November 11, 2016

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Thoughts from the Desk of Bob Repass…

In the spirit of full disclosure this was written prior to Election Day which is why there is no mention of the results.

I first read Malcom Gladwell’s The Tipping Point in the fall of 2004. My son, Robbie, had just enrolled at the University of Pennsylvania and this was required reading for his freshmen class. Now over a decade later The Tipping Point has sold over 2.5 million copies.

So what prompted me to write about this book you ask? Well we just concluded NoteExpo 2016 and in one of my opening remarks sessions to the audience of over 500 attendees, my topic centered around making the most out of your conference experience by focusing on Content and Connections.

The theory on which The Tipping Point is based is that “Ideas, products, messages and behaviors spread just like viruses do.” The concept is that in order to most effectively spread your message, you must be in constant contact with Connectors, Mavens and Salespeople.

First there are Connectors. These are people that know lots of people. They know EVERYONE. They are social, they know how to network – they are the people who bring people together.

Next are the Mavens. If the connectors are the “people specialists,” then the mavens are the “information specialists.” What defines a maven is that not only do they have the information, but they are willing to share it with others. They are information brokers. This is what makes them so valuable.

Finally we have the Salespeople. The key to being a salesperson is the ability to persuade. They understand the importance of listening, they know how to read non-verbal cues when meeting with someone, and they also realize that building relationships is the driving factor behind continued success.

Bob RepassSince you receive this newsletter you are a connector, maven or salesperson in our industry. You are one of the people that make things happen. You help spread the word of what is going on in the market. You play a role in the success of your company, as well as our companies and the industry as a whole. And we Thank You.

So which one are you? A Connector, A Maven or A Salesperson? Please answer our poll of the month below and let us know. By the way, I would say I am a Maven.

Bob Repass
Managing Director

The Trading Corner

The Four I’s

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I recently had the honor of kicking off NoteSchool’s 5th Annual Appreciation Event. I want to share with you some of what I covered in my address to the audience.

Back in what Eddie refers to as my “corporate days,” I would start off each morning by emailing my entire staff which consisted of nearly 100 employees with a “WOW Moment” email. The purpose was just a daily push to motivate our team by sharing an inspirational quote.

Over time I found that most of these quotes came from particular themes which I coined as the “Four I’s” – Integrity, Intelligence, Intensity and Initiative.

These are also the filters I use in relationships, whether it is deciding who to do business with, or what new employee to hire.

The first is Integrity. In short integrity is your moral compass. Do you do what you say you are going to do? As I spoke to the crowd of small business entrepreneurs I shared one of Zig Ziglar’s quotes; “Honesty and integrity are by far the most important assets of an entrepreneur.”

Next is Intelligence. Are you a continuous learner? “A man only learns in two ways, one by reading, and the other by association with smarter people.” said Will Rogers. Those that know me know I am a firm believer in reading and if you are reading this then you pass that test as well. Now the question is do you associate with smarter people as well?

The third I is Intensity. Are you passionate about what you do? Do you have the perseverance to see the mission to the end? Nolan Bushnell is best known as the founder of Atari Corporation and Chuck E. Cheese’s Pizza Time Theater. How’s that for diversity? Bushnell once stated “Hire for passion and intensity; there is training for everything else.”

The final I is Initiative. Are you proactive vs reactive? Stephen Covey who is best known for his popular book The 7 Habits of Highly Effective People said “Employers and business leaders need people who can think for themselves – who can take initiative and be the solution to problems.”

I ended my remarks with perhaps my favorite quote which in a way combines all four of these characteristics. In 1492 on his long journey that resulted in his discovery of America, Christopher Columbus in the journal he kept, wrote repeatedly the following simple 4 words “Today, We Sailed on…” This is a true testament of character and perseverance keeping his focus on the mission as he pressed on not knowing exactly where his journey was taking him. In short, keep going forward! And always remember it’s really all about the journey.

MarketPulse

Déjà vu All Over Again?

by Kevin Shortle

I read a lot of articles on the real estate and note industry. When you do that often enough you start to notices trends within the industry. One such trend that I am seeing is the fear of another real estate bubble in certain parts of the country. Perhaps the leading cause of the last real estate crisis was lending money to borrowers with lower credit scores and small down payments. Well, guess what? These loans are growing once again. See this snippet from a recent article:

Bank of America is expanding its “Affordable Loan Solution” mortgage product, introduced back in February in partnership with Freddie Mac and Self-Help Ventures Fund. The bank announced this week that it is doubling its annual commitment from $500 million to $1 billion.
The program allows down payments as low as 3 percent on the purchase of a primary, single-family residence, with no reserve funds required in most situations. Borrowers must have a FICO score of 660 in order to qualify and non-traditional forms of credit are accepted. However, first-time buyers must participate in homebuyer education through a HUD-approved housing counseling agency.
D. Steve Boland, consumer lending executive at BofA, said, “We’re especially proud of how the Affordable Loan Solution program has become a popular choice for creditworthy first-time homebuyers, many of whom live in underserved communities.”

BofA was among the first of several banks to offer proprietary low down payment programs this year. Wells Fargo and JPMorgan Chase also rolled out programs this year.

These are NOT the only loan programs offering low down and lower credit scores. Something to keep an eye on! Where do you think this is heading?

In The Spotlight

Why You Should Start a Self-Directed IRA as Early as Possible

by Martha Speed

Many young adults tend to focus on the immediate year tax benefits of making contributions to an IRA. This is certainly one important factor in maximizing the potential of an individual retirement account, but it might not be the most valuable one.

Perhaps the biggest benefit from having an IRA is that all investments income and gains that are kept inside the account (that is, not taken as a distribution by the account holder) occur on a tax-deferred or tax-free basis. The upshot of this tax-advantaged growth is that young adults should be working very hard to start a self-directed IRA as early as possible in order to maximize their benefit.

Let’s take a closer look

Consider two individuals, one of whom makes their first $5,000 contribution to a self-directed IRA at age 25. The other individual makes their first $5,000 contribution at age 35. By the time each of these individuals reaches age 55, the value of their investments will be very different. Assuming an 8% annual rate of return, the first individual’s contribution will be worth a little over $50,000. The second individual’s same $5,000 contribution, made a bit later in life, will be worth less than half that – just over $23,000. Giving your contributions as long as possible to grow will be the key to a prosperous retirement, and that means starting an account and making annual contributions as early in life as possible.

Let’s now take this hypothetical scenario one step further and compare the long-term differences between a Roth self-directed IRA and a traditional self-directed IRA. Let’s again look at what happens to a contribution to each type of account after 30 years of growth. We’ll use the same assumptions (an 8% annual return and a 30% tax rate) for a $5,000 contribution.

After 30 years, that contribution to each type of account will have grown to just over $50,000. But because distributions from a traditional IRA are subject to tax, the value of that $50,000 account will actually be $35,000 once the distribution is taken and the taxes are paid. Distributions from a Roth IRA can be made tax-free during retirement, so that $50,000 is actually worth $50,000 to the account holder.

But what about the tax deduction that may have been available for the traditional self-directed IRA in the year of contribution, you might ask. At a 30% tax rate, that deduction will be worth $1,500. Assuming the account holder invests all of that money (and that’s a big assumption) in a taxable account, the $1,500 will grow to approximately $15,000 after 30 years. (Note that this is a best case scenario representing all capital gains, as any reinvested dividends would be taxed, thereby reducing that amount). But that investment growth will be subject to tax, so the after tax value would be much less.

This second example helps demonstrate why, for many account holders, a self-directed Roth IRA may be preferable to a traditional account.

I’d like to thank Nathan Long for allowing us to post this Quest Article in our Newsletter as a reminder that opening a retirement account isn’t enough. Regardless of your age when you open your account don’t let your money sit idle. Remember, IRA accounts can be inherited creating a legacy when you INVEST and GROW the account for yourself and future generations.

ryan-parsonCapital Markets Update

Wake-Up Call for Big Capital

By Ryan Parson

I just got back from Denver where I attended an alternative investment conference with a wide variety of financial advisors and planners. The speakers, who were primarily fund managers with large institutional offerings, were there to educate advisors how to place more alternative investments in their clients’ portfolios.

There were a lot of great conversations about the current state of the market and the role of alternatives, and here are my five takeaways that told me what I needed to know:

1) No Storming the Stage…

I was very eager to interact with a couple of the featured speakers in Denver after their talks. Normally, after the speech, there’s a mad dash to the lectern to get a word in, grab a card, and figure out how you can further engage with the speaker

It didn’t happen here.

While I was surprised, I have a theory why. Many of the advisors in attendance were from the traditional world of investments and simply lacked access to the language of engagement. To their credit they were present, trying to find ways of helping their clients, but many of them were there because they’re having to do self-preservation, and they simply didn’t know what questions to ask. With a 2% average return from the stock market this past year, I think many advisors realize they should diversify into alternatives. When you factor in inflation, there’s been little to no gain in traditional investments.

Unfortunately, traditional advisors and the financial planning world are NOT geared toward alternative investments… as a result they’re losing clients who are dissatisfied with just breaking even in largely traditional investment portfolios.

While there was a myriad of excellent investment opportunities to offer to their clients, there was a lot of palpable confusion. And where there is confusion, “No” is the reaction soon to follow.

So up I went to find out if any of the lecturers had additional capital to invest in our private multi-sector/multi-structure approach. As it turns out, many of them were excited to learn about our educational and investment strategy we engage in with our own family businesses and that of other investors who work with us. My interaction with them went well, and the best part of it all was that I didn’t have to stand in line to talk to these other industry experts.

2) Phenomenal Deals with Alternative Investments in a Traditional Structure

I was pleased to see that many of the alternatives on offer were presented in a traditional structure. Why? Understanding the moving parts of the alternative world comes with a degree of complexity so adding a traditional structure to this helped demystify some of the perceived difficulties.

This approach could help minimize that confusion for advisors and thus make it easier and more comfortable for the advisors when offering these alternatives to their clients.

3) Heritage Capital is Already Doing What the Institutions Are…

It was very re-affirming that the presenters and their respective Funds in most cases were seeking out what we’re already doing, albeit in a private environment.

We have direct insight into the businesses or companies we buy from and do deals with. When you’re the only investor or with a small group of investors in a club-like format, you have a DIRECT link to the CEO of the company we’re investing in.

Direct insight can be lost in a traditional structure. In our experience, the oversight helps remove degrees of uncertainty, and it’s reassuring to our families with whom we co-invest.

4) Yield Compression

‘Yield compression’ is a fancy way of saying you’re not earning enough return on traditional investments; that’s why it’s becoming more important to seek out alternative investments to earn a higher yield. Financial advisors are getting tough questions from their experienced high net worth investors about how to reverse the unpleasant returns of the traditional stock market.

Accredited and high net worth investors continue to be sought after by advisors. To retain those cherished relationships and to attract new clients, the successful advisor going forward must be able to offer meaningful alternative investments in defined structures. Investors seeking alternative investments, who are increasingly disillusioned with typical Wall-Street returns, are continuing to seek out ways to gain the desired access, which is not necessarily including the services of a traditional financial advisor.

In order to avoid yield compression, at least in part, investors are realizing that being able to co-invest with other like-minded investors is a big key.

5) Asset Allocation was the Hot Topic

Many conversations revolved around asset allocation and what kind of split you should have between alternatives and something traditional.

What emerged from our discussions was that only 20% should be in alternatives with the bulk still in traditional stocks, bonds and mutual funds.

However, in having individual conversations with some of these experts, I wasn’t surprised to learn that their personal wealth was predominantly in alternative investments and not traditionals. I’ve long held that traditional investments won’t get you where you want to be.

A two-percent return on your investment is already weak. When you factor in inflation and an annual advisory fee, you really need to ask yourself if you’re doing all you can for your future.

The hallmark of this event was clear: without alternatives as part of your portfolio, the probability of long-term success with your wealth goals is slim. It was a pleasure to have attended, and I look forward to continuing to see how both advisors and managers alike evolve to best serve the discerning needs of accredited and high-net worth investors.

Until next time… happy investing!

Quote of the Month

“If you want to bring a fundamental change in people’s belief and behavior…you need to create a community around them, where those new beliefs can be practiced and expressed and nurtured.” – Malcolm Gladwell

Survey Says…!

Which of these best describe you?

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Bob Repass
Managing Director at Colonial Funding Group
Bob Repass is a 25-year veteran and expert in the seller finance mortgage and distressed asset industry. Over the course of his career, he has purchased over 40,000 performing and non-performing mortgage loans totaling over $2 billion dollars in volume, giving him an unparalleled track record in the industry. Mr. Repass most recently served as the President of Pathfinder Equity Holdings, LLC a mortgage consulting, loan trade advisory and real estate investment firm whose focus is to assist clients in realizing the maximum potential on their investments by improving acquisition returns, as well as loss mitigation and exit strategies.