Lee Calfo is the Chief Executive Officer of Alden Investment Group, which consists of a broker dealer, Alden Securities, and Alden Capital Management, an asset management firm and a founder and President of Equalize Capital.
Previously, Mr. Calfo served as a portfolio manager at Boenning & Scattergood, Inc. Prior to that he was Director of Research at Cohen & Company Securities, LLC and was a research analyst at several firms since 2000. Mr. Calfo earned a Bachelor of Science in finance at Penn State University and holds the series 7, 24, 63, 65, 79, 86 and 87 securities licenses.
TWST: Please tell us a bit about Alden Investment Group’s history and how and why you came to join the firm as its CEO.
Mr. Calfo: I’ve done a lot of different things in finance over the last 20 years, mainly in the investment advisor and securities space, being licensed as a securities representative, starting several investment advisor and broker/dealer firms, and starting different asset management vehicles, real estate LPs, investment funds that buy loans, securities, different types of assets. And really the Alden Investment Group story goes back about five years to when myself and several partners decided that we wanted to create an investment platform that would support a number of initiatives that we had, and really be, in the broadest sense, able to do whatever we felt we needed to do in finance to add value for different constituencies like financial advisors and clients. To do that, we wanted to have our own entities, and we wanted those entities to be set up with the business approvals and the ability to handle all different types of investment and securities business. So, we purchased a broker/dealer that was started in 1994 in Pennsylvania by Peter Engelbach, who’s a gentleman who’s been licensed since the mid-’60s. He’s 81 and continues to work at the firm today.
We bought the broker/dealer because it had a full-service clearing relationship with Raymond James. Since then, we’ve started a couple of different investment advisors. One’s focused on the wealth advisory: private client group folks that handle private clients’ money, retail investor money, and help them with their financial goals and objectives. That’s one of our areas of business. We have an asset management focused registered investment advisor that does the things that I’ve traditionally worked more on: different types of products, funds around certain investment goals or underlying asset classes. And then we have an investment advisor that focuses on working with financial institutions, banks and credit unions, to meet certain investment and Community Reinvestment Act needs that they have; it’s a very specialized type of investment advisory firm. And the broker/dealer supports these different businesses in different ways.
So that’s the journey that I had, first working for other people in the investment advisory and securities space, then doing several of my own firms, but really coalescing the last five years around focusing all of our efforts into the Alden Investment Group, which has the different parts that I described to you.
TWST: I was going to ask what had changed or gown since you joined the firm. Is there anything else you would add in that sense?
Mr. Calfo: We really started, to your point, with a blank slate. We had this broker/dealer that had a lot of different business approvals and had a clearing relationship with Raymond James. When we took it over, we applied for business expansion so we could add certain areas of expertise – private funds, wholesaling, different investment banking lines of business that the broker/dealer wasn’t approved for – so that gave us a really robust securities firm that had about 16 different approvals, which is a lot in the FINRA world. The reason that we felt we had something to add is we were consistently being approached at our prior firm by investment advisors that wanted to leave the bank or wirehouse channels to go independent, in their view – have a higher payout, be unconstrained in the choices that they could offer clients, be less conflicted, be able to find any products or services, funds, strategies, that work for their clients. So, we felt we had something to add, because me and my partners had become very versed in technology, particularly today, cybersecurity compliance, and we understood the type of investment options that advisors needed. So, one piece of our journey in evolving the firm was really to create a great platform for financial advisors to bring their clients to and do their business in the way that best suited them and their clients.
The asset management business is largely similar to what I was doing before, just a little bit expanded. We can work with different asset classes – we sub-advise a public fund, a mutual fund, we have private funds that we create around different investment opportunities, and we really focus on meeting a particular goal or return objective around a risk framework. There are a lot of interesting things to do in asset management, and that’s a continuation of what I’ve been doing before, at the new firm.
And then, we’ve always focused on financial institutions as a part of what I’ve done. I used to write research on banks. We have an investment fund that invests in community banks, and now we’re actually managing assets, underlying loans, Small Business Administration loans and loans to underserved, primarily minority, underbanked borrowers to help them acquire mortgage loans. So, we work with financial institutions to create investment funds that can buy these loans that the banks and credit unions can invest in to meet some of their goals around lending to these different constituencies.
Across the firm, we have a lot of breadth in different things, we’re about 100 people today, and it’s been a nice journey so far.
TWST: What else would you note that you think sets Alden apart from its peers or competitors?
Mr. Calfo: I think that our flexibility and transparency is refreshing for certain people, and we try to play up those strengths. When I say flexibility, when folks are coming to us, particularly those investment advisors, maybe they want a 1099 payout, or a W-2, maybe they need help with back office or office space or setting up their computers, maybe they want to be a little bit more independent in those respects. We don’t have a one-size-fits-all business model in our private client group, and in both the private client group and the asset management registered investment advisors that we run, we’re very transparent. This firm is owned by the principals. We didn’t take any outside money. We don’t serve any other constituencies beyond those advisors and the firm’s clients. So, we’re able to be pretty nimble, and use the expertise that we have to create the right investment vehicle – a separate account, a fund, a limited partnership, an LLC – around particular investment opportunities to maximize return potential, liquidity, and other features for our clients. So, I would say it’s more of a holistic approach and an unconstrained approach, which you don’t typically find in most of our peers.
TWST: What stands out to you in terms of the current investment market environment? What are the big trends that you’re keeping an eye on, and how is the firm responding to current market dynamics?
Mr. Calfo: What I would say is, there’s been a continuation, basically my whole career, which is very good for investors – it’s fee compression. Investment choices have generally become more broad for individuals, and fees that investment advisors, financial advisors, charge their clients has generally become less costly. There are exceptions to that with certain alternative products, but both the regulators and I think the overall investment community, with technology, has just demanded more value for service and for things to be more reasonable. We’ve always created the entities that I’ve established over the last 12 years to focus on those trends. It’s actually a good thing for firms like Alden that have or try to attract wealth advisors that really want to add value to their clients, because they’re still certainly money to be made, but I think that the overall trend of investment choices becoming more transparent and lower fee is good for consumers, and ultimately good for most of the industry. It tends to weed out people that are just charging too high fees or really aren’t offering value to their clients. So, fee compression is certainly an industry-wide trend that we’ve built our model around, being able to offer those options and being able to accommodate that business and having people that do the right thing and find the right investment at the right price for their client. It’s a philosophy, and it’s also a reality of the business. That’s the first point I would give you.
The other thing that I’ve noticed in the business, particularly recently, is there’s a lot more money – and I don’t think this is just true of financial services firms, asset managers and private client groups – but there’s a lot more private capital, private equity money, money from institutional investors, that’s flowing into investment spaces that didn’t normally see that type of investor coming in. So, there’s been a focus with a lot of firms in the independent channel on either being able to attract that capital, or you’re seeing a lot of roll-ups. A roll-up would be an acquisition of different private client advisors or different firms into one firm. And so, from a competitive landscape as a market participant in the advisory space, there’s a lot of money coming in. That can be a little bit disruptive, to both advisors that want to take a check, or it creates more competitive pressure to bring people in. You would normally see people, say 20 years ago, they’d go from Morgan Stanley to Merrill Lynch, or they would go from one bank channel, Bank of America, to Wells Fargo. While those moves still occur, you’re seeing a lot more advisors coming out of those Top 25 firms and going independent or going to privately backed groups. And so, it creates a little bit of a different dynamic that can be disruptive to independent firms or the clients of those advisors, but it’s just a reality of the business that there’s a lot more movement, I would say, among the financial advisor community than there used to be 15 or 20 years ago. It’s a lot more competitive, and there’s a lot more movement of advisors and clients than maybe you saw in the past.
TWST: Within asset management, is there any particular investment model or investment strategy that you would like to talk more about?
Mr. Calfo: I would say, just like the continuous progression to lower fee investment options, there’s been an expansion of the type of investments that advisors typically buy for their clients or that their clients are looking for when they’re asking for a financial advisor. One of those things is alternatives. Alternatives could be, in the old nomenclature, just hedge funds. But there are other things that are considered alternative assets, like direct ownership of real estate. There are lending funds out there that give private clients access to private, more like pools of loans, or bridge financing. There’s cryptocurrency, which is a big buzzword today and obviously very volatile.
And then there’s the whole ESG space, which means different things to different people. Certain larger firms just want to build out their ESG offering with as much as possible to show that they’re committed to social initiatives, whereas other groups are like what we do with our funds: they’re targeted on a specific market that maybe has been around for a while. Small Business Administration making loans to small business clients that maybe banks otherwise wouldn’t make, or mortgage lending to disadvantaged underbanked groups. If you can increase the liquidity of available capital that will purchase those loans, you can encourage additional direct lending. And so, when we look at ESG, we really look at not only the community that’s benefited from increasing capital or financial monetary resources to folks, but how that’s done. I would say that the expansion of asset classes to include more things that clients can invest in brings opportunity, but it also brings the need to really be diligent in how you’re evaluating those opportunities, because some ESG is more greenwashed – they’re taking an existing product and trying to play up potentially beneficial components of it. And then obviously, when you’re getting outside of public equities and publicly traded debt and you’re getting into alternatives, there’s a whole extra layer of due diligence and suitability that needs to be examined, which really, I think, benefits expert firms and advisors that can do that type of work.
TWST: What is your approach to doing that due diligence and research?
Mr. Calfo: I think it’s partly experience based. You do and have seen things that have worked out well, and also things that have gone wrong, because nothing’s ever perfect. Without a requisite amount of experience, it’s really tough to judge the merits of something, whether it be a real estate fund or a new asset class. You have to ask questions beyond what the financial goal is, meaning, what’s your return expectation, how much money could you lose? That’s basic, that everybody tends to cling to. But then there are other things. The taxability of the investment. When do the K-1s come out? Do they come out before March 31? Or, is the reporting requirement more onerous for the client? Do they understand how much of their liquid investment net worth they should put toward this type of investment? Really educating the client and the advisor on the expectations globally of owning this type of investment – how it affects their taxes, their tax reporting, the return expectations, what they should expect out of the investment from a financial perspective. So, I think you need to be thorough and look at all aspects of the investment, not just the return expectations and risk.
TWST: Are there any particular asset types, or drilling down to specific sectors and industries, that you feel have the best opportunities right now? Or any that you’re especially cautious about?
Mr. Calfo: On the opportunity side, our clients have done very well, and I’ve seen the value, in direct investments in real estate as a passive investor. If you buy real estate, historically, 20 years ago, people would buy a publicly traded real estate investment trust or REIT on an exchange. And while that can offer some dividend yield, there are a lot of layers of fees and expenses related to running a REIT. They can still add value to a portfolio, but direct ownership of real estate assets by qualified managers – whether it be workforce housing like multi-family apartments, or it be self-storage facilities in rapidly growing metro areas – provides a natural hedge against inflation much of the time. You’re using an inherent leverage that you get from the bank loan. If you have a tenant in there, the tenants are paying their rent and the equity that you’re putting up is being levered, if you will, by the bank loan, so it’s a good way that we’ve found for our investors to tax-efficiently build wealth, especially if they’re not doing it on their own. It’s really hard to own a building and be a landlord. I own the commercial building that Alden’s headquartered in, and there’s a lot of work related to managing the building and the tenants for some of our people. So, for those that don’t want to do that direct model, the passive real estate ownership opportunities in the marketplace, I think, have been a big benefit to our clients specifically, and those returns have been the most consistent and some of the highest that we’ve seen. So, on the positive side, I would say direct real estate investment vehicles can be really beneficial to certain clients.
I think investors generally have access to a lot more information. A lot of advisors hate Vanguard or free Schwab ETFs. But to get people started in investing, I’m a big believer in retirement plans, and the 401(k) market, I think, has gotten a little bit better over the years, and I would love to see it be expanded even further, where employers are maybe required to offer some sort of retirement option. So, very low fee ETFs and more of a focus on retirement investing from an earlier age, I think, is a good trend overall for the business and for people, specifically people that are starting out in investing. I would say that’s a positive – financial education literacy, and being able to get started with a much smaller amount of money with very low fee products is good for investors generally.
On the negative side, I’ve been in the alternative space since 2003, and there’s just been an explosion, continually every year, of more and more private equity funds, currency funds, funds that invest in cryptocurrency, people wanting cryptocurrency directly. We focus a lot on sales training, both training the client and our advisors, on the products that are offered through the Alden platform, and those are products that we’ve done the most and best due diligence we can think of to put on there. I find sometimes when I talk to peer, advisors, advisors coming to us, or clients coming to us, they have a very poor idea of what they actually own if it’s an alternative. They didn’t go through the process of really figuring out the liquidity, or when the tax documents come out, or what’s the taxability of the investment. They may even have misconceptions about what the fund is actually doing, because these products tend to be less transparent, and not know exactly what they’re holding at particular points in time. I think that you should have caution, and you should have some expertise as an advisor, if you’re offering these products, and really educate yourself and also make sure that the client is properly informed. You want them to understand and be knowledgeable about the investment, because they can be really beneficial, but they can also be among the largest points of pain and frustration, even if the investment returns are doing okay, due to other factors. So, I would say that the proliferation of private products and alternatives is a double-edged sword. There are positives, and then there are some distinct negatives that tend to trip some people up occasionally.
TWST: What are common questions or concerns do you and your colleagues hear from clients these days?
Mr. Calfo: I think that it really depends. I’m a big market psychology, emotion of investing person, so you see different things at different points in the cycle. I would say right now, consumer confidence is very low. You see the surveys where they say, well, people have never been more pessimistic about the job market or the economy, or they think that maybe they won’t have the same amount of growth, they may be poorer, relatively speaking, than their parents’ generation. That is detectable, I think, to people in my business, financial advisors and asset managers. There’s some client pessimism out there. It’s especially exacerbated. We haven’t had high inflation like this since the late-’70s, so there are people that never had to experience this type of inflation as an adult. People have generally experienced market pullbacks in the stock market; we have a fairly severe one right now, probably one that’s eclipsed COVID sell-offs, at least in terms of its duration if not its magnitude, and it hasn’t approached, thankfully, the 2008 recession. But there’s a lot of concern and fear out there about the economy, about investments in general, and about the worry that people may not be as well off as they hoped they would be as they age. So, I would say one of the challenges facing the investment industry today is clearly pessimism. It’s amazing – that can turn. It could turn based on election cycles, market cycles, inflation going back down. People tend to have short memories, and the market does tend to go up over time, but right now there’s a lot of pessimism among investors and financial advisors in the finance universe.
TWST: What are the macro issues top of mind for you right now?
Mr. Calfo: I would say we have long-term factors like demographic trends. In highly developed countries, people are having less children, and that changes the workforce dynamic and really puts a governor on the way that an economy can grow. But I’m not a believer that you can’t still have a decent economy if you don’t have an economy that can grow at India’s growth rate, 8%-plus. If the U.S. can only grow at 3%, 3% can still be pretty good, can feel good, if inflation is low. Inflation is one of the things that scare, particularly the Federal Reserve and elected politicians as well as, I would say, financial advisors the most, because inflation, you never really get it back, right? Inflation can lower, but it very, very rarely goes negative, especially for an extended period of time. So, the more inflation that you have, the relatively poorer people become, and really the only way out of it, in most cases, is what we call demand destruction – which is, things just get so expensive. If you’ve gone and filled up your car, or you’ve gone to a restaurant or the grocery store, it is so much more expensive. There are few people that can increase their incomes as fast as inflation in some areas, so you have to have a natural inability for people to be able to afford to buy as much goods and services as they previously did. If you have a credit crisis or an asset bubble but you don’t have severe inflation, you don’t have extremely high unemployment – inflation and unemployment are, I think, the two scariest things in general for a highly developed economy, and right now, we’re in the midst of inflation, which cannot be solely corrected by raising interest rates or by monetary policy or fiscal policy. There has to be some slowdown in demand for things to get better, and that’s always a painful process.
TWST: Is there anything else you’d like to discuss in conclusion?
Mr. Calfo: I would say we’ve hit on a lot of the overall themes. Industry is very competitive. Fees are competitive and coming down. So, I think you have to be good at what you do and really offer value for service. Flexibility, I think, is important. I see larger firms that aren’t as flexible in many circumstances. They’re really trying to retain the top talent that they can, their best producers. And then they’re trying to bring people in at the bottom (newer FAs) because they still have a focus on adding new client accounts and they have a lot of cash flow, so they bring people in at the bottom and hope that they’re very good at sales to be able to grow – if you’re in the Merrill Lynch training program and you’re really good at going out and getting your network of people to open accounts that’s a goal for those firms. You see a lot of top producers, at the larger firms, focusing on bringing in younger sales folks that can make their mark to continue to grow the overall business of the firm in a cost effective way. The middle of that barbell, I think, is where we play, in the independent, smaller/mid-sized firm space. They’re really good advisors, and if they’re in an environment where they’re not restricted and they’re not in a high fee platform for their client and they’re not restricted on the type of investments that they can choose and how they can work with their clients – they’re not just pushed to bring in new business, they’re able to actually take care of the business that they have – I think there’s a nice space, and that’s where we focus as a firm at Alden, in serving those advisors that are really looking to be in a good fit, a place that they want to work, a place they’re proud to work, and a place they can offer more value for service than some of the more traditional places in the market.