Episode 33: Alan Zafran - Managing Partner and Co-Founder of IEQ Capital

0:00This week on Generating Alpha, I'm joined by none other than Alan Zafrin, co-founder and managing partner of IQ Capital, the$41.7 billion dollar wealth management firm, advising some of the most successful entrepreneurs, executives, and families in the world. Over more than three decades in the business, Alan has built a reputation for pairing sophisticated investment expertise with a deeply personal approach to client relationships. Before launching IQ in 2019, Alan co-founded Luminous Capital, growing into one of the largest independent advisory firms in the country before selling at the First Republic.

0:33His career has also spanned leadership roles at Goldman Sachs and Merrill Lynch, giving him a rare perspective on how wealth management has evolved from a product-driven industry to one centered on fiduciary advice. In this conversation, we explore Alan's upbringing, his unconventional path into finance, and the lessons learned from advising clients with$10 million and$1 billion alike. We discuss his views on risk, the pros and cons of investing's democratization, and how families can instill drive and grounded values in the next generation. We also cover the principles that have guided his career and the single piece of advice he would give to a 15-year-old today.

1:05I really enjoyed making this episode, and I hope you guys enjoy listening. If you're not already subscribed to the podcast on YouTube and follow on Spotify, I would please urge you to. Please send this to any friends or family who you think might find this interesting. I'm trying to get the podcast out there. Thank you, and I really appreciate it. Thank you, Alan, for joining me. I really appreciate it. Welcome to the podcast. Pleasure to be here, Amir. Thank you for inviting me. I'd like to start off where I always do, the beginning. So give me a little bit of background. Tell me a little about your childhood and upbringing.

1:33What was that time like for you? Well, it was Torrance, California, 20 minutes from everywhere in Southern California. Great weather, middle-class America, sort of in the military industrial space, lots of engineers and scientists working there on behalf of military and aerospace areas. And growing up in my household, parents wanted me to be a doctor or an engineer or maybe a lawyer, and I failed on all three fronts, but I found wealth management by hook and crook. And so somehow I made it. you've worked with we'll get to this later but you've worked with some of the wealthiest families in the world what was your own relationship like with money growing up i never really thought about money honestly i just and would live day to day um family vacations were pretty modest uh the big trip once a month was to the bob's big boy hamburger shop we generally ate at home.

2:26My mom clipped coupons. I suppose, if anything, I, from afar, probably worshipped money in the sense that we didn't have a lot, and I would know occasionally other kids had money. It was as simple as during the holidays. My parents would usually give me one gift at Hanukkah, but the kids would have tons of gifts at Christmastime. I played tennis in high school. I had one old wooden racket and I had an old t-shirt and an old pair of tennis shorts and I'd play against kids from other schools and they'd have four or five rackets and proper tennis whites. And I realized I wasn't quite in the same socioeconomic background as they were.

3:07So I noticed it. It wasn't necessarily a driving force for me, but it was certainly something I recognized. And I actually think it affected me because as early as age eight, I actually started working for money. So I think there was always that drive to be somewhat independent and try and find a way to strive for a better economic background. It wasn't really that the parents told me. It just kind of instinctively had that edge that I wanted to have ultimately sort of a better living standard. Not that there was anything wrong with what we had. It was just obvious to me that we weren't the most affluent family in Southern California.

3:45you go off to stanford and if i'm correct you major in political science rather than the kind of traditional business or economics but seen a lot of my most successful guests on this podcast um they don't come from traditional backgrounds i think the ability to be able to draw on different perspectives is is very very helpful within this industry um what was your experience like at stanford and how do you think that kind of poli-sci background shaped your thinking as an advisor, but then also an entrepreneur? Well, I had imposter syndrome. I came from a public high school. I felt really intimidated.

4:17All the kids around me were handsome and well-polished and had read the Iliad and the Odyssey and done all kinds of informative academic readings I didn't do. And I felt like I was immediately behind in college. I didn't have a car, couldn't afford a lot of stuff. I was working while in college doing things like busing food for people. I was working in the library. I was doing all kinds of odd jobs. It was humbling. On the other hand, again, it was a motivator. So I was fascinated by American history growing up. And so I pursued political science. But I spent my first summer in Washington, D.C., living in a loft of a Stanford alum paying$50 a month.

5:00And what I did is I worked nine to five in a congressional lobbying group Monday to Friday, I worked double shifted weekends, 6.30 a.m. to 10.30 p.m. Saturday and Sunday as a bellhop, making minimum wage but getting cash tips. And that was how I was surviving. So I was working long hours, no days off, grinding. And, you know, I just taught myself, I might not be the smartest person, but I think I can outwork everybody. So I just focused, focused, focused and concluded I would eventually find my way. You found your way, you eventually found your way to Wall Street in the 80s. What drew you there initially from kind of that background?

5:40And what were some defining experiences in those early years that you think really kind of catapulted you to where you are today? Well, there's two versions of this. Part first version is fairly straightforward. By default, I concluded the things I didn't want to do. Turns out spending that summer in Washington, D.C. was not a terribly fun time. It felt very bureaucratic, very intimidating. I didn't feel like I was empowered at all. And so I didn't know I didn't want to go that route. I wasn't an engineer. My father was, and I didn't want to do what he did. I didn't want to be an accountant. I didn't want to be a lawyer.

6:15And by default, I was trying to figure out where all the brightest kids in 1985 were going to after college, and they're all going to Wall Street. So I said, well, heck, I could go to New York City. I've never lived there before. I could learn something new. It'll be an exciting time. It's only a couple of years. I can always go to business school. So that was part of the drive. And then what actually happened and how I got there was kind of embarrassing. It was early in my senior year, and it was pouring rain one night, and I was studying a good mile and a half from the fraternity house I lived in.

6:45And our cook, Ruthie, was not the world's greatest cook, and I had a bicycle. So I concluded, well, I didn't want to ride my bike in the middle of a pouring rainstorm to get not the world's best dinner. And I looked on a board, and they had advertised there was an an investment bank throwing a cocktail party for MBA students with a small presentation, 6.30 PM at the hall, right, right by me, I could walk to it. So I said that it's probably dinner. So I just stood in the back. I was in jeans and a shirt. Most of the kids were actually in suits and ties back then sitting attentively. And there were maybe 25 or 30 students there.

7:21And there were seven or eight, uh, three piece suit wearing bankers there. I was in the back eating the shrimp and the cheese and crackers for dinner. They finished a presentation and John Gordon walks up to me, says, tell me, so young man, tell me about yourself. And I tell him a little about myself and how I got there. And he finally says, okay, so are you a first year or a second year? And I said, well, technically I'm a fourth year. And he said, excuse me? I said, well, truth be told, it's pouring rain. The chef in my fraternity house isn't very good. And I figured I could get a free meal here and learn something.

7:55He couldn't believe that I had the gall to show up and say that. So it was like that pregnant pause. And all of a sudden he yelled out to his friend, hey, Chip, come on over here. So Chip Goodyear came on over and John said, hey, what's your name? Alan, can you tell Chip that story again? So I told Chip, they looked at each other and said, young man, I've been on the road for a week and a half. You're the most enterprising young man I've come across. How would you like to fly to New York City on my dime and meet my partners? I'm like, sure. Happy to. I didn't know what investment banking was. I just found it It sounded interesting.

8:27So you spent some time in investment banking, and then you eventually shifted to advisory. And you kind of brought up the idea of knowing what you don't like to do. How did that idea kind of play a role in your shift from traditional investment banking to advisory? Well, I was one of those 100-hour week associate grunts in investment banking and corporate finance. I'd show up at 8 a.m. and I'd go home at 1 a.m. And it was very long hours, pretty drudgery. But I did find in the same building, whenever I had downtime, I'd walk one or two floors down. And I thought the sales and trading desk was amazing.

8:58It was tons of energy. People are eating pizza. Legs are on the desk. And they're trading stocks. I'd read research reports. I thought, this is great. And then I thought to myself, wait a minute. I could go back to California where the weather is warm. I don't have to work these crazy hours. And I can actually talk to people one-on-one about their own personal financial affairs. That sounds a lot more fun than working in New York City and trying to explain to the CFO of a company why they should issue a convertible preferred offering instead of straight debt or equity. And that just didn't sound that fun.

9:29So by virtue of not having a great time and working too hard, I concluded my best route was to go back to business school, try and get an MBA, and from there reposition myself into wealth management. And that's what happened. And I ended up getting very fortunate. I was hired by Goldman Sachs to go into their private client services group based in the Los Angeles office. And I started in August of 1990 in their training program. But it was a process of learning through experience of the things I wasn't enjoying, but keeping my ears and eyes open and tuned to what I was looking for. And what I was looking for was working in a climate that I liked and working ultimately one-on-one with people.

10:05That's what really drew me to wealth management. It was investing was interesting, but it was also making a connection one-on-one with people, no different than when I was in high school. I used to tutor people. And I've always enjoyed one-on-one connections. So I fell into it. But had you asked me at age 18 or 20 or 22, I wouldn't have been able to articulate how I was going to get there. I fell into it. So fast forward a bit, you spend seven years at Goldman and over a decade at Merrill Lynch before founding Luminous and eventually IEQ, where you are now, what ultimately drove your shift towards independence, founding these two firms, since you were at these gigantic firms for so many years?

10:48Really a combination. And at that point in 2000, it was two things. One was courage, having worked already in wealth management for 18 years. And at that point, I was over 40 years old, I concluded if I wasn't going to do it now is never going to be an entrepreneur. And secondarily, much as I thought my employer at the time was a good firm, my ability to offer products and services to my clients were limited to what that firm itself was allowing me to offer. And yet we were identifying a variety of investment offerings, whether they were hedge funds, whether they were credit funds. There were a number of investment strategies we thought were excellent, but because they were not officially approved by the firm I was at, I was unable to offer those to my clients.

11:41That felt a bit disingenuous. So in 2008, three of my other partners and I, the four of us, co-founded Luminous Capital with an intention to be luminaries, educating our clients, and also to be transparent such that we could offer them a much wider array of investment products and services. So that was the motivation, was a combination of courage and recognizing that we probably were too limited in what we could offer our clients. I'm interested in what were the biggest lessons you've learned from advising clients, but then also founding a firm? Because you're not only an advisor, but also an entrepreneur.

12:19Two entirely different things. From the standpoint of advising clients, you have to be a great listener. And I'm still not a great listener, but I try to get better at it every day. It's really hard. I also think it's imperative to really get an understanding of a client's risk tolerance and time horizon. I think there's arrows on both ends. Some clients or investors are just far too aggressive. I don't know why. It's almost like the saying 80 % of Americans think they're better than average drivers when, by definition, only 50 % can be. But also, conversely, there are oftentimes clients that are just too conservative.

13:05I mean, inflation is a real problem. And so if you want to sit in cash your whole life, that's great. But inflation will actually make your dollars less strong. You'll have less purchasing power. So teasing out people's proclivity to take risk, but to measure it in prudent amounts is as much art as science. It's kind of an art learned over time. And it comes by listening, asking a lot of open-ended questions and trying to really empathize with the client and their needs. That's the element of a client. running a company. It depends on the kind of company, but at a wealth management firm like ours, in the end, all we have is people, right?

13:45We have phones, computers, but we're people. It's a people business. It's critical to listen to individuals and try to give them the tools, resources, and culture to feel comfortable and aspire to grow. And so it's art. Again, it's not my strong suit, but we here at our firm, IEQ Capital, strive to build a culture that empowers people to be intellectually curious, to ask questions, to politely challenge when they don't understand things. We have a variety of values and principles underlying values that we make sure we communicate clearly. And we still get it wrong because it's a people business.

14:32but running a service business with people, it's all about the people that deliver the service to the clients to ensure that they feel that they have the best culture in which to allow them to be successful. You've worked with an incredible amount of clients over your career. I just want to kind of be very specific on this example, but what's the biggest difference between advising someone with$10 million and a billion dollars?

15:00um that's a tough question um because it also is predicated on how much they spend and what their goals are so crazy as it sounds um it's not just about how much money is there it's a combination of their both life experiences and life expectations in many ways managing a 10 million dollar person which is still a by any stretch of imagination a tremendous amount of money, right? In many ways, that's harder. And the reason is all things equal, by definition, someone with$10 million has less cushion for failure to potentially theoretically become bankrupt than someone with a billion dollars. So I would argue it gets back to far more fundamentals.

15:47Is the underlying client reasonable? What are their goals and expectations? Are they in alignment with their personal spending habits? Do they have offsetting personal family matters? You don't know if they have situations where they're attending to loved ones that are hospitalized or individuals who have persistent health conditions that can be a big drain financially. Clearly, a family with a billion dollars probably has a higher degree of complexity in managing what we call their estate, all the money. They probably have more sophisticated legal structures called trusts or family limits liability corporations.

16:25They may have properties spread across the U.S. or even globally. So the various issues that might arise might be different, might require a different set of skills. But it may not be more complex than navigating what's right for someone with$10 million to ensure they have enough capital, both to live the life they and maybe their spouse for as long as they want. Coupled with whether goals they have to pass on some of that wealth to their beneficiaries, typically their kids, or they may have a desire to pass money to charity. So it's too uniform to just say the billionaire family is harder to manage.

17:01I don't think that's true. I do think it's true that there's a high degree of likelihood the billionaire family has far more entities and issues, but it may not actually be more challenging to actually get the client to the end goal. So this might seem like a very broad question, but I think you can tell a lot about someone, whether that be an investor or advisor by asking this. How do you think about risk right now? And how has your perspective on it kind of evolved over your career? Well, risk is always an element of uncertainty. And uncertainty oftentimes is measured or quantified over what's the rate of return or spread, what we call it, over a risk-free rate, which historically is a treasury bill.

17:43I don't know if I've really thought about risk any differently today per se than I ever have. Every environment in my 36-year career, every environment is, oh my gosh, this is the most challenging time I've ever seen in my career. I've never seen so much uncertainty. It's kind of funny. Things just tend to work out over time despite whatever we throw at the markets. I counted. I think I've seen 13 or 14, 20 % plus equity market sell-offs. I could rattle off the years and the drops in my career. So stuff happens. And the issue is, how do you deal with it? And the way you deal with it is you make sure up front, you're only taking risk to the degree you can tolerate that risk.

18:23So that means you really understand yourself and your goals and your income needs and risk tolerance and your time horizon. And you also look at it, how it relates to the different pieces of your puzzle. So if you're a young adult, maybe the best thing you could do if you're in a low tax bracket potentially is you could create a Roth IRA. Put your money in a Roth IRA with your after-tax dollars, and it didn't get taxed very much because you were in a low tax rate, and embrace risk. Put your money in an all-equity index of like no fee because it's not a lot of dollars and it's not complicated, and close your eyes.

18:55Why do you care what the latest farm report is, what the latest CPI report is? Why do you care who's the president even or who's in Congress or are we at war with the country? You're taking a 50-year view before you're going to touch that money. That is entirely different than if you're talking about your own personal money at age 22 or 23 where you have to start thinking about saving money for maybe I'm going to buy a townhouse or a condominium. I don't even know if I can take equity risk. So even with a young individual, different pools of capital can have different purposes and different elements of risk taking.

19:31So again, it's a little more nuanced. But to me, risk is variability, which generally means an opportunity to take advantage of that volatility when it drops, but it's contingent on knowing the personality, what entity it's held in, and what the needs or purposes of the capital are. If you think you're going to, within the next three years, take some money to make a down payment on a house, it's really hard to buy into the stock market because if you have a stock market fall, it's going to take several years potentially for those values of those assets to come back up. And you may be woefully mistaken that it would have been better to wait and watch the house price fall at the same time.

20:08You could have bought the house at a better price. over the last, over your career on wall street, I think from my perspective, I haven't lived that long is that the biggest change has been technology and more specifically the flow of information, how the flow of information has gotten so much more information has gotten so much more accessible. Obviously people have edged on information, things like, I don't know, Bloomberg terminal versus the average retail investor with, I don't know, a Fidelity or Robinhood account. And I heard this funny anecdote where like in the, in the eighties, you could, if you were reporting on a company, you could just go down to the SEC and get the 10K before other people got it.

20:42You could just get the 10K and that's the kind of flow of information back then. Investing has become much more democratized over the last couple of decades. What do you see as the pros and cons of this kind of democratization? And how do you navigate that with clients? Well, clearly, I think the pros are if all individuals have equal access to information, it should, in theory, make the markets more efficiently priced. You would expect to see less anomalies, less people taking advantage of in the context of trying to invest their capital for a reasonable rate of return, attend to what academically you should earn.

21:17I think the downside of that is, I think, nevertheless, individuals might unknowingly assume that because information is more readily available, they can suddenly embrace greater degrees of risk. I'll give you a good example of this. Part of what's being discussed in Wall Street currently is something called the democratization of alternative investments. So in simple terms, publicly traded stocks, bonds, cash that you can buy and sell on a daily basis or conventional investments, and more or less anything that doesn't have daily liquidity that can be bought and sold daily, we're going to just call alternative investments.

21:54It could be forms of making loans to private companies, which is called private credit. It could be buying private equity, which means you're investing in a private company where there isn't stock trading every day. It could be meaning you're buying real estate where real estate properties don't invest all the time. So a variety of managers in the private equity, credit, real estate areas are actually creating funds that individual investors, if they're an accredited investor, which means they have a certain net worth threshold or income earning threshold, are now going to be allowed to invest in funds that are providing the funds may have a monthly or a quarterly liquidity provision, but they're actually buying assets that don't readily trade and sell every day.

22:43The vehicles are being touted to these accredited individual investors as vehicles that can be sold on a monthly or a quarterly basis. But in the fine print, and appropriately so, the manager can effectively do something called gate the fund, which means in the event greater than a certain percentage of the investors all want to get out at once, the manager has the right to say, stop, we don't want to let more than, let's say, two and a half percent of the aggregate capital or five percent of the aggregate capital get out at any month or any quarter. because if we do, we'd be forced to sell everything all at once.

23:22And if we sold everything all at once, we may not be able to get the price we're representing its worth because the value we're putting on this fund is based on estimates. These vehicles, these pieces of real estate, these ownership stakes in private equity, these loans to private companies, they don't trade every day. So we're using models to guess their prices. It turns out, by the way, there's a good chance if everyone wants to sell at once, it's probably at a time of stress when prices are probably falling anyway. So the challenge, albeit I think it's well-intentioned, the democratization of alternative investments, is to allow individuals who normally wouldn't be able to access these alternative investments suddenly can.

24:00But the danger is that they're being told that there's monthly or quarterly liquidity without being told the other side of the story is there is a chance you will be limited to your ability to access that capital. So it's buyer beware. Make sure you understand the fine print before you go into these alternative investments. And I am concerned that individuals may not really understand the fine print until it's actually tested. And oftentimes these things happen when we have momentary significant drops in asset prices for any reason you want to come up with. People naively think, oh, no problem.

24:35I can just sell my monthly liquid or quarterly liquid fund. And if they find out at that moment they can't, they may not have as much liquidity or access to capital as they thought they did. So I think in general, going back to your question, greater information and the democratization of investing is a benefit, but it comes with the caveat that buyers need to have completed information to understand fully what they're doing at any point in time. And it also gets back to advisors. We have to be prudent to make sure we communicate clearly with investors and And like all things life, don't put too many eggs in one basket.