Talk Your Book: Defined Outcome Strategies with Jason Barsema of Halo Investing

Episode Summary

Executive Summary: The episode explores structured products through a conversation with Halo Investing co-founder Jason Barsima. The hosts and Barsima frame structured notes as customizable, insurance-like instruments that provide downside protection with market upside participation. The discussion focuses on the market’s size, common misconceptions, fee transparency, liquidity, counterparty risk, and Halo’s role as a marketplace that increases competition and access for RIAs and independent advisors.

Main Topics: What structured products are and why they matter (Priority: 5/5): Barsima defines structured products as investments that wrap a bond and options to create defined downside protection while preserving some upside exposure. The hosts initially struggle with the complexity but come to see them as a portfolio insurance tool for investors seeking outcomes between stocks and bonds. Halo Investing’s marketplace model (Priority: 5/5): Halo is presented as a fintech platform that connects advisors with multiple issuers, making structured products more transparent, competitive, and easier to access. Instead of dealing directly with one bank, advisors can compare issuer pricing and terms on a single platform. Fees, transparency, and issuer competition (Priority: 5/5): A major critique of legacy structured products is opacity, high fees, and issuer concentration. Halo’s pitch is that by running competitive auctions and showing terms clearly, it compresses issuer margins and removes hidden costs and wholesaler layers. Liquidity and secondary trading (Priority: 4/5): Barsima argues structured products have historically suffered from poor liquidity and punitive early-exit pricing. Halo aims to improve this with independent market makers and a future exchange-like secondary market, reducing trading spreads and making exits less costly. How advisors can use structured notes in portfolios (Priority: 4/5): Barsima outlines three uses: core portfolio exposure, tactical bets on specific names or sectors, and protective overlays on concentrated holdings. He emphasizes holding to maturity and using notes as a repeatable allocation rather than a short-term trade. Market size, adoption, and democratization (Priority: 4/5): The conversation highlights that structured products are massive globally but underappreciated in the U.S. Halo wants to democratize access for RIAs and eventually retail investors, especially as retirement demand for downside protection rises. Future expansion beyond structured notes (Priority: 3/5): Halo plans to expand into annuities, insurance, and other protective investing products, while prioritizing non-bank issuers and broader competition. The long-term goal is a marketplace for protective financial products, not just structured notes.

Key Arguments: Structured products are best understood as a bond-plus-options wrapper that can create defined downside protection and upside participation. The products are not a free lunch; investors give up dividends, some liquidity, and take counterparty risk as the tradeoff for protection. Legacy structured products suffer from opacity, concentrated issuer power, and high fees, which Halo aims to reduce through a competitive marketplace. Banks issue structured notes because they are capital-friendly and provide cheap funding, not because they are taking the opposite side of investors’ bets. Halo’s value proposition is transparency: clearer pricing, lower fees, better analytics, and easier access through independent custodians and RIAs. The products can be useful in a challenging market environment where investors want returns in a defined range without relying on active management. Structured notes are especially appealing for retirees or clients with specific return targets who want a middle ground between stocks and bonds. Improved liquidity and competition could make structured products a much larger market in the U.S. over the next 5 to 10 years.

Data Points: Global structured products outstanding issuance: $3 trillion - Barsima says this is the approximate size of outstanding structured products globally. Annual structured products issuance: $1 trillion per year - Barsima cites annual issuance worldwide. Approximate number of major global issuers: 20 or so - He says the market is concentrated among roughly 20 major issuers. Total issuers globally: Over 4,000 - He distinguishes major issuers from smaller firms that issue the credit and outsource the option component. Halo annualized transaction volume: Just over $4 billion - Barsima says current annualized notional volume based on deal signs exceeds $4 billion. Platform issuer count: 27 issuers globally - He says Halo brings 27 issuers onto the platform. Typical bank fee before Halo: 3 to 4 points - Barsima describes legacy issuer fees as historically around 3-4 percentage points. Halo issuer economics: 50 to 100 basis points - He says issuers now make roughly this amount depending on maturity. Typical U.S. note maturity: 2 to 3 years - Barsima says U.S. structured notes are typically issued with this maturity range. Possible note maturity range: 6 months to 10 years - He explains the general maturity range available. S&P 500 dividend yield: About 1.85% per annum - Used to explain the opportunity cost of giving up dividends in a structured note. Example downside protection: 25% hard protection - He cites a five-year S&P-linked note with a 25% downside buffer. Example upside participation: 120% of upside - He describes a note that pays 1.2x the S&P 500 price appreciation. Liquidity spread on Halo secondary sale: Around 35 basis points - Barsima says Halo’s platform spread is roughly 35 bps versus much wider legacy spreads. Legacy early-sale discount: 2 to 3 points - He contrasts Halo’s liquidity with prior market discounts on early sales. Old minimum customized note size: $1 million to $3 million - Barsima says banks historically required this level to customize a note. Halo platform minimum order size: $250,000 - This is the lead order size needed to launch an auctioned note. Minimum investment for tack-on orders: $1,000 - Advisors can join a lead order in small increments. Future customization minimum: $500 - Barsima says Halo expects users to customize notes at this level in about 18 months. Uber-linked example note: 1.5 years with 14.5% fixed annual return and 50% downside protection - Barsima offers this as a tactical example tied to Uber stock.

Pivotal Quotes: "Structured products are a way for investors to get a level of downside investment protection from market declines, while still allowing them to participate in the upside of the market." — Jason Barsima: His opening 90-second definition of the product category. "A structured note is just a candy wrapper, and inside that candy wrapper is a bond and an option." — Jason Barsima: He explains the instrument’s basic structure in simple terms. "I don't believe in active management in US large cap core. Find me a US large cap core manager that can outperform the S&P 500." — Jason Barsima: He explains why he prefers using structured notes as a passive-with-protection overlay.

Implications: Structured products may grow as retirees and advisors seek defined outcomes, but success depends on clearer pricing, better liquidity, and education. If Halo’s marketplace model scales, it could make these instruments more accessible and competitive in the U.S.