question we ask all of our guests. What conventional wisdom or advice do you think is generally bad advice? And you're not allowed to say follow your passion because we've had like 50 people say that already.

• 46:21Speaker 01

  I think that, uh, the, the conventional advice of like start a company and raise money is terrible advice. And like, I think that the vast majority of companies that are started, especially now in this world of like, you know, minimal capex to get something off the ground. The vast majority of companies are actually not venture, shouldn't be venture backed companies. And, you know, I mean, we've raised almost a quarter billion dollars and like, I wish I'd raised a lot less.

• 46:44Auren Hoffman?

  You're talking about you're a landscaper who has, who's now has amassed a massive, great life and a great net worth for doing a great job for his customers. I'm sure. And, you know, I'm sure he gets a lot of value out of that. Like that's a business that's defined and probably didn't need a lot of capex to start. He needed maybe a couple of law knowers or something, and then maybe grew over time through its profits. We could all start businesses in some ways. Like you don't, you don't need to go to Andreessen Horowitz or something to, to start a business like that. And it's a more guaranteed way of building, uh, building, uh, net worth as well.

• 47:20Speaker 01

  Totally. I mean, I think that like, we, you know, we, we've lived through a couple of cycles where like the amount of money you raise and who you raise it from is like a really important vanity metric. I've raised a lot of money from a top tier investors. So like, you know, I'm, I'm in a glass house throwing stones here, but. But I do think that like the, you know, the, that's actually not really a great like proxy for if you're going to build a successful business or not.

• 47:43Auren Hoffman?

  I'm meeting people all the time who have these like sleepy businesses, some of which they end up like worth like hundreds of millions of dollars and many of which like they've never raised venture capital for, they never raised outside money for. It's like, it's like, it's incredible, but it's a different way. And you're probably not going to be on like the Forbes 400 or, you know, whatever, like it either Forbes 30 under 30 or you're not going to get like the, the accolades when you do it because it's a slower compounding way to grow your wealth.

• 48:15Speaker 01

  It's funny. I thought you were going to ask me the conspiracy theory question and, and actually my one is kind of similar to what you just said, which is that I actually do believe that there's a group of like a thousand people who control the world, but I think it's just like, not the people that you think it is, you know, it's, it's the people have done these like, you know, sleepy businesses and, or, or, you know, that are just like behind the scenes. Like no one knows who they are. Like there's, you know, they're kind of no names. And I don't think they're nearly as organized as people, as people, uh, uh, you know, like, like, you know, make them out to be, but, you know, but, but I do think that there's this like group of people that like, are sort of in the plumbing of like how the world works that like no one really knows about.

• 48:52Auren Hoffman?

  Yeah, it's awesome. Thank you, Andrew Stones, for joining us on Summation CEO Facet. This has been super awesome. I really appreciate coming on.

• 49:01Speaker 01

  Yeah, no, thanks for having me. This was fun.

• 49:02Auren Hoffman?

  One more thing before we go. I read a blog called Summation. It's the same as this podcast. The blog is about non-obvious idea sharing on business, talent, data, longevity, and random contrarian takes. If you like the conversations on this show, you'll probably like the blog. It's free. New content comes out twice a month. You could subscribe at orin.substack.com. That's orin.substack.com.