The Wolf in Sheep’s Clothing

Bad actors and bad ideas.

I had a completely different newsletter written for this week, but what I saw yesterday was so incredibly egregious, I had to address it.

We all know not to take advice from charlatans on TikTok and course shillers on X/Twitter, but what about the wolf in sheep’s clothing?

The guy who tells you he is there to see the regular person win, the guy who claims to want to see Main Street take a turn, the guy who claims that Wall Street has had more than enough fun, and it is time for that to change.

Now that guy might be someone we’d be inclined to listen to. What if this guy was also ex-Goldman Sachs? He’s seen how the rich get richer. And frankly, he knows how the rich do it.

Surprise! It is easier to compound your returns when you have more money. I mean, come on, who would’ve known this? Did you know that having more money could lead to generating bigger dollar-denominated returns?

What else do the big guys have? Oh, that’s right, they have access to credit! The little guys deserve access to credit too.

And there we have it. The sick and twisted idea for a leveraged IRA is born.

Requirements to gain access? A pulse and being 18 years of age.

Basically, this company, which claims to be backed by massive Wall Street names like Bill Ackman, is allowing investors to access 4x leverage within their IRA. For every $1 that is contributed, one could have access to an additional $4 in exposure.

They do this via a non-recourse loan vehicle. This is very similar to how people establish self-directed IRAs and use leverage to purchase real estate within the SDIRA. (Side note: I have been an outspoken critic of real estate within an IRA for years.)

The IRA would be funded with $7,000, and this would allow the IRA to purchase an interest in an LLC that is set up by the company. From there, the LLC would secure financing of 4x the initial capital the account was funded with ($28,000).

Now, to me, it is incredibly hard to come up with a “solution” for less wealthy people (asset-light individuals), but have wicked fees associated with the product. In my opinion, this is blatantly predatory.

Below is an example for informational purposes; let’s break down the first year’s cost.

Annual Subscription Fee: $300

Management Fee (.50% on the total balance of $35,000): $175

Financing Costs (6.26% of the $28,000 financed): $1,752.80

Total Cost: $2,227.80

That is a whopping 31.8% of your initial investment of $7,000. What the hell? This is supposed to help people?

BUT WAIT, THERE’S MORE!!!! They take 5% of gains within the account as well.

This is a ticking time bomb, and my fear is that the people who do engage with this are not going to understand nearly the implications other than the idea that they could “amplify” their returns by 4x.

It worries me especially for younger people who are feeling so lost or intimidated that their account balances are not where they should be, and revert to this “solution” to accelerate their path to riches.

To make matters worse, if that is even possible, the IRA is invested very oddly. 15% to an S&P 500 index fund and 85% in a “diversified bond ETF.”

Their bond fund of choice is seeking to generate a “positive carry,” which is fancy language for “yield more than the leverage costs.”

I am unaware of any bond funds that are around that can 1) serve as an anchor position for quality income, meaning their prices are not subject to massive swings and 2) generate a better yield after their expense ratios than the 6.26% in financing costs alone - not even including the additional $300 in annual subscription fees.

I have really tried to make sense of this whole ordeal. I looked at it from every which way possible to give this platform the benefit of the doubt. Unfortunately, for them and for any of their clients, this seems to me like an absolutely horrid way to grow wealth.

This whole offering is wildly disheartening. Not to go all Mark Baum on everyone, but this is directly targeting those who do not have much capital to lose to begin with.

There is an accredited investor status that higher net worth, high earners, and those who have passed certain Series Exams can attain. This allows them to access deals, investments, and other capital instruments that may take on more risk.

I am all for that. If you want to take on risk, be my guest. At least you have the financial backing to sustain potential losses.

Allowing 18-year-olds to get access to 4x leverage within an account that is supposed to grow over the course of decades for their retirement and charging asinine fees is disgusting.

Be vigilant out there when it comes to these “new wave” products. In today’s day and age, we must, unfortunately, question any business that puts a core value in “helping the little guy.”

The “help” they are offering very well may be a wolf in sheep’s clothing, taking utter advantage of someone’s lack of financial literacy.