Wealth Actually

10 FAMILY OFFICE MYTHS EXPOSED

In this episode, 10 Family Office Myths exposed (and debunked). https://youtu.be/j1cgcZZcRBM Welcome back and Happy New Year on the Wealth Actually podcast. I’m Frazer Rice. We have a fun show today where we talk about 10 myths in the family office space. Mark Tepsich, who runs the family office governance practice at UBS is here as we dish into the ideas and concepts that are misunderstood in the family office world. Summary This conversation delves into the complexities and myths surrounding family offices, exploring their structure, governance, and the unique challenges they face in wealth management. The discussion highlights the importance of understanding the specific needs of families and the role of family offices in managing complexity and preserving wealth across generations. It also addresses common misconceptions about family offices, including their necessity, governance, and their relationship with institutional investors. Takeaways Family offices are established to manage complexity in wealth.Not all family offices are the same; each has unique needs.Governance frameworks are essential for effective family office management.Many family offices outsource functions rather than internalizing them.The myth that 85-90% of family offices shouldn’t exist is false.Shirt sleeves to shirt sleeves is a debated concept in wealth preservation.Family offices need to adapt to the evolving needs of families.Investment functions in family offices are often secondary to administrative roles.Family offices are driven by complexity rather than just size.The future of family offices may involve more direct investment opportunities. Chapters: Family Office Confidential 00:00 Understanding Family Offices: Myths and Realities02:02 The Complexity of Family Office Structures04:37 Debunking Common Myths About Family Offices06:17 The Role of Outsourcing in Family Offices07:54 Generational Wealth: The Shirt Sleeves Myth10:51 Flexibility vs. Permanence in Family Offices12:48 Governance and Decision-Making in Family Offices15:49 Investment Functions in Family Offices18:05 Size vs. Complexity in Family Offices20:09 Family Offices vs. Institutional Capital21:19 The Aspirational Nature of Family Offices23:30 The Relationship Between Family Offices and Institutions25:36 Technology in Family Offices: Current Trends29:03 Family Offices and Private Equity: A Comparative Analysis Myths 85-95% of FO’s should not exist vs. “there is no such thing as a family office’ Family office internalize everything A Family Office Anchored by an operating business is the same that is one funded solely by liquidity event Shirtsleeves to Shirtsleeves is myth Family offices are designed to be permanent’ Family Offices don’t need high end (almost SOX) like governance Family Offices are driven by net worth (no, by complexity) Family Offices are built on a robust investment function (no, it”s complexity management- often rooted in bookkeeping and accounting) Family Offices are like institutional Capital (no, many more motivations than pure returns- including whimsy and the knee-jerk ability to override the IPS) Family Offices are the right result for a career (they could be, but it is extremely unlikely- a lot of things have to be “just right” and there is little to know patience for development Family Offices make great wealth clients (very much depends on the function and the product- they can be difficult consumers) Family office tech is best – in – breed (No and it probably never will be) Family offices shun Large institutions (Surprisingly, no- needed for deals, expertise, and most importnatly financing and introductions) Keywords family offices, wealth management, governance, investment strategies, family dynamics, myths, financial planning, family wealth, complexity management, family governance Transcript: Family Office Myths Busted Frazer Rice (00:04.462): Welcome board, Mark. Mark Tepsich: Hey, Frazer, good to see you again. Appreciate the opportunity. Frazer Rice: Likewise. So let’s get started first. We’re going to go into some of the myths around family offices. But you really participate in kind of an interesting subset of that in terms of helping families design and govern them. What exactly does that mean on a day-to-day basis for you? Mark Tepsich: Yeah, good question. So, you know, it means a couple of things, right? So if you think about a family office, you have families that are at the inception point, right? Where things are getting too complex for them. They need to set up some sort of infrastructure. And it’s really like, what is a family office? What can it do for me? What are the pros, cons, and trade-offs? Where do I start? What’s the infrastructure, the systems? Who do I hire? How do I structure a compensation? So you’ve got families maybe coming at it. From post liquidity event, maybe coming at it from, we need to lift up, lift out this embedded family office out of the business to, hey, we’re an existing family office. We’ve got, you know, we’re evolving, right? The family’s growing, their enterprise is changing, the world around us is changing. People are leaving the family office, the next gen’s getting incorporated into the family office in some way. We’ve got some questions that could be, how do we engage the next generation through the family office? Mark Tepsich (01:21.614): How do we make decisions, communicate around our shared assets and resources, which could be a portfolio, maybe even a business, or hey, how do we come together and hire? What is this profile of this person look like? Who should we hire and not hire? What’s the structure of their compensation, carry co-investment, leverage co-investment? What’s the tech stack look like across accounting, consulting, reporting? Now, how do we insource and outsource? So it’s sort of. I like to call it organizational capabilities. So, you know, sometimes it’s soup to nuts, like starting from zero, other times it’s, we’ve been around for a long time, but we have a couple of questions. So that’s kind of my day to day. And, you know, I’ve been living this really since 2008 pre-global financial crisis. Frazer Rice So we’re going to go into, I think, some of the craziness of the family office ecosystem where we have people who wear many hats, people who wear masks, some people who are jokers and other people who are really good technicians and provide a lot of great insight. One of the things you were talking about is that the different types of mandate can be different. And I think maybe one of the first myths we should tackle is the The bromide that if you’ve seen one family office, you’ve seen one family office, which is thrown around at every family office conference and everybody chuckles for a minute and then it sort of washes away and no one cares anymore. What do you think about that statement? Mark Tespich (03:19.006): So I don’t necessarily think it’s true. And here’s what I mean. Let’s make an analogy to this, right? A business needs certain core infrastructure to just operate, right? And using accounting back office, you know the inflows, the outflows, you know, if you’re make a decision, these are the steps you have to go through. And so a family office, right? It needs to incorporate that, but it needs to incorporate it with the family and the family enterprise that is existing for that family, right? So, yeah, each family office is different because each family is different, but that’s like saying you’ve seen one business, you’ve seen one business, right? The strategy could be, the culture could be different, but, you still need some core operating infrastructure. And again, there’s accounting infrastructure, and that’s the basics, right? So there’s a curl of truth, but largely I think that it is false. Well, and at the same time, yes, families are different, but in general, families are trying to get to the same place, which is, know, they want to steward the wealth. They want to make sure it benefits the family and the other constituencies. And they want to make sure that it’s preserved over time. And those functions, you know, it’s very infrequent. You’d find the functions not there. And so how you get from A to B may be different, as you said, but there are a lot of universal truths to setting one of these things up. Frazer Rice So one of the other myths that we’ve come across is the idea that 80 to 90 percent of family offices shouldn’t exist. is, people and families set these up for, let’s call it the wrong reasons. Maybe it’s fear of missing out, maybe it’s great cocktail party chatter, maybe it’s an overdiagnosis of their needs. What do you think about that? Mark Tepsich Again, false. know, family offices are largely a function. They largely exist because there’s a market scale here. And what I mean by that is when you look under the hood at a family office, you’ve got basics of an accounting firm. You’ve got basics of an investment slash wealth management firm. You’ve got the basics of a legal slash tax firm. And then you’ve got essentially everything in between. And when you look at professional service firms out there, They can’t provide all of those under one roof, whether compliance or regulatory reasons. But the other reason is because no business model out there can really scale the complexity that each one of these families has. So yeah, you could outforce a lot of this stuff, but at the end of the day, family offices often exist because of a market failure. so, false, 85 to 90 % of family offices should exist. Frazer Rice (05:41.164) One of the other things, I’ve been around enough of these getting set up, is that the family office, if we get into sort of a technical structure, such that you set up a structure so that you’re able to deduct the expenses related to administering the wealth around that, that’s a valid reason to do things in addition to the organizational component. So I agree with you that there’s, to say that they shouldn’t exist is sort of belying the notion that these functions should take place internally. And I think you spoke to that. And I guess that gets to another myth, which is that family offices should internalize all of these functions. You just talked about it a little bit, that that’s not a great business model either. Mark Tepsich No, mean, yeah, so, you know, 85 to 90 % of family members out there, you just use that statistic, outsource a fair amount of things, right? And what that means is let’s just use tax counsel, for instance, right? This is something that these issues exist in every family office, they exist for every individual, but at the end of the day, should you have, you know, a tax counsel in-house in a family office that’s only doing, you know, income tax advisor work? Probably not. For 95 % of family offices because the frequency just isn’t there, right? So, you if you look at general councils alone, right? So they should have a broader mandate than income tax. should have well-transferred estate planning. Every family has those issues, but do they have the frequency to warrant bringing that individual, that professional and the rate, the cost? Probably not. a lot, you know, most family offices outsource a fair amount of whether it’s investment management, manager selection and due diligence. So false. Most fair amount offices do outsource a fair amount. Frazer Rice (07:31.374) One the things, this is one of my favorite controversial topics in the family office ecosystem of vendors that are out there is this notion that shirt sleeves to shirt sleeves is a myth. that the, and for those who don’t know what that means is, know, the first generation has generated the wealth, the second one enjoys it. And then the third one for a variety of reasons is ill-equipped to carry the wealth forward. And then everyone kind of goes back. It transcends culture. It’s lily pad to lily pad. You know, there’s a British version and a Russian version and whatever version. But the advice ecosystem around this is such that there’s a lot of debate about the statistics that have, quote unquote, proven that. And I can listen to that and say, yes, those may be very narrow. But there is a myth out there that shirt sleeves to shirt sleeves is a myth. Maybe you have some comments on that. Mark Tepsich Man, this is a tough one. I will say this will probably be the toughest one. So I think once a family becomes wealthy, right? And you can kind of define that as, the wealth, meaning the financial wealth will last a few generations with really out, with really nobody working, right? Let’s just define it that way. It’ll last a couple of generations if you make some not dumb decisions, we’ll call it. I think such as the financial markets today, right, as long as you’re diversified, you will stay wealthy. Does that mean you are going to have the same amount per capita over time? Maybe not, right? So if you look at it today, is a nuclear family of four, and you look at it 50 years from now, and the family is 30 people, right? I don’t know what the growth rate would have to be on those assets. So I think the family will remain wealthy whether they remain, you know, on a per capita basis, right? That’s a different story. I think what this is missing, however, I think the numbers kind of overshadow what this is getting at. I think when you look at it, when you take a step back, that first generation wealth creator, right? Will the family continue to be builders and entrepreneurs down the road? Frazer Rice (09:50.26) That I think that’s the question. Will they continue to kind of reach their full potential? I think that is that should be the focus. I’m going to punt on this one. I think it’s TBD and it’s there’s no set answer. I think the idea that the returns, To get back to your point is that as you go from generation to generation, the complexity increases, I’d say geometrically. Whereas the assets in many ways are going to be designed to increase linearly. And so at some point it may be 14 generations down the line when you’ve got 300 people that you have to take care of, are those assets gonna be in place to be able to support the level of living that people expected in generation one, two, and three? I think that’s the equation we’re all trying to fight. And so I’d say while Shirt Sleeves to Shirt Sleeves isn’t necessarily a prophecy, it’s definitely something that has to be addressed. So I’m gonna say that the fact that Shirt Sleeves to Shirt Sleeves is a myth, I think that’s the myth. Mark Tepsich So that’s where I draw my line in the sand there. think there’s an equation you constantly have to fight. Okay, so here’s another one. Family offices are designed to be permanent. I happen to think that they start out trying to be permanent, but in actuality, they really have to be more flexible and flex with the needs of the family, even at the first or second generation. Yeah, I would agree. Often they’re established for a good reason, right? That reason is complexity. Whether that complexity continues to exist for the family is a different story, right? You might have a business being sold. The family might just say, “hey, we don’t need to do all these direct investments, these alternate investments. Let’s just keep it simple, keep it passive.” I don’t think they’re designed to be permanent. I think families don’t really think about that too much. They want to exist for probably the existing generation that’s leveraging it and they wanna transition it, to your point, be flexible over time. But I don’t think anyone like a business, right? If you think about a business, the business generally speaking, it’s meant to exist in a perpetuity. That’s why you have a business, right? It’s not a sole proprietorship, but a family office, I think it’s TBD, right? So, you know. I don’t think anyone’s setting up a family that will say this is going to exist a thousand years from now. And I think if they came out and said that, think that it would add question and motivations. Frazer Rice Maybe we may be welcoming the Martians, we may be speaking Mandarin. There’s a thousand things that could happen in between here and then, that’s for sure. Here’s a myth that I think you and I are both going to agree is one, which is that family offices, for the ones that we think are going to try to persist, don’t demand necessarily Sarbanes-Oxley or high-end governance. Mark Tepsich I think as family offices mature, meaning as the family evolves, they do need some sort of decision-making framework. Especially if they’re going to really come together and act like somewhat of an institution. What I mean by that is, under the hood of a family office or under the hood of a family, let’s say there’s 10 family members. Let’s say there’s 20 to 25 trusts within that. You know, you could come together and pull your assets, right? And pull your resources. That’s part of the reason for having a family office. And so you just have a larger pool of capital. When you’re doing that, you do need governance. Okay? But if you’re gonna have, it’s just like, hey, we’re gonna have our separate portfolios. We’re not gonna come together and have pooled investment vehicles. You might not need an investment company, okay? And there might be good reasons to have an investment committee. In fact, many the investment committees I see, they’re not like college endowments where, we got eight people or nine people on here. We need to agree at least have five people to agree to allocate to this manager or change the allocation or change the IPS, depending on where that authority resides. I often see many investment committees for families, hey, we’re just collaborative in nature. We’ll get together. We’re going to have a meeting and talk about different strategies. Different advisors, things we should be doing. But if they’ve always had to agree at the family business level, they might not wanna have that same construct in the family office slash investment portfolio. If they’ve always struggled, know, come into agreement at the family business, now they’re gonna like, hey, we’re gonna recreate this dynamic. don’t have a binding construct. In fact, we ran a report, it’s coming out hopefully in the next couple of weeks. on family enterprise governance and a component obviously is the investment committee. 70 % of the investment committees out there are advisory in nature, meaning they don’t make binding decisions. They take it back to the trustees or whoever the authority is and they say, hey, here’s what we think, right? So individual family investors, whoever that is, co-trustees, it’s a, okay. So I do think governance is important, but it depends on what you mean by that, right? Should there be an IPS in place? I 100 % think that each family investor should have an IPS in place. The biggest mistake I see there is, hey, we’ve got this shared pool of capital. We’ve got 50 trusts. We’ve got one single IPS, right? I think that is a big mistake. don’t think that’s good governance. So it really depends on what you mean, but I think, yes, there should be some decision-making framework that you’re following. Otherwise, what exactly are you? Adhering to it, right? Like, what is your framework? What is your decision making tree? Frazer Rice (15:53.902) On top of that, possible myth. Family offices are built on a robust investment function. I mean, yes, there are some that are like that, right? You know, there’s a big names out there, MSD, Pritzker, so on and so forth. Those are the exceptions rather than the rule. Most family offices, 85 to 90 % are formed to manage the complexity, right? So again, otherwise you’re gonna have all these outsourced providers and that just doesn’t make sense when you’re trying to make a decision, because you need all the different parts to come together. They’re often built as administrative functions first, rather than, we’re gonna go start the next, you know, a private equity firm. that’s false. Frazer Rice The, as I like to say, probably to the boredom of a lot of people who talk to me a lot is that a lot of these really are built on a bookkeeping or an accounting spine. You’ve got to manage the inflows and outflows of everything and keep track of what you have or else you can have a great investment function, but things are going to spill all over the place. Mark Tepsich (17:30.872) I’ll never say, yeah. mean, and that actually goes back to good governance, right? So I always say, it’s not provocative. I’ll say, listen, this is not a provocative answer, but you need to create that first. And most of the people that are considering this rate are business owners. So they’ll intuitively get that. In fact, that function might exist somewhere at the business, but it’s really not organized. And without that function, like, it’s hard to make a decision, right? If you’re going to allocate 20 % of your portfolio, to private equity drawdown vehicles. got cap calls, capital commitments, distributions, like that needs to be budgeted and forecasting, right? So a lot of these families will have, one nuclear family can have three to four homes, 10 bank accounts, 20 entities. It’s not like a single piggy bank that you could take cash out of and move it every which way, right? Those are owned by different vehicles, different trusts, different assets and things like that, so. Frazer Rice Here’s a myth that I espouse which is Family offices and whether you have one or not is driven solely by size whether you have five billion or two hundred million or something like that that if you aren’t a certain size you shouldn’t have one and if you’re Of a certain size you must have one. Mark Tepsich That’s a myth. It’s driven by complexity first. I’ve seen, I’ve spoken to people that are worth two to $3 billion. It’s concentrated in a few stocks, meaning like they were early stage employees, right? They’re still in it. They’re getting a healthy dividend at this point. Guy talked to couple years ago. He had two homes, two cars, probably 95 % of his network was tied up into two separate securities that were probably traded. And he’s like, I don’t think I need a family office. You want to know what one was, what it could do from. And I’m like, listen, if you don’t have the complexity, it probably doesn’t make sense. Okay, if you can make a decision within whatever framework you have, whatever complex you have. Now, the other, you know, there is a cost factor to it, right? It gets easier to start a family office, meaning hire a couple of people, if you’ve got the… asset base for it to make sense on a cost perspective. So most of the time it’s driven by complexity, but cost does become a factor, right? If you’re worth a hundred million dollars, you’re to go hire 10 people. That probably doesn’t make sense. Frazer Rice (19:28.342) Right. Well, on top of that too, if you, and there’s a sort of the difference between a family office driven by a liquidity event and meeting that’s, that’s all you have versus a family office that’s tethered or sorry, a family business that’s tethered to it, that is also generating cash flows to help pay for things that that’s a big part of the decision. Because if you’re hiring people, you know, a CIO minimum, absolute minimum is probably $500,000. They’re going to need people, you know, you’re looking at at least 3 million. just to get the thing up and running before you start figuring out what you actually have to do. And so the concept that the size is going to dictate completely, it underscores sort of that cost component that you described there. Frazer Rice This is an interesting one and I like this concept to talk about. Family offices are like institutional capital as investors. Mark Tepsich Again, myth, there are some, again, there are some that are like institutions. They have the size and the sophistication. Oftentimes you see them, they’re former PE or hedge fund founders, right? That just aren’t doing any more of it. They made their wealth in the financial ecosystem, in the markets. And so they’re very sophisticated. But by and large, I mean, they’re sort of quasi-institutional, right? So I’ve seen multi-billion dollar family offices that Again, they’re more of the administrative hub rather than, we’re gonna be splashing around and playing in the markets and using a lot of leverage and doing a lot of control equity investments. So by and large, it’s the myth. 85 to 90 % are institutional-like. They are there to fill a need and that need is complexity management. Frazer Rice Here’s one on a different angle, which is family offices are the goal for people in the wealth management industry to work for, meaning family offices are a great aspiration for people who work in the industry and that that’s universal. Mark Tepsich (21:34.35) Myth, I think it’s an option. I think it’s interesting. I think it is a growing opportunity for folks that work in, you know, maybe wealth management or investment management or the financial ecosystem. But you didn’t, again, family has been around for a long time, but they’ve really only became, you know, kind of popular post global financial crisis with the rise of PE because of ZERP. You know, I’ll talk to a lot of people that are like in the hedge fund ecosystem looking for a change, right? And I say like, listen, like these opportunities for you are out there, but it depends on the family. It depends on their compensation philosophy as on the culture that you’re going to have to live within. There’s a lot of key man risk. Is it an opportunity? Yes. But again, it is, it is family office by family office. Frazer Rice I tell people too, it’s for people who are used to having lots of clients or lots of institutional support that is going to be a shift. It’s different to have one client. It’s different to have a scenario where the business of a family office, the business model of that particular family office can change on a dime. And if you don’t share the last name of the family you’re working for, you could be in a tough spot. Mark Tepsich Yeah, “we’re gonna build out a sustainability impact portfolio. We’re gonna build out, we’re gonna have a direct investment initiative. We’re gonna allocate whatever, a few hundred million dollars to it.” That person, that professional gets there and then a year or two or three years goes by and the strategy changes because a family member too had to change a heart. And then it becomes, okay, why am I here? Where am I gonna go now? So again, they could be great opportunities. I had a great experience.but it really just depends on the family. Frazer Rice (23:26.894) Here’s one, and you’ve got UBS over your shoulder there, so this is dramatic foreshadowing in some ways, but I think it bears talking about. It’s that family offices shun the large institutions, and that they want it bespoke, they want something peculiar all the time. What do you think about that? Mark Tepsich No, I mean, it goes back to the earlier myth that, you know, basically we’re saying family office should, family office do outsource a lot, right? So again, most family offices are five to eight people, right? I call it family office island, meaning you’re there on the island and you’re like, what is going on outside of the island or off of the island? You know your island really well, right? You know the family, know all the facts inside and out, but they are, I mean, there’s a reason why all these institutions, including UBS, has built out the resources to cater to family offices, right? I’m the perfect example. They brought me on to help our clients build family offices, right? They would not do that if it was gonna cannibalize their business. So they could be great clients and other times it’s like, hey, we’re very insular and we’re gonna keep everything close to the vest. Again, it’s family office to family office. But by and large, they’re great wealth clients. Frazer Rice No, and they also, you know, they need institutions to partner with of size, whether it’s at custody or lending or any number of other functions that are out there. Sometimes, you know, the RIA space is such that, you know, they try to be all things to all people and the appeal of being in, you know, the billionaire space. It takes a lot of people and a lot of effort and frankly a different business model to deal with that and to just sort of wander in and say we’re great and we can do these things. I think that’s a short road for a lot of institutions. Frazer Rice (25:17.602) Again, like we are brutally honest too. And I’ll, and here’s what I mean by that. Well, like we’re rated a lot of things, but I’ll say like, listen, there’s things that we can’t do for you. We can’t be your accounting back office, right? Like we just don’t offer that. We don’t have it. We’ve got a couple firms that would do that. They’re pure plays on it. So they’ve got to be good at it. but you know, use the various institutions for what they’re good for. They’re, know, again, that’s why you’ve got a family office. You can kind of pick or choose and be agnostic as to what you’re using them for. Frazer Rice If we wind down here a couple of last ones: The tech that family offices rely on is going to be best in breed. Mark Tepsich I, listen, I have this power station all the time with family office meeting, like what, what, you know, what tech providers should we be looking at? Listen, family office have grown in, right over the past 10, 15 years that there’s not a question. they’re historically, right. had to use in a family office, had to take basically institutional tools, try to repurpose them for the family office and they just, they’re just kind of clunky, right? The family office is still a cottage industry. If you’re trying to sell the family offices, you’re selling the two firms with five to eight employees, right? So the tools are going to continue to get better. But in my opinion, they’re always going to lag the institutional tools and kind of sophistication. But that’s also because institutional tools are very kind of narrow and deep, whereas the family office tech tools, you’ve got the accelerated reporting, but it needs to link to the accounting. That’s an issue. And so the family of standard day is left with like a bunch of disparate fragmented systems that have a challenge talking to each other. With that said, AI, I’ve been talking to a lot of these sort of mom and pop shops, I’ll call them. They’re firms that are trying to incorporate AI to break down these walls. So it’s not fragmented disparate systems. I use the analogy of it’s like jailbreaking an iPhone. I don’t know where this is gonna be in a couple of years, but I think the tools are going to continue to improve. But again, you’re probably not going to take a family office tech tool and deploy it at institutional scale. So if that answers your question, I guess it’s a measure. Frazer Rice First of all, I think it’s going to take a long time before something, quote unquote, replaces Excel, which is still a powerful tool that is flexible and does what it says it’s going to do. And people use it sometimes at their own peril to be the underpinning of everything. the one thing I would add is that the mom and pop software components, I think, have a lot of great ideas. The total market to sell into that, though, does not necessarily make for a great software business. As you say, to get those tools that are specific and required at the family office level to be profitable, you got to figure out a way to sell that into something bigger. I’m not sure there is anything bigger. Mark Tepsich (28:49.358) Yeah, I mean, you’d be better selling it to, you know, small businesses, right? So, I mean, the tools are going to get better, but there’s been a lot of interest recently in the past couple years. I don’t think, I think most of them are not going to survive. I don’t want to say there’s only going to be a couple winners, but on the Consolidated Reported Front, I really think there’s only going be a couple winners because you need scale. And again, family office, if you’re looking to make a decision, you’re like, well, okay, well, 5,000 users use Adapar and 50 use this other platform. So which one are you gonna choose? You don’t wanna onboard to the one that has 50 and then three years down the road, they’re out of business, or there’s fold or something like that. So with scale comes a little bit of security that at least you know that a lot of other people are using. You could point to that. Frazer Rice Last question. Family offices will rival PE firms in terms of influence in the investing market? 85 to 90 % will not rival PE firms. That’s not what they’re set up for. That’s not the goal of most family offices. Again, it’s complexity management. Will some rival PE firms? Yeah. But again, you… Listen, I’ve seen some family office go out there and raise their party capital. When they do that, they’re not a family office anymore. They might have a component in there, but they’re private equity firms. What you’re getting at is private equity firms are raising a fund every couple of years. Can a family office do that? No, because once they do that, they will be a private equity firm. So PE by and large has an infinite capital source, as long as they are good at what they do, right? So with that said, you know, there’s a lot of entrepreneurs that are are post liquidity events have played in the direct investment space, they really wanna do it. They’re still young, right? They’re billers, operators created. They wanna do it from a different vantage point. They’re coming to a realization: “that w”We need to start a fund.” I really love that story because again, they’re founders and operators. They didn’t come from the financial ecosystem first to do this. So I think they’re putting a different spin on PE. I think it’s great for the PE industry as a whole, by the way. And I think, if you’re a founder or a business owner, you might have an easier time taking an equity investment from somebody like that, who’s known in that specific industry that they made their money in, who’s had to make payroll. And they probably have a different timeline than normal PE that’s looking to flip every three to five years. So I think as an investor, I think that would be an interesting investment opportunity, right? And so it’s like, okay, well, part of my PE allocation, you know, This might look interesting. I hesitate to make, you know, I’m not an investment person, so. Frazer Rice Great stuff. Mark, how do people find you and reach out? Mark Tepsich I’m on LinkedIn. I would attempt to just spell my name with my email address at ubs.com, but it’s very lengthy. You just hit me up on LinkedIn. But, Frasier, I appreciate the time. This was great. Frazer Rice I’ll have that in the show notes and as a final parting, we sort of listen to people say, the family space is getting loud. I’m not sure it is. I think the vendors are more loud than the family offices are. I don’t know what your experience is there. Mark Tepsich 100%, the family members themselves are still quiet. You don’t see them out there on LinkedIn. It is the ecosystem to your point around them that is getting loud, right? It’s LinkedIn. It’s like, you know, every time I’m on there, it’s like somebody’s got something to say about families, which is good. Again, if you think about every boom in history, they attract people, right? You could say the same thing about AI, right? But again, it’s become loud, but that’s the industry. It’s not the family offices themselves. Frazer Rice Great stuff. Thanks, Mark. Mark Tepsich Thank you, Frazer. Appreciate it. FAMILY OFFICE DEFINED MORE ON FAMILY OFFICE DESIGN WITH ED MARSHALL https://www.amazon.com/Wealth-Actually-Intelligent-Decision-Making-1-ebook/dp/B07FPQJJQT/

THE BIRTH OF AN ETF

We have Mike Monaghan on the show today and covering the “Birth of an ETF.” He’s going to talk about the Founders ETF and its new launch. We’re also going to talk a little bit about what it takes to get an ETF up and running. From a compliance perspective, remember, there’s no guarantee of future performance. https://youtu.be/o-m3PYHKXqk?si=qBaHkJpUt7xgdpjG Transcript of “The Birth of an ETF” 00:00 The Founders ETF Frazer Rice (00:00.986)Welcome back, Mike. Michael Monaghan (00:02.616)Frazer, it’s great to be back. Frazer Rice (00:04.4)You are at an interesting point in time right now. You’re about to start up Founders ETF and I think you’re about to get trading authorization to get going. Maybe tell us a little bit about the process to set up an ETF. Then we’ll dive into the strategy a little bit. Michael (00:21.25)Yeah, absolutely right. We should start trading on the SIBO Thursday, so two days from now. And we’ve launched our first fund, the Founders 100, that owns the 100 best founder-led companies. I’d be happy to go through some of the process that it takes to set up an ETF. Frazer Rice (00:40.014)Love it. ETFs are the main way to go now in terms of getting an inveestment cvhicle up and running. What has your experience been around? The Popularity of the ETF Structure Michael (00:52.014)Yeah, so ETFs have become the primary investment vehicle for a few reasons. Let’s outline those reasons. Then we can go through some of the steps that it takes to set up an ETF. So on the advantage side of an ETF, they’re typically a bit lower cost than traditional mutual fund products. Importantly, they’re tax advantaged. So there’s no gains or losses that occur during the normal ETF growth phase. Everything that happens within the ETF is done with what’s called an authorized participant. So you do exchanges. And so there’s no capital gains that are assigned to the investors. As long as they hold the ETF, a tax trigger only occurs when they actually sell the ETF. Finally, it’s a great way to get exposure to the market. So whether you want to own a broad market index, one of the legacy indexes, or a vehicle like ours. That gives you in one single trade, rather than having to guess who’s going to win. Is Nvidia going to win or Palantir who’s going to win? You can own a hundred of the best winners in the market in one single stock ticker. In our case, FFF. Frazer Rice (02:07.364)So let’s dive into that theme a little bit. As you said, it’s the top hundred founder led companies. First and foremost, public I assume, private, you’re not diving in those waters. Public vs Private Michael (02:20.59)Correct. So these are the hundred best publicly traded founder led stocks. And we generally fish from the 200 largest founder led publicly traded stocks. So a lot of these are names and founders that are very well recognized. Whether it’s Elon at Tesla or a Mark at Metta, Larry at Oracle, Rich Fairbanks at Capital One. These are all very well known founders. They’re great entrepreneurs who are leading highly scalable, very high performing publicly traded stocks. 02:53 Understanding Founder-Led Companies Frazer Rice (02:53.914)So let’s define founder a little bit. Obviously we have sort of the cult of personality around high-end CEOs. It sounds like you’re identifying companies that have been founded. The people who are running them not only founded them, but they scaled them. They have now gotten them to a level of maturity. That’s different from the typical public company that we find in the S &P 500. Definition of Founder Michael (03:19.104)Yeah. So first let’s define a founder. Then let’s talk about why we think the founder led companies outperform a traditional S&P company. We define the founder as being a chief executive leader. It could be chief executive officer, could be chief technology officer. Sometimes that say a scientific or medical company, would be the chief scientific or chief medical officer. And that person conceived and founded the company, took it from zero to one. It’s their imprint that has guided it over its 10 or 20 or 30 year period. That’s taken it from a small private company to a venture backed company to a large publicly traded company. And so the idea being the person that founded it continues to run it to this day. We talk about the fact that we own an Nvidia that Jensen still runs. But we don’t own Intel. We own Meta because Mark still runs it, but we don’t own Google. We own Dell computer because Michael Dell still runs it. But we don’t own Apple. We own Capital One because Rich Fairbank still runs it, but we don’t own American Express. Investment Process Frazer Rice (04:25.86)Got it. So lots of things to get into here. How does it a company get on your radar screen? And then ultimately, how does it get off of it? Michael (04:35.806)Great question. the getting on the screen is fairly mechanical. We look at the 200 largest by market capitalization founder led stocks. So we look at all U.S. listed. So it could be listed on the New York Stock Exchange or NASDAQ, but it has to be U.S. listed. We then look at the 200 largest. And from there, we select the 100 best using a quantitative factor model. So I’m have a Sanford Bernstein background and so do some of the folks here. And so for folks who are familiar with Bernstein’s research, we use a Bernstein factor model to pick the best, the hundred best names out of the 200 largest. That’s how they get on our radar. And to get off is quite simple if they retire. So if a CEO announces he’s retiring, per the prospectus, we have 90 days to sell the stock. once we, so for example, Mr. Buffett recently stepped down from Berkshire Hathaway. And so we sell Berkshire Hathaway on his announcement and no longer own the stock. Frazer Rice (05:38.0)things like corporate mergers or divestitures or maybe even a reclassification of stock where the founder stays on in some capacity but their decision making has been reduced. How do you analyze that? 05:54 The Investment Strategy Behind the ETF Michael (05:54.326)Yeah, so there is some human overlay judgment calls here and the founder has to be an executive officer leading the company. So they can’t just run a division. They can’t just be chairman of the board. They have to be the executive in charge of running the company. Frazer Rice (06:14.0)And if for, I guess one of the exits possibly would be if, and I don’t know if this is even possible, but if NVIDIA were to take over Meta and there isn’t room for Jensen and Mark in the same suite, how do you analyze something like that? Michael (06:34.253)So in the business combinations where you have two founder-led companies or a non-founder-led company swallowed up by a founder-led company, as long as an original founder remains, it remains in the portfolio. So we’ve had some stocks that had, say, three to four co-founders. And as long as one of those co-founder remains, it remains in the portfolio. Voting Shares Frazer Rice (06:58.352)So one of the things that’s a bee in my bonnet is the concept of having shares where, in a sense, they’re super majority or voting components and then shareholders that have less decision making authority to act as a check and balance around the company. Is that something you’re not really that worried about or is it something that may be a factor that’s important later on? Michael (07:24.525)So we actually think that’s one of the opportunities that this exists. Like one of the things that we haven’t talked about yet is why is all this alpha there? Why is this uncaptured alpha there for us to go get? And we think historically in the past, active money managers have sometimes shied away from these founder led companies because to your point, Frazier, oftentimes the founder has managed to have super voting control, 10 to one shares, 101 shares. So they completely control the company. And some of these larger active money management complexes have said, well, we as the shareholder, we need to be able to have a vote and we’re going to underown these stocks. We have the opposite view. We think these founders are special. So we think that by the time a Mark or a Elon has driven their company into the public markets, they’ve showed that they know how to set the vision, ruthlessly execute and generate value for the shareholders. Concerns? And so we’re not concerned by super voting structures. Oftentimes those are the stocks that we want to own because it’s the founder that’s in control and setting the direction of the business and generating high returns for the shareholders. We view it as you either believe in them and you own the stock or you don’t believe in them and sell the stock. We’re not interested in other people’s getting on the board and monkeying with the decisions of the founders. Frazer Rice (08:30.255)Is this it? What is it about the founders, especially for those that go from zero to one, then to scale, and then to shepherding a mature business? What makes them better and what drives the alpha that you’re trying to seek? In terms of putting together a portfolio of these types of companies? 09:01 The Importance of Founders in Business Michael (09:02.891)Yeah, so the great ones tend to be a bit irreverent. They tend to be highly visionary. They tend to be charismatic communicators and relentless in their execution ability. They’ve got a great ability to pivot if a change needs to be made. And rthe moral authority to set a tone to generate very high rates of return. We see it sort of over and over and over in these founder led companies. And if you look at some of the studies that we’ve done. There’s a study that Bain Capital, Bain had done years ago in combination with Harvard Business Review, founder led companies tend to outperform non-founder led companies in say the S &P 500 by 3X. So it’s this personality type of high vision and high execution tends to drive outsize returns. And it’s a bit of a self-selecting process. What makes Founders Unique? If you think about it by the time any of these founders that we own or talk about have got to the public market. They first had to identify an opportunity to go after. They had to develop a great product by listening to their customers. And they’ve shown that they can scale all the way from a series A round, B, C, D, all the way investing and generating high rates of return in the private markets. Transitions of Founders to Executives They get to the public markets, continue to do that. And now you get a little bit of an effect of a echo of that, of now all of sudden you’re in the public markets. If you get enough scale, you have this highly effective business. Now you’re getting relatively cheap capital that you’re feeding into your business through the public markets. And now you continue to grow. Frazer Rice (10:42.096)Just to summarize at least what I’m hearing is that they’ve gotten to the point of becoming public. They’ve been able to say no to losing control in exchange for either putting some liquidity back in their pocket or otherwise moving on. And so they’ve almost ratified their vision and message and they keep going. And by the fact that they’re public, there’s enough liquidity for everyone else out there in terms of their investments. So it ends up being a win-win. Michael (11:11.157)I think so. That’s what we see. Frazer Rice (11:13.316)So one thing that I’ve been sort of reading about and thinking about is the concept that the number of public companies is becoming less, well, it’s decreasing, and that many people are able to stay private for longer. Do you worry that your universe is going to get too small to provide sort of a canvas for your ideas here? 12:02 Market Trends and Future Outlook Michael (11:37.549)Let’s talk about three phases of that. We don’t, we actually see the data showing that there’s more and more opportunities within founder led. So let’s look at history and then let’s move to the future. So historically, probably about the time you and I joined the securities business, they would actually take the, to your point, they would take the founder, they would kick out this charismatic founder. They would put in some mid-level proctor or GE middle level manager to be the you know, the suit in the room to take the company public. And that was sort of in the late nineties and people figured out that wasn’t such a good idea. So if you actually look at the chart, there’s more and more founders staying and leading their public, their, their publicly traded companies. That’s number one. Number two. Yes. We have seen some companies stay private, obviously Stripe, SpaceX, but we are now seeing, for example, SpaceX coming to the public markets. Eli is talking about coming next year. so we, we haven’t seen it so far impact the pool with which we can fish in. And as I mentioned, that’s what we saw historically. Public Markets and the Future In the future, think, Frazer, I think we’re going to start to see a conversion of public and private markets, meaning these private mega cap companies have liquidity. And I think that you’ll see more and more ability to trade those stocks almost in public liquidity. So I think these two markets are converging. So I think that Not only do we have plenty of founders in the traditional public markets, I think that the liquidity and the big privates is going to converge to a public market style shortly anyway. Frazer Rice (13:13.232)You’re in a curious time as far as launching an ETF around this concept. I know a lot of people are wary of Mag-7 and ultra valuations and issues related to that. How do you respond to that concept that a lot of the growth has taken place in seven, maybe seven out of the hundred that you’ve chosen? Debunking the Mag-7 (to the Mag-3) Michael (13:33.356)Yeah, so that’s a misconception. We see Mike Saylor get on TV and wave his arms around it, but it’s not really true. First of all, what’s interesting, if you tear apart the Mag-7, it’s actually the Mag-3. The outperformance in the Mag-7 has come from Meta, Tesla, and NVIDIA. So it’s not just the Mag-7, it’s a founder led. And now you say, well, that’s a small sample set. Let’s look at a bigger sample set. So if you look at the NASDAQ 100, for example, It’s actually the 20 founder led companies have driven most of the outperformance over the last 25 years. And what I’m about to tell you about the S &P 500 probably won’t surprise you. It’s the 37 founder led companies that have driven most of the outperforming the S &P 500. So the outperformance is coming from founders, not from any specific part of the market. And one of the things that we think is great about this ETF is to avoid concentration. 14:50 Risk Management I know you’re really familiar with the concept of active share and that’s how different you are than the S &P 500. We have an 85 % active share to the S &P 500. So if you own the founders 100 ETF, you have much different exposure to the market than say the S &P 500. And so we think it helps reduce some of that concentration. We’ve done some things to make sure that we are diversified. First of all, we do own 100 stocks. Diversification So really good diversification across that. And then number two, while we run a market weight portfolio, we cap. No stock can be bigger than 7 % of the portfolio, so we don’t get out of balance at any point. So we think that we mitigate some of those concentration risks and we allow people to invest in innovation without being over concentrated to any one name, say the MAG-7, for example. So we think that we’re giving our investors really good exposure to innovation through the founders, but not exposing them to pre-existing market concentrations. And then finally remind everyone It’s not the MAG-7, it’s not the NASDAQ-100, it’s not the S &P-500, it’s the founders within each of these are what are driving the outsized performance in those analytical groups. Frazer Rice (15:36.218)So from a diversification standpoint, obviously not everything in one name, the 7 % cap you described, do you have sector concentration guidelines as well? Michael (15:45.749)We don’t have sector concentration guidelines, but if you look at the nature of the portfolio, we were fairly well diversified. We’re slightly overweight tech and financials versus say the S &P, but we own healthcare stocks, own consumer stocks, we own energy stocks. So we’re giving you a broad exposure to the market. Leverage Frazer Rice (16:05.924)Let’s talk about leverage for a second. I know a lot of people are trying to juice returns by piggybacking off of other people’s money on that front. Does that have a place in your ETF? Michael (16:17.004)So there’s no leverage in the ETF. We sort of believe in get rich the slow way. I like to tell people that it’s very hard to make money in the stock market over the short term, but it’s not particularly difficult over the very long term. think Mr. Munger and Mr. Buffett used to talk about this. the idea being, leverage can impact you in times that are not favorable. So we believe in just owning the stocks unlevered, let them compound over very long periods of time. And we think that by doing that, we and our shareholder, we think our shareholders can generate wealth over very long periods of time. Taxes Frazer Rice (16:54.98)So tax efficiency, the concept of holding period, does that play into your process at all? Michael (17:04.316)So remember within the ETF, as long as you’re managing your trading properly within the ETF, there’s no tax implications inside of it for your shareholders. Your shareholders only would be impacted at selling. So assuming they hold the stocks for over a year, any gains would be long-term capital gains treatment. Frazer Rice (17:27.024)And when you’re describing the investor profile that you’re looking to attract here, who is this for? Michael (17:35.916)Yeah, so the person that, you we really think it’s appropriate for you if you have a five year or more holding period and you want to have long-term capital appreciation. You know, if your goal is to be exposed to the best minds and public securities, that’s the founder led companies, and you want to compound your wealth over a very long period of time and have a high probability of outperforming the traditional broad market indexes, this ETF is designed for you. 17:59 Investor Profile and ETF Positioning Frazer Rice (18:04.705)And as you’re sort of outlining that profile and for those people who are trying to figure out where this fits in from an equity allocation perspective, you’re in charge in many ways of the spoke of a hub and spoke component of people are really sort of looking at indexes as the base of their equity portfolio. What are you looking for? What kind of benchmarks do you sort of measure yourself against? Michael (18:35.007)Yeah, so we think this is absolutely a core holding. So if you’re looking to build out you or your client’s portfolio, we think this should sit at the core. It is on the growth side, so it’s core growth. We think that it is a one-for-one replacement for, the NASDAQ 100. Or, for example, somebody holding the triple Qs. We think this is a better holding than the triple Qs. So we benchmark ourselves against them and against the S &P 500. Ee look at beating those two broad market indexes, generating better risk return for our investors. Frazer Rice (19:13.019)For those listeners that are out there and want to find out more, what’s the best way that they can either get a hold of you or maybe even better, do you have a ticker symbol ready that people can discover? FFF and Contact Information Michael (19:25.215)Yeah, absolutely. So the ticker is FFF. So that’s the FFF ETF that we’ll trade on. And investors can find that at their favorite brokerage firm, whether they’re Schwab customers, Interactive Brokers customers, Fidelity customers, trades under one ticker, just like a stock. Frazer Rice (19:44.365)And let’s take, we have a few minutes to go here, which is great. Your experience in terms of establishing the ETF, maybe a couple of some of the touch points when you went from vision to execution here, what was the process? Michael (20:00.106)Yeah, so ETF has a few basic processes that are regulated under the 1940 Securities Act. And so a lot of those rules are set up to protect the end investors. So for example, the securities live within a trust. So we set up our own trust. Some people use a mingled trust. We thought it was better for our end investors to have our own trust that we set up that has an independent trust board that oversees to make sure that we’re executing our strategies as we’ve outlined in the prospectus to make sure that we’re Doing the best we can for our investors. You’ve got to set that up There’s a few firms that do the plumbing for the for the ETFs would say US Bank is probably the largest player. So US Bank provides our our fund custody and fund administration and then there’s just a few other vendors in the space that sort of help with all the plumbing to make sure that the ETF runs smoothly. So it’s probably a six month process if you stay really focused to get all of that set up. 20:58 Navigating the ETF Launch Process Frazer Rice (21:03.313)You get that set up, how do you approach the Schwabs and the Fidelitys and the other platforms to make sure that people can access, buy, sell, whatever they want to do with your ETF? Michael (21:14.347)Yeah, that’s a great question. So the online brokerages typically put you on the platform as soon as you’re listed on a major US exchange. So you’ve got to get listed on NASDAQ, NYSE or CIBO. We chose CIBO. So again, on the traditional online brokers, you’re there day one. And then the big wire houses, JP Morgan, Goldman, Morgan Stanley, BAML, they typically have a few hurdles that you’ve got to get through, whether it’s daily trading liquidity assets under management. And over time, as you run the wickets through their process, you’re added to those platforms. Macro Issues? Frazer Rice (21:48.721)We live in a political age and a time when there’s just chaos everywhere, different types of rules in order to allocate capital. If you’re an investor trying to guess what’s happening politically, et cetera, that are difficult, you must be positive as far as the environment for founders to find success in this country and beyond. Is there anything that you’re looking for to make sure that those conditions hold? Michael (22:18.225)Yeah, we don’t really look at the macro or political backgrounds. think over very long periods of time, U.S. innovation outperforms. so we sort of we think that, again, one of the great things with investing in founders is they keep adapting as the background changes behind them. So we think over very long periods of time, the U.S. has great economic growth. And for those people that have worried about little blips along the way, we think the founders are the absolute best at mitigating those blips. Frazer Rice (22:48.334)I like to say you bet against America at your own peril and it sounds like from a founder perspective it’s still a great place for them to locate their businesses and grow them here. Michael (23:01.042)Absolutely. 23:50 Final Thoughts and Contact Information Frazer Rice (23:02.971)Just to reiterate, FFF is the ticker symbol for people to find it. any other contact points for people to find you if they’re interested in what you’re putting together. Michael (23:15.613)Yeah, so we have a great website at FounderETFs.com. can go check out there or anyone’s happy to email me, just michael at FounderETFs.com. Happy to chat with anyone who has interest about the portfolio, the strategy, or what we’re building. Frazer Rice (23:32.197)Well, great to have you back on, Mike. Thank you for putting up with my attempt at looking like Steve Jobs. It’s 25 degrees in New York here, and I am the stupid one who’s not in California or somewhere warm. appreciate you taking the time to be on and talking about your new product. Michael (23:48.011)Yeah, it was great to be on here. Really a huge fan of your podcast and just the level of guests that you’re able to interview and help educate your viewers. Frazer Rice (23:56.849)Mike, thanks for being on. Michael (23:59.061)Thanks a lot, Frazer. https://www.amazon.com/Wealth-Actually-Intelligent-Decision-Making-1-ebook/dp/B07FPQJJQT/ Previously with Mike Monaghan ETF EDUCATION ARTICLES ON ETF.COM

DIVORCE FOR THE WEALTHY WOMAN

BROOKE SUMMERHILL has written a new book to address “Divorce and the Wealthy Woman.” https://youtu.be/FFSeBg3XT8M In this conversation, Brooke discusses the complexities of divorce, particularly focusing on the financial aspects that wealthy women face. She emphasizes the importance of understanding one’s balance sheet, hiring the right professionals, and navigating complex assets during divorce. The discussion also covers the emotional components of divorce, the significance of having a supportive team, and the benefits of open conversations about finances, including the role of prenups. Takeaways from “DIVORCE FOR THE WEALTHY WOMAN” Divorce can be a daunting process, especially regarding finances. Understanding your balance sheet is crucial during divorce. Breathing and staying calm can help alleviate anxiety. Hiring the right professionals is essential for navigating divorce. Complex assets require specialized knowledge and support. Cash flow planning is vital for post-divorce stability. Parenting during divorce needs careful planning and support. Open conversations about finances can strengthen relationships. Prenups can facilitate healthy discussions about money. Divorce is a journey that can become easier with the right support. Chapters 00:00 Introduction to Divorce and Finances 02:58 Understanding the Balance Sheet 05:45 Navigating Complex Assets in Divorce 09:05 Building Your Professional Team 12:04 The Emotional Component of Divorce 15:09 Modeling Settlements and Cash Flow Planning 17:56 Parenting and Financial Responsibilities 20:41 Preventative Measures and Financial Awareness 23:53 The Role of Prenups in Marriage and Divorce Transcript of “DIVORCE FOR THE WEALTHY WOMAN” Frazer Rice (00:01.186) Welcome back, Brooke. Brooke Summerhill (00:03.378) Hi, thanks so much for having me. I’m so excited to be here. Let’s chat about the most fun topics in the world. Divorce and finances, right? Frazer Rice (00:09.952)Well, and codified in your new book, Divorce for the Wealthy Woman. I have already started, and I think it’s a winner for a bunch of reasons. The big one really is addressing a viewpoint that I think has been missed by the financial books generally speaking, Brooke Summerhill (00:15.794)Mm-hmm. Frazer Rice (00:31.086)It really corrects a problem, I think, around information asymmetry in finances generally. And unfortunately, we’ve both been around it from a divorce perspective. Tell me what, first of all, let’s let our listeners remind themselves of your practice. And what do you do there? And then what was the book trying to accomplish? https://www.amazon.com/Divorce-Wealthy-Women-costs-that-ebook/dp/B0G1ZMFVCN/ Brooke Summerhill (00:53.554)Okay, so hi, I’m Brooke Summerhill. I do specifically for the last like 15 years in finance. Specifcially in the last five specifically in divorce and finance for wealthy women. So I’m not very creative my book specifically and my podcast is literally called divorce for the wealthy woman. I love being able to understand the perspective of someone going through divorce,not feeling the fire, and creating a years long fight. I help alleviate the stress of divorce and go through the finances, the emotional aspect, I’m in financial psychology. I’ve been doing that and I plan on continuing doing that. It’s a fun, fun, fun career path for me. Frazer Rice (01:40.526)One of the great things I think about your book is it starts where I start. You really have to be comfortable with what your balance sheet looks like. Take us through a little bit about your experience in helping wealthy women get acquainted with something they weren’t familiar with initially. However, they have to get familiar with it real fast. Brooke Summerhill (02:03.014)So typically, you go to a lawyer . You’re about to get divorced and it was blindsided in your face. my god, what is going on? He wants to get divorced or she wants to get divorced. Doesn’t matter who you are, heterosexual couple or not. It does not matter. You might not know where the finances are, right? And you’re going to a lawyer. You expect them to help you out, but you don’t even know where the assets are. You don’t know it’s on the balance sheet. So the first step is breathing. Let’s not get into this sympathetic nervous system. No fight or flight, freeze, thaw, and let’s not go there if we can’t avoid it. And really just breathe and understand it’s going to be OK. That’s the first thing I want to just point out is you can do the work on yourself without having to do hard interval training. You can just breathe. So you’re going to breathe and understand, OK, the balance sheet. I can figure this out. You got it. And you might need to hire someone like myself who’s a certified divorce financial analyst, you might have your lawyer help you. You might ask your soon to be ex if they’re willing and amicable to understand the balance sheet. You might go to a financial advisor, wealth manager, your family office and ask some questions. So this is a time of learning and it’s okay that you don’t know where everything is. And the balance sheet is terrifying for most people. 98 % of us have money anxiety. It’s okay. Breathe. Get help and support where you can. The foundation is the balance sheet. If this is the only thing you take from today, is just breathe and know that the foundation is your budget, your expenses, what’s coming in, what’s going out. Can you figure that out? Even though you might not know where your assets are. Do you have Bitcoin? Or have different properties? Do you even know if there’s liens, mortgages, loans on them? That all will get figured out. But you’ve got to know what you’re spending. I would say, you tell me if you have a different experience. But most clients do not know their budget. And that’s OK. Doesn’t matter your wealth, income, anything. Most people, at least in America, do not know what they spend every month. So that’s the foundation is to start theirs. Understand, what are you spending? Just keep a little log. It can be old fashioned. And I have plenty of technological apps that can help with this. But keep it old fashioned. Just write down, what are you spending? And keep that for a week. Brooke Summerhill (04:28.752)That can help you in your divorce process and remember to breathe. There you go. Frazer Rice (04:32.91)And it’s part of my process, I think, is to just understand what you’re spending. And then the next step is really understand where it comes from to help support that spending. It’s like analyzing someone who earned 100 million dollars from this movie. It’s like, OK, that’s the headline. Now it’s a lot different in reality. Certainly taxes, how it’s paid to you. We’ll get into this in a second, and sometimes it’s not in cash. Sometimes it’s in different types of assets. Whether it’s stock or maybe you own homes, and it may not be necessarily liquid right up front. It sounds like we’re parking our cars in the same garage on that front. Brooke Summerhill (05:19.154)Absolutely, absolutely agree with you. Frazer Rice (05:22.114)So maybe let’s go through some of the complex assets that you think about that come up in any, not all divorce situations, but definitely in many of them. Many times people have grown their wealth through a private business. so even, you know, the number that is settled upon in the divorce settlement may not be readily available from a cash payout perspective. How do you take people through that? Brooke Summerhill (05:47.473)Oof. So I have an entire chapter on businesses because majority of my clients, I’m going to be very sexist here and say majority of my clients, husbands in a heterosexual relationship do own a business or have just been bought out of a business or are starting a startup or have something behind the scenes that they’re aware of or maybe not even aware of. So businesses are huge thing. That’s why I put a chunk of it in my book because The biggest advice I can give is hire, I’m going to be a repetitive throughout this whole podcast today is hire the right professionals if you can, because you don’t know what you don’t know and that’s okay. You’re going to breathe through that and acknowledge you don’t have to be an expert in divorce. But when you have a business reading, listening to podcasts, doing all of those exercises are wonderful and hiring an expert. So getting someone who’s understanding the finances in a divorce specifically, so business valuator, or just having a consultation. That’s enough to understand, this, I need a forensic accountant, because I don’t know anything that’s going on within this part of the businesses that I’m a part of, but I’m not really a part of, or I need a business valuator. Let’s just have a consultation. It could be really a non serious, non threatening, non emotional way to start it. I’m just going to have a consultation to understand, do I need this business valuator? I would just at least have those conversations to understand more about your husband’s business or your business in general on what are the numbers behind it? Because it is very complex, just as you’re saying. Businesses, absolutely, you want the right experts involved. Frazer Rice (07:30.506)And sort of as a broader business, or not really business, but sort of as a broader sort of contextual situation here, the type of wealth, whether it’s private funds, people who are invested in private equity or hedge funds or stock options or RSUs for people who are in the tech world, things that are held in trust, there’s the concept of carried interest and real estate and concentrated stock. This is to go back to your comment that there are people out there that can help you. Understand those assets, I guess for lack of better word, can and can’t do. As far as either provide cash flow or are easily divisible in a divorce settlement. Does that square with your thinking on that? Brooke Summerhill (08:13.522)Absolutely. And my role is to really divide assets in a creative way that benefits both parties. They can move on, clean the slate, know, not have fights for years to come. So when you talk about dividing assets, that is spot on. Get the right professionals involved, understand your options and the scenarios, and then you can drive the car with control off the right highway scenario, or you can continue down that highway to another off ramp. If that suits you in that creative solution of dividing the assets with complex assets like RSUs. And RSUs, restricted stock units, we can go into some of these definitions that are complex, or we can just say, reach out to us if you have questions on what is RSU or what is stock option, or what is these terminology things that you guys are saying. Because it’s very complex and scary, but it doesn’t have to be if you get the right professionals involved, understanding your options. Frazer Rice (09:07.564)So let’s pull back a second in terms of assembling your team. If you’re going, you’ve been side swiped by sort of potential for divorce, you’ve hired a divorce lawyer probably right off the bat. But that you really, in my opinion, you need more than that. We talked about the financial advisor to help you work through what’s owned and how it’s owned and what cashflow it can throw off and whether it can support you or not. I would argue that this is a good time to reengage a trust and estates planner because when you go through a situation, know, divorce situation, the things that you have in place don’t necessarily apply in the same force that they did before and definitely need a look. Your accountant, of course, if you don’t have one, it’s probably worth it to get started thinking about that because how you receive assets are gonna be important and how you pay taxes on them. You’re gonna be on your own going forward. And so it’s gonna be important to understand those ramifications. What other people do you have in your cabinet there? Brooke Summerhill (10:10.547)Okay, so if we’re on a yacht and we have crew members, we have to have a few of them like you mentioned. I would say nowadays, if we go into the differences of litigation versus arbitration versus mediation versus collaborative divorce, there’s different types of lawyers that we would hire. So we can go into that, but we’ll just say, you’re gonna hire the right attorney for you to help you with the divorce process, understand the law, and it’s not going to look the same for everyone because you might not need someone who’s going to litigate and really be your advocate every second when you can hire a mediator that can help you both get creative and neutral setting wise, get you divorced faster potentially. You hire the right divorce arena lawyer, advocate or mediator, someone in that nature. And then yes, you absolutely need the accountant, CPA, tax attorney, sometimes the complex assets require hiring some consultants within the tax arena to understand what the private equity actually means within the contracts because they don’t even understand it. It can be very convoluted. So hiring the right teams with a tax standpoint is very important within the state that you are in or that business is in. That’s just another arena. The other crew member you want in a lot of Frazer Rice (11:16.046)Definitely. Brooke Summerhill (11:36.691)times I’m the one who’s bringing them in is absolutely trust the states. You might need a whole team and a crew around that because if you have dynasty stress that you didn’t even know you were signing off on for your children, you know, five to 10 years ago, you need someone to understand what that means. Or if you have an estate plan that is in the midst of there’s a lot of creative solutions here that you need the right team members. So trust in the states, like you said, big, big, big deal. Then we have therapists. Frazer Rice (12:05.454)No, I was just going to dive in and say dramatic foreshadowing talking about the emotional component of this. so divorce is a dramatic situation. To me, being a good user of professional services is using the right person for the right situation. I’ve gone through it and had friends go through it. I’ve had clients go through it where Brooke Summerhill (12:06.792)Go on. Frazer Rice (12:27.212)Sometimes they go through and they use the divorce attorney as their therapist and that’s an expensive and not very productive way to do that. Whereas having a therapist in your crew and using that person who’s trained for that and can get you from here to there in that journey of recovery. It’s an important part and one that shouldn’t be neglected, especially when you’re facing… maximum stress legally and maximum stress emotionally and if you’re trying to sort of manage the firehose of information in order to make good decisions. Brooke Summerhill (13:03.731)Absolutely. Well said. I agree. So therapist is a tool. Parenting coaches, I utilize that a lot of the times. I’m a divorce mediator, but I don’t like to practice it because I like to stay in my financial analyst realm and helping women on that end. And so I’ll bring in, you know, divorce coach and a parenting coordinator. So there’s a lot of little rules that you don’t think about that might be necessary to help a mediator, to help your divorce attorney and you, as the client understand what’s best for you, your children and your emotional setting during this financial whirlwind. And you mentioned financial advisor. I’m going to just put a little caveat there. It cannot just be a general financial advisor. There’s tens of thousands of those all over the United States. I absolutely have a bias here, but it has to be someone who is specialized in divorce and someone who understands complex assets. You cannot go with someone who is non-experience in the higher to ultra high net worth realm because they will not grasp what you need as quickly or as efficiently as someone who’s done this for years in that bracket. It’s definitely something that I like to point out all the time. Frazer Rice (14:19.245)No, and it’s absolutely just such truth right there because the assets are complex, the machinery around it can be complex and whether you can or can’t do things, you have to understand that quickly. The tax ramifications of even dividing assets can be net less to everyone involved. And so we’re going to talk about modeling settlements in a second. But then the other thing I tell people is that sometimes people walk into these situations having done trust in the state’s planning in conjunction with theoretical asset protection planning, maybe in lieu of a prenup or something like that. And that’s not necessarily a sure thing. Family law is such that judges can take a look at certain situations and say, hey, you know what, this isn’t equitable. We’re going to go in a different direction here and you may owe it anyway. And so to have that I hate the word holistic, but I’m going to use it here. The broader view of not only how the numbers work, but how it relates to the different legal and structural things in place. It’s vital to have, especially at the numbers that we’re used to talking about, because those mistakes, even unintentional ones, can be really expensive. Brooke Summerhill (15:29.523)expensive is the word there. It could be extremely, extremely devastating to not only you, but in the future, your children are going to most likely be part of that legacy or your philanthropic endeavors. And if you’re making mistakes, even with your team unintentionally hiring the wrong people that don’t understand the complexities or the tax ramifications, that’s devastating for not only you, but yeah, yours to come and your family and charitable giving.Frazer Rice (15:57.071)So once we compartmentalize, it seems to be an important thing here. You have to be able to sort of put different things in different boxes as you step into the different components of settlement that are in place here. So let’s say you’ve got the emotional part kind of addressed in the sense that you’re working on those issues that you need to work on to come out the other side. You’ve got your team together from attacks and legal and trust in the states and divorce settlement. Now, to me, is the notion where you have to step in and say, OK, this is now becoming a bit of a business arrangement where you have to model a settlement that is going to work for you and it’s going to work for your soon to be ex-spouse so that, as you say, you can move on rapidly, but in an orderly fashion. So you come out the other side and have something that’s workable so you can move on in both of your situations. from the modeling settlement part of it, how much do you go into that cashflow planning, knowing what you cost and making sure that those things are funded so that you can enjoy your life going forward? Brooke Summerhill (17:03.271)Think that is the foundation of the house. think that again, I have a bias coming into it, seeing what can happen when it goes wrong and I’m coming in after the divorce and helping with money coaching. really is devastating to see, wow, you took this, this, this, this, and they didn’t model what would happen with your cashflow if you didn’t take this, this, this. It’s devastating. Why I do what I do is really to be that precursor to look at those options before you make decisions. And there’s others that do what I do, you know, as a certified divorce financial analyst, we model out scenarios with the cash flow. So you have to understand your expenses and income and what’s going to be coming in and out basically. And that’s okay. Again, you are like most people and you don’t know what it is. You can hire someone to help you through that and really work on it in a very easy and manageable step-by-step manner, where once you understand what you’re spending and what you need to live off of, then you can model out those cashflow scenarios with the different assets coming through. And the software that I utilize makes it really easy and more fun and crisp and clean. Calculations are not hard. We’re not doing it by an Excel sheet, managing it every second for hours. It’s just, let’s look at this scenario for five minutes. And then Frazer Rice (18:21.423)you Brooke Summerhill (18:26.939)Again, let’s go off the highway. You’re steering the car. You have the foot on the gas. You tell me your values. And client, let’s go see if this highway will match. Let’s look in my software and see. Will it match your values if we took this scenario versus this other scenario? So she, for me, it’s a she. She’s getting to make those decisions. But I’m there in the passenger seat making sure. You’re not going to come to someone in six months to a year and be devastated because you don’t have the cash flow. You’re going to take the right settlement. Or present it to your student to be X, where it’s best for both of you. You both can move on and not fight in court year after year. Because you didn’t get what you deserved, right? That’s resentment building. We don’t need emotions in it if we can make it part of the business thinking process. Frazer Rice (19:12.751)No, and it’s important to underscore the difference between owning assets versus generating cash flow. You can be wealthy on paper, but if you’re having trouble getting the tuition payments made. Or if that hasn’t been discussed as to where certain financial requirements are being taken care of either at one spouse level or the other, that’s when you end up tripping over things that might have been dealt with with a little bit more organized approach going forward. Brooke Summerhill (19:44.787)Absolutely, hire the right team members to help you through that. Because if you’re listening right now and your anxiety is spiking a little bit. Because you’re like, my gosh, I don’t know, I don’t know, I don’t know, it’s okay, breathe. This is all you need to hear is hire someone or at least consult with some people in this divorce world and you’ll get through it. Frazer Rice (20:04.719)So the part that I know least about, I don’t have kids. from a parenting and support component, I can sort of look from afar and have an opinion on it. But it’s quite a bit different when you have your own kids and you’re making sure that they’re taken care of, that their five, 10, 20 year plans are squared away going forward. The emotional component of shared parenting, the establishing a schedule post divorce, those types of things which seem obvious in some ways but aren’t because suddenly you and your soon to be ex-spouse are going to be having different schedules and different priorities, etc. How do you take your clients through that? Brooke Summerhill (20:46.653)OK, great question. That’s a whole chapter in the book as well, children. And that is a difficult journey for most clients right at the start. And it gets easier. So if you’re listening to this and you’re just thinking of divorce.Oor you are just hit with papers and you are about to go through a divorce, or you’re in the middle of it and you still feel like it’s crunchy and it’s really difficult and you’re walking through mud in a way, it gets easier. It really does. The first step is again, you can hire the right professionals. So hire a therapist for yourself. And it’s better than just friends and family because friends and family might fuel the fire. That is a mistake that I see a lot of men and women make as they divorce. So hiring a therapist for yourself, then parents and coaches, parenting coordinators, those who can really understand where you’re at and level with you to make those decisions or hiring the right mediator or divorce attorney. Work specifically with those who have children because it gets way more complex with children, especially when you have bigger assets, then you need to understand what’s going to happen with the cash flow for schooling. mean, private schools, let’s just say you have two, three children, you’re going to have hundreds of thousands going out a year for just schooling, curricular, extracurricular activities, right? And things like that, you need to prepare who’s paying for that. And it’s non-emotional, but it is very emotional, right? So we want to say it’s non-emotional, but it is absolutely going to be in preparation, hiring the right professionals around you, and knowing it will get easier. Because when we look at this from a standpoint of, OK, how do we talk about with our children? How do we work through this, our scheduling? All these things can be a lot easier and simplified if you have the right professionals guiding you on that path. Frazer Rice (22:34.211)One of the things I liked about your book is that even if you’re not getting a divorce, I think a lot of the things that you have in place are very useful in terms of a spouse who knows less about the financial situation. This book in many ways brings, in my opinion, kind of a good framework from which to discuss things and how to ask questions. There’s another book I just read which I like called MONEY TOGETHER by Doug and Heather Bonaparte and so this one I’m going to recommend pairs extremely well with that in terms of building, just really building a knowledge base. For those who aren’t in DEFCON 5 and are facing a divorce and so on and they’re able to maybe get to you ahead of time to say, you know what, everything’s good. But I don’t feel comfortable. How do you talk to those types of people? Brooke Summerhill (23:31.44)My favorite part of the role is if we can be preventative because if we get in at the right time in our thought process of thinking maybe about divorce, most likely you could shift your mindset and understand more about the finances and gain confidence and clarity and then that control can just whirlwind into, I know my options and I want to stay married. Like I’m happy in this. really uncovering and discovering what your values are around money and yourself, understanding your own memories around money and how you deal with money. So your money scripts as, okay, how did you deal with money as a child? That’s some of the questions I go into is, okay, and are those still popping up right now? Have you seen some patterns and behaviors around money as a kid and as a teenager and as a young adult that are still affecting you now? And do we want to shift some of those behaviors and patterns so that you can stay in this relationship? And also we want to uncover the finances in a way of, let’s be open and understand. Maybe we bring in your spouse to these conversations so we have an open conversation about where the money is, how you’re going to be living the next few years with your values. Together you guys can build that relationship. Because most of the time, one of the person in the relationship does not want to deal with the money, or they’re scared of the money, or there’s some kind of script around money that’s scary. And so they put their head in the sand, or they turn out the light and they don’t deal with it. The other person is more in control of the money, right? That person is making the money or dealing with the finances. So if we can bring them together during marriage, when they’re thinking of divorce or before that, that’s the best part. And then they can see they’re gonna be okay as long as they both understand it and have the support. Frazer Rice (25:17.327)As we wind down here, we’ve gone from divorce during marriage and now before marriage. Preenups, I in general, if the discussion can happen, I like the idea of having them. And I think frankly, it accelerates good discussion ahead of time anyway and helps get that information to both spouses. And as you say, give them confidence within the relationship. That’s such a great, I like that narrative a lot. What’s your predisposition there? Brooke Summerhill (25:48.308)There’s so much stigma around having a prenup. There’s so much stigma. There’s so much potential though in my mind in a positive light of having these tough, scary financial conversations. If you have a prenup or if you’re thinking about a prenup, if you guys can be open around the finances, how can you not both benefit from that? Talking with a lawyer or with someone in the financial realm with the lawyer paired in a room, having these really, really intense conversations. And I say intense because it’s about money and that’s usually intense at the beginning and then it gets easier. If you can do that, how are you not gonna be set up for success? And you’re gonna most likely be well prepared for that marriage and stay married. I wish there was some research I could say, like this is the statistic. If you have a prenup and you actually, you didn’t just do the prenup because your parents are the wealthy ones and you wanna keep the money in the family. It was for the right reasons of I wanna understand my asseets. I want you to understand your assets, I want to understand that we’re in a marriage because we love each other. Here’s the financial ramifications of this and that. And you guys have open conversations well before marriage conversation, like not the day before the marriage, right? And have it be an open dialogue with professionals. I think that’s a wonderful way to keep you both in this beautiful marriage for long term, where it’s healthy. That’s I agree with you having a prenup and that’s in my book too is Frazer Rice (26:59.907)Got it.Brooke Summerhill (27:14.621)Preenups can be a very, very positive tool. And in divorce, on the other side, understanding what you signed before you get divorced, or if you are thinking of divorce, understanding and going to the right lawyer, maybe the one who drafted it, who you trust, is a very good idea, too. Beware, they will most likely have to talk to both of you. you guys, long story short, go to the right attorney, make sure if it’s a neutral person that you both worked with, which is rare. That should be a red flag. But if you both worked with the attorney, you both are in the room understanding the prenup before you get divorced so that you understand the ramifications of what you chose to do and what you chose to sign. So divorce, you need to know the prenup. But before you get married, get a prenup and have those really tough, scary conversations upfront. Frazer Rice (28:01.871)Terrific. Brooke, so glad we got to catch up again. What is the best way for people to find your book and otherwise find you? Brooke Summerhill (28:10.887)You know, I think nowadays Amazon is really an easy target to type in right there. Divorce for the Wealthy Woman is my book. And my phone number is in the book. My email is in the book. I’m very open. People have questions, conversations to be had. I’m right there for you. So they can reach out on my website. Just type in Brooke Summerhill. You’ll find me or buy the book online and learn something new. Frazer Rice (28:36.111) – Divorce for the Wealthy WomanAll of that will be in the show notes. Great stuff, Brooke. Thanks for being on. Brooke Summerhill (28:40.519) – Divorce for the Wealthy WomanThank you for having me. PREVIOUS DISCUSSIONS WITH BROOKE BROOKE’S FIRM https://www.amazon.com/Wealth-Actually-Intelligent-Decision-Making-1-ebook/dp/B07FPQJJQT/

THE TENNESSEE WEALTH ECOSYSTEM

Wealthy families are discovering Tennessee’s legal and tax ecosystem as a key component for their long term wealth strategy. I spoke with ANDREA CHOMAKOS from Pendleton Square Trust on Tennessee around these advantages that the Tennessee Wealth Ecosystem provides in the context of other states’ legal systems and economies. We cover directed trusts and Tennessee situs, and even a tip like the Community Property Trust, which is interesting in both prenuptial tax planning and estate planning contexts. https://youtu.be/CiR8eoAG-iI “The Tennessee Wealth Ecosystem” Transcript Frazer Rice (00:00.814)Welcome aboard, Andrea. Andrea Chomakos (00:03.128)Thanks, Frazer, happy to be here. Frazer Rice (00:04.696)Well, glad to have you on. Always happy to talk to friends of mine at Pendleton, talk about Tennessee and trust administration generally. Our listeners are probably pretty well versed as far as the idea of trusts, but I don’t think it hurts to go and talk a little bit about what the trustee function normally entails as we talk about what is interesting about Tennessee and other jurisdictional issues. Andrea Chomakos (00:29.358)Absolutely. So Frazer, it’s great to be here and share some conversation with you and your audience. While I have been in the professional fiduciary role for several years, for several decades before that, I was a practicing attorney. So I would often have conversations with my clients and drafting their documents and asking them decisions about who to appoint as a trustee. One of the very first conversations we would have is what does it mean to be a trustee? As I have now come over to the other side, broadly stating that the trustee has the responsibility to administer the trust for the sole benefit of the named trust beneficiaries in accordance with the trust terms. That seems like a lot of really big words that don’t make a lot of sense to the average person. I get it. When I was practicing, a lot of my clients, their reaction would be, okay, so you’re just telling me that this person is the person who makes the decisions about distributions and that’s great. I can go, you know, no big deal. And the reality is, yeah, the reality is it is a big deal. Because it’s more than just making distribution decisions or making them in a vacuum. You have to look at the broader picture. Frazer Rice (01:41.228)It’s more than that though. Andrea Chomakos (01:55.598)But it also entails managing the trust assets and investments. It means making those important distribution decisions and understanding the impacts those are going to have not just in the short term but the long term. Filing and paying tax returns for the trust. Communicating with trust beneficiaries, providing reports and accounts. And even all of that sometimes seems like not that big of a laundry list but Let me give like an example that I ran into. Everybody loves a good example. So when I say a trustee is responsible for investing and managing all of the assets of the trust, that also means the protection and preservation of those assets. And it’s incredibly common to see a trust hold some real estate, oftentimes a residence that a trustee or a beneficiary lives in. Frazer Rice (02:24.58)That’d be great. Andrea Chomakos (02:51.094)And you may say, OK, well, no big deal. Like if something happens, we’ll just get it fixed. Well, it’s more than that, right? You need to really understand what that means and the risks you’re taking and the potential liability you’re taking if you don’t manage those issues in a way maybe different than you would if it was just your own house. So I was at a prior institution and that institution was serving as co-trustee with a beneficiary who resided in some trust-owned property. And lo and behold, you know, got a call from that beneficiary saying, hey, there was a leak with one of the pipes in the house. So I just went out and got some duct tape and put that around the pipe to stave off the leak, but now it’s gotten really bad. And you’re just sort of like, well, wait a minute. Like that’s. Frazer Rice (03:34.276)Hmm. Andrea Chomakos (03:47.573)As a trustee, that’s not an appropriate response to fixing a leak, it’s not a roll of duct tape. So it’s things like that that trustees are responsible for. Frazer Rice (04:00.004)One of the things too that’s happened in modern legislation is that those three functions you talked about, the investment, the distribution, and the administration have been in many states you’re able to, we like to call it bifurcate them, so that you can put an expert maybe in the investment role, maybe a family member with a corporate trustee in the distribution role, and then a corporate trustee in the administration role who, you know, they’re used to doing the paperwork and the tax filings and the eye dotting and T-crossing. And in your, I guess in your experiences, we’ve gone through that. How have trust companies evolved to take into account this new flexibility? Andrea Chomakos (04:42.254)Absolutely, think you hit the right word. I always say the same thing, Frazier. It’s a bifurcation of those duties and responsibilities. And so there are more trust companies who are embracing what we call the Directed Trust Model, where the corporate trustee is handling the administrative functions. So the reporting, the trust beneficiary communications, filing the tax returns, all of those very important functions, but ones that oftentimes are overlooked, their importance is overlooked. And other people are given the role of either distribution advisor, and sometimes the corporate trustees in these roles will make distribution decisions. But certainly the investment function is one. And as you see arise in individuals, families, using private equity for investments, other alternative investments, you see them using RIAs, multifamily offices, to manage their investments that, and those entities don’t have that trustee function. There are more corporate trustees who are filling that role. And I think that we’re only going to see that market increase and that demand increase. Frazer Rice (06:11.196)I don’t think I could agree more with that statement. I think the idea of people having all of those functions under one umbrella really ignores just the way wealth is being managed these days, whether it’s sort of peculiar assets or even, you know, regular run of the mill stocks and bonds, people have their advisors and they don’t want to necessarily give that up to take advantage of trust situs and professional trustee services. Andrea Chomakos (06:21.998)Listen. Frazer Rice (06:36.524)As I talk to people around this topic, the culture of a good trustee, and especially sort of a good corporate or a good administrative trustee, there are a lot of things that go into that. In your experience, what is it that makes a good sort of corporate or administrative trustee for particular family? Andrea Chomakos (07:01.422)There’s I mean, that’s a great question. And it should be top of mind for all clients. Right. I think there’s a couple of things. One is the institutional professionalism that a corporate trustee, independent corporate trustee provides, as well as the skill, the background and then the lack of conflict of interest. So when you think about an administrative trustee that’s not managing the investments, we have no dog in that fight as they say about what’s going on with the investments, how they’re being managed, how they’re being allocated. We, Pendleton Square and others are here to serve the beneficiaries, to facilitate communication, to help beneficiary wealth education, to continue the continuum of family values and conversations, as well as be some be a person who can sit there alongside them and educate them about the trust, about the wealth, about the impact the distributions from the trust are having on their own estate, on their own lifestyle, and really honing in on the things that they’re really good at. And I think predominantly it is that being free of conflict. We don’t have any other interest in the trust. Frazer Rice (08:28.252)I think the concept of staying in your lane is important. I think in the old world where the big trust companies did everything and they would allocate resources to that because doing everything required good integration and so on, it made a lot of sense. But nowadays, as we talked about the bifurcation just now, the provision of the administrative trustee functions and the distribution committees, et cetera, that feels more like an accommodation. Andrea Chomakos (08:30.913)I’m sorry. Frazer Rice (08:56.696)than a sort of focus for them. And so these trust companies that have developed, the new ones that are less worried about the investment function, that that focus is now a strength in the sense that people hire experts in that field in order to get what they need from an estate planning perspective or a site of choice, et cetera, but then to really effectuate that culture we just talked about. Andrea Chomakos (09:26.956)Yeah, I mean, think there’s a couple of nuances there that you touch on that always resonate with me. And so one is. Trust business, it’s a business, we all have to admit that it’s a business, but is it relational or is it transactional? And at its core it’s really relational. You’re working alongside a family for hopefully multiple generations and as an institution you can carry forward that historic bank of knowledge in the grantor’s intent, the family values as you’re administering the trust. But in many larger institutions, because of just structural considerations and constraints, sometimes you have a lot of turnover in personnel. You have some loss of historic knowledge and information. And you have a compression of what it takes. not just the skills, but the technology and what it takes to execute on trust to meet the needs of the beneficiaries. And so sometimes those decisions get kind of kicked down the road to a committee that maybe only meets once a month or every couple of weeks, since you may not have an immediate decision. having a more nimble corporate trustee who recognizes that and values the relational side of the trust business is… really ideal and really the flip side of the coin I think the thing that a lot of clients and some of their professional advisors advocate for is don’t name an entity name a person as trustee and that’s where I think the staying in your lane part gets really complicated. A lot of opportunity for you know the wheel to drift over to the other lane and Frazer Rice (11:29.816)Well, as you alluded to before, institutions that have a trust capability but have a lot of other things going on, found that, I use the analogy, sometimes the anaconda of maybe the commercial bank or the investment bank finds the sleeping bunny of the wealth management arm and then by extension the trust company. And then you start getting things, start getting business metrics applied to that part of the business that maybe aren’t.appropriate for the 50 to 100 year nature of what’s going on there. Andrea Chomakos (12:00.526)Sure. Yeah, absolutely. And the reality is that the profitability margins in the wealth business in general, and then when you push it down to the trust business in particular, are even close to the margins of financial institution sees from their lending line of business. Because that’s what banks are. Banks are, they’re in the business of lending money, taking in deposits and lending it back out. That’s how they make their money. And so Frazer Rice (12:28.281)Right. Andrea Chomakos (12:30.712)When you look at an institution, whether it’s Pendleton Square or someone else that is solely a trust company, what we’ve said is we know our lane and we’re sticking to it. Because we’re just gonna do it really well. That’s all we’re gonna do. Frazer Rice (12:45.902)So in general estate planning circles, there are lot of favored jurisdictions. Many people know about Delaware, sometimes from the corporate law standpoint, Nevada, South Dakota, et cetera. But Tennessee, especially in the last five to 10 years, has become one of the real top jurisdictions for trust planning and general wealth planning. What are the parts of Tennessee’s attributes, whether tax or legal structure, that makes it appealing these days? Andrea Chomakos (13:15.838)I think there’s a laundry list, Frazier. So as a former state planning professional, I went through an exercise probably about six or seven years ago with a client looking at different jurisdictions for them. Specifically, they wanted to establish some trusts and were interested in going outside of their home jurisdiction, which is a state that does not appear on any of these lists. Frazer Rice (13:41.572)I live in one, so yes, I can empathize. Andrea Chomakos (13:44.663)You really do live in one. At any rate, we briefly looked at Tennessee, we ended up going to a different jurisdiction for other reasons, but let’s start going through the list. And if you even take out specifically what I think Tennessee’s state laws have done well, if you’re a planning professional or a client, these are some of the things that you’re generally gonna look at. Number one probably should be, doesn’t always hit number one, but number one probably should be state income taxes. The state income taxation of trusts is very complex and sometimes it cannot be entirely avoided just based on where a grantor resides, where some beneficiaries reside, depending on each state’s laws, which just FYI to the listeners are not uniform between states and very complex and If you want to have a separate podcast about that, happy to. I talk about it all the time. Frazer Rice (14:43.716)No- I’m, acutely aware of being from New York, which really hamstrings you sometimes on that. Andrea Chomakos (14:46.318)Yeah, no bueno. So, but, you know, Tennessee does not have an income taxation on trust. And when you look at the ability to, and there is the ability in many circumstances to extricate a trust from the tax grips of one jurisdiction and move them out of that, you know, people…overlook the importance of state income taxation. That can be anywhere you’re in a jurisdiction where it can be as high as like 12 plus percent. That’s a big drag on a trust’s return if you’re having to pay out 12 percent every year and just in state income taxes. The next thing that a lot of people look at is how long can this trust last? The legal terminology for that is the dreaded rule against perpetuities. I’m not gonna get into the rule against perpetuities, nobody wants to hear it. But basically, let’s just distill it down, like how long can my trust last? Can it last 100 years? Or 360 years? Can it last indefinitely? For some clients and families, they want to take advantage of that and have that trust last for as long as possible. Because if structured properly, that means wealth can transfer Frazer Rice (15:38.838)I’m getting it. Andrea Chomakos (16:03.886)for an infinite to an infinite number, indefinite number of generations without estate taxes. So Tennessee’s law is a little bit unique and I’ll distill it this way. If a trust is established in Tennessee, the default rule is a 360 year term for the trust. can last for 360 years, which is probably, you know. five to six generations, maybe seven, depending on the longevity of your family line. Frazer Rice (16:37.092)By the way, the US is going to be 250 years old next year for context. Andrea Chomakos (16:41.836)Yeah, that great context. I love it. I love it. So, 360 years. But two years ago, Tennessee modified its statute on this point to say if a trust is moving to Tennessee from a jurisdiction where it had previously been administered, that allows for a longer duration of trust, including an indefinite one then that would be recognized by Tennessee. In other words, you’re not shortening the duration of your trust’s longevity by moving it from a jurisdiction like Delaware that allows indefinite trust terms. By moving it to Tennessee, you don’t lose out on that. Which I think is a really interesting and important point and shows and demonstrates how proactive Tennessee is in updating its trust laws. Frazer Rice (17:36.613)The flexibility that Tennessee gives the practitioner. In terms of being able to decant or modify or change trusts. That started out doing one thing but life evolves, people evolve, the family’s needs evolve, and sometimes these things need tinkering. Tennessee, as I understand it, just continues to have a pretty broad array of tools in the toolkit. Andrea Chomakos (18:00.417)It sure does. I think I’ve been impressed with, as a practitioner who’s licensed in North Carolina that does not have as flexible of laws as Tennessee does. It’s really nice to be able to take advantage of Tennessee’s flexibility to modify trusts. A lot of times just from an administrative perspective to say, hey, This was always at, always anticipated, this trust always anticipated a corporate trustee that invested the assets and handled everything. But now it’s appropriate for us to look at this bifurcated structure we just talked about earlier. In Tennessee, you can do that. You can modify the trust to bifurcate that trustee structure by an agreement of the beneficiaries. You don’t have to go to court. And you don’t have to do anything funky or elaborate to accomplish that objective. Frazer Rice (18:56.396) One of the current bees in my bonnet is around the intersection of post nuptial planning and longer term trust planning. And I know that there’s a community property feature to Tennessee’s law that is interesting in certain components of that. Andrea Chomakos (19:15.278)Yep, absolutely. I think to put in context for folks, a lot of people talk a lot about the estate tax. The reality is that the estate tax exemption has more than tripled in the last about 12 years. And from the time I started practicing law, When I started practicing law, the estate tax exemption amount was $600,000. And it will be $15 million in six weeks per person. Per married, know, spouse and a married couple, so 30 million. For man people, including wealthy people, estate taxes are not as much of an issue as maybe income taxes. And so a lot of… Planners, attorneys, advisors, CPAs are focusing more on income tax planning for clients in concert with their estate planning. And a nuance to the basis step up rule, so people know. When you die and asset is included in your estate, that asset’s basis adjusts to fair market value as of date of death. So that, everyone knows that. For community property, because property that’s classified as community property, it’s considered owned by both spouses. Not like jointly with the rights of survivorship, but more as like they both own 100 % of it. When one spouse dies with community property, it gets a full step up in basis. Even though the spouse inherits 100 % of it. So doing tax income tax basis planning with low basis assets. If you’re not in a community property jurisdiction, which is just a handful of states, you can implement that same benefit. By establishing a community property trust in a jurisdiction like Tennessee. With that trust agreement, you are creating a community property interest in that asset. You contribute it to the trust. The trust terms can provide specifically what would happen if the married couple dissolved their marriage and who would get that asset back. So for instance, if it were a separate property asset, you can contribute the property to a community property trust. The asset to a community property trust and get the full set of a basis. Howver, the trust agreement could provide if the marriage dissolves, that asset goes 100 % back to the contributing spouse. It can address both issues, because a lot of people have that issue, and I get it. Frazer Rice (22:08.361)It’s a nice feature to have. When you’re doing your estate planning or pre/post nuptial planning, it’s a good idea to have both sets of expertise in the room. You can have one document that’s at odds with what you’re thinking is supposed to happen in another document. That creates a real unwind situation. See it. See it all the time. Andrea Chomakos (22:30.869)Mm-hmm. Yes. Frazer Rice (22:33.253)We alluded to some of the things that Tennessee does to stay modern in the trust jurisdiction wars. The Nevadas and the Delawares, et cetera, that make constant revisions. Tennessee stays on top of it as well. Are there any other features that you see in that that are on the horizon or that just taken place? Andrea Chomakos (22:58.35)I’m not aware of anything on the horizon. Another adjustment to the statute late last year, is a provision around grantor, irrevocable grantor trusts. In that situation, the grantor of the trust reports all the tax attributes of that trust on their own personal return. They will have potentially, usually most likely, tax implications from that and tax liability. We estate planners, I still consider myself a state planner, always said like, that’s great. That’s a gift tax free gift, know, paying the grantor, paying the tax on the trust. Assets, but sometimes the grantor gets to a point where that’s a little heavy for them to bear. Many estate planners like myself would not draft a trust to include a tax reimbursement provision. Not in the trust back to the grantor. There had been some IRS rulings that were all over the place about whether that created a problem The IRS has seemed to kind of backed off of that. In particular when there’s an independent trustee who doesn’t have the obligation to make the payments but can in their discretion reimburse the grantor for the taxes. That seems to be a pass muster with the IRS. So Tennessee has now included a statute in their trust code. It tatutorily gives trustees the ability to reimburse grantors for their tax liability. That can be really beneficial for a grantor who’s maybe hitting that pain point. However, she doesn’t necessarily want to toggle off grantor trust status or could not without some other adverse tax consequences. And the trust agreement doesn’t include that reimbursement provision. By resitusing in Tennessee and having the independent trustee, they would have the automatic right to get those tax reimbursements. So, a nice feature for people in those circumstances. Frazer Rice (25:03.319)Nice feature. So as we wind down here. What is the best way for people to find out about Pendleton? Yourself? If they want to know more about the Tennessee features? Or otherwise need a corporate or administrative trustee? What’s the best way to find you? Andrea Chomakos (25:22.85)That’s great question. We have a really nice website, Pendleton Square Trust Company dot com. We have a great insight page which has a lot of this information we talked about. It has a lot of posts and blogs and insights on the Tennessee advantages. I’m listed on there. You can always find me on LinkedIn, Andrea Chomakos, C-H-O-M-A-K-O-S. I’m the only Andrea Chimekis in the world, so pretty easy to find me. Yeah, yeah. So always happy to respond to a reach out either through Pendleton Square. Or through LinkedIn and always happy to have the opportunity to share this great valuable information, Frazeer. Thanks for the really insightful questions. Frazer Rice (25:54.493)There are multiple Fraser Rices in the world, which always surprised me, but alas. Frazer Rice (26:17.925) – The Tennessee Wealth EcosystemThank you. All of your information will be in the show notes. Andrea, thanks so much for being on and say hello to my friends back at Pendleton for me. Andrea Chomakos (26:26.326) – The Tennessee Wealth EcosystemI sure will. Thank you. BUILDING A TRUST COMPANY WITH BETSY BROWN PENDLETON SQUARE TRUST https://www.amazon.com/Wealth-Actually-Intelligent-Decision-Making-1-ebook/dp/B07FPQJJQT/

THE MUSIC BUSINESS: “REPUTATION OVER FAME”

Musician and label owner, Blake Morgan, discusses the Music Business and the importance of “Reputation over Fame.” Ever wondered how musicians really make money? It’s a tough journey filled with losses and small wins, but it’s all about persistence! In this episode, Blake Morgan shares that every small gamble counts, and eventually, one big win can turn it all around.: “The people who are “for real” have no choice.” https://youtu.be/j8vf5dI-cbE Transcript Frazer Rice (00:01.135)Welcome aboard, Blake. Blake Morgan (00:02.946)Good to be here. Frazer Rice (00:04.111)Well, it’s really nice for you to be here. You were nice enough to invite me to your show, your residency downtown. And I was glad to reconnect and remind myself how talented A, that you are and B, that musicians are. And it got me thinking about business and how musicians and the world of music works these days. So it’s a treat to have you on there. Blake Morgan (00:27.714)Thanks so much. I’m glad you could make it to the show and it’s great to talk to you again. Frazer Rice (00:32.155)So let’s start at the beginning. So if you’re a musician, you’ve been bitten by the bug, you’re talented, and you get that wonderful curse, what are the ways that musicians really make money and support themselves? I imagine it goes from a spectrum of busking and performing and having your guitar case open and taking… donations from there on up to the professional musician and then to the actual creator of the music itself. How do you think about that? Blake Morgan (01:01.858)Right. So, you know, I think I’m thinking about your audience and finance people and business people, you know, right off the bat, of course, for starters, the marriage between commerce and art has always been, shall we say, an interesting one, or it’s been it’s been a conflicted one. And it’s mostly been conflicted for the artists. But the reality is, you know, I think Frazer Rice (01:22.747)Sure. Blake Morgan (01:32.897)in a lot of ways and I do have something of an eagle eye view because I’m an artist, I’m a songwriter, I’m a record producer and I’m a record label owner. And so whether you’ve had a career and are having one like I am or like the person that you’re imagining who’s just getting, who’s just starting out, I think your experience basically it’s very similar to quantitative finance. in that you’re acquiring a lot of small bets that rarely pay off, but when one does, they make up for all the other losses. And every part of being a musician is very much that experience. So when you’re first starting out, whatever that means, if you’re making, if you’re building tracks on your laptop, if you’re, you know, I think the days of busking on the street are, probably behind us because I don’t see it very much, honestly, in New York. And we can talk about why we don’t see it very much later. But the reality is however you’re getting into it, you’re immediately in a position where you know you’re going to be taking a loss. And what you’re hoping is that there will be a payoff at some point so great that it will pay for all or most or some of your losses that you’ve Frazer Rice (02:30.203)Right. Blake Morgan (02:58.414)crude. And the truth is that really never ends. And I think that that really also kind of never ends if you’re a superstar. That’s really that’s that’s that’s the gig. I don’t see I don’t see billionaire investors usually sort of hang up their investment coat jacket. I don’t know what it is, but I don’t see them hang up their cape and say, I’m out. You know, they’re still trying to somehow leverage what they have into something else. Frazer Rice (03:20.279)Bye. Blake Morgan (03:27.822)And so that’s the financial part of it, which is that, you know, I think especially now, if you were talking about the beautiful curse, like I think especially now there is this feeling in music that musicians make music, you know, for fun. And I’ve never, I’m not a musician who makes music for fun. I’ve never met a musician who makes music for fun. We make music because we’re compelled to. That’s the beautiful curse. It’s not because, hey, I’ve got I’m thinking about doing this and it’s just the people who are for real have no choice. And so I often say that my relationship to making music, and this was true when I was a kid, when I was just starting, my relationship to making music is exactly like my relationship to breathing, which is that I really like doing it. But if I didn’t, it wouldn’t matter because I’d still have to do it to be alive. It’s a part of who I am, right? Frazer Rice (04:21.403)Sure. Blake Morgan (04:23.894)And the thing about breathing is we aren’t in a position to being like, how’s the breathing industry? How am going to leverage my breathing into some sort of better form of breathing that would keep the lights on? We’re all doing that, I guess, with our lives in some form. But that’s that awkward marriage of commerce and art, which is that our strength as artists, as musicians, comes from the fact that we have an absolute bedrock. We are compelled, a bedrock need. to continue to make music no matter what, no matter what’s thrown at us. And then that’s also exploited because the people who exploit us know that we’re still gonna do it no matter what, in whatever form that takes. So that was like 20 pounds of answer to a one ounce question. But that’s the real truth, which is I think if you’re starting out, you really are hoping that you’re gonna you’re gonna start trying things basically to get some kind of a career off the ground, some kind of path forward to be able to make more music, some path forward where you’re gonna be able to make music where you wouldn’t want to have to do something outside of your own profession. People don’t tend to set out to be in a profession with the overwhelming feeling like they’re gonna have another profession that they’re gonna have to have to pay for their bills for their actual profession. Frazer Rice (05:52.611)No question. How do you graduate from hobby to commitment in many ways? Blake Morgan (05:53.39)So. Blake Morgan (05:58.734)Exactly, exactly. And so right out of the gate, you’re hoping that your ideas and your talent and your perspiration and your inspiration are going to be enough to leverage the next moment and the next moment and the next moment. Moments where you know, and you know, a 13 year old who’s trying to write their first song or pick up a violin and practice, they know that they’re going to lose and lose and lose. and lose and they’re hoping that somewhere down the line they win and that pays for these losses and this is financial a financial truth and an emotional truth to like I’ve taken I often say to people like I’m a good humored person generally speaking but like I’m 96 % scar tissue at this point and so I still the joy offsets the scar tissue right I don’t want to be bitter and and and I’m and I’m not but Frazer Rice (06:47.62)you Blake Morgan (06:56.969)The moments of artistic wonder and satisfaction, just like the moments of financial hope, like, my God, this actually is hitting or this actually works. This really gets the monkey off my back to be able to do more of this, right? It’s very, very much the same, whether it’s financial, emotional, or temporal. The time you’ve put in to try to do something pays off when it works. Frazer Rice (07:26.731)So this massive investment, time, emotion, skill, dollars, et cetera, what are the ways that you start to get into the green and turn it into a situation where you’re actually sort of making money on what you love here? Blake Morgan (07:47.832)So if there was an easy answer to that, I would hope that you would have it and you could teach me what it was, but there’s a complicated answer to it. And it’s harder than ever. Art and music are devalued more than ever. The rungs under the ladder of where I’ve been able to get in my career have been kicked out. It’s harder for people to get to where I am. The world has changed because of piracy and streaming and Frazer Rice (07:52.89)Right. Blake Morgan (08:16.043)now AI and you know, we can touch on all of these things. But I do think that there’s an important panacea that will lift every facet of this. And in a world where we’re seemingly fixated on followers and likes and streams and these kinds of numbers, the reality is the place that I get paid As a label owner, as a record producer, as an artist, as a singer, as a guitar player, as a bass player, as a piano player, all the jobs I have, the place that I get paid is that I have a reputation. And we live in a fame-obsessed business, music, and a fame-obsessed culture, but reputation and fame are not the same thing. And… When you’re in, for lack of a better way to describe it, when you’re living in sort of in a Mad Max world, the music world has turned into this kind of wasteland in a lot of ways, unfortunately. When you can prove that you know where the fresh water is and you have some fuel for your car, you know how to evade the raiders on the highway, when you actually have a reputation. Frazer Rice (09:28.603)You Blake Morgan (09:35.278)there’s any numbers of ways that that winds up being valuable. And that could be a reputation of just being an incredibly professional singer who on short notice can go and sing a national anthem. That can be a reputation to say, we’ve been trying to make this record for months. We can’t get out of our own way. We’re screwed. We need someone who actually is from the before times who knows how to make a freaking record as opposed to just generating one. Right? Frazer Rice (09:48.581)Mm-hmm. Blake Morgan (10:04.683)Why would you go to a doctor? You’d go to a doctor because you need something. You can’t do it yourself. Home dentistry, bad idea. Home lobotomy, bad idea. And then you’re going to say, well, which one of these doctors has a reputation that I could trust to put this part of my life in their hands, right? So I think that’s always been true for musicians to some degree, but as other opportunities to make money. Frazer Rice (10:12.187)Home, home, home heart surgery. Yeah, not great. Blake Morgan (10:32.961)have really just evaporated. think for me personally, in my musical life and in my music business life, as a label owner and a label runner, it’s our reputation that matters most. if I’m gonna be honest, like we don’t really look for artists. We don’t look for business opportunities. They come to us and I don’t mean that in any other way than the exact words I’m using. It’s the reputation that’s the calling card, and you can’t have one until you build one. And so there’s an irony where all of those speculative bets that you’re making that turn out to be losses, along the way, if they’re consistent and they paint a picture of a vision or a plan, in whatever way you’re a musical artist, Over time, that’s the temporal part of it, over time, they have a chance to create a reputation and consistency. I think in music, three really important parameters are originality, quality, and consistency. And it’s the consistency that people drop the ball on. And it’s the consistency that is where the money is, because you have to be able to be counted on, whether you’re a session player or a label president. Frazer Rice (11:47.013)Sure. Frazer Rice (11:55.772)So many parallels in my sort of world too, where it’s, you know, sometimes you work on things that don’t amount to much, but the experience, it helps. It may not be immediately profitable, but somewhere down the line, maybe a future client, you know, has some sort of problem and either the connection you made to try to solve the previous issue comes to bear or, you know, just one guiding word puts them in the right frame. Blake Morgan (11:58.891)Of Blake Morgan (12:19.948)Sure. And we understand this and I think we just sort of inherently understand this in your part of the world. We would also understand this from a very, very good poker player. A very good poker player wins like 52 % of the time, 51%. There’s luck involved, there’s force majeure involved, but there’s also knowing that you’re going to over time eke out that 1 % along the way of wins versus losses. Frazer Rice (12:55.077)So when you’re putting, as you own a label, you’re a successful musician, you grew up in it, and you’ve sort of absorbed the arrows of being in the industry from that view. Right. The evolution of forming a label and being there for musicians and providing the comfortable environment from which to. Blake Morgan (13:08.197)Hence the scar tissue, yes. Frazer Rice (13:21.26)have them develop what they’re doing, then you’re not in it for a hobby either. You need to be able to eat and live and be in New York and that type of stuff. Maybe take us through that journey a little bit. Blake Morgan (13:32.47)So I think the cliche is necessity is the mother of invention. And that’s true. For me, it was desperation. Desperation is also the mother of invention. And I had a big record deal at the beginning of my career. And parts of that really worked out and parts of that really didn’t. Bizarrely, the artistic part of it really worked out. I made a record I loved with people I loved. The record did well. It started my reputation. It didn’t do particularly well commercially or really at all. but it was really good. And so immediately I was an artist who had made a really good debut record on an upstart label with major label distribution founded by Phil Ramone. So there’s reputation too. Phil Ramone. Well, he’s got a huge track record. and this young guy who’s starting out, he’s made a really good record with Terry Manning who made Led Zeppelin III, right? So there’s reputation there. And it was critically acclaimed. Frazer Rice (14:15.612)Mm-hmm. Blake Morgan (14:30.134)people definitely recognize that for a first time out, I hit the ball soundly, you know? And then some business parts to the label. The good part is that the label didn’t really know what it was doing. And so I got to do some things artistically that really paid off. The bad news is they didn’t know what they were doing. And so from a business standpoint, they made some poor decisions that also hurt the health of the record out in the world. Frazer Rice (14:36.901)All Blake Morgan (14:59.242)And soon after that, about a year or so after that, I really had to fight my way off that record label. And I did. Unacrimoniously, it was very complicated. was very painful for me because to follow through on that baseball, you know, image, you know, I felt like I was hitting white balls for batting practice. I was really getting somewhere. And then it felt like, I’m I’m back in the minor leagues. What do I do? Frazer Rice (15:10.457)but complicated and laborious and… Blake Morgan (15:29.376)And I, you know, my management at the time was like, we’re gonna get another record deal. It was very difficult for me because I actually knew that I’d gotten pretty lucky with that deal because I was able to do what I wanted to do artistically and it had worked. I felt that it was gonna sort of be the same thing. And I did get some offers, but they really weren’t A-list offers from A-list labels. It was gonna feel like a step down. And I was walking down the street here in Manhattan with my mother and I said, you know, I’m producing all of these demos for all these other artists. you know, if I had any guts, I’d just start my own label. I wouldn’t ask permission from anybody to do this. And all the mistakes that would happen would be at my own, and I could learn from them, right? Our victories would be sweeter. And all these demos I’m producing, what if they weren’t demos? What if they were records? And we just figured out, I don’t know anything about how to do this, but what if I just had any guts, that’s what I would do. She said, yeah, you know, if you had any guts, that is what you would do. And it wasn’t hostile, was just sort of like, okay, gauntlet thrown. I remember standing on the corner of Fifth Avenue and 11th Street and I put my hands on my knees and I just went, there’s gonna be like, all that scar tissue I had, you know, right? And that was really what it was. I really just didn’t have a choice. I didn’t feel that I was gonna get a record deal that was going to propel me forward. Really at the end of… Frazer Rice (16:29.884)Exactly. Blake Morgan (16:55.116)some of my rope and I did showcase the very last label showcase I did. My lawyer called me on a Friday at 6 p.m. and after days of not being able to get in touch with him and he was like oh yeah well you know the fallout from the showcase like listen man I don’t want to tell you to stop doing what you’re doing but you know hey you know all right cool all right man and I was like okay hung up the phone. And I think that conversation with my mother was like the next day. Right? So it really just felt like I was out of options. And that’s a very, that is a place that any musician listening to this and any musician I’ve ever met is familiar with in one form or another. The orchestra I’ve been playing with is going out of business. My band’s breaking up. What do I? I, my recording studio burned to the ground. Whatever the emergency is, it feels like, my God, this is it. This is that evolutionary moment where I can’t, I can’t move forward. Frazer Rice (18:00.668)Yeah, you’ve got to cross the Rubicon because you’ve got 10,000 troops about ready to stab you in the back if it doesn’t work. Blake Morgan (18:06.922)Right. Exactly. And so I started a label on my laptop on like a Wednesday. It had the right spirit. And all those people I was recording with in those early days, we put out records. We printed CDs and we posted it online. And this was prior to the streaming era, but in the iTunes era, you know, the download era. And it’s grown since then and basically the commitment has never stopped, which is trying to elevate the music of artists I believe in, records I believe in, and trying to find a Mad Max way to keep that work alive and keep the artists who are making that work alive so that we can make more stuff, so that we can actually operate in our profession, right? Frazer Rice (18:57.8)When you start the label and you’ve got artists that you’re supporting and helping them create and they’re looking at you to be the business end and really the distribution end, I guess. How did you learn that part? I mean, you knew a little bit from your previous experience and some of the scar tissue that you built up over that. How did you get to the point where you could get the music distributed, make that sort of saleable? And I guess the follow-up question is, then the streaming component kicks in and you have to kind of relearn a whole different thing. Blake Morgan (19:29.269)Sure. So how did I look the first part of your question? How did I learn that I started with two things. The first is I learned immediately from the mistakes that the record label I had been on had made. They had put me on the back cover of Billboard magazine. They spent one hundred thousand dollars to put a full back cover ad for me on Billboard to make a splash. And they thought I’d be thrilled. And I was horrified because the cost of that one ad that would be in that magazine for one week. Frazer Rice (19:42.129)Mm-hmm. Blake Morgan (19:57.91)could have put me on the road for two years. So financial responsibility, we’ve got to rub two nickels together and come up with a plan. So I learned from all of their mistakes. And I tried to answer every question that I had about how I was going to do this with what would I want if I was an artist on this label? wait a minute. I am an artist on this label. So what would I want my label to explain to me? What was so painful to me with the lawyers and managers and labels that I had worked with in the past? Lack of communication. lack of transparency, lack of clarification. What does that mean? Having artists in all the meetings. Even to this day, Monday, we have all of our artist meetings, 11 o’clock, 12 o’clock, one o’clock. And once a week, I talk to every artist I work with and explain to them what’s going on. Right? And that’s good business sense because then the artists know and you’re building trust and you also are on the same page about what the plan is. In terms of How did I get our first real distribution? It was reputation. A small distributor with larger distribution behind them cold called and said, you’re putting out this record that you made with Leslie Gore. Do you have physical distribution for it? And I said, no. And they said, would you like some? I was like, well, what would that look like? We started talking. And that led to digital distribution once the streaming era began. you know, somewhere in 2011, 12, something like this. We rebranded our label from Engine Company Records to ECR Music Group because we started signing smaller labels. We’d grown to a certain size and these labels didn’t know what they were doing. And they saw that we were doing, what we were doing was working even just 1%. Well, can we help, can we get, so once again, it’s reputation and it’s exemplifying forward motion at whatever speed that is, know, Tom Waits once said there’s no status quo in the music business. There’s you’re either moving up or you’re moving down and Even if you’re moving up One mile an hour or one millimeter higher You’re moving up and people can feel that and so it was really reputation that got us our first legitimate distribution which kind of broke us into the the new shape that this label Blake Morgan (22:28.135)was in and now we’ve been with the Orchard for years. We left that smaller distributor and the Orchard is, you know, is Sony Music. So it’s major label distribution for this fiercely independent boutique record label in Greenwich Village. Frazer Rice (22:43.288)So one of the things growing up sort of did some work really more academic on the music industry and you know the distinction between you know the sort of performing and where the revenue comes from that the mechanicals used to be CDs and records and so on and now streams and then the copyright the songwriting the let’s call it the sheet music or intellectual property behind the song and then the merchandise, is sort of a spillover way to make money with, you for a musician. As a label owner and the, I guess the first question is how does it really break down in terms of, you know, selling of streams, and which is how most people consume their music now versus the use and exploitation, and I mean that in a good way, of the copyright slash sheet music. How do you think about that in terms of sort of your overall strategy? Blake Morgan (23:41.323)So it’s different for every artist because every artist’s reputation is different, where they’re at on that ladder is different. There used to be a playbook that you could run and it would vary based on audience reaction, based on an artist. There used to be at least some kind of playbook that you could run that you would tailor. And I guess there still is, but not really. It’s more like a cheat sheet or a bullet point list and you’re really trying things. Frazer Rice (23:51.484)Mm-hmm. Blake Morgan (24:10.622)And I often think of an image of a balloon animal. You know, it’s like you squeeze, where if you squeeze it here, you know, it pops out over here and then you squeeze it here and it pops out over there, you know? And trying to make money in the music business is exactly like that, except it’s the opposite. It’s the downward pressure squeezes here and squeezes here and you’re more and more compacted. So the old revenue streams, even Spotify when they launched, they’re like, you don’t have to make money or and certainly piracy, the Napster crisis was like, don’t need money on this, just sell t-shirts. And this is an argument back from 2006 and 2007. We’re not going to revisit that. streaming, just so your listeners understand, the math with streaming is it takes a million streams to generate about $3,500 of total revenue. A million streams, $3,500. Right? So you need something like four or 500,000 streams a month to make minimum wage. It’s a minimum wage job. And by the way, 400, 500,000 streams a month is a large number. So that’s not a legitimate revenue stream. It’s something. Right. It’s nowhere close. It’s something. Frazer Rice (25:33.02)No more clothes. Blake Morgan (25:38.632)Now if you’re an artist who is built up something of a following where Where and I mean like if you’re an artist from the before times if you grew up in the major label system And you’ve gone indie if you grew up, you know And you are someone who can do smaller shows where you’re selling vinyl or CDs or t-shirts or something You can still do that, but that’s not break the bank money either that’s something else So again, what you’re really doing is you’re cobbling together all of these different things, and then you’re hoping for, my God, my track is in a major television show. It’s in a movie. It’s in the trailer of a movie. You’re trying any way to push back against this reverse balloon animal of pressure, because each of these revenue streams, the revenue from songwriting, the revenue from performing, Frazer Rice (26:31.536)Right. Blake Morgan (26:38.954)80 % of small venues in this country have gone out of business. 50 % of professional musicians have gone out of business in the last 10 years. 80 % of professional songwriters have gone out of business. And this is all prior to the arrival of AI, which is an existential threat, to all of the means that musicians use inside their profession to continue to move forward so that they can do what they most want in that profession. Right. So there isn’t a really clear answer. But here with the label and just in my own career as president of the label, but also as an artist, you came to see me at a very well attended show in Greenwich Village. I’m not making money at that show. I got to pay my band. The venue takes a cut as they need to. You have to publicize the show. We spent more money publicizing the show. Then I could possibly make it the show even before I pay my band or pay for rehearsals. Right. But what am I doing? I’m making a speculative bet. It’s quantitative finance. I know I’m going to lose money at that show. But the reputation from the show will build it in a way where someone’s going to want me to produce their record or they’re going to want to come or an artist of a different size is going to want to come aboard the label. Or one of our artists recently, the National Hockey League called and wanted her to sing the national anthem at All-Star Games for their All-Star tournament. So there it is. It’s like you’re making all of these bets that are losing, boom, something happens. Okay, well that paid for that. It’s a good example of that, you know? But each of those streams that you mentioned, each one of them hasn’t dried up completely, and it is different for each artist, but every one of them has dried up substantively, if that makes sense. Frazer Rice (28:28.526)So we’ve already busted through what I thought would be a great time limit here, because I could talk about this for three hours. But let’s dive into the AI and maybe some of the technological aspects that threaten other creative pursuits by introducing, let’s call it cheap skill, into the creative process. How do you defend yourself against that? How do you, on one hand, think AI, you know, brings lots of people into it, but then the value of authenticity and what I would call quote unquote actual skill skyrockets if you position it correctly. How are you thinking about supporting your artists and defending them going forward? Blake Morgan (29:09.022)Well, think, sure, you know, this is not my line, but I think it’s the best line that I’ve heard to describe AI. The underlying purpose of AI is to allow wealth to access skill while removing from the skilled any ability to access wealth. Frazer Rice (29:30.917)the Blake Morgan (29:32.36)That’s it. And to pretend that it’s anything other than that is really just to pretend. Right. We don’t need music teachers. We’re just going to have AI teachers. We don’t need you the proponents. Of this advancement. I’m making air quotes for the people who aren’t watching this. You know they know exactly what they’re doing right. But that’s what it is right. It’s it’s to give it’s to give. Frazer Rice (29:53.584)Right. Blake Morgan (30:03.464)It’s to allow wealth to access all of the skill that we’ve spent our lives accruing while removing from us the ability to accrue wealth. And the second part of that does not have to be necessary. I mean, the first part doesn’t have to be necessary either, AI is a tool that can possibly change the course of our species in a positive way. but it doesn’t have to rob us of our humanity. And I do think that that is very much what’s happening. Everybody knows that there’s about 100,000 tracks that are uploaded every day to streaming services, 100,000 tracks every day. But there’s another 150 to 200,000 tracks that are now being uploaded every day that are just generated by AI. This is bad on so many levels. It’s bad for musicians. Bad for recording studios. It’s bad. But I’ll even skip over all of that. It’s just bad for us. Because the greatest power I have as an artist is that I have the power to make you feel something. And I use the word make because I mean it. I have the power to get you to have a feeling involuntarily by a piece of music if I know what I’m doing and if I do my job well. And part of the feeling is your understanding as a listener that I’ve experienced something that speaks to something that you’ve experienced. Our humanity is brought closer. Music unites us. Blake Morgan (31:46.408)And when you listen to an AI track, however deft its mimicry is of the Beatles or the Stones or of Nina Simone or of Beethoven or of anybody, that is fundamentally lacking because it wasn’t generated by an individual or a group of individuals who had a human experience and who are then speaking to that experience and speaking it out loud so that you can experience it so that you’ve shared something so that you become united. And that’s what’s the most dangerous thing in music. And of course it’s dangerous financially and of course it’s existentially from a how is this all going to work standpoint from a business perspective. But at the heart of any healthy business is some piece of humanity that then draws people to that business and makes them want to do it. And you know I think that that people talk about AI in terms of theft. and in terms of mimicry and you know what it actually reminds me of, Frazier, it reminds me of that 70s movie that Charlton Heston was in, Soylent Green, and I don’t mean to spoil the movie for people, but if you haven’t seen the movie by now, it’s been out for a while. It’s 50 years old and it’s a dystopic vision of the future in this movie where people are starving, but the city and the government is feeding people with a substance called Soylent Green and it comes in these tablets and these little bars and everything. Frazer Rice (32:54.492)It’s 50 years old. think people can find it out. Blake Morgan (33:13.581)And it’s revealed towards the end of the movie that Soylent Green is actually made out of people. And that’s the famous line, you know, it’s, it’s people, it’s made out of people. Well, that’s what AI is doing. That’s what these people want to be doing. It’s not so much that they’re stealing us. They are, they’re feeding us back to ourselves. Frazer Rice (33:21.638)It’s people, Frazer Rice (33:34.652)No, and you can’t algorithm a soul, which is, think the… Blake Morgan (33:35.953)It’s so… Exactly, exactly. And the people who think that you can, I’m sorry, because I’m a big fan of humanity and I’m a big fan of empathy. It’s very difficult to muster some humanity and empathy for the people who think that that’s a good idea. That these people who think that you can algorithmically produce a soul. are the very people who were so unbelievably boring in junior high school and high school that they never formed a band and they never went to theater workshop and they never decided to try stand-up comedy and they didn’t go to the cool party and they really, it’s like they have this chip on their shoulder, but it’s not a chip on their shoulder because they wish they were cool too, although boy do they wish they were cool too. The chip on their shoulder, and I actually said this at the show that you were at, I think the chip on their shoulder is that artists and musicians specifically Frazer Rice (34:18.172)the Blake Morgan (34:26.503)especially when You have a business mind and a cogent approach and attitude towards your own career as an artist. We have a unique power, which is that we really can unite people. We really can reach across barriers and bring our humanity into focus and bring what makes us human and what makes being alive really worthwhile talk about a quantitative bet, right? For all that we all go through, we’d still rather be alive, generally speaking, than not, you know? And so I think that that is the existential threat to them, which is that we have this incredible power, whether we’re wealthy or not, whether we’re famous or not, to really make a difference in some people’s lives through music. And AI is not going to be able to do that. But what AI is going, and no matter how smart or good it gets, it’s not gonna be able to do that. But what it is gonna be able to do is it’s going to be able to systematically remove the pieces that a musician is able to put together to form a career and to form that reputation and to form simply a methodology where you can keep the lights on and you can keep going. And that’s an existential threat. to our business, just as it’s an existential threat to, you know, I know it’s a lot, but it’s not a hysterical thing. It is an existential threat to our humanity, which is what we’re all talking about. And it doesn’t have to be in a Terminator kind of way. It has to be. Frazer Rice (36:15.842)even worse, it’s death by a thousand cuts and you don’t see it coming. And all of a sudden you’re left with the carcasses of a lot of creative industries. I would even, you know, whether it’s law or accounting, maybe they don’t get a lot of credit for being, you know, fun and exciting, but, you know, we look in these spaces and AI is here to eat our lunch. And, you know, I’m not impressed with it yet, but I know it’s coming. Blake Morgan (36:18.899)Death by a thousand, that’s right. Blake Morgan (36:41.277)Right. think I think that objective truth and knowledge and expertise are good things and they’re all under attack. There is a violence being perpetrated against them. Expertise is a good thing. I remind people all the time. The word elite is a good thing. Elite is a good thing. An elite basketball player is that’s a good player. An elite surgeon. Once again this is a good thing. This means the best of. It doesn’t mean anything other than that. You know, and skill and craft and art are some of the greatest and most wondrous achievements that human beings have been able to render. And I hope we get the chance to continue to do it. Frazer Rice (37:26.566)Well, as I like to hope, think and hope that that sort of creativity and authenticity, it’s the new beachfront property. In the sense, it’s not being made anymore. It can be under threat, but it’s extremely valuable. And when people see it and know it, they’re nourished by it. And I think, you know, that’s my hope is that as you keep going, keep going. It’s important. Blake Morgan (37:34.696)Yeah, I like that. Blake Morgan (37:54.131)Yeah, I think that’s a really good point. We’re probably just 1 % of 1 % into our AI journey, if that. But I can already feel that if I do something well on stage, already feels a little bit different. Like, wow, you’re really juggling those chainsaws. Huh. I mean, I’ve seen juggling chainsaws online, but I don’t know if it’s real or not. But I actually saw you do it. And it’s not just the live experience, it’s making records, which we do here, making records that are made by people. It sounds like it. And it’s a very interesting thing when we get on a major playlist on Spotify or Apple and you listen to the other songs on that playlist, and then our track comes up, it does sound fundamentally different. That’s one of the reasons it does very, very well. Because whether people know it or not, or they dig into the story behind it or not, you know, Listeners very often are like puppies, and I mean that in a good way. We all love puppies. something happens and they go, this doesn’t sound like all the other things that I, you know, this anodyne cookie cutter mimicked, soylent kind of thing. Right. This sounds this there’s actual food in this. Right. And so that’s part of our business model, too. You know, we’re not we’re not interested in being the embiggened bigness of the big thing. Frazer Rice (39:08.901)Exactly. Blake Morgan (39:17.638)We’re interested in being good and we’re interested in being the, you know, the Criterion Channel gives me so much hope in the cinema universe with all the Marvel movies out there that I love and all the Star Wars movies and shows that I love. I love that Criterion Channel is such a success. And they stream Truffaut and Hitchcock and Kurosawa and interviews with great directors and actors and cinematographers. It’s a huge success. And that says something to me. That is a proof of concept for this record label. That’s what we’re trying to do in an indie rock and roll way here in Greenwich Village. That’s a business model. Frazer Rice (39:57.946)Really cool stuff. Blake, how do people find you? Blake Morgan (40:00.968)You can go to blakemorgan.com or I’m at the Blake Morgan on all social media come say hi Frazer Rice (40:07.206)Really good stuff. Blake, thanks for reaching back out. It was a treat to see you live. I mean, if you ever get a chance listeners and watchers to see Blake play, it’s terrific. And go out and buy music and go see the show. You’re supporting an important ecosystem. Blake Morgan (40:26.63)That means so much to me, especially coming from you. really appreciate it. It’s been great being here. Frazer Rice (40:31.1)Terrific. Thanks, Blake. MY FIRST DISCUSSION WITH BLAKE ON ARTISTS RIGHTS ARTICLE ON ARTIST MUSIC THEFT FOR AI TRAINING https://www.amazon.com/Wealth-Actually-Intelligent-Decision-Making-1-ebook/dp/B07FPQJJQT/