Steven Weintraub - West Coast Financial | Durable Value Ep. 55

 

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Thank you guys for joining us today. We are fortunate to have Steve Weintraub, who is a partner at West Coast Financial, a registered investment advisory firm based in Santa Barbara, California. I just wanted to thank you, Steve, for joining us today on our Durable Value podcast. It's exciting to have you a client of ours on the podcast as well.

And I'd love to just start a little bit by hearing a little bit of your background, your story, and maybe what got you into kind of the financial advisory world in the first place. Thanks for having me, Ryan.

I was an accounting major in undergraduate school, and when I took intermediate accounting and they introduced debits and credits, I went into deep, deep sleep, but I was...

I was in love with income taxes. This is not to date myself. This is before the tax reform act of 1986 when you could get write offs equal to the money you put in a deal. So you actually had no hard dollars at risk. I love the idea of doing something that integrated income taxes and economics. And I also wanted the opportunity to.

work and change individuals lives. So, the industry was just starting and it was very fortuitous for me.

Steve, I know on your journey you started or were one of the founders in West Coast Financial. I'd love to understand what kind of the nexus of West Coast Financial was. What, what made you kind of get into the independent advisory space?

Great question. I was wrestling with the idea of Going to law school or maybe getting a master's degree in tax accounting when I had heard that San Diego State University was going to start a brand new graduate program in financial planning I went out there and talked with the chair of that department and was actually the very first person ever enrolled in San Diego State's master's program in financial planning.

The financial planning industry was really just being born in the early 80's. So I was learning how to be a professional and learning how to work a computer at the same time. We had two partners who were really, really good at business development and they had no time. to do any of the work. So they would bring in Von's shopping bags and just drop them on my desk and say figure it out.

So I was given tremendous amount of leeway to develop processes in the planning and the investment side.

Steve, I'd love to just understand what do you enjoy doing on a day to day basis? I still love problem solving. It never gets old. I love connecting with my clients especially on emotionally intense issues where I feel like we can be real and get things done.

I love working on a team, especially with young employees, and I love writing. I don't know if you refer to them as core values, but you mentioned compassion and teamwork. You evaluate people on that. Number one, I'd love to know, is that a part of your kind of actual core values? And then I'd love to understand compassion and why compassion would be a core value for your firm.

That's such a great question. They are part of our core values. And I think, you know, we're approaching 2 billion of assets under management and Obviously, we have a completely dedicated investment team staffed with CFAs, and we take the investment management seriously. In our core, our root, we're financial advisors, and we're problem solvers.

And I think to be effective, it's interesting,

the industry... is starting to treat pure money management as a commodity. Markets are reasonably efficient. A lot of people index. I wouldn't argue away those people who've selected passive approach to investing. I think the idea of doing it on your own, if you have the time and the temperament, it doesn't require rocket science.

I think financial planning is where you could really add value. And in order to be effective as a financial advisor, I think you need empathy. You need to care. It's not just our advisors, but our analysts and our client service team that consistently go the extra mile to make sure clients are cared for and to reassure them how much we care.

You know, if you could speak a little bit to for, for our viewers that may not know RIA, Registered Investment Advisor. And how that is different than you know, like a Merrill Lynch or, or something along those lines. So we're fee only financial advisors. We don't have anything to sell except for advice.

We've been a, a fiduciary when I first started attending. NAPFA conferences, the national organization for personal financial advisors who work on a fee only Fiduciary basis in the 80s. There were maybe 25 people in the room. Yeah, I was gonna say And they were rabid. I mean I give them a lot of credit for carrying the torch Steepest part of the hill I'll give you a quick metaphor I like to share.

You go to a doctor, you don't want to go to a doctor that no matter what's wrong with you, they're going to prescribe medicine. , and they get paid based on the medicine they prescribe. A lot of good health advice might involve changing your diet. Exercise, sleeping routines, reducing stress, things that have nothing at all to do with a doctor moving medicine.

You know I know that West Coast Financial is kind of an ascriber to the EOS philosophy. Our firm has also kind of benefited from the structure of that. I'd love to hear what how it's been impactful for your firm and maybe how it's kind of changed our firm a little bit. West Coast Financial is a pretty unique organization.

We have about 45 employees. I'm what's left of the founders, and technically I serve as the managing partner of the firm, but all big decisions are made by an executive committee. The executive committee uses EOS for organizational structure that keeps our team focused on the achievement of specific strategic objectives, whether they're for that meeting, for that quarter, for one year, three year, or five years.

All of our meetings are run on an EOS platform and once you get used to it, they keep you remarkably organized and hold people accountable. It's funny, whenever I hear a firm talking about, oh, we've got our rocks for the quarter, what everyone else would know as goals, but whenever you hear the term rocks, it's like, oh, you, you're on the EOS system.

Exactly. But yeah, I agree. We found it to be to add, especially as a firm scales to be able to add structure, consistency and effectiveness because as a firm scales, it's very easy to, especially to add meetings upon meetings upon meetings. And next thing you know, you know that the firm is less effective through meetings, not more effective.

So definitely. So, you know, just to get a little bit of you know, Personal professional, personal side. I'd love to know maybe a challenging time either in your business or a challenging time professionally and and you know what you learned out of that. I always find that when people obviously when you talk about successes, it's a lot harder to learn than it is when you talk about failures or challenges or obstacles.

Yeah, good question. I would say, having been doing this for more than 40 years, I've seen a couple of unique experiences along the way, and having experienced the extreme ends of greed and fear. Fear was reasonably easy to deal with in 2008 leading up to, say, March 9th, 2009. That fear was reasonably easy to address because you could just remind people that the market at its trough was trading at single digit P.

E. ratio and that historically people tended to make a lot of money. At those starting valuation levels. Yeah. Yeah. I actually found 1999 more stressful professionally when people swore off diversification, wanted nothing to do with value stocks, small stocks, international stocks. All roads led to Janus funds where 90 percent of their positions were in tech with no regard for valuation.

And that by maintaining a modicum of discipline, we received a lot of negative reinforcement professionally during that time. And of course, 2000 COVID created its own unique set of problems because A, we didn't really have a blueprint for how the world operates in that environment. And B our secret sauce being together as a team.

It's kind of like the team environment had to be a little bit reinvigorated after, you know, because we were away and weren't able to have that FaceTime connection that we were so used to. I do feel like maybe the world is a little bit more effective today than it was pre COVID. You know, we probably relied More on the in person than we needed to, but the thing that we saw during covid certainly was that there are just certain aspects of business, life and relationships that don't work through a zoom call like this.

Exactly. So you got to have that personal connection 1st to be able to establish relationships like this. Exactly. We hire a lot of kids right out of school. We found that it's to create an ideal advisor. We take them basically from scratch and train them for many, many years and it's really important for them to be physically in a client meeting, seeing client reactions, hearing a narrative that a senior advisor might have honed by answering certain questions over and over.

And there's it's just critical to the development of young talent to be in person You know, you you've touched a little bit on maybe secret sauce or special sauce of west coast financial But i'd love to understand from a client perspective how West Coast Financial, you know, differentiates or, or kind of create something a little different for their clients.

If you're going to tee up an infomercial, I'll take advantage of it. First I would say it's our team. We put a tremendous effort into hiring. And training young employees, there's plenty of brainpower out there. Kids are smarter than ever. We specifically at the initial relationship with a young employee are screening for their ability for compassion and teamwork.

And I, I know that's different, but it's critical to not altering the culture of the firm, which is based on client goals, not individual goals. Yeah, that's the first and foremost part we prioritize precision and flexibility over efficiency. A lot of that means that we're developing our own tools that are harder to develop and more time consuming to use than what you might use in off the shelf software.

We eat our own cooking, meaning that as we buy equities for our clients. We buy them for our own accounts, same time, same price. We treat our clients as partners, not us and them. We honor what brings a prospective client into the office. When they walk into that office, they have worked hard and they've made decision after decision, gave up immediate gratification.

To enhance their long term savings, that needs to be honored. And the way we do it is we say, why should you, who have lots of advisor options, take the risk in the relationship? We'll take the risk in the relationship. And the way we do it is, we'll do all the upfront analytical work and draw a roadmap for them, and we don't charge anything for it.

The other thing I'd be remiss not to mention is for the past 27 years, we have been deeply involved in real estate. Which I know some RIAs are now getting into, but it's been an integral part of our investment philosophy for 27 years now. You guys have a pretty unique structure when it comes to investing in real estate, and it's kind of some distinct competence that is unusual.

Can you speak a little bit to the, kind of that structure and how you guys evolved into it and, you know, how you see real estate? You know, kind of how it fits into your, your firm. Real estate has, over long time periods, just provided a higher rate of return than most alternative asset classes. That's just data driven.

Private investing, I'm particularly enamored with because it takes away the liquidity option that real estate investment trusts. seduce investors with. And what I mean by that is, oh, things are getting bad, now it's time to pull the cord and jump out, is exactly perverse to the investor's long term interests.

of being a patient and persistent investor. So I love the fact that once you're in, you're in for the long haul win, lose or draw. The other thing that I've found is stocks move in tandem on the downside. There's this expression in the stock world that correlations move to one and it in a down market.

It doesn't matter whether you're in utility stocks, health care stocks, technology. When market goes down, it takes everything with it. The real estate market, there isn't a single homogenous market. There are separate geographies, there are separate property types, and each has its own unique cycle. I know you guys have a fund vehicle for your clients.

And in our work with RIAs, you know, different RIAs approach it in different ways. And I'd love to understand kind of the nexus for that, the, the fund vehicle, and, and kind of how you guys look at creating diversification within that sleeve of of the portfolio. So we started 1996, and It was easy. We had probably six or eight employees in 1996 and, you know, maybe 10 clients that were really eligible to be investing in these type of vehicles.

Today we have 45 employees, 700 clients, and the scale of everything is much larger. We use an outside compliance firm and when they came to us in 19, in 2018, they said, how are you allocating? If you get a million dollars of one deal, how do you allocate that between 40 investors? And kind of went and they said, this is one of the hottest issues for the Securities and Exchange Commission, which, of course, polices the RIA industry, and they suggested that we start using funds.

I was opposed to the idea at the beginning because I didn't want either the reality or the optics of West Coast Financial having quote products, but eventually we knew that from a compliance perspective, we had to go this way and we've structured our funds to be the same fees to West Coast Financial as if a client were in a stock, a bond or a mutual fund.

So, we have no incentive for a client to be in real estate unless it's in their best interest. The funds, as you mentioned at the beginning of the question, provide us with excellent diversification. We have partners around the country, we're in many geographies, we're in many different property types, and not everything does move.

Exactly in the same direction and where we do have a couple of problem properties there being more than compensated for strong performance within the same fund that there are huge values to your trusted advisor, the R. A. A. Knowing where a client should be investing. And yet, because of the kind of, you know, perceptional conflict, R.

A. Stay away from that. Understandably, It feels like kind of an elegant solution is, look, it's, I have no, I have no motivation to go one way or the other, but now all of a sudden I'm a part of your full portfolio instead of you go off, do this side deal here, you do this side deal here, and it doesn't fit into the full portfolio.

So. It's it's definitely a fascinating approach and applaud you guys for it. All right, let's get to some brass tacks. So I would love to ask if you had an unexpected million dollars today, outside of normal portfolio construction, where would you put that million dollars? Let's start with where I wouldn't put it.

I wouldn't put it in Bitcoin. That's actually even more valuable. I wouldn't put a penny of it in Bitcoin. Nor would I buy concept stocks trading at ten times sales. I'll be a little flip here and say we just experienced the hottest temperatures ever recorded on the globe. I'm not positive there's anything on the horizon that's going to turn it around.

So, if I really had some play money I would like to grab a, a cool weather Pinot Noir vineyard because I think they're going to get smaller and smaller in supply. And an extremely high valuation, elevation ski resort. There are a lot of skiers, and there are going to be fewer and fewer places left for us to ski.

I thought you were going to go with, I wouldn't invest in Miami real estate. But this is kind of the other direction, which is go high. Skiing and Pinot Noir, self preservation. Yeah, that you know that because the portfolio is already figured out. I like it. Well, you know, we've been fortunate to have you guys as an investor with us.

I'd love if you don't mind just filling in a little bit. You know, why do you guys invest with crusade of partners? What have you found surprising about investing with with our company? We were referred to you by another advisor. We were specifically seeking additional partners for our real estate portfolio.

And we always select a partner before we select a project. A partner from our perspective has to do everything possible to align their interests with our investors. We tell our clients all the time, real estate syndicators are not 501c3 organizations. They are actually in business to make a profit. And we want them to be wildly successful after they provide good rates of returns to our clients.

Yeah. So, you guys invest your own capital in deals. You have a free fee structure that doesn't reward volume. We need a partner with a clear articulated strategy for adding value, a track record of success, and a deep bench. I think you guys have done a great job of adding young talent since we've known you.

You have a balance sheet that can put out the occasional fire if needed. And basically, you've done everything we could ask for you know, that was, that was an infomercial. I didn't expect that much. Thank you. Yeah. Well, you know, you gave me time to prep. Yeah, yeah, exactly. You know, I, I'd I also, I'd love to understand just broadly private equity, real estate.

How do you see, Okay. What do you see the, the purpose of that in a portfolio, when you're looking at a client and you're deciding, you know, the magnitude of private equity real estate? And I know that's a very specific niche of the, the, the puzzle, but I'd love to understand kind of the thought process around what's the right allocation for that client.

So I'm going to back up to a comment I made about we do the analytical work up front for a client. And to me, the idea of a client's. asset allocation or investment strategy being decoupled from a long term cash flow analysis is like building a house without an architect. Like, really, you don't need to know anything about the soil or which, where the sun comes up or what the neighbors look at.

They're, they're, it's impossible to, Take those two and separate them. The first step we do in determining an appropriate investment strategy as is to look at all the resources, goals and objectives, income taxes, inflation, etc. And derive a number that is, what rate of return do our clients need to achieve all their goals and objectives as stated?

We start with the premise, if they can do that in treasury bills, why shouldn't they? Yeah, that's our starting premise. Yeah. So the, the idea of moving up on the risk continuum, whether it's by waiting a portfolio less to cash and bonds and more towards equities or equity portfolio being weighted more towards small or foreign stocks or adding alternative asset classes, all of it.

Is derived from what are the, what does client need to get to the finish line? Yeah, that's, that's everything for us. It's a pure analytical clinical process. Yeah, and I love the idea that you start with zero risk or effectively zero risk minus the debt limits that we've been debt ceilings that we've been dealing with.

Theoretical zero risk. And then you move up that spectrum based on the client objective rather than, you know, a lot of times you do see kind of that bottom down approach, which is like, well, you should have this much of this and this much of this. So thank you for turning that question around. I like that just kind of a last closing question.

I'd love to ask, which is like, can you give us your best crystal ball on this macro environment where you see both kind of challenges and opportunities ahead? Thank you. Yeah, you have to be an optimist to be in the investment business, whether it's real estate or the stock market. So I'm a chronic optimist.

That said we borrowed quite a bit from our children and grandchildren as it relates to both financial resources and natural resources. And at some point, somebody is going to get stuck paying that bill. So. I'm concerned about our ability to sustain debt levels where they are, to sustain doing to the environment what we're doing today.

The U. S. has a terrific track record of developing technology solutions to big problems. And we'll just have to see if they can pull a couple rabbits out of their hat and get us past these new, larger challenges. Yeah, that's an interesting way to say it because the the debt burden, certainly I think we all talk about, but then thinking about kind of other resources that we may be bringing to present that really is a future resource in a more qualitative existential way.

Yeah. Fascinating. Well, Steve, I appreciate you taking the time today. This has been hugely insightful and look forward to catching up on the ski slopes. Totally. My pleasure, Ryan. I really appreciate the time with you and looking forward to spending time with you guys on a pure fun basis. Yeah, absolutely.

Thank you for listening to durable value and investors podcast, where we demystify commercial real estate with safe, sound investment strategies to help you balance your portfolio. If you enjoyed this podcast, be sure to rate it on iTunes or wherever you get your podcasts. To learn more, visit crusaderpartners.

com, where you'll find more information, investor's tools, case studies, and more. This podcast is hosted by Joe Miratori and Ryan Zwela. It's produced, edited, and mixed by Melodic, with intro music by Ian Post. Thanks again for listening, and we'll see you next time.

Summary

This episode of Durable Value features guest Steven Weintraub, co-founder and advisor with West Coast Financial, a registered investment advisor. Steven shares how RIA’s are able to find creative investments that focus on less traditional metrics like risk tolerances.