Brendan Ross is one of the few financial advisors who gets p2p lending. He is the principal of Ross Asset Advisors based in Los Angeles and I chatted with him recently about his practice and his p2p lending investments. An edited transcript of the interview is below.
SLN: Tell me a bit about your practice. How are you different from other financial advisors?
Brendan Ross: Five years ago I looked a lot like my peers. I used a combination of index funds and a buy and hold strategy to get the maximum return for my clients. Then came the financial crisis and that changed. Now, my clients are looking for a “Sleep Well at Night” portfolio where they don’t have to worry about their portfolio dropping 50% over the course of a year. But they still want a portfolio that grows – they certainly don’t want to have the same amount of money in 10 years time as they do today. Which is really where we have been in the stock market. The S&P 500 is not back yet to the levels that were reached in early 2000. Now, with the huge government debt that we have, it concerns me that over the next 10 years we will continue to move sideways. So the stock market isn’t attractive and the bond market is yielding just 2% to 3%. That means you are getting very little there for all the interest rate risk you are taking by buying bonds.
SLN: So where are you investing your clients money?
BR: I like municipal closed end funds – these funds are yielding 6% tax-free and I like p2p lending.
SLN: Why p2p lending?
BR: You have credit card companies charging people an average of 14% with a default rate around 4%, which gives a 10% return. Now along comes Lending Club and Prosper and they are charging investors just 1% to in effect rent their underwriting model. That is a good deal for investors. Consumer loans are a $798 billion industry and until recently there was very little opportunity for individual investors to participate in this industry.
SLN: When did you get interested in p2p lending?
BR: I have been paying attention to the space from the very beginning. Innovations in finance interest me, so I was aware of both Lending Club and Prosper from their inception. But there were some elements missing, that an institutional investor would want to see, until March of last year with the launch of LC Advisors. This new vehicle from Lending Club was the first to create bankruptcy remoteness, an important technical requirement for many institutions.
SLN: How do you invest in Lending Club and Prosper?
BR: For Lending Club I invest with both of their LC Advisors funds and at Prosper I often use a hedge fund called Colchis to invest in Prosper notes. I think of my Lending Club investment as more like an index fund and my Colchis investment as an actively managed fund.
SLN: It is clear you are bullish about p2p lending. So I am curious to know if you are still treating this as an alternative-type investment with your clients and keeping allocations small?
BR: We are doing larger and larger allocations to p2p lending for clients and less in equities and bonds.
SLN: Why has p2p lending failed to gain much traction with financial advisors so far?
BR: Financial advisors at large firms are typically not allowed to use alternative investments because the liability is too great and at smaller firms advisors find these kinds of investments a hassle to manage and stay on top of from a due diligence perspective. It is just easier to put people into traditional investments.
SLN: Do you talk with your fellow financial advisors about p2p lending?
BR: There is plenty of opportunity for financial advisors to develop expertise in this area. The general pushback from most financial advisors is that it is new and it is just not necessary. They don’t have to offer it in order to keep their clients happy. But for me, I have been investing in Lending Club and Prosper in my own portfolio and like to give my clients the best of what I own.
SLN: What do you think might happen to p2p lending returns if we have another recession?
BR: If I was to guess what would happen to returns if unemployment went from where we are now which is around 8% to say 10% or 12%, well I think returns would drop, but they would stay positive. I would think that a fund like the Broad Based Fund at LC Advisors would drop from around a 10% return today down to the 4%-6% range, still a decent return. Meanwhile the corporate bond market would be down 20% and equities would be down 30%.
SLN: As p2p lending becomes a more mainstream investment do you think returns can be maintained at their current levels or do you expect a decline in coming years?
BR: That is a good question. The only way I can see investors experiencing a sustained drop in returns would be if interest rates went down for consumers borrowing money. Now, I don’t believe that the credit card companies will lose pricing power any time soon and certainly not because of the impact of p2p lending for at least 10 years.
SLN: Anything more to add about p2p lending?
BR: People think p2p lending is new and therefore it is risky, but consumer lending is not new at all. What is new is that individual investors now have the opportunity to get returns that the credit card companies have been enjoying for decades.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.