BankBosun Podcast | Banking Risk Management | Banking Executive Podcast

BankBosun is a biweekly syndicated audio program that provides the multi-tasking bank C-suite officers ideas and solutions from key executives from all types of businesses operating in the banking ecosystem. BankBosun provides relevant ideas and solutions clearly, concisely and credibly to better enable them to navigate risk and discover reward. Kelly Coughlin is a CPA and CEO of BankBosun, a management consulting firm helping bank C Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. Kelly earned his undergraduate degree (BA) from Gonzaga University and a master’s degree in business administration (MBA) from Olin Graduate School of Business at Babson College in Wellesley, MA. Kelly lives in Edina, MN.
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Now displaying: August, 2017
Aug 28, 2017

Title: Pick Up the Damn Phone Means No Cold Calling! Listen to Joanne-of-the-Nice-Voice Explain.

Date: August 25, 2017

Attendee and Guest:  Kelly Coughlin, CEO, BankBosun; Joanne Black, Author and Consultant,

[Boatswain’s whistle] That’s the Bosun’s whistle calling you bankers to attention.  Listen, compete, win.

Intro: Kelly Coughlin is a CPA and CEO of BankBosun, a management consulting firm helping bank C Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Greetings, this is Kelly Coughlin, CEO of BankBosun, helping bank C- suite execs navigate risks and discover reward in a sea of threats and opportunities. It wasn’t so long ago, that there were really only three ways to communicate with people: the mail, in-person, and on the phone. That was it. That’s the way it was only 40 years ago. Imagine that…no texting, no social media, no cell phones, no internet, no email…just 40 years ago.

Today, we have all these new different ways to communicate…and frequently, when something “new” is introduced in the market, it gets overused and misused. Why? Because we lose sight of the purpose of the new concept and focus simply on using the new concept. In communications today, I will say the reliance upon binary digits…technology…is overused and misused today. As most of you know, we at BankBosun are huge fans of using the human voice as a way to more effectively communicate your message…whether it be your company mission and vision, your product features and benefits, or your assessment of the market landscape and environment, the power of the human voice to communicate empathy, energy and emotion is one of the strongest powers as human beings we have. And if we don’t use that power, we miss a huge opportunity to connect and communicate with our tribe. We like to say, while the pen is mightier than the sword, the voice is stronger than both. Use it. The new communication tactics today are terrific and I use them constantly and consistently. But in terms of effectiveness, nothing compares with the sound of the human voice…I fully recognize that it is not efficient, and that is why many companies founded in the digital era have adopted a business model that minimizes or sometimes completely eliminates the human voice…Facebook, Google, Uber…have you ever tried to get an Uber customer service agent on the phone…forget it…it just won’t happen.

This audio interview is an example of the power of the human voice. I posit that if you only read the transcript of this interview, you will miss a huge portion of the underlying message. See how I said huge there? You would miss that if you just read it…it would sound huge…If you only read, you will miss the guest’s energy, empathy and emotion. You just don’t get that with the written word. Oh, and did I mention people don’t read anymore…they don’t. If you send a written piece longer than three quarters of a page it most likely won’t ever get read. Over 65% of written documents over one page in length get put down for later reading…and over 50% of those docs never get read…period. But if you listen, you get to hear a whole new dimension of communication. And you technical people that think your products and services are way too complex and need to be communicated with a written doc or flow chart or a Powerpoint. Wrong. You especially need to tell your story with your voice. I am not suggesting you abandon your written material. But frankly the more complex your offering the more you need to be able to tell your story with your voice…if you can’t, you need to learn your story better.

My guest today is also a strong advocate of using the human voice. She is a thought leader, author, and consultant.  And frankly, she is the genuine article.  She has written a number of books, one is called No More Cold Calling: The Breakthrough System That Will Leave Your Competition in the Dust.  And then another one, Pick Up the Damn Phone!: How People, Not Technology, Seal the Deal.  She is America’s leading authority on referral selling.  She is not bragging though, her publisher gave her that moniker and she runs with it, and runs with it hard.  And now she is going to run with it at BankBosun to help our community and regional banks compete and win, not through cold calling or the traditional tactics like getting referrals from centers of influence, rather, she is quite the contrary and thinker who believes no sales person should ever have to cold call or send cold emails.  Let’s hear about that.  But what I like most about our guest, Joanne Black, she has a nice soothing voice, especially, compared to my rough and gruff voice.  And so, I am going to welcome Joanne and hope she is on the line so we can all hear her great wisdom and insight and hear her especially nice voice. 

Kelly: Joanne, are you on the line?

Joanne: Oh, I wouldn’t miss this for the world, Kelly. This is fabulous.

Kelly: Thank you Joanne for taking the time.  I know you are on the west coast of California, is that correct?

Joanne: I am in the San Francisco Bay area so it’s a beautiful sunny day here and we haven’t had any earthquakes in a while and I hope that continues.

Kelly: Excellent!  Well, Joanne, are you ready to get right into it?

Joanne: I am always ready. 

Kelly: Alright. Well, Joanne, I am going to start out with a challenging question here.  I am going to start out by asking you to reconcile two seemingly contrary and opposing messages that are the titles of two of your books.  One book says, Pick Up the Damn Phone and the other says, No More Cold Calling.  Well, what do you want us to do, call or not call?

Joanne: Oh, I want you to call but only if you have gotten a referral. The reason I wrote that second book is, I truly was alarmed by how so many people depend on technology and not only depend on it, I think they hide behind it.  And instead of actually having conversations they are depending on emails, on e-books, on social media to get people’s attention.  But the titles may seem like they are not aligned but they actually are. To only wants you to pick up the damn phone, when you have done your research online, when you have talked to people and then when you have been introduced to the person you want to meet or you are going to pick up the damn phone to talk to some of your colleagues, to talk to your clients and ask them for other people you should be meeting.  That’s what the phone is for, not to cold call. 

Kelly: Well, are people afraid of the phone these days or are people afraid to contact people?

Joanne: It depends on who your clients are.   So, we need to communicate as our clients communicate, and if they communicate by text then text them and set up a time to talk to them.  But you have to have the conversation when you are asking for a referral.  You know, you can’t ask for a referral in any digital format.  That’s my point of view and I am sticking to it.  And the reason is that a referral is very personal and before I can introduce you or I can introduce any banker I need to have a conversation.  I need to know the business reason why I am going to make the introduction. Because when I refer someone my reputation is on the line.  I need to depend on you to take care of my client just as I would.  So, therefore, I need to have that conversation.  I also need to equip you with a language to introduce me.   And it’s not just because I am a nice person.  It’s not just because I have written two books.  It’s not just because I have had my company for 21 years.  It’s not just because you say I have a nice voice.  I mean, that’s not business reasons for the introduction.  There has to be something I do that’s going to resonate with the person you are introducing me to that’s going to help them solve a problem. 

Kelly: Now, you are kind of picky about using the term referral, why don’t you define what you think a referral is and then what a referral is not.

Joanne: Well, it is what I know, not what I think.  But a referral means that you receive an introduction.  Let me contrast that to my definition of a cold call, any cold outreach, whether you are sending an email, whether you are on social media, whether you are just popping in to a client.  I mean, I don’t know if anybody does that anymore, but some do.   A cold call versus a referral, a cold outreach means that you are contacting someone who doesn’t know you and doesn’t expect to hear from you.  That is ice cold, you are definitely interrupting them. They don’t know you. And in many times there are actually circumspect whether that person really said that you should talk or not, a lot that goes on there.  So when a referral gets you the introduction you always get the meetings, because you have been introduced by someone your prospect knows and respects.  Make sense?

Kelly: Yes it does.  I’m interested in the term outreach.  I’ve been in the sales business one way or another many many years and it’s only been in the last eight years maximum that the term outreach has become popular.  It is just selling, correct?    Is it just making a contact, whether it be outreach on the phone, outreach on email, outreach in person, it’s selling, correct?

Joanne: I don’t agree.  So here is the thing, I’m want to go back a whole bunch of years when I did work in the banking industry.  I worked for a makeup performance and my clients were all banks, mainly community banks, and at that time if you wanted to get information on a bank you would call their corporate communications department and they mailed you an annual report.  That’s how we learnt about a company.  We did not have the internet and when the internet first became frequently used, I’m going to say mid 90s, maybe, when people were contacted all over the world and then it went from there. We now have many different ways of reaching people so it’s not just calling someone to get information.  It’s not just making a phone call.   And, by the way, I think those times were probably a lot simpler, but there are so many ways of contacting people now.  And that’s what I mean by outreach, because it could be by phone, in person, social media, email, I can’t think of anything else, but there probably is, but there are just so many avenues we have now to reach people. So that’s why I call it outreach, and I don’t think it’s selling.

Kelly:  I think probably selling implies doing more talking than listening. But if an outreach is listening and talking then that probably makes more sense to use the term outreach.

Joanne: I think it is very much about building relationships and expanding connections, and those lead to sales.  Here is what happens. I have been exposed to several people recently who have said to me, I don’t know if I should go to that event because I have been to things like this in the past and I don’t get any leads.  Don’t say that to me, I say that’s always a wrong approach.  We need to be out there meeting people all the time, whether it’s for breakfast, for lunch, for a beer, whether it’s part of a golf tournament, a tennis tournament, whether we are going to our kid’ their baseball or soccer games, we need to be out there all the time meeting people, getting to know people, sharing ideas.  That to me is what selling is about, because the number one reason that people do business with us, because they trust us.  That doesn’t happen overnight.  It does happen when you get a referral introduction.  For me, sales is about having a conversation and being clear about what their issues are before ever talking about what we do.  

Kelly: Let’s talk about account based sales. You seem to spend a lot of time, a lot of energy on account based sales activity. What’s your definition? Why is that important and what’s the alternative to that?

Joanne: It’s the old saying that there is nothing really new again.  So account based sales is a newer term used for those of us who have named accounts.  We have a certain book of business, a certain book of accounts that we are responsible for meeting with and ultimately selling to.  It’s a book of business, period, named accounts.  And as bankers then we know we need to meet these companies and talk to them and build relationships with them. That’s what it’s about. That’s account based selling.  It’s just a new term but there is nothing new about it.  The opposite is, so many companies now have people on the phone all the time, inside sales reps, people calling and wanting to open up a conversation.  They don’t build relationships.  They are the ones making a hundred dollars a week, a day or whatever it is, and maybe talking to a few people.  That is not what I’m talking about and that’s not where bankers are playing either.  It’s not where I play.  Account based sellers build relationships.  That’s the differentiation in the term. 

Kelly:  Do you distinguish between retention of business or for cross selling, up-selling purposes?

Joanne: One of the downfalls that I see is that in so many organizations, that we do business with a client, we close that business and then we move on.  To me, when you talk about cross selling and up-selling, it’s always listening.  So, we get in there with one product or service because most of these companies have more than one bank they are doing business with and through developing the relationship and getting to know them better, yes, our goal is to find other opportunities within that client.   We may or may not, or it could be that a bank that they were doing business with, maybe they changed bankers and their client doesn’t like this new banker and suddenly reaches out to you because they like you. It’s critical to stay in touch with people.  And yes, if the door opens and you see an opportunity to talk about another product or service, you do that, but more importantly, we need to be asking those clients for referrals to other people they know. And that is not happening.  It’s happening yes, ad hoc, but it’s not a discipline.  It’s not systematic.  And it happens but we can’t depend on that.  

Kelly: Okay, you make a pretty bold statement in some of your work.  One of these statements says this, Why closing is never a problem in account based selling. Why is that?

Joanne: First thing, it’s never the problem, it doesn’t matter what you do.  So, when people say to me, I’ve had a sales leader say to me, Joanne, my team can’t close, can you help me?  Well, that’s my time to step back because it is never about closing.  It’s always about something earlier in the sales process that was forgotten. That was over looked.  If we have done our true discovery and we built relationships with all the people who are going to be involved in the decision, that we found out their timeline, we found out what they need, we’ve made a lot of check ins. I don’t even like to call it that, but we are in touch, then closing should be like one foot in front of the other.  Closing is never the problem.  I am going to give you an example.  I realized that I missed a step, very recently, and I knew the deadline was short so I wasn’t even sure about that. But a client was having a meeting and they were bringing in their account executive and suddenly they wanted to expand it to a bigger group so now we are looking at like 25 people instead of 10.  The mistake I made was, I did not have the conversation with the right person about what that would cost them when they expanded that number and I would have made a recommendation to start with a smaller group.  The group that really would get the most benefit from referrals, start with them first.  Let’s get proof, let’s get results and then we can expand it.  So, I missed that step. Now, as a result, first of all, the date didn’t work and second, it was too big. And it will happen because they do these quarterly business reviews and bring the whole team together then.  And now I have to do a lot more work on my end which I am willing to do and we have already outlined some next steps to bring a referral program into a quarterly business review with a smaller team. So, I made that mistake.  It’s called, sometimes...I have an author friend who calls it "happy ears”.  You know, when a prospect or a client just says, oh, this is fabulous, yes we need to do it.  This absolutely meets what our challenges are.  I never thought about it that way, you have given me so many insights   and good advice, on and on and on.  We have “happy ears”, and they go sure, they are going to do business with us.    That’s not business, that’s “happy ears”, and that was my downfall.

Kelly. Yeah.  You make another statement here, How digital dependence derails account based selling teams.  I want to give some background in this question.  At BankBosun, we believe that audiocasting is a very effective way to communicate your message, whether it be a company message, a product message, service message, a human voice communicates with energy, empathy and emotion and you just can’t get that out of the written word unless you are writing like Yeats or Shakespeare, most people really don’t read anymore anyway.  So, we like to use digital audio to capture this, like we are doing today.  In my interview with you, we get the emotion, we hear your wonderful voice, we hear your energy and then we envision banks would share that message with their referrals or current customers or prospective customers.  I am not at all suggesting that banks rely upon this and be dependent upon it, but do you think that tactic challenges your statement, digital dependence derails account based selling teams?

Joanne: No, if digital is the only outreach then I would say yes.  The point in that post and really the message in my second book, Pick up the Damn Phone, is that if we sit behind technology and we rely only on technology, whether it’s audios, videos, emails, e-books, whatever it is, webinars, podcasts that we are not developing the relationships we need to develop when we have a conversation, and that’s what I mean by digital dependence.  Now, audio is one tool, video is another.  I just wrote a post, in fact, about why video doesn’t work for me.  You see, everybody has a different way of accessing and understanding information.  For me, I can read way faster than I can listen, of course then, I have to put in my blue tooth or my earbuds.  You know, whatever I’m doing, it’s one other block for me.  Now, I agree that there is nothing that replaces hearing a human voice, that’s why we need to talk to people and have conversations but we need to communicate in different modalities.  Some people love videos, some love audio, and many people love audio because they put it on their phones and can listen in the car.  If it’s the written word, there is Infographics.  Some people love those.  Infographics gives me hives. I just don’t know where to look first.  I get, you know, where is this?  It’s like charts and graphs. I want someone to explain it to me.  That’s my learning style.  We need to use various modalities in digital but then we need to have an actual conversation.  And when I talked about digital dependence is there are so many people who are not having conversation. They are relying on digital for everything.

Kelly: Got it. I would like to reserve part two, if we could, to talking about strategy and tactics on getting referrals, could we to that in part two, do you think?

Joanne: Well, of course we can and I look forward to it.

Kelly: Okay, I want to end part one with, I find it interesting, the contrary, and you are, that you use the term, circles of influence and many of us use the term centers of influence, is there a difference between how we use the terms?  I actually kind of like your term better. It implies, large, diameter, circumference, wider in scope whereas a center implies something that’s closed.  It’s got a door and only few people are allowed in it, closed, narrow. What are your thoughts on that?

Joanne: I think they are interchangeable.  I mean, truthfully, with everything I say is maybe I meant center and I said circle. You know, it’s really the same thing. We understand these are the people who would most likely to give us referrals over time.  And that’s centers of influence, circles of influence, it’s exactly the same.

Kelly: Okay.  Well, with your permission, unless you have some kind of trade name, ownership and you are going to charge me every quarter every time I use it, I am going to start using it.

Joanne: Oh, fantastic Kelly, please do.  

Kelly: Joanne, I would like to know how bankers can get in touch with you.  You could put a plug in for your books again and any other thing.  I think we are doing a giveaway on the book, No More Cold Calling: The Break Through System That Will Leave Your Competition in the Dust.  Is that correct?

Joanne: That’s correct.  The way to reach me is, Joanne, J o a n n e, and the first 10 people who send me an email and put in the subject line “listened to your podcast with Kelly” will receive a book.  If you would like to chat and hear a human voice, it is area code 415-461-8763, 4154618763, and that’s Pacific Time. I invite you to visit my website,  And yes, both of my books are available on Amazon, on Kindle as well as in hardcover for No More Cold Calling and paperback for Pick Up the Damn Phone

Kelly: Very nice, sweet.  Joanne, thank you so much and we will be in touch about scheduling part two which is “the circles of influence and how to get them to work for you.”                                                  

Joanne: Terrific, thanks Kelly.

Kelly: Okay Joanne, thank you, good bye.

Outro: We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC;  and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle. Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin. If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers. Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant. The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier.

Aug 24, 2017

Date: August 16, 2017

Attendee and Guest:  Kelly Coughlin, CEO, BankBosun; Mike Lindell, CEO,

That’s the bosun’s whistle calling you bankers to attention. Listen. Compete. Win!

Kelly Coughlin is a CPA and CEO of BankBosun, a management consulting firm helping bank C Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Greetings, this is Kelly Coughlin, CEO of BankBosun, helping bank C- suite execs navigate risks and discover reward in a sea of threats and opportunities.  I used to sing an Irish song to my four girls when they were young called John O’Dreams.  It’s one of my favorites…and the song song went like this, “The prince and the ploughman, the slave and the freeman, all find their comfort in old John O’Dreams.”  So, John O’Dreams is like the sand man representing sleep. What’s that have to do with BankBosun and bankers?  Well all of us need our sleep, even brilliant successful bankers, and who better to help you sleep than, For the best night’s sleep in the whole wide world visit, Mike Lindell, CEO of

Kelly: Mike, are you there?

Mike: Yes, I am.  It’s great to be here.

Kelly: Great!  Mike, many thanks for taking the time to do this interview.  I am not sure if you know this but you have become somewhat of a cult celebrity figure from your MyPillow ads on TV, I suppose.   Very impressive, so congratulations on being a rock star.

Mike: Okay, thank you.

Kelly: I want to focus kind of on the business part of things, but I do have one question for you on your recent ad change.  There you are, you are waking up in this couple’s bathroom/bedroom with your pillow.  I mean, Mike, don’t some of the iron rangers in Minnesota raise their eyebrows a bit at that? 

Mike: I don’t know what clip you’re seeing, but I am actually in their mirror they open up their cabinet in the morning when they get up and say, hear that guy, the MyPillow guy, and then we go from there and then I go to their bedroom and see what they are sleeping on with their pillows and correct them in that, and we go through all the problems they have with their current pillows.  But it has been amazing, that ad and the other ads that we have made right now.

Kelly: Yeah, well I am really intrigued about your ad spend and your budget and your ROI on that, but before we get into that, as much as I would like to give you the opportunity to promote the pillows, I think we’ll focus on the business part of company, some of the background on you personally and then, in business, how did you get started, the history of MyPillow, especially the early foundation years. 

Mike: Well, I have always been an entrepreneur and my last job was in 1980s where I worked for someone, but I had a carpet cleaning business and then I had a lunch wagon business, and I had some bar and restaurants that I bought, but everything I did I sold to a bank.  I had a lot of problems with the banks, so when I started MyPillow I actually spent two years inventing it and I had sold the bar that I had at the time and I ran the money completely down to nothing.   So, when I finally had the MyPillow invented I mortgaged our house to the hilt.  I had four little kids and we were all in and that’s all we had left in the world, just a few pillows and a dream.

Kelly:                              You’ve started this up in northern Minnesota, is that where you are from?

Mike:                              I am from far west of Minneapolis, it’s my home town.  I grew up in Chaska, Minnesota, and when I invented the pillow it took a couple years.  I actually had, like I said, I didn’t have any money left and I walked into box stores and they said, how many would you like, and they laughed at me, and I had people laughed that you are never going to get a partner on a pillow and all these different things.  And then a friend of mine finally said,  and he said, why don’t you do a kiosk?   And I said, how do you spell that?  I didn’t know what a kiosk was.  And I ended up doing the kiosk and we only sell like 80 pillows.   And one of the guys that had bought one there actually called me in January of that year and said, are you the guy that have been in this pillow from Minnesota?  And he said, this pillow changed my life.   And he said, I run a Minneapolis home and garden show, would you like a spot in there?  And that started where I did shows for seven years, home shows and fairs and any place there was people.

Kelly:                              Did you man the booth yourself in the early years?

Mike:                              Yeah, I did everything, made the pillows, faced a lot of it, virtually, people tried to take the company.  I had my own demons,  I was a crack cocaine addict, so I had a lot of problems, but yeah, I did the booth, I did all my own manufacturing, learnt how to sew, I worked out of a little garage, I took any phone calls.  Myself and my family, we did everything ourselves, everything, even the design on the packaging. We still do to this day.  We do everything ourselves

Kelly: How did you get your funding…your start-up funding?

Mike: Yeah, that’s when I mortgaged my house and I had money from a business I had sold a couple of years earlier but with four kids and not working at the time and just advancing the store I ended up at nothing.  So, basically I took every money I made in the show and I would roll it back in to buy product the next time or to buy raw materials and so I didn’t have any funding.  I never had.

Kelly: Ownership, has that always stayed the same, since inception?

Mike: Yeah, I’m the majority owner of the company.  I have had stock with my friends and employees and stock that I have given away and a couple of people that buy into it back in the day and so it is all like a big family. 

Kelly: Why pillows?  How did you find, or how did you select that industry of all the things to get into?  What was it about the pillow industry?

Mike: Well, I have always had problems with pillows, even when you go back from when I was 16 years old and I worked in a grocery store in Chaska, Minnesota, and one of my first pay checks I went and bought a pillow.  It was 1977, and I said if I go and buy a nice pillow maybe it will work, and it didn’t.  It was a down pillow I got at home and it didn’t work.  I couldn’t return it and, I don’t know, maybe it was my calling, but I just had problems.  All my life my pillows would go flat.  I would use my arms, headaches, neck-aches, I had all these things that I knew the pillows were the problem and I tried every pillow through all my life and nothing ever worked.  Basically, out of my own necessity, at first I am going, I want something you can move and adjust and would make it fit me rather than me trying to fit the pillow, and kept thinking to myself, well they make all different size clothes for people, how can they give us a pillow and say it’s going to work for all of us and none of them ever do. 

Kelly: Which pillows or which type of pillows were you really trying to compete with?

Mike: No, there was nothing out there like MyPillow.  I had a dream of the logo and I wrote the logo all over the house, MyPillow, and my daughter came upstairs, one of my daughters, in the middle of the night, she was like nine or ten years old, she said, what are you doing dad, and I said, I am going to invent  this amazing pillow. And she grabbed her water and she said, that’s truly random, and she went back downstairs. And then I just had an idea, I wanted something that you could just adjust and move.  And it wasn’t necessarily what was going to be inside it, I wanted it to be soft like down, but I wanted it to be support.  I wanted it to have everything you would ever want in a pillow.   If you ask every single person, what would you like in a pillow?  Whatever came out of their mouth, my pillow would have.  You know, I was so particular, once, you know, I tried over 94 different kinds of foams and stuff to go inside a pillow and poured stuff on a deck.  One of my sons and I, every day we get home and he would try different things like, you know, some mad scientist.  And so, it was a lot of trial and error and I would get close and then once I had it invented, I wanted it so you could wash and dry it.  In pillows traditionally, you couldn’t do that before, and I wanted it to last so I put a 10 year warranty, and then the washing and drying, adding that to the mix,  that took another two months. I would first engineer what the product should be and all the problems I had and why they didn’t work and then you just solve each problem.  So, it was kind of reverse engineering of what I wanted and say, okay, this pillow goes flat, well, let’s make it so it won’t go flat at night.  Well, this one here I want to build it wash and dry, let’s make it so you can wash and dry it.  Well, this pillow it feels soft but you can adjust it, everybody‘s shoulders are different.  So there was a lot of that went into the inventing of it.

Kelly: Oh, kind of traditional things that many people do, kind of the business school activities, you look at your market; look at your competitors; look at the price points; look at demand; how are you going to fill that, you kind of said, to hell with all that, I’m not going to do that.  Did you do any analytics, before you got neck deep into this on pricing and market demand or anything like that?

Mike: I did absolutely no analytics.  I just drop my life, I thought, wow, am I the only one out there that has problems with pillows and sleep?  I started asking around and it wasn’t just me.  Every single person had the same problem.  So many people at that time thought, oh that’s your bed, or I’ll just go and cotch some place and just sit, oh, I just sleep, I guess when we get older we just, you know, our sleep is worse.  And we have insomnia and all these problems associated with sleep.  I didn’t buy that from many and I didn’t believe this.  So, my philosophy was, you solve these problems, and if I can do that for myself and then these other casting out I gave some to other people to try and it solved everybody’s sleep problems.   So, I’m going, if you do that and then the price points and stuff came later.   And I actually got myself in a lot of trouble, selling at a lower price at one time and then with my marketing, if you want to talk about that in a minute, I just wanted to help people get great sleep and then I didn’t know anything about indirect cost, direct costs and all these other things at the time.

Kelly: Interesting.  So, you claim that they are made in Minnesota, where do you get all your materials? 

Mike: My patent form is made in Wisconsin.  I have never changed off of that, that is the formula that they tried to duplicate in other places but they can’t.  So, like for my neighboring state of Wisconsin, the foam gets poured there, I get the stuff, I run it through my machine then I patent the runs, makes the different sizes.  There are three different sizes that all go into the pillow.  One is the size of a quarter, one is the size of a dime and one is the size of down and then they are all mixed together proportionally.   And these other machines, the fabric got cotton grown here and California and the Carolinas.  We do all our own cutting, sewing. We have machines that fill.  I have over 1500 employees now.  So, we do everything in Minnesota.   I have two factories in Chaska, my neighboring town.  I guess we have about 350,000 square feet now of factory and then I have, right outside as I am sitting here, my own call center because I...when I did shows for seven years I knew at those shows what kept me going is people kept coming up and telling other people that already had the pillow then, this is the most amazing product I have ever used, not pillow, product.  And I am getting all this amazing feedback and it just kept me going that was so powerful.  I like helping people.   Then I said, you know what, if nobody will take my pillow I am going to bring it to the people.  So, I did my own infomercial in the summer of 2011 and it was a real audience, just me and a friend of mine.  I had never been on TV before, and it launched October 7, 2011 and I had five employees and 40 days later I had 500 employees. 

Kelly: Alright, how much did that infomercial cost you, do you recall?

Mike: To produce it was $150,000 or $200,000, something like that, but I was told I needed movie stars and all this and I said, why, I think people are tired, they just want honesty and they are tired of seeing infomercials that claim this and do this, and like I said, it was a real audience and then I just told my friends and family.  I didn’t have any money.   I said, guys if we all put in money on this we are going to be the biggest infomercial ever and they all believed me and I didn’t know that most infomercials fail in this country.   And by December 26 of 2011 we are the number one infomercial in the world. 

Kelly: How many people did you get in on that?

Mike: It was just, I don’t know, maybe 20 of us, just friends and family.  We all just threw in      everything we could into just get it going.  And over the next six months we took in tens of millions of dollars, because every ad that went out, you know, we are making the pillows, it was a miracle we all got out in time.  But the bigger companies didn’t believe me that I was going to get that big that quick.  So, we didn’t get good pricing on raw materials.  We were taken advantage of. I learned so much from the spring of 2012 because my advertising dollars were spent on audiences that weren’t my audience and I didn’t know they were bad at the time.  It’s like batting a 100 hitter instead of batting all your 300 hitters.  We took in all those tens of millions and we were in the hole by June.  And I’m going, what happened here?  And when you look at nowadays the stuff I learn, and every ad you now you ever see for My Pillow I view that as my only business, that particular ad at that moment in time.    So, if that doesn’t make its number in direct sales, I never re-up it again.   And I do that for every ad you ever see.  I don’t do branding, I get direct marketing or I am getting direct sales from that ad and then, obviously, you get the branding comes secondary.  I know where every ad dollar, I know my audience so well, I know my demographics, I know who is buying.   You think everybody needs a pillow but everybody doesn’t buy a pillow.  The millennials are one group that’s really hard to crack. I do the same thing for my customers.  I view every customer like it’s my only customer.  That has been the success of MyPillow because I could spend, at $1.5 million a week on advertising, easy.  And if I had an ad that went out and it didn’t make us money I will never do it again.  If every company in this country knew where to spend their advertising dollar and knew they were actually getting a good return and didn’t advertise the thing that didn’t work, product cost in this country would go way down because you wouldn’t have all that wasted advertising out there.

Kelly: So, in 2016, the election year, you spent quite a bit of money on advertising at Fox and CNN and I’m sure many, many others during that period, how much did you spend in 2016?

Mike: By the way, it’s not just CNN and Fox, we do 18,000 radio reads a week. Radio is one of our biggest venues too.  In TV, we do hundreds of stations across the country, but we probably spend 1.5 million a week times 52. 

Kelly: In TV and radio or just TV?

Mike: That’s probably just TV.

Kelly: So that’s the biggest...well, that’s one of the biggest part of your budget, because you go direct, you are not doing anything wholesale, right?

Mike: No.  While we do...You know, we have some box stores, we do a little bit of wholesaling but we are in some stores across the country too but that’s not our...Our biggest thing is direct to the consumer.  That’s our biggest part of our business and I love that part.  I love being on TV, and we do our own advertisement.   It’s really easy in radio because the radio hosts, you get them and their family believing in the product and nothing better to sell if you are a radio host, if you believe in the product you are selling, that it’s helping you, most likely it’s going to help someone else.

Kelly: I heard that Dana Perino on Fox news one time singing your jingle and I thought, man, that’s got to be terrific for you. 

Mike: [Laughs] I was just at the White House for the Made in America, I got to meet, last summer, Mr. Trump, the President he called me to meet him before he was elected and it was all about meeting and talking about, wow, Mike, your company is everything I want in this country, and he goes, you have all these employees, and we talked about the inner cities and stuff.  And here again and I get invited, a year later, to the White House for...and all these other manufacturers were there and what an amazing time.  We talked about how it’s so important that this stuff be made here, and it’s quite an honor to be there for that.

Kelly: I know you attended the Trump rally and certainly you are a big supporter of Trump, that of course can be politically toxic these days. Has it helped or hurt your business?

Mike: Right, well, like I said, for me, it has been an easy decision because of that meeting I had with him last summer.  I wasn’t political before that and then when I met him I was all in.  That he would be the best President ever, I still stand by that.  I know where his heart is.  I know what he is going to do.  It’s too bad he gets attacked all the time.  I actually went to the third debate. I was in the spin room. I went all in.  I spoke at the Minnesota rally about two days before the election when he flew in here to talk.  So, I just know this was what I was supposed to do and we let the chips fall where they fell and it hasn’t hurt us.  If someone doesn’t want to buy a pillow, because I met a guy that I know is going to help this country and I’m aligned with, I am going to do it with the stuff.  I am doing with the inner cities and my foundation, we align perfectly and I have access now to be able to do that, to help all these things.  I have been very blessed with this platform to help people, and that aligns with the President, so would I change anything, absolutely not.  Will I ever change what I do?  No!

Kelly: Well, that’s just great, Mike.  It’s quite a success story and I think that is terrific.  Do you have any of your favorite quotes or sayings or any beliefs you want to share with us that kind of helped you get through your challenging years?

Mike: I am going to say a couple things but one thing about manufacturing here in the U.S.  I want to tell people, this is when I was just at the White House, this got brought up, anyone that thinks they are saving a bunch of money by going over and getting it made overseas if you are a small entrepreneur, and you have got to realize, your money is tied up for three months. Those products are going to take two months, six to eight weeks to get here.  Now, if your market changes, let’s say you get too big, they are not here in time, you end up air shipping them in, or let’s say, by the time it gets here your markets changed and now you are sitting on all that inventory or if it’s not the quality you expected, you have that, it becomes quite costly.  So, there are so many things that I don’t think people realize.  And then if you get in trouble what happens then is big companies will come in and try and gobble you up and give you pennies on a dollar because they have the money to do it where you didn’t have that money to do that.  So that was one of the things with made in the U.S.A.  And I firmly believe that people nowadays, where we are at, that I would say by telling people, you are made here, I think that’s at least a 20 percent lift in sales, that’s just my opinion.  When you talk about perseverance, and as an entrepreneur, a business owner, I’ll say I faced a lot of adversity I am quite a story of hope, from a crack cocaine addict to where I am at now.  I quit everything by the grace of God, January 16, 2009, everything overnight, and I’m doing so much nationally with all these different places, like your Teen Challenges, Union Gospel, Salvation Army, all these places to help people in that area.  But as far as entrepreneurship, if you don’t believe in your own product, it has to start there and it has to start, you know, not giving up.  Still if something happens, like I see it happens all the time, because I get approached by entrepreneurs and inventors and everything, all the time, they’ll get one little obstacle, number one, out of fear they won’t get it out there, they are afraid to jump in, out of fear. What if I fail? What if I fail?  And that’s one thing that will block them from even starting.   But then when they do come across something that happens to them, that’s a little adversity they are facing, but might seem devastating at the time, you look back on that and you’re going, wow, that had to happen.  I mean, I can look back at My Pillow and so many different things happened and I look back and I go, wow, that had to happen at the time.  And you come through it and you learn from it and you look back later on and you go, wow, that had to happen. That wasn’t so bad.  That was meant to be.

Kelly: Well, Mike, I hope I get a chance to meet you some time. It sounds like you are just one heck of a business executive, but more importantly a terrific human being.  I appreciate your time on this podcast and I encourage all our listeners to go out and order one or two pillows from And tell them BankBosun sent you…and they won’t know what the heck you are talking about. Mike, I wish you the best of luck and success going forward.  Thank you.

Mike: Thanks a lot.

Mike: Bye

Outro: We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle. Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin. If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers. Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant. The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier.

Aug 14, 2017

"Stand your ground. Do not fire unless you are fired upon, but if they mean war, let it begin here." 1775, Battle of Lexington and Concord, Captain Parker


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast, Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers risk management, technology, and investment ideas and solutions to help them navigate risks and discover reward. And now your host, Kelly Coughlin.

Kelly Coughlin:

This is part-two of my interview with Kirk Chisholm, a wealth manager with and the Innovative Advisory Group in Lexington, Massachusetts. Kirk, are you still on the line?

Kirk Chisholm:

I'm still here, Kelly.

Kelly Coughlin:

Great. Kirk, let's talk about Lexington. That's a famous town in American early Republic history.

Kirk Chisholm:

Yes, it is. We are surrounded by our country’s heritage. I'm actually surprised at how few people, where I say where I'm from, who actually point that out. I appreciate you pointing that out.

Kelly Coughlin:

I love early Republic history and Revolutionary War stuff. I have since I was in fifth grade, I think.

Kirk Chisholm:

We have a lot of that in Boston, too. It's all over the place. It's really interesting. I think living here, we don’t appreciate the heritage that surrounds us everywhere. I walk around the city and I see it, but I don’t always appreciate it, because we're surrounded by it every day. It's nice, especially times like the 4th of July, when they have the parades in Lexington. It's nice. Nice thing to bring you back to the way things used to be hundreds of years ago.

Kelly Coughlin:

Well, Kirk, just to get caught up here. In our first interview, we talked about more of the mechanics of IRA custodians and trustees in the alternative space. While it's a topic that I think tends to be a bit of a boring topic, the work that you've done in this space is very impressive. Since our first interview, I've dug into more of what you've put out, and I would highly recommend that people that are interested in this space go in and get your publication, Ultimate Insider’s Guide to Self-Directed IRA Custodians and Administrators. If you're really bored with your life, go get that book, and you'll be an expert on it. It's quite impressive what you've done.

In part one, we talked about the “sausage” of these custodians and administrators, and the features and benefits that are required and customer service and a little bit on fees. Today, I thought we'd talk about some alternative investment choices and options that individuals can have in their IRA, and I want to start out with a discussion about holding real estate in an IRA. How does that work, and doesn't that present some problems? Unlike traditional securities, once you buy it, then there's really no ongoing cost to maintain the asset. Real estate is just the opposite of that.

You've got physical maintenance costs, insurance. You've got taxes. You've got all these costs related to just holding the asset. If it's a rental property, you've got to collect the rents. If you own this asset in your IRA, do all of the costs to hold the asset and to maintain the asset and the receipts on the asset, do all of those revenues and expenses have to go through the IRA? Or can you carve expenses out and deduct those? That kind of thing.

Kirk Chisholm:

It's a really interesting topic. Real estate, while it is the most common alternative asset held in IRAs, it is also one of the more complicated ones. I always find this interesting that people want to invest in this complicated structure. This is just without an LLC. This is just straight real estate. The way it works is this. You cannot transact with your IRA. You cannot sell a piece of real estate to your IRA. Your IRA cannot sell a piece of real estate to you. You're a disqualified person as are some other people. There's a list of disqualified people. You cannot transact with yourself. Effectively—

Kelly Coughlin:

With any asset, not just real estate. Is that correct?

Kirk Chisholm:

Any asset, yes. Any asset. That's a clear rule in the Internal Revenue code. What's interesting is, you have to consider your IRA like one of the neighbors on your street that you really don’t like. You're not going to loan this guy money. You're not going to work for free on his house, help him out for free. You're not going to let him borrow your lawnmower. There's things that you don’t like the person, you're not going to do these things for them. You have to treat your IRA the same way. You can't loan your IRA money. You can't work on the real estate, because that would be called sweat equity. You're not going to give away your labor for free to some other person. There's many things you cannot do.

You have to look at your IRA as completely separate entity, in that if you own a piece of real estate, you're going to have a broken toilet. You're going to have to fix the roof. All of these different things are part of owning rental property. In the case of real estate, you have to hire somebody to do these things. You cannot fix your own toilets, and I know the landlords out there listening to this are going to cringe at the idea of hiring somebody to do something they can do themselves. It's hard, but you cannot do it yourself. If you think you're trying to get around the rules, I can assure you, you won't. The IRS is much smarter than you.

Kelly Coughlin:

You can't set up an LLC management company to do that on your behalf?

Kirk Chisholm:

Who’s the owner of the LLC? You? Then, no. Owned by some other third person at arm’s length? Then, maybe. You have to hire somebody else. You can do the hiring. You just can't do the work. You could do administrative functions. You can pay the bills. You can hire people, but you can't do the work yourself. You basically have to find a property manager to do it for you. It's the easier way to do it. Through this process, your IRA has to pay for these fixes.

If they have a new roof, you have to make sure you have enough money in your IRA to pay for that roof. Effectively, that's one of the problems with real estate is that you might buy it for $100,000, but you need to have an extra $20,000 or $50,000 sitting around for expenses, for other things, just to make sure that you don’t run out of cash. Or, you have a good line of credit somewhere. Then, when you borrow money, that brings up another level of this, which makes it more complicated. Your IRA, like yourself, potentially can file a tax return.

You might think, you own real estate in an IRA. I don’t have to pay taxes. Maybe. If you're buying it just straight out for all cash, then probably not, but if you have a mortgage on it, you may have to pay taxes. Look at it this way. If you buy a property for $200,000 and you put $100,000 into it, because that's all you have in your IRA, and you borrow the other $100,000, your equity is still $100,000. You don’t pay taxes on your equity. You pay taxes on the asset amount that you don’t have. You have $100,000 of assets that is backed by debt, you have to pay taxes on the levered amount. Effectively, 50% of your income is taxable, potentially. Now, that being said, you would have to file a tax return on your IRA, which of course, you also get the deductions of real estate, so you may not have to pay taxes. The levered amount would be treated as if it was an individual.

You get the amortization. You get depreciation, the deductions, all of that. You do get all the benefits. You don’t lose those, but potentially, you would have to pay taxes on that. It does bring in a level of complication that many people are not aware of. Real estate is, on many levels, can be complex and in some ways, harder to deal with. If you own an LLC, that can make it easier for the custodian and for you, but it still has to go through the LLC. The process is the same. In some ways, it can be simpler, but in other ways, it can also raise more issue. Real estate is not simple. Other assets are generally simpler. You buy it and then it does what it does, but real estate tends to be a little bit more complicated because of all the moving parts.

Kelly Coughlin:

In addition to real estate, talk about other investments. What are you seeing out there? What are some of the most interesting choices that you see investors have made over the years that you've put into this business?

Kirk Chisholm:

We've got a lot of stories. I don’t where to begin, but I'll tell you a few of them. One of my all-time favorite assets to invest in, which actually is one of the earliest assets that I was looking at when I started this journey into self-directed IRAs was tax liens. The reason I love tax liens is because you're effectively getting essentially really high rate of interest. In the state of Florida, you can get 18% interest. You have a superior position to any mortgage or lien on the property. You're almost guaranteed to get paid off the money owed, or you would own the property. I look at it as a great asset that so few people know about, and it's such a great asset.

I believe a few years ago, there were six banks that had $200 to $300 million portfolios of tax liens. It was just a phenomenal money maker for some of these firms. Certainly, the institutional demand has driven the rates down a lot, but you can still find good rates in some of these states.

That's one of my favorites. Some of the other interesting ones was, I had a client who invested in a payday lending business in the state of Missouri. The state of Mass, I believe, the most you can charge interest without it being usury, I believe, is 20 percent. I think it's 20%, 25%, or something like that. Anything over that is usury. In the state of Missouri, you can charge 30% a month on some of these loans. I don’t think this individual is doing God’s work. He's really, I don’t want to say preying on the people, the underprivileged. Charging 30% a month, getting 360% a year on somebody who, it's basically on payday loans. They need money today, but they don’t get paid until Friday. They're borrowing at that rate. I don’t see that as a great business, but if you take out the moral implications and just look at it from the financial perspective, that's a pretty darn good business. Even if you have losses, you're still getting 100 to 200% returns, which is pretty fantastic.

Kelly Coughlin:

The only problem is, you've got to pay Tony Soprano, put him on the payroll, to collect for you.

Kirk Chisholm:

Oh, no. No, no, no. Not in the state of Missouri. On title loans, yes. You have to find a repo guy to repo the car. In payday loans, this is something that blows my mind. If I get a payday loan from you and I don’t pay you, the constable throws me in jail until I can pay. Now, how that is even remotely logical is beyond my comprehension. You're saying if I don’t pay, you're going to put me in jail until I can pay? How’s that going to work? How am I ever going to get out of jail? The process of some of these things is completely absurd, but the reality is, the laws in place support this activity.

If you remove the moral implications, effectively it's a pretty strong way to collect. Like you said, Tony Soprano to collect for you, you don’t have to. The state is doing your job for you by putting these people in jail. The point I'm making is, it's an interesting asset class that I'm sure some people will find interesting, but it's one of many. We have another client who invested in a horse, a dressage horse. This I found extremely interesting. I knew nothing about dressage horses before this. My business partner did the due diligence. He became an expert on dressage horses. There are a lot of rules that you have to abide by with IRAs and 401ks, and there are a lot of exceptions to those rules, and there are some exceptions to those exceptions.

Kelly Coughlin:

Generally speaking, you cannot do the work on the asset. Once it gets funded, you've got to keep an arm’s length or relationship with that asset. Correct?

Kirk Chisholm:

Yes. I'll close up this little topic with this. Let's say you want to buy a business and you want to run that business and get paid for running that business. You cannot do that in your IRA, but you potentially can do it inside of a 401k. There are ways to do things. You just have to understand what the rules are and follow them. If there's exceptions, you can take advantage of those exceptions. There are ways to do things. Part of what we do in this process is working with our clients to help them facilitate the transaction so that it's not become a prohibited transaction, because we as a registered investment advisor are fiduciary.

We're liable if we mess something up. We make sure that things are done absolutely correctly and there's no room for error. There are gray areas, because certain standards haven’t been defined by court cases or what have you, but we're not putting ourselves on the line. We're making sure that whatever we do is okay. When we do these things, we're definitely not playing in the charcoal part of the gray, if you know what I mean.

Kelly Coughlin:

Is that your sweet spot at Innovative Advisory Group? Helping clients that have these nuanced alternative investments they want to do? Whether it be they want to do something unique in their IRAs or their 401k? Is that your sweet spot? Or is your sweet spot investing in portfolio management, overall wealth management generally speaking?

Kirk Chisholm:

The way I would characterize it is this. We have a lot of clients who don’t work with alternatives, and that's fine. We're actually agnostic when it comes to asset classes or investments. We have our theories, as most people do. Everybody’s got a theory as to what works best, but in general, I don’t look at it and say, stocks are better than bonds or horses are better than cows or real estate is better than stocks. I don’t really care. I look at each investment individually, and I look at it and say, given the broad scope of what we have to work with, what is the best way to invest? And is this investment itself a good investment?

We do a lot of traditional portfolio management, but when it comes to alternatives, there are really two types of clients that come to us. One type comes to us and says, I want to buy a horse in my IRA. Can you help me do this? Which we will. We have a lot of people come to us with very specific investments that they need help with, and that's a big part of what we do.

We have another part of business where clients come to us and say, I just want to invest in alternative assets. I don’t like the stock market. It scares me. I don’t want any part of it. Can you please find me something that's alternative that makes sense? For those people, we have built up a network of investment sponsors that we do work with to help fulfill that need in the portfolio. We do have clients that have really interesting stuff. We don’t generally offer that to most of our clients, because it's very niche, and it's not what we do. We have found ways to be able to find, in our opinion, good alternative investments that are really lower risk and do provide consistent returns and things like that. We do have areas that we look at, and we're constantly expanding that. I know one area that we do actually a lot of work with is private mortgages. One of the reasons we like private mortgages is, both my partner and I love real estate.

We think it's a great asset class for so many reasons. However, right now, I think real estate is expensive. I know that real estate is very closely tied with inflation. If we ever had deflation, real estate would be negatively impacted in ways that most people haven’t even thought of. I've written about this a few times. It's happening in Japan right now. In general, buying real estate long-term is great if you can find a great deal. When you have private mortgages, you more or less are investing in real estate. You get a yield that is reasonable to you. You know what that yield is. You don’t have to deal with tenants. You don’t have to deal with expenses. You don’t have to deal with all of the headaches that go along with real estate, but you still have a rate of return that's tied to real estate. You're getting your yield, whatever it is, 5, 10, 15%, whatever it might be, although I don’t advise finding a private mortgage for 5%, but some people do.

You find, let's say call it 10% for the sake of argument. You get that yield. If they ever don’t pay you, you foreclose on the property. You own the property. If you're okay owning the property, then it's basically for the price that you lend the money. Then, you really have a pretty good investment there. We look at it and say, it's light work for the investors. It's not light work for us. We do a lot of work on it, but we don’t have a lot of the headaches that go along with owning real estate, and you don’t have to own it for 10, 20 years.

Most of these private mortgages are one to two years. You have a very short maturity. You have a high rate of return, and if you do it right, you can do it relatively low-risk so that if the market turns sour and things get really bad out there, then these notes mature and you can use your cash to buy real estate or stocks at a discount. In our opinion, one of the better asset classes, given the current rate environment that we find ourselves in, we really like that asset class. There are some others, too, that we like, but that tends to be our most popular one at the moment.

Kelly Coughlin:

You've done a significant amount of work in this space of the self-directed IRA market. You've seen a lot of the providers out there, and you've seen a lot of different deals, a lot of different alternative assets that have come through your desk. I guess my question to you is, since our audience for this series of podcasts with you is really community and regional banks who I think it's safe to say, are not specialists in alternative asset business. It might be that many of them simply say, no. We're not doing that. Would it be an accurate statement for me to say that your position would be that any financial institution that doesn't specialize in this or that hasn’t adequately and thoroughly resourced this business line should stay out it? Should not get into it at all? Is that an accurate statement?

Kirk Chisholm:

Yeah. I would definitely agree with that. For the last 40 years with the IRAs have been in existence, some firms have come and gone from this part of the industry. I think that there are some banks on our list. They do this to a moderate degree, and there are some banks that provide custody for administrators and all they're doing is providing custody. They're not really doing anything else. The problem with the custodians, if you're doing that model is, you still have to provide oversight. You still have liability. Even though the administrators are doing all the legwork and the administration, as a bank you still have oversight. The administrators do something wrong, then you're ultimately liable.

The bank still has to provide compliance on these accounts, which means, obviously you have to hire a compliance person to deal with this. If you're doing it at scale, then it perspective makes sense. If you're not doing it at scale, then it doesn't, because why are you going to hire $100,000, $125,000 compliance person to do a handful of transactions? Probably not high on your list of things to do. It can make sense in some ways. I think a lot of the administrators have collectively focused on only a handful of custodians that do most of their work. They provide their oversight, but in general I would say, most firms should not do this kind of work unless they're actually going to specialize and decide that they want to do this as a business model. You can't do this with a kind of sort of thing. You really have to put your efforts in.

Kelly Coughlin:

Okay. Then, the follow up to that would be this. We have a banker that listens to this. Let's say he's a CEO and he says, you know what? We're thinking about getting into this business. We're going to get out of it. Let's see if we can set up a relationship with Kirk and his group. Would you be willing to have a relationship with a community bank, whether it be in your footprint there or the state of Kansas or anywhere else where you would agree to help their customer that has an alternative asset, that needs some help, but you're not going to poach the relationship for the other part of the business? Are you open to that kind of relationship?


Kirk Chisholm:

Yeah. It's a great question. We have relationships with many different financial institutions. We as a firm, we will work with other financial institutions, because they don’t know what they're doing with self-directed IRAs. They don’t have the experience. They don’t have the background or the infrastructure. What they'll do is, they'll say, we have a client who wants to invest in this horse. Can you help us? We will work directly with them on that, and manage that asset. We don’t poach the relationship with the client. We just work directly with the advisor. It's the same way we're working with a bank or another financial institution. If they want to come to us for a very specific transaction, we will work with them directly and make sure it's done properly. If a bank wanted to offer these services and do that, we certainly offer consulting services.

Kelly Coughlin:

Right. Your primary footprint is in Lexington. What county is Lexington in?

Kirk Chisholm:

Lexington is in Middlesex County, but we actually have clients all over the world. We are not location specific in our firm. We have clients across the country. We have some international clients as well. We're not really location specific. As I'm sure your audience knows, in this environment, it's becoming more and more virtual. We actually have fewer and fewer people who want to come back, stop by the office anyway. Everything is virtual now.

Kelly Coughlin:

Well, Kirk, I think you're doing some really terrific things. I keep picking on IRA custody as being kind of a boring sausage business, no sizzle, but you're doing some pretty interesting things with it. So, congratulations on that, and I know that you've got a business partner there who does a lot of the due diligence on deals. I looked at his resume. He seems like a pretty capable guy, too. So, congratulations on building a unique and high-value financial advisory wealth management practice. I think it's pretty cool. Kirk, why don’t you give us another plug for how listeners should get ahold of you if they wish?

Kirk Chisholm:

The easiest way to reach us is at our website. It's On our website, there are a lot of free resources that you can learn more about us, about me, about self-directed IRAs and alternatives. Also, we have a free gift for listeners of this show. If you go to\bankbosun-podcast, you can get a free gift for that.

Kelly Coughlin:

Thank you for that. I want to put a plug in for this riveting publication. So exciting. A Quick Start Guide to Self-Directed IRAs.

Kirk Chisholm:

Yeah, thanks, Kelly. I appreciate that. I almost forgot to mention that. We put together a few resources for self-directed IRA investors, or CPAs and attorneys or people who specialize in the self-directed IRA space. Really, anybody who’s interested in this space. We have resources for pretty much all comers. There is a quick start guide to self-directed IRAs for people who are just learning about them and want to know more. It provides a lot of great resources to get you started on your journey. We have the Ultimate Insider’s Guide to Self-Directed IRAs, which effectively includes the Quick Start Guide. It's really comprehensive. If you're looking for a custodian or administrator for your retirement account, you have to pick between one of 47 companies. This resource will help you make that decision in the best way possible.

We put together some really in-depth due diligence on each of these companies with over 100 data points in each one. We also have fee calculators for each of these companies, because even though there's a fee schedule, sometimes it's hard to figure out what you're actually going to pay. This fee calculator allows you to estimate what it would cost you to use this custodian based on your investment strategy. This is probably one of our more well sought-after resources. I can't tell you how many times people come to me and say, I'm just really unhappy with the fees I'm paying. I didn't know I was going to pay this much, but if you do all this research up front, you won't have that experience. The last one is really a comprehensive resource for people in the industry. It's really access to all of our research. You can get access through the website.

Kelly Coughlin:

I appreciate your time, and I wish you luck going forward.

Kirk Chisholm:

Thanks a lot, Kelly. Appreciate the opportunity to speak here. It was a lot of fun.

Kelly Coughlin:

Thanks. Cheers.


We want to thank you for listening to the syndicated audio program, The audio content is produced and syndicated by Seth Greene, Market Domination, with the help of Kevin Boyle. Video content is produced by the Guildmaster Studio, Keenan, Bobson Boyle. Voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin. If you like this program, please tell us.  If you don’t please tell us how we can improve it. And now some disclaimers, Kelly is licensed with the Minnesota Board of Accountancy as a certified public accountant. The views expressed here are solely those of Kelly Coughlin and his guest in their private capacity and do not in any way represents the views of any other agent, principal, employee, vendor or supplier.

Aug 14, 2017

“My other piece of advice, Copperfield,” said Mr. Micawber, “Annual income twenty pounds, annual expenditure nineteen to nineteen six. Result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six. Result misery.”

David Copperfield (1850)


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast, Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers risk management, technology, and investment ideas and solutions to help them navigate risks and discover reward. And now your host, Kelly Coughlin.

Kelly Coughlin:

Greetings. This is Kelly Coughlin, CEO of Bank Bosun, helping bank C-Suite execs navigate risk and discover reward in a sea of threats and opportunities. I've been in the financial services industry since I was 23 years old. That was a long time ago. Merrill Lynch, PWC, Lloyds Bank, Global Bridge. I've seen a lot of different products, services, strategies, and tactics, and other than during the periods where the industry blows it through errors, omissions, and to a certain extent, unrestrained greed, it truly is a terrific industry. One of the most interesting segments of the industry is the alternative investments area. The opportunities to invest in alternative investments has never been greater. Alternative investments can range from professionally managed venture capital investments and hedge funds to private LLC investments in a local real estate deal. Along with this huge increase in investment choices comes the ability for individual retirement accounts to make these investments.

It used to be that IRAs could only invest in fairly plain, vanilla securities like registered investment companies, mutual funds, ETFs, and individual stocks and bonds. Now, IRAs can invest in just about any asset, but unlike an individual’s traditional, say a cash account where an investor can buy the asset and hold the evidence of the purchase of that asset whether it be an LLC agreement or a stock certificate in any place he or she wishes, in IRAs, you can only invest through an improved IRA trustee custodian.

You can't just buy it yourself and hold it in your safe deposit box or file cabinet. You can only buy it through one of these approved IRA trustee custodians. In this world, you have two categories of approved trustee custodians. Bank custodians and non-bank custodians. I think the assumption is that all banks with banking powers are approved to hold IRA assets so they don’t need any special authorities.

The other IRA trustee custodians are the non-bank custodian. The IRS maintains a list of a financial institution’s need to demonstrate some level of financial internal controls in order for them to get approved. Currently, there are about 75 financial institutions on that list. As I look at the list, it seems most of them are broker-dealer type organizations. The subject of this podcast is on the IRA trustee custodian business. Why? Recall, I said alternative investments are one of the most interesting segments of the financial services industry. IRA trustee custody is probably one of the most dull and uninteresting segments of the business.

A famous marketing guy, I think it was Elmer Wheeler from upstate New York, a sales guru in the mid-1900s said, sell the sizzle, not the sausage. I'm here to tell you that there ain't much sizzle in the IRA custody business. While I think Napoleon said, man should not know how laws and sausage are made, today we're going to learn a little bit about how the sausage is made and why it's important, and what we need to know to evaluate the sausage maker that is the IRA custodian.

With that in mind, I'm going to interview a very, very sharp financial advisor from Lexington, Massachusetts. He's a wealth manager and principal at Innovative Advisory Group. In addition to traditional investing, portfolio management, and wealth management, he is especially strong in the self-directed IRA business and the alternative investment area.

His name is Kirk Chisholm. He's produced an online course titled The Ultimate Insider’s Guide to Self-Directed IRA Custodians and Administrators, and the publication A Quick Start Guide to Self-Directed IRAs. Kirk has turned what some people, including financial institutions like bank IRA custodians and non-bank IRA custodians into a sizzling business line at Innovative Advisory Group. With that in mind, I'm hoping I have Kirk on the line, all the way from Lexington, Massachusetts. Kirk, are you there?

Kirk Chisholm:

I am. How’s it going, Kelly?

Kelly Coughlin:

Great, Kirk. Thanks for attending. I hope you're doing well. Did you hear my intro there, Kirk?

Kirk Chisholm:

I did, yes.

Kelly Coughlin:

Anything you disagree with on that?

Kirk Chisholm:

No. I thought it a very descriptive intro, yeah.

Kelly Coughlin:

Okay. Great. I'm really looking forward to talking to you. You're obviously a sharp and capable guy in this space, and you're a recognized expert. You were recognized as one of the top financial advisors in the country. Tell us about this. Was that at USA Today? Or where was that?

Kirk Chisholm:

Yeah. Thanks. That was a recent accolade I received. It was very unexpected, and it was very nice to be acknowledged. Investopedia had a list of the top 100 most influential financial advisors, and I was ranked number seven. I have to say, I was surprised to be up there. There were a lot of great people who are in the top 10, and I know many of them and they've all done a great job. I'm humbled to be among such a great group.

Kelly Coughlin:

Excellent. That's great. Let's get right into it. You know what we're going to talk about here. You focused a bit of your career on IRA custody and trustee business. Why has that been such a point of interest and focus for you?

Kirk Chisholm:

I'll tell you a little story. It's interesting. A number of years back, I was working for the wire house channel at Smith Barney. One of my longtime clients came to me and said, I want to invest in this private mortgage. I said, great. That's awesome. He said, I'd love to do it with my IRA. You can do that? He went on to tell me, apparently, somebody had educated him about it. I started reading up on it and realized, wow, this is fantastic. I don’t have to limit my clients’ IRA funds to stocks, bonds, and mutual funds. There is a virtually unlimited amount of investments out there, and to limit yourself doesn't seem like the best option. I went and talked to my manager and said, my client wants to do this. Can we do it? He said, no. You can't do that. I said, no, actually you can do it, and I went on to explain to him how you can do it and how it works. He said, well, you're right. You can, but we can't.

Then, the lightbulb went off. My client was a longtime client. He's a good friend of mine. I wasn't getting paid for it, but I helped him through the process. I went and took the next three months to research the process, and this was back before the Internet was a big deal. There was information out there, but it wasn't a lot. It took me a while to do this research. I was trying to do it right. I wanted to make sure he didn't get himself into trouble. Came to the conclusion that this was such a great opportunity for investors, and nobody knows about it. Spent the next six months researching custodians and administrators and trying to learn the inside and out of each of these companies, and it took me a long time to do this research. Really spent the next few years trying to figure out how I can work with my clients on this, because I saw so many interesting opportunities outside of the stock market that I really wanted to try to take advantage of that.

My partner and I started our current firm, and really the point of it was to focus on providing advice to alternative investments inside of self-directed IRAs. So, while we do traditional wealth management services like tens of thousands of other financial advisors out there, we also offer this specialty, which very few people understand. I think there are currently, there's about 4 or 5% of IRA holders are holding alternative assets. There's very few of them that are actually doing that. Out of the IRA holders, let's say maybe no more than 10% are even aware that this can be done.

Most people don’t even know. It's too bad, because some people have some really interesting investment strategies just for their personal taxable money, and if they were to use their retirement funds, they would have a lot more opportunities available to them, especially when many of them don’t contribute to their retirement funds because they don’t want that money to go into things they don’t understand. They want it to go into investments that they do understand.


An interesting story. When I was, I think, about a year in, I had started at Paine Webber back when they were Paine Webber. About a year in, I had spoke to this individual who owns real estate. I was talking to him about how he ought to diversify into other investments. He said, look, all money goes into real estate. Every nickel I have goes into real estate. Why would I ever invest into stocks, bonds, and mutual funds? I know real estate. I don’t know stocks. Why would I ever do that? I said, I can't argue with you. If you're doing well with real estate and that's your expertise, you should definitely not invest in things you don’t know. At the time, I wasn't aware of this, but real estate happens to be the most common asset held in self-directed IRAs. There are a number of people who are actively using this asset, but in general, most people are not aware of this type of investment strategy.

Kelly Coughlin:

They can't buy the actual asset itself. They can buy an LLC, C-Corp, that sort of thing, that holds real estate. Probably not a sub-S. They can't buy the asset directly, correct?

Kirk Chisholm:

Well, they can, actually. People always ask, what can you invest in? It's probably easier to say what you cannot invest in, because what you can invest in is virtually unlimited. What you cannot invest in is what is described in the Internal Revenue code pretty explicitly is, you cannot invest in collectables. You cannot invest in life insurance on yourself, and you cannot invest in S-Corps. There are some other nuances there, but more or less, those are some things you cannot invest in. There are exceptions to those, but more or less, the S-Corps, you're correct. But you can own real estate inside of an IRA. That is the most common asset held in IRAs that are alternative, is real estate or real estate-related investments. Many people own it directly. You can own it inside of an LLC or a C-Corp, which some people choose to do, but there's no limitations. It's up the individual to make that decision. The rules for the IRA, the IRA was established in 1974.

Kelly Coughlin:

Oh, ’74? That early?

Kirk Chisholm:

Yeah, with ERISA. Since then, the rules haven’t changed. They've changed a little bit, but this was always allowed. Even back then, you were allowed to invest in all of these different things. It's become an industry. The financial service industry has done a great job bit of marketing to people and convincing people that you have to index, you have to invest in mutual funds, you have to invest in stocks, because that's how they make their money. You can't blame them for that kind of marketing, but that's all people see. There's no contrary marketing that you should be doing something else. People don’t see that, so they have the message that this is what you should be doing. For some people, maybe that's the best choice, but it's not the best choice for everybody.

I think the more people that are aware of this option, the more they'll be able to take advantage of their own expertise in certain areas. Side anecdote, which is kind of interesting. The collectables part. People ask, why collectables? They're an investment for some people, which is certainly true, and there are some collectables which are allowed. I wouldn't say collectables. There are exceptions, but certain coins are allowed within IRAs. Interestingly enough, the reason they put collectables in there was because, at the time they're writing the law, some stolen Nazi art has surfaced. They were afraid that if somebody ever put this stolen Nazi art in an IRA, nobody would ever be able to get it. They had that exception there. They said, you can't put collectables in there, because they were afraid they would never be able to get it again.

Kelly Coughlin:

That's really fascinating. You're saying, back in the ‘70s and ‘80s, you could buy these alternative assets in your IRA?

Kirk Chisholm:

Yes, yes. Some of these companies were started back then.

Kelly Coughlin:

I'm really surprised by that. I thought that this was more of a recent thing. Let me ask you this. It seems as if many of the custodians, especially the brokers who are interested in straight-through-processing on transactions, low-touch, high-volume transactions, they didn't want to have anything to do with these alternative deals. Is that a fair statement?

Kirk Chisholm:

The best way I would describe is this. If you're running a company, you want scale. You want to lower your expenses as much as possible and try to get as much scale as possible. These financial service companies have done a great job at that. The ETF world has taken what Vanguard started as indexing mutual funds and have lowered the expenses even more. The ETF world is erased to zero with expense ratios, but the industry itself has done a great job at scaling. When you're investing in securities, it's easy to scale. When you're investing in rental property and tax liens and horses, you can't scale that. If you wanted to invest in a horse in your IRA at one of these big discount firms, if your account is large enough, it's possible they might let you, but you probably wouldn't want to use them, because if they're specializing in stocks, bonds, and mutual funds, that's the place you want to go.

If they have no idea what they're doing about investing in horses with an IRA, then that's not the firm you want to use to custody your IRA. Ultimately, there's a lot of back office paperwork that has to be done on their part. If they're not familiar with that process, then you don’t want them to mess it up. This is your retirement. The last you want is your retirement to get disqualified and you have to pay taxes on it. You don’t want to focus on companies just because you have your other accounts there. You want to focus on companies that have the best combinations for the investment strategy you're trying to pursue.

Kelly Coughlin:

Do the traditional bank and broker custodians accommodate this type of security willingly or begrudgingly? If they accommodate it.

Kirk Chisholm:

In general, they don’t accommodate it because they don’t understand it, and most likely you're talking to a customer service rep who has no idea. Your most common answer when you ask them to invest in a horse in your IRA is, you can't do that, because they just don’t know. They're not taught that this is an option. Now, if you have a big enough account, maybe you find somebody who is knowledgeable enough. They might say, yes. It can be done. I'm not sure if we can do it. I had a friend of mine who worked at one of the major broker-dealer firms. He had a big client. The client wanted to invest in an alternative asset. He went back, and big enough client, he's trying to make him happy. He went back and said, yeah, we can do that. The back office said, yeah, we'll take care of it.

It literally took the next six months for them to come back and say, sorry, we can't do it. They tried. They tried to figure out. They couldn't figure it out. They finally said, no, we can't do it. They just don’t want that business. It's not scalable. They don’t make big money off of it. it's not just worth the time. They have to hire other people. It's completely understandable why they don’t want it. Recently, some of the custodians that have specialized in this area have been reaching out to these firms and have been working with them and providing sub-custody services. Some of these bigger discount broker-dealers can offer a sub-custody agreement, but are not advertising it, because it's not their main core business.

Kelly Coughlin:

In that sub-custody arrangement, is it fairly typical for the end investor to get one statement from the primary custodian and that sub-custodian asset rolls up into that? Or will they get two separate statements?

Kirk Chisholm:

It depends. Different firms have different arrangements. Some firms will just refer the business to the other firm. Some firms will keep it in-house. One of the more well-known names, after the financial crisis, they pretty much said, we don’t want any alternative assets, which of course gets rid of all the hedge funds that were being held at their firm. Typically, what they would do is charge them a flat fee per year, per asset, and then they would put it as a book entry on their statement. Then, after the financial crisis, they said, we don’t want this business and just told everybody to take a hike.

Eventually, they said, all right. We'll take it back. I think with those firms, they don’t really understand that business, and they don’t want to deal with it. It's kind of a headache for them. I completely understand. I can't blame them. If I was them, I wouldn't want to do it, either. It's not a scalable business. It's a very different business model. I think in general, they don’t want that kind of a business, but now they do accept it more, because it is money. I still don’t think they're going to advertise a lot, because they don’t want to take away from their core money making business.

Kelly Coughlin:

Do you think it's a profitable business line for them? Or is it more or less a breakeven? If they can collect even fees to pay for the additional staff and, I don't know if there's any systems that are required? You think it's more or less a breakeven?

Kirk Chisholm:

I can't speak to whether it's breakeven or not. I think each firm has their own P&L. I wouldn't know specifically, but I would guess that it's probably a break-even or maybe even a loss leader just to keep the business, because they make so much money off the other part of the business. For them to just break even or even lose a little money to keep a client, in general, is probably worth it for them, because they're not doing that much of this business. They're not seeing a ton of it, but if you have an ultra high net worth client who has hedge funds, he's got $20 million at your discount brokerage firm, and he has $2 million in hedge funds, even if they're charging $75, $150 a year, even if you're losing money, it's worth it to you to keep that extra $20 million.

I think in the large part, they see the bigger picture and just say, yeah, we'll do this for cost or close to it. That would be my guess, just based on what I see some of these other specialized firms charge, that most likely that's the case. The other thing, too is, most of these discount brokerage firms that do offer that, I'm not sure that they're offering that inside of IRAs. They're holding hedge funds for book entry on a statement. More times than not, that's actually taxable money. The IRAs, some of them do it. It's become a more recent thing, but they're not really specializing in it.

Kelly Coughlin:

Okay. You mentioned fees, and some of these companies that specialize in it. What kind of fees are you seeing for trustee and custody of alternatives? I assume it's got to be higher than holding $100,000 in mutual funds and ETFs. What kind of fees do you typically see? What's a low end? What's a high end?

Kirk Chisholm:

Fees are an interesting concept. If you're accustomed to a discount broker, you're probably with the recent reduction in many of the firms, you're probably looking at $5 a trade, which is pretty inexpensive to do a trade. These brokerage firms certainly make some money on that, but they also make money on the spreads. They make it different ways. They make it on cash, margin. There's many ways that they can make money. If you're considering a custodian that holds non-traditional assets, they're called a self-directed IRA custodian for short, you'll notice that these are a lot higher. Right now, there's 47 custodian administrators that specialize in this area. There might be a few other stragglers that are out there that don’t advertise, but more or less, that's how many are out there. Out of those firms, every single one of them has more or less a different fee structure.

Kelly Coughlin:

Are you including banks and non-banks? And are you then saying, yeah, there might be more than this, but there's really 47 that are active in this space?

Kirk Chisholm:

There are two different categories. There are custodians, which are typically non-depository bank custodians. Then, there are administrators, which are companies that just do administrative services. You might see them as a TPA and a 401k plan, or administrating insurance, or some other things. There's many uses for administrators, but these have decided to focus on alternative assets inside of IRAs.

It's different from a custodian, but they're required to use a custodian. They might choose to find a local bank and custody of the assets there, and they would do the administrative services of it. Each of these firms, whether internally or some of it's outsourced, they would provide both administration and custody services. Administrators do not provide custody. They outsource it. The custodians provide custody and administrative services, but the administrative services are in-house. It's just a different business model. There are some other differences, but that's the basis of the difference.

Kelly Coughlin:

You say there are 47. How did they get to specialize in this?

Kirk Chisholm:

I actually created—this is such a huge list, and there are so many incorrect lists out there that we actually created a list on our website, because I've seen many lists, and some of them are inaccurate. They have companies on it that aren't even in the space. It's hard. We put together a really comprehensive list. Some of these companies are banks. They are local or regional banks that happen to have a branch or an arm of the bank that does wealth management services and does self-directed IRAs.

Some of these are banks that do offer that. Other firms are exclusively set up to deal with this kind of business. That's all the do, or primarily that's what they do. There are enough people out there that want this service, even though it's only 4% of all IRA holders. It's still a decent amount of people. You're talking about tens of billions of dollars that are in this area within these firms, but each of these firms, they're all different. This is probably the most frequently asked question when people call us up.

They say, what's the best custodian to use? We went through over a year worth of due diligence on all of these firms. We put together extensive resources on them. In the beginning, we thought, well, there will be a handful of best firms, and there are some firms which we prefer over others, but generally speaking, if you look at all these firms, you can't say there's a best firm. Each one of these firms is a little bit different. Their fees are different. Their assets that they allow are different. They're very hard to find a large number of firms that are the same in one area.

Some of the larger firms are more common household names in this area, but generally speaking, real estate, for instance, is the most commonly held alternative in IRAs. Some of these firms don’t offer that. They will not custody real estate for one reason or another. While the Internal Revenue code restricts certain assets, everything else is allowed, but the custodians don’t have to allow it. The custodians can certainly impose more restrictions on what is allowed and not allowed in their own judgement.

For instance, one firm that didn't offer real estate, I asked them a question, obviously. I said, why don’t you offer real estate? You're giving up a big chunk of business. They said, you know what? It's too much of an administrative nightmare for us. We don’t want to deal with it. We'd rather deal with simpler alternatives, and that's what they focused on. They have a decent client base. It's not as if they're hurting for business. They just decided to focus on other areas. There are plenty of alternatives out there that people focus on.

There's one surprising one I'll mention, because I thought it was interesting. I've never come across this with a client, but I've done a little research, and it's interesting. The asset is church bond. One of these companies specializes in church bonds. Many of the companies don’t allow it at all. It's not a big asset class. There actually was a publicly traded closed end fund which converted to a mutual fund later, which was specifically focused on church bonds. There's a market for everything. It's just a matter of finding that market and trying to fill the need.

Kelly Coughlin:

I look at this IRA custody world in three primary categories to evaluate a custodian, and I'm not listing these in order of importance, but fees, features and benefits, and customer service. Is that a reasonable attribution of the categories that you would go through when you look at these 47 players in this industry? How much do you have to pay for it? What do you get for it? And what kind of service do you get from the provider?

Kirk Chisholm:

Yeah. I think that's a good starting point. I categorize them a little bit differently.

Kelly Coughlin:

You're the expert. Tell us how you like to categorize them.

Kirk Chisholm:

We do look at fees. Fees is a very important of the concept, and most investors put that at the top. I don’t, but they do just generally speaking, and I understand it. The fees is definitely an important part of that puzzle. Specialization is another part. As I was mentioning, many of these companies don’t offer all assets. Some of them specialize in certain area. Their most popular asset might be real estate, or it might be Reg-Ds, cryptocurrencies, or whatever it might be, but they have a most common asset or a most popular asset. If you figure it, they're doing a lot of business.

If this is their most common asset, most likely they're going to be good at that asset or good enough. That's another thing we look at is, what are it specializations? We look at customer service. Always a very important part of the puzzle. As you stated, it's much of this is not scalable, so you're dealing with customer service. You're dealing with people that, if you have a rental property, somebody’s getting evicted or you're paying your electric bill.

You need a roof fixed. You may have to converse with these people on a very frequent basis, or you may not. It depends on your investment, but it is important that customer service is knowledgeable. They understand the rules, they understand what you can and cannot do. They will never give you advice. Explicitly tell you they don’t give advice, but they will give you information on what some of the things that you can do or their parameters are.

However, if you have a company that has 100,000 clients and they only have five customer service reps, I'd be pretty confident that you're not going to get great customer service. That's just a shot in the dark, but we look at those metrics and see. Every firm has a ratio of X amount of clients per customer service reps. This firm has only a handful and they've got a lot of clients, I look at that and just say, okay, that's probably not a good sign.

We look at some other things, but that's the customer service piece. We also look at the transaction frequency in reviewing firms. This is not a firm-specific thing, but it's important, and this goes more to the fees in that some custodians have a transactional model, and some have an asset based model. Those are really the two main categories. There are some other different ones. There are some hybrids, but if you have one investment and it's not going to require any effort, you buy it and leave it for 20 years, then you don’t really want an asset based model. You probably want a transaction model, because it’ll end up being cheaper every year.

Kelly Coughlin:

As an account owner, you as a provider would like the asset based fee, right?

Kirk Chisholm:

Well, as a provider, it depends, and this goes to the “…every company’s different.” If you're offering a transactional model, the people that are going to gravitate towards you are people most likely that are in the buy and hold mentality, but if you're in asset based model, then most likely the people that are going to gravitate are the people who are flipping 10 houses in a year, because they don’t have to pay for each transaction. Or if they do, they pay a nominal amount. Investors are going to gravitate to where they're going to get their best bang for the buck.

The custodians and administrators are going to obviously get what the investors gravitate towards. Some of them have multiple fee structures, too. Some offer multiples. We've developed all these resources because the industry is so complicated and convoluted. The discount broker model, everybody’s more or less the same. I think Fidelity recently reduced their $9.99 trade to $5.00, and then their competitors naturally did the same thing, because they're natural competition. With these firms, you don’t tend to get that, because they're not all the same and you have very many different investors. They each have their own piece of the puzzle, but those are the big four that I look at when we're looking at firms. There are many questions we ask, but those are the probably the bigger categories that I would consider.

Kelly Coughlin:

Okay. What sort of feeling of fees would be for that provider? Can you give us any guidance on where that would come in? Certainly, it's more than $100 a year, which is the $100 to $125 typical IRA fee.

Kirk Chisholm:

It depends. I wouldn't make a broad statement with the fees, because the $100 is, I think, probably—I don't know anybody would charge $100 for this service. That's really low. Many of them charge $50, $25 to $100 to even set up the account. In the traditional side, that's what they would charge to bookkeep it, but in this side, it would probably be more expensive. By and large, if you're getting a Cadillac type of service, you're going to have to pay for it. I'll tell you a funny story.

I was talking to a guy recently. He was an attorney. He was telling me about one of his clients. I'll give you some interesting anecdotal story here. There's a side story. The GAO published a report a few years back, I think it was 2014, about IRAs above a certain amount. I believe they went into different categories. This is something you could probably easily find, but I believe there were 300 or 400 individuals who have over $25 million in their IRA, which to me is fascinating, but I've been in this business a while, and it's a rarity to see somebody with $1 million IRA.

I've seen a lot of $700,000-$800,000, but when you get into the millions, you have to be doing a lot of things right, because even if you're maxing out your 401k every year and doing what you should, it's still hard to find people who have that kind of depth in their IRA. To find somebody who has $25-plus is just, it's a really small number. I think there are 314 taxpayers who have an IRA over $25 million. Now, one of them you might know, is our former president candidate Mitt Romney, who had an IRA of, I believe, was $102 million. It was disclosed when he was running, but if you look at the numbers in the GAO study, out of that 314 people, the average of those 314 people is $250 million. If the average is $250 million, it makes you wonder with the biggest one looks like. Now, I've heard a rumor that it's above $1 billion, but certainly, nobody’s going to talk about that in detail. Somebody like that wants some very specific things.

They have a lot of money at stake. They want the Cadillac. They want all that. If they're not getting it from the companies that exist, some of them might just create their own. There comes a point in time where, if it's not there, if you have enough money, why not just create it yourself? Create the solution, because even with all these companies, they do provide some great services, but like I said, there's no one singular best of breed.

There's some great companies, but there's not one solution for everybody is what I mean. If you have that kind of a setup, then there's definitely some room for additional competitors in the market. We've gotten calls from people that wanted to start their own. They've seen our research and they said, hey, we want to see what we can find out about this market. We'd love to start a new company. Technology, as we've seen with gen tech in a traditional space, is a big part of this.

The more that you can scale this part of this business, the more profitable it will be and the better services they'll be able to provide. I think that's the next natural step in this industry, is better technology to provide better services in a cheaper way. From a fees perspective, I think if I was to start one, I would offer multiple fee structures to provide something for everybody so that you can have the transactional as well as assets under management kind of fee structure. I think would be the most flexible. You would appeal to the most investors. Whether that works with your infrastructure is a different question, but that would certainly appeal to everybody.

Kelly Coughlin:

Then, in terms of the features and benefits, certainly specialization is an advantage, but it seems to me that if you were starting one, you would want to be able to specialize in either all of the assets that you could foresee, or those assets representing the top 50, 60, 75%, or some breakdown of where are people putting their money? You need to be able to specialize in those asset classes. Is that a fair statement, do you think?

Kirk Chisholm:

Yeah. It comes to two different parts. You want to offer as much as you can to appeal to the most people, but you don’t want to dilute yourself, either, because obviously, you have people with different expertise and you just have to hire more of them. It doesn't always make sense. When you talk about features and benefits, I call this specialization. I mentioned one firm specializes in church bonds. I think that's great. There is a market out there. Nobody really wants to address it. They did. They specialized in it. I think that's great. Another asset class that people don’t really want to touch is international real estate. There's no reason not to, but people just, the firms just don’t want to deal with the international standards and liabilities and all that. One interesting asset, it's really interesting talking to different firms about this, because nobody really has a firm opinion on it.

Even we've had to research it, because it's not something we'd seen before, but domain names. Investing in domain names inside of an IRA. Many firms look at it as intellectual property. Some firms say, where is the domain being registered? They want to see, what's our recourse? There's so many different levels to these assets. You can't just say, it's an asset. We'll invest. You have to look many levels deep into what are the repercussions if this happens or this happens? I'll give these firms credit. They've put a lot of thought into it. I'd agree with their decision, but they've put a lot of thought into why they will or will not hold these assets.

It makes sense, and if I was them, I would probably have a similar conversation. We have a different view of some assets than they do, but they certainly have full rights to say no for whatever reason that they decide. I think there are a lot of assets on the edge. I think cryptocurrency is another one that people are unsure about for many reasons.

I think a lot of people look at it as a good investment/speculation, I would say. A lot of people are interested, but it's an unknown, so many of these firms won't hold it, because they're not comfortable with it. In another way, they might think it's too risky. Maybe many of it's clients lose money or they get blown up because they don’t know what they're doing. For them, they're just saying it's not worth it for us to custody this asset and have clients lose all their money. It's just for liability reasons or whatever, they just don’t want to do this. There are many reasons that they make these decisions. There are some firms that’ll custody almost anything. There are other firms which actually specialize in only a handful of areas. I think you can look at it from different ways. Our economy has come a long way to the nature of specialization, where many companies used to be generalists, and now, people want specialists. They want somebody who’s an expert in this or an expert in that. There's a market for that, and I think if one firm offers great service to all of these assets, that's fantastic, but I think it's harder to do and you'd have to have the scale to be able to do it well.

Kelly Coughlin:

Kirk, that's all I have right now. That's a very interesting and fascinating topic on the sausage related to IRAs and custody. I think you added some nice sizzle to it, and I appreciate that. I hope our listeners do, too. That's it for part one, but I want to give you an opportunity to tell the listeners how they can get in touch with you if they're so inclined to look for some help from an expert in this industry.

Kirk Chisholm:

Yeah. Thanks a lot, Kelly. We're pretty easy to find. You can go to our website, which is, and we have a lot of free resources there that we write up just to educate people about self-directed IRAs and alternative assets. Certainly, you can contact us through that as well.

Kelly Coughlin:

Okay, Kirk thank you very much for your time. I hope you're well.

Kirk Chisholm:

Thanks a lot, Kelly.

We want to thank you for listening to the syndicated audio program, The audio content is produced and syndicated by Seth Greene, Market Domination, with the help of Kevin Boyle. Video content is produced by the Guildmaster Studio, Keenan, Bobson Boyle. Voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin. If you like this program, please tell us.  If you don’t please tell us how we can improve it. And now some disclaimers, Kelly is licensed with the Minnesota Board of Accountancy as a certified public accountant. The views expressed here are solely those of Kelly Coughlin and his guest in their private capacity and do not in any way represents the views of any other agent, principal, employee, vendor or supplier.

Aug 10, 2017

Title: Out of the Box Banker; Inside the Box Regulators, Chuck Leyh, Enterprise Bank – Part 2

Subtitle: A two-part discussion with a successful banker fulfilling a COMMON BANKING need with an UNCOMMON BUSINESS solution.

Date: July 25, 2017

Attendee and Guest:  Kelly Coughlin, CEO, BankBosun; Enterprise Bank Chuck Leyh

This is part two of my interview with Chuck Leyh, CEO of Enterprise Financial Services in northwestern Pennsylvania.

Kelly Coughlin is CEO of BankBosun, a management consulting firm, helping bank C-Level officers navigate risk and discover rewards.  He is the host of the syndicated audio podcast,  Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank and Merrill Lynch.  On the podcast, Kelly interviews key executives in the banking ecosystem, provide bank C-Suite officers risk management, technology and investment ideas and solutions to help them navigate risk and discover rewards, and now your host, Kelly Coughlin.

Greetings, this is Kelly Coughlin, CEO of BankBosun, helping bank C- suite execs navigate risks and discover reward in a sea of threats and opportunities.  Today is part two of my interview with Chuck Leyh, the CEO of Enterprise Financial Services in Allegheny County, Pennsylvania.  For those of you who do not know your geography, Allegheny County is in western Pennsylvania. 

By the way, the history of Allegheny County is fascinating, especially the period during the 1750s and 1760s, before the revolutionary war.  During this time, the French and British were jockeying for position, power and control of the inter area of the U.S. and primarily the Ohio River Valley. In the U.S. we call this the French and Indian war but the Europeans call it the Seven Years War, and it was really the world’s first World War.  And at the center of the Ohio River Valley was a small fort first established by the French at the spot where three rivers came together, the Allegheny, the Monongahela and the Ohio rivers.  This spot was titled Fort Duquesne by the French but after they lost it to the Brits, it was renamed after the British prime minister at the time, William Pitt, of course, we all know it as Pittsburgh. 

And at the center of Pittsburgh and Allegheny today is Enterprise Financial Services led by Chuck Leyh and his team. And they are doing some really really interesting and fascinating debt funding deals with companies who most likely would receive a big “no” from traditional bankers.  But because Chuck’s team has included a number of due diligence, risk mitigation and value-added consulting services to their business model, he has created a very good business and a company with excellent financial results.  In part one we talked about his unique business model and how it evolved and some of the critical value-add components.  In part two we are going to talk about how this uniqueness presents challenges in dealing with regulators and his auditors. 

Kelly:                    Okay, just briefly, you are dealing with regulators and auditors, I imagine those guys give you a bit of a hard time over your business model.  Is that a fair statement?

Chuck:             I would say that is an extremely fair statement.  I would say that if I had known the way the regulatory environment was going to be migrate after the recession I would have never started the bank in the first place. I am a CPA by trade and whether you are a regulator or you are a banker, the generally accepted accounting principles govern the way we operate and the financial information that we put out and I have a very very strong belief that regulators do not follow generally accepted accounting principles and as a result makes it very challenging for banks to deal with startup businesses or businesses in distress.

Kelly:               Is it mainly the revenue recognition challenge?

Chuck:             Yeah, I think that’s a big big part of it.  I’ll give you an example, if you look at GAAP There is terminology when it comes to revenue recognition and it’s basically, more likely than not probable.  If it’s probable you are going to recognize the revenue you should and if it’s not, you shouldn’t.  When you look at the way the regulators interpret things of that nature it goes beyond what the intent of generally accepted accounting principles, say, for instance, when we accrue revenue and a loan that may have a challenge associated with it, the regulations for the regulators that are interpreting that probability threshold, say that if you haven’t gotten a payment in 90 days you stop accruing revenue unless you are well secured and in the process of collection. 

And that interpretation makes a lot of sense to me.  If you haven’t got a payment in three months, clearly this loan’s cash flow is challenged and it’s affecting your probability of collection, unless you have a lot of collateral and you should start recognizing income.  But the key comes into the way regulators interpret and their own regulation because when they say, stop recognizing income if you have a delinquency greater than 90 days, unless its well secured and in the process of collection, they interpret the term, “process of collection”,  meaning that I have to show I’ll have my money in 30 days. 

Well, you tell me in the legal world how you can go through a foreclosure and get your money in 30 days.  Even if you are at 25, 30, 50 percent loan to value. It’s not possible and yet it is extremely probable that you are going to get all your money back.  This is why you have small business people that they build up a lot of equity and say, okay, it’s time for me to try to start my business.  I have spent years saving for it.  I have got all this equity saved up, now I need a loan for cash to buy some things and have working capital and the banks will say no.  And people look at us and say, what are you talking about?  I am asking for $100,000 loan and I have got $250,000 equity in my house, how can you not do this?  And the common sense approach is, I should be doing this I don’t have a risk of loss. 

Except when a regulator tells you, well you can’t recognize any of the income and you know it might take two or three years to work out this loan. You have now put this capital out there and you can’t recognize income for two or three years until you have finished your collection.  Well, you can’t wait for two or three years to show income. Now, that drives banks away from helping small businesses.  It drives them away from helping businesses in distress and it does not follow generally accepting accounting principles.  And you will not get a regulator that will back off of that issue.  It’s just very bad for the economy, it’s very bad for the country and it’s a challenging environment to be in.

Kelly:               I then asked Chuck about an interesting disclosure in his management discussion and analysis for the fiscal year ending September 30, 2016.  The difference between management’s application of GAAP and the regulator’s application of the regs is evidenced most clearly in a year when the regulators require that all prior payments received as a result of collections from nonaccrual loans that had been recorded as interest income should now be reversed and recorded as principal even though the banks position was well secured.  

The result was a big material difference in the financial statements reported in the bank’s call report versus the financial statements reported to the shareholders.  Enterprise presented a very transparent description of the differences and the methods that triggered this, but I think you will hear Chuck talk about his ongoing frustration in having to deal with this. Let’s listen.

Chuck:             No question about it, I’ll give you an example, we made a loan to a group who started up in business. They didn’t have enough to make the full down-payment of the GAAP required to put something down on full accrual but they did make a significant down-payment so that we were sure to get our principal back based on the property that served as collateral and other assets, and at least that was our opinion.  The regulator’s opinion was, no, you are not assured so you should be on cost recovery. 

So, for three and a half to four years this loan never missed a payment, ever, for four years never missed a payment.  We never recognized one penny of income.  Then in year four when the minor payment were sufficient GAAP tells you, you can retroactively switch back to accrual and all the deferred income comes in, in one fell swoop.  So here you have, in our case, this was a large credit, this is a $2M credit.  We waited for three to four years.  This client never missed a payment, always had profit, always looked good.  We couldn’t recognize income until year four and then all the income comes in, in one fell swoop from three to four years for this loan.  When you talk about distorting income and creating a problem for shareholders and interpreters of a financial statements to try to understand what was going on.  You can’t create a better example than that.  

There just seems to be no recognition from a regulatory body that that’s a bad thing.  You know, they all sit there and say, oh we are glad to see how it worked out for you.   And nobody looks back and says, maybe you should be concerned that you misrepresented the financial information for the last three or four years.  That doesn’t seem to be an issue for them. They are just very conservative, and that’s just the way it is.  You know, a lot of people sit out there and say, why are bankers so tough on small business and why won’t they make the small business loans, and you hear all your clients say, when I need the money they won’t give it to me and when I don’t need it they will.  Well, this is in fact the driving reason why. 

Bankers aren’t bad people, but they have regulators that they have to deal with and what people don’t understand is, there is no way for me to get to court to get an independent evaluation of this. When the regulator makes this important decision, your only appeal rights are to the same regulator that made the decision and the only way we can get to court is to refuse to do what the regulator says. Then when they assess the fines against you it can be up to $10,000 a day for each director and senior officer and then we have the option to go to the court. 

Well, think about this issue I had with that one credit and how it misrepresented things, do you think my directors wanted to take the risk of a five to ten thousand dollars a day penalty and it takes two years or so to go to court on an issue like that. And that’s their personal assets that they have to worry about.  So, it’s a practical matter.  A bank can’t even get to court to get a judge to rule on the thing and to override what you are doing so it’s a very challenging environment to be in right now.

Kelly:               Yes, what’s in store for you and Enterprise?  Your secretary says you are 60 years old, you have got another 15, 20 years left in you.   Organic growth, acquisition, what’s the future there?

Chuck:             We pretty much have decided on organic growth.  Actually, two and a half years ago, three years ago, stock growth for a few years because we made a decision to let capital grow to prepare for the adjustments for Basel III and now we are going to have to look at it again, watching what is going to go on with the new CECIL changes and how it is going to affect capital.  And about the time that we were contemplating what was going to happen with Basel III, and at one point we thought it wouldn’t be effective to the banks, at that stage we decided to double our overhead and prepare to double the size of the bank. 

So, we doubled building size, infrastructure and everything else.  And as soon as we were done doing that and ready to start kicking in for growth and now that we have the infrastructure to grow safely and soundly then Basel III kicked in and we had to table the growth for a few years until we accumulated capital. And we kind of finish that up about a year ago and started to grow again and so now our key is to keep growing and balancing profits and growth because we elevated our overhead intentionally, our fixed over-head, and now we need to grow into it so that’s the bottom line, built to where we wanted to be. 

Kelly:               What opportunities do you see?                                              

Chuck:             As much as I can sit there and seem negative with regard to regulators, it’s a great business environment out there and people are always coming up with new ideas and it’s just a lot of fun to be out there helping people work with their dreams and build their businesses.  I think the opportunities are endless and we are in an area around Pittsburgh, Pennsylvania, where it’s a very large market and I think our opportunities are whatever we want them to be.

Kelly:               Great.  And financial services or any service business, your key asset, go home every day, take the elevator home every day.  How do you tie them up?  How do you secure them and where are the biggest challenges you have in fulfilling?

Chuck:             Well, as I said to you before, the relationship managers and that concept of running your own business inside the bank is certainly those risk parameters, risk reward parameters are very unique to the banking environment, most bankers are not entrepreneurs.  It’ challenging to find people that fit in that consulting relationship manager role but we don’t really lose them if we don’t want to in this scenario because typically they get there and they have that entrepreneurial drive and it’s hard for them to find that in banking. So when they get here it’s like they’ve found a great place and they are happy based on the concept. 

So, it’s pretty easy to satisfy that group. And the senior management group where we have our chief operating officer and operations people and accounting people…the assets here are the people, they are not the machines, they are not the equipment. So, you have got to take care of them, reward them, keep them competitive with the rest of the market place and that makes it a fun place to work.  We have a campus type setting here, we have an auditorium here where we put on programs and I speak to small businesses and they are involved.  We have a gymnasium here, day care center. We have soft-serve ice-cream and pop and popcorn and so we try to make it a fun environment for everybody that it is something where they look forward to coming to work.  

And it work out well because to be quite honest, the senior management group that we have recruited and we have really worked at, especially the last two or three years, developing a transition group, as I have gotten older and some others and so, you know, we try to create an environment that’s fun for them and it seems to be working because we haven’t had any turnover in those areas for the last 10 years.   We are pretty happy with the way things are working out that way and it’s basically just taking care of people and creating an environment that’s fun to work in.  

Kelly:               Terrific!  Well Chuck, I bet you are an excellent executive.    That’s all I have, is there anything else that you want to add? 

Chuck:             Life has always get you challenges and you always seem to take a step back but as long as you are routinely taking two forward that’s just the way life is and you have to enjoy it for what it is and it’s a lot of fun.

Kelly:               Great.   Alright Chuck, thank you very much for your time.  I really enjoyed it.  Best of success going forward.

Chuck:             Very good. Take care Kelly.

Kelly:               Thank you.  Bye.

Chuck:             Bye

We want to thank you for listening to the syndicated audio program,  The audio content is produced and syndicated by Seth Greene, Market Domination, with the help of Kevin Boyle.  Video content is produced by the Guildmaster Studio, Keenan, Bobson Boyle. Voice introduction is me, Karim Kronfli.  The program is hosted by Kelly Coughlin.  If you like    this program, please tell us.  If you don’t please tell us how we can improve it. And now some disclaimers, Kelly is licensed with the Minnesota Board of Accountancy as a certified public accountant.  The views expressed here are solely those of Kelly Coughlin and his guest in their private capacity and do not in any way represents the views of any other agent, principal, employee, vendor or supplier.

Aug 10, 2017

Title: Enterprise Bank's Leader, Chuck Leyh: Accountant, Banker and Deal Maker, Part 1

Subtitle: A two-part discussion with a successful banker fulfilling a COMMON BANKING need with an UNCOMMON BUSINESS solution.

“Being a banker is like being the pilot of an aircraft.  It is years of boredom and seconds of terror.”

Kelly Coughlin is CEO of BankBosun, a management consulting firm, helping bank C-Level officers navigate risk and discover rewards.  He is the host of the syndicated audio podcast,  Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank and Merrill Lynch.  On the podcast, Kelly interviews key executives in the banking ecosystem, provide bank C-Suite officers, risk management, technology and investment ideas and solutions to help them navigate risk and discover rewards, and now your host, Kelly Coughlin.

Greetings, this is Kelly Coughlin, CEO of BankBosun, helping bank C- suite execs navigate risks and discover reward in a sea of threats and opportunities.  Being a banker today is an enormous challenge.  I like to say the three “Rs” that are constantly threatening and challenging then are risks, regulation, and revenue creation.  And within each of the three “Rs” you have varying layers of threats. 

In the risk bucket you have cyber risk, operational risks, compliant risk, market risk, interest rate risk and, of course, credit risk. That is the risk that in your core business, lending, you make a bad loan and it doesn’t get paid back. There are some great quotes on banking in the lending business.  Warren Buffet says, “Banking is very good business if you don’t do anything dumb.”  Carl Webb, Co-Manager of Ford Financial Fund said, “Banks get in trouble for one reason, they make bad loans.”  And now you have an ironic quote from another now infamous banker, “Irrational lenders come and go, but mostly they go.” That’s from John Stumpf, former chairman and former CEO of Wells Fargo.  And, of course, Stumpf was the banker who appeared in front of Congress a while back and got completely hammered, rightly or wrongly, and now he, just like other irrational lenders, is of course gone.

And then you have one of my favorite quotes from Fred Schwed, author of Where are the Customers Yachts. He writes, the conservative banker is an impressive specimen.  He spends his day saying, no.  He says yes only a few times a year. His rule is that he reserves his yeses for organizations so wealthy that if he says no some other banker would quickly said yes.  His business might be defined as the lending of money exclusively to people who have no pressing need of it. 

In summary, he affirms what Bob Hope, one of my favorite comedians of all time, said, A bank is a place that will lend you money if you can prove that you don’t need it.  Consequently, because of these dynamics banks typically are not the place one goes to get early stage or startup or venture or distressed or risk capital for a number of practical reasons.  Regulators don’t like it.  The revenue could be tricky to accrue, especially when collectability is either not assured or perhaps uncertain. 

Bank auditors are frequently stuck in an audit review model that challenges their ability to think outside the box on revenue recognition collectability.  The end result is only a few banks step into this world of lending to companies who truly need it.  I came across a bank, a while back, that breaks the mold on this. I was frankly looking at some historical financial data on banks. 

As most of you know, I spend a significant amount of my time helping community and regional banks improve their revenue growth rate by improving their ability to compete with big banks, brokers and advisors. So, in doing that research I came across a very unique bank located in Allegheny County in a suburb near Pittsburgh PA. The bank is fairly traditional in a few areas. They accept deposits.  They make personal loans.  They make business loans and they sell some insurance products.  I don’t believe they provide wealth management or trust services but it’s where they are unique that really got my attention. 

Number one, they offer consulting services.  Number two, they offer book-keeping services.  Number three, they offer marketing services, and number four, they offer temporary services, primarily, temporary short-term CFO type services.  Number five, they lend to the small business, the startup and the small distressed business market. And most importantly, their uniqueness is most apparent in its five-year cumulative annual growth rate of approximately three times the industry average. They have a growth rate of 25 percent and the industry average is about 8 percent. And with that type of uniqueness, I decided I need to talk to this company. 

So, with that in mind, I hopefully have the CEO and chairman of the Board of Enterprise Financial Services group, Chuck Leyh, located in Allison Park, Pennsylvania.  Chuck is a CPA with more than 30 years of experience in public accounting with an emphasis on tax and business consulting and he has experience in business analysis and business valuations and he is a member of the AICPA and a member of the Pennsylvania Institute of Certified Public Accountants. 

Hopefully Chuck is on the line.  Chuck, are you there?

Chuck:             I am here.

Kelly:               Chuck, how are you doing today?

Chuck:             Very good.

Kelly:               Well, did I make any mistakes in my introduction there?

Chuck:             No, I think you kind of covered it.  I’m not sure the growth rates are quite what you have stated but certainly over a long haul they have been very significant.

Kelly:               I just took some summary financial data prior to today, you are substantially higher than the industry average?

Chuck:             Yes, yes, we do a lot of, as you stated, startup businesses, businesses in distress, means we do a lot of risk mitigation with SBA, real estate, and what traditionally happens is in more challenging economic times we have more loans than we know what to do with. And in the competitive times is when it becomes more challenging for us to grow, because the economy is strong and a lot of business are healthy and banks are out lending and there is a lot more competition and there are not as many people, believe it or not, starting businesses or going through distresses when times are strong, and when times are weak those trends go up and that’s when we typically grow a great deal.

Kelly:               Chuck, I have a lot of questions here but before we kind of get into the guts of this let me ask you this, are you fundamentally an accountant or are you fundamentally a banker?

Chuck:             I am fundamentally an accountant.  I still am a partner in a CPA firm and that’s what my chosen profession was.  Twenty years or so I got this bright idea with some friends to start a bank and after a few years it wasn’t doing what it was supposed to.  So, when you usually start something with your friends and clients they look at it and say, yeah, this isn’t working out here, well, you got us here, you better go fix it.   And so that’s kind of how I got into banking.

Kelly:               Alright, let’s talk about the history of enterprise Is this first-generation enterprise or does what we see now kind of the second generation after you have fixed this version?  

Chuck:             So, this is the same business concept.  Basically, this business concept grew out of me having a friendship with a banker and looking at modeling out a business plan.  The way I kind of created the business plan to model out was to go to my accounting firm clients and get a list of the things they did not like about banking and see if I could draft a business plan that address those issues, and that’s kind of how this whole system grew.  It wasn’t run quite the way it was intentioned and it struggled for a few years and, like I said, that’s been how I got into it on a day to day basis.  And I have continued for the last 18 years to oversee day to day operations and turn things around and put it on the right foot.

Kelly:               The version of enterprise that we see now, what was the market and was the opportunity?  What void did you fill?

Chuck:             I think, when you go back to when we started the bank, that list of things that my clients didn’t like about banking, there was basically a few premises and we kind of built a plan along that line.  The lack of continuity in relationships, probably a lack of business empathy, and almost, what I term, the phase banker’s arrogance, where bankers felt that they know how to run a business better than the business person.  So, that was kind of one issue and, obviously, the other was continuity where things get in our relationship, those people get promoted, move on and you start all over again trying to educate your bankers as to how your business run. And probably the unique focus of Enterprise Banking structure was to address those two issues.  

And one of the ways that we did that was to create a relationship manager concept where, that’s not unique, every bank has what they term relationship managers, but in this situation a relationship manager functions as a small business inside the bank. Basically, it’s treated as the branch gets its percentage of revenue based on the bank’s net interest income, monies to bad debt reserve, which we build and allocate on a per loan basis.  So basically, they get a percentage of that and out of that you hire their staff, have fringe benefits, expenses, whatever it is that all run through that little business unit.

By them running their own business inside the bank, it kind of address the empathy and the continuity because they don’t get promoted or anything else.  The stronger, the larger the branch gets, the more money they make so they get empathy and get rid of that banker arrogance by running the business themselves.  So, they experience the same problems their clients and borrowers are experiencing.  The continuity issue is addressed because they are in that position and that’s a lifetime relationship type position like a CPA would have with their clients. 

So, that’s a kind of a unique situation in the bank and a lot of it is quality assurances and checks and balances and everything that revolve around that structure and that structure was created to address those two basic issues.

Kelly:               At the parent bank level, is there a credit committee that approves any sort of investment that the bank would make then?

Chuck:             Yes, there is actually in this bank, one of the problems that we created to address was the timely decision on credit.  More than, if there was a “no”, setting goals for people so that they can address those goals and perhaps come back and then have a different answer if they have taken time to prepare themselves better for the lending relationship.  And so, because there is a senior loan committee that’s actually made up of board members that meets weekly and it addresses all the credit requests. 

So, the relationship managers have a financial stake in what happens with the loan.  And, obviously, that is something in their minds and it has to pass their comfort level before they will introduce it to senior loan committee. But the senior loan committee then is the ultimate approval source so, pretty much, every relationship and loan, so that there is a strong checks and balance in the system.

Kelly:               So, in terms of the types of deals that you guys do, let’s just talk about the nuances of the start-up business.  Are you looking for deals, whether it be a startup and that their cash flow is limited but there is some sort of a asset protection there that you have got some collateral protection?

Chuck:             Yes, as I am sure you are aware, most banks emphasize historical consist in cash flow as the basic foundation for assessing risk for making a loan. 

If you have a start-up business or a business that’s gone going through distress where it has lost money for a period of time, you don’t have that cash flow continuity and strength to support the lending relationship.  This is still a bank.  It still takes bank risks so it reverts back to looking for an underwriting that’s almost a worst-case scenario.  It almost assumes that the business will go under then it looks at it and says, can we assess the risks and protect ourselves?  And that typically then leans towards collateral of some sort or government guarantees that mitigate the risks if there is not enough collateral so that the elevated risk of failure is offset by this collateral that mitigates the amount of the losses potential.

Kelly:               Your success in the distressed business vertical, if you will, versus the startup.          

Chuck:             I don’t know that there is a whole lot of difference between the two.  Actually, the distressed area is a different type of thought process and underwriting.  You know, when you have a startup, business projections are never what reality ever is in either business.  So, you are kind of looking at the management background, the experience level, the concept and, is it a well thought out program?  That’s what you are sort of looking at for the startup program. 

But, it’s a little different with the distressed business because in there, typically you come in and they have been successful for a period of time, now they are going through a problem and you have to assess that problem.  Is that the real problem?  Do they have the fix identified? And you believe that fix is the only thing that’s necessary.  And so there is a little bit of an analytical difference between the two.  Both, you have to have a good sense that management has a hand to hand, either in the start-up situation or the distressed situation but the validation is a little different in the two different scenarios

Kelly:               I don’t need to tell you that management is first and foremost a factor to be evaluated, how are you doing in that area, and especially in the stress mode where you have management that kind of attribute their distressed situation to market factors as opposed to themselves and their own management decisions?

Chuck:             I have been in the marketplace for 40 years and you have kind of seen a lot of examples of good and bad management, you’ve seen a lot of examples of mistakes and people learning from their mistakes or basically saying it’s somebody else’s fault.  And so you kind of go through the situation and you see how people analyze the situation, how they take responsibility for it and what their game plan is, moving forward. 

And that is the intangible analysis you go through to try to assess your probabilities for success, but, ultimately, in this type of lending you are going to have a lot more failures than you will in a traditional bank environment.  And so you have got to stress the collateral practical liquidation analysis and assess the risks a little differently based on collateral.   Because until you experience somebody first hand going through distress and pressure and how they react to it,  you actually don’t know for sure how an individual’s character will hold up to pressure.

Kelly:               The team you have that help you in the due diligence and acceptance of a deal, I suppose you are looking at their market plan, certainly their internal control systems, their accounting systems, all those core things to run the business but, in my opinion, businesses typically fail on the revenue side, not so much on the back-office side. How do you guys go about really evaluating the  revenue projections and their ability to get their first customers, if they are a startup; or to substantially increase their ability to get customers, if it’s a turnaround?

Chuck:             There are obviously, based on the pedigree of management, the experiences they have, the type of idea, the amount of competition, all of those things, that are into a risk analysis and then you look at that perceived risks and then you mitigate it with either collateral or guarantees or something else.          

As a CPA and as a banker, the one thing I disliked with when bankers would tell my clients that that business plan doesn’t have a prior, it will never generate to revenue, and then five years later those people are multimillionaires because they really did know what they are doing. And, you know, that banker arrogance is again the thing that you watch because just because a revenue is planned doesn’t seem to make sense to you, it doesn’t mean it doesn’t have the chance of success.

The most successful people are the people who does something unique and outside the box.  Because you haven’t seen it succeed you feel there is a greater risk. You want to try to balance that mind set so that you don’t turn down a deal because the revenue is not apparent.  But you do look at the deals where you are more skeptical of the revenue and you say I want more protection with collateral or more of a government guarantee or more some risk mitigation when I don’t feel real comfortable or think this revenue stream is going to happen soon.  And every situation is done on a case by case basis, and that is the key. 

In a small bank like this where everything is customized to the specific circumstances you don’t have prepackaged products.  You try to design something just for that particular client.  For instance, somebody starts up a driving range and they come in and say, you know, I have a better idea and I can do a better job running the driving range, my people skills, my networking, my background.  Well, you look at those kind of things and you know it’s going to take time for reputation to grow, you know things are going to have to work out in a certain way and you know there is going to be curves and steps backwards, you know, the best of us, hopefully, take two steps forward and then one backward.  It’s inevitable to happen.  

So, you start to look at the design, for instance, you might go say, okay, clearly these people don’t have any revenue from say, November through April, well, then you may design a loan structure that it goes interest only in the off season and then it kicks up to a greater than normal principal and interest payment on the in season so you kind of help them budget themselves and help them structure things.  And you advise them in that relationship as to how you are going to mitigate your risk in the off season in the business plan. 

If you have a facility where you can conduct parties or do something in the off season or some other revenue that complements the off season to get rid of some of the cyclical nature of the business.  And then you start to look and see how does that perspective borrower react to your advice and your thought process.  And all those things come together to determine whether it’s a relationship you want to work with or not. 

Kelly:               Let’s say, a term of the compensation on these deals, are you taking any warrants, options, any sort of equity or is it straight interest rate?

Chuck:             We haven’t done that up to this point in time.  It has been a straight interest rate.  I will say that up through the recession, the spread for taking this kind of risk when you are using the SPA, for instance, they will have a maximum rate that you can charge and have a guarantee. 

The spread that you got from your cost of funds to the rate that you would get for doing this type of lending was significant, the money was very good. I will say that since the recession, flattening of the interest rate curve here, recently, but really since the recession that margin shrunk a lot and so we are looking at different ways to perhaps supplement revenue to get the margin back to where it was say 10 years ago versus where it is today.

Kelly:               Right.  Like any bank, your core source of funds are going to be customer deposits and you always have some assets to liability risk management you have to do there, are you able to get sufficient deposits from your customer base, knowing that this is your business model, so are they fearful of that?

Chuck:             Actually, when we work with a client obviously we are showing a loyalty towards them that the other banks aren’t showing because we are doing a loan that others won’t do.  We kind of expect that loyalty to come back so we’re kind of writing things upfront that says if we are going to take this risk loaning you this money.  You have got to have your operating accounts with the bank.  Everybody is pretty good about that and obviously when the businesses become successful and strong and get out of their start up period then deposits can become very significant.

  And that funds a big portion of the bank but we are not a retail consumer oriented group so that’s our sole client base and small business deposits is not sufficient to fully fund the operations.  So, we will go in and do borrowings from federal loan banks, we will do self CDs, you know, and then use even a broker CD market, as long as the funds are reasonably priced, and competitive with home loan bank borrowings.  We actually push our class of funds higher than most banks because while we are taking what most would deem to be more credit risk than most financial institutions, we take extremely low credit risks and interest rate risks. 

So, what we are giving away on the credit risk part we are taking back on the interest rate risk part so that we have pretty much a neutral situation for our funding and our asset to liability management so that drives our cost of funds up also by having a lot longer term borrowings than a lot of institutions.

Kelly:               Let’s talk about your consulting services that are packaged into your offerings.  I see that you have got marketing, bookkeeping and temporary services and I believe that there are primarily CFO services, what purpose do they fill and are they important to your overall offering?        

Chuck:             Well, they are very important, especially to the start-up businesses.  And the original premise of forming the bank was to make banking into a service value oriented proposition versus a purveyor of money.  The concept here with a relationship manager is to be a consultant, a financial consultant similar to a CPA.  But CPAs are typically more in a tax oriented consulting approach and then some general business consulting, and these people are a more general business consulting, finance consulting.  That’s the training they get, to be a relationship manager. 

Now, the subsidiaries that we have, given to more of a specific and stronger expertise in certain disciplines, whether it is real estate, marketing, bookkeeping services, IT services, and then general business consulting with different specialties niches so that when, you know, a startup business has the idea, if you build it they will come.  We all know it doesn’t work that way, people have to know about it and so our marketing people will take it to the next level. And what it does is, it improves the probability of success for the startup businesses, and obviously that has a strong synergy with the bank because it improves our success rate and reduces the bad debts. 

And at the same time, we price the services that we are not making a big profit on it, we are making some money on it and then that synergy of making our underlining businesses get stronger.  Those two things together create a strong value for the bank and for the client.  When we have a new relationship come on board from a borrowing perspective we do analyze and have our consultant go out and look at their accounting system and make sure that they have the capabilities to report to us the way the loan documents require.  And we have somebody from our IT subsidiary go out and review their computer systems to make sure that they have a security level that makes it safe to do business with us and them. 

And so those two things are looked at and if they identify a problem then we go to the client and say, you need to beef up these areas and if you want we can help but you don’t have to work with us or you can find anybody but there is an issue here.  So, those are the two areas we look at where we say there is a certain level we have to get to but we never go with our people and say you have to use them or something like that.  If the client wishes to that’s great, if they don’t then so be it.

Kelly:               Oh, that’s very smart, very smart.

Chuck:             Most of the clients have assembled a team of people and we are more than happy to work with that team of people.  Let’s say, if something doesn’t work and that team drops the ball somewhere that’s typically when our people starts to get involved.  So, it’s more of helping a client and being there to pick them up when they stumble rather than try to push services and grow the service aspect of the business.  This is a bank, we look at those services and seeing them being complementary to the bank, not so much as a huge profit center in and of themselves.

Kelly:               Do the cost and the revenues from those services, do they run through the bank or do they go through a consulting subsidiary?

Chuck:             They go through a subsidiary but they get consolidated but most of them are operated a little above break-even but not much. And that’s how the pricing is affected to keep it almost overly competitive so that people that are going through distress can actually afford to get the help.

Kelly:               I love that business model. I really do. In terms of your footprint, where do you operate geographically?

Chuck:             It’s pretty much Allegheny County and the bi-contiguous counties but what really drives it is not so much a geographic distance.  That is something that with remote banking and all the electronic world, the way it is today, geography isn’t really an issue.  What is important for us is the evaluation of collateral and the accretive evaluation, and if we get into a troubled loan, having it be within an area that we can dispose of assets to get our money back. 

And this bank does some things pretty unique in that area and like, for instance, many times when you reap with us a piece of property and it’s in a distressed situation we can actually have a little subsidiary that comes in, repairs the facility, gets it ready for market and then our real estate group goes and sells it. And so in this particular bank we are not sitting there selling a distressed property at thirty cents on the dollar.  We don’t do that.  We go in, we make sure we fix it up so it’s presentable and it’s safe and then we’ll market it in a conventional sense and market for its fair market value.  You have to be close enough to our Allegheny County location for us to efficiently carry out that aspect of the business plan. And so it pretty much runs in western Pennsylvania. 

Kelly:               That’s terrific.  That concludes part one of my interview with Chuck Leyh, CEO of Enterprise Financial Services, in Allegheny County, Pennsylvania.  In part two we are going to talk to Chuck about how   his unique business model presents challenges in dealing with both regulators and the auditors.  

Thanks for listening. 

We want to thank you for listening to the syndicated audio program,  The audio content is produced and syndicated by Seth Greene, Market Domination, with the help of Kevin Boyle.  Video content is produced by the Guildmaster Studio, Keenan, Bobson Boyle. Voice introduction is me, Karim Kronfli.  The program is hosted by Kelly Coughlin.  If you like    this program, please tell us.  If you don’t please tell us how we can improve it. And now some disclaimers, Kelly is licensed with the Minnesota Board of Accountancy as a certified public accountant.  The views expressed here are solely those of Kelly Coughlin and his guest in their private capacity and do not in any way represents the views of any other agent, principal, employee, vendor or supplier.