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What are the $25 “RETIREMENT NOTES” teased by Unconventional Wealth?

Ryan Cole says "Buy enough of them, and you can collect regular, monthly checks as high as $9,517."

By Travis Johnson, Stock Gumshoe, October 29, 2015

This ad is being heavily pitched again, the emails for this ad now open with lines like “We recently discovered a strange website” and “invest in little-known $25 investment notes that pay interest rates as high as 28.99%.”

The ad itself is unchanged from when it first started running a little over a month ago, this article is unchanged from when it was published on September 24, 2015.

We’ve had a few questions about this teaser pitch, so although it’s not exactly about a stock I thought we’d dig into it a bit today.

And heck, I even decided to offer myself up as a guinea pig to see how it works and what the real-world experience of a small investor is with these “Retirement Notes”…. But more on that in a minute.

Ryan Cole at Unconventional Wealth often tries to pitch things that at least sound, well, unconventional…. like the variable indexed annuities he pitched as “Franklin IRAs” and “Secret Vatican Accounts”the “Queen’s Shocking Private Account” earlier this year.

And this is, like those, an “outside the market” way to earn income — with the carefully worded implication that “$25 notes” can turn into monthly payouts of thousands of dollars.

Here’s some of the tease:

“I recently heard about a strange website that lets you invest in ‘retirement notes’ that pay interest rates as high as 28.99%.

“At first, I thought this had to be a scam of some sort.

“Little did I know… it was about to change everything I knew about investing.”

Exciting, right?

So what are these “retirement notes?” Here’s more from the ad:

“The really groundbreaking part is that since their inception, serious investors have enjoyed 99.9% reliable returns from these notes.

“You can’t get that kind of security from stocks… not by a longshot.

“Once I discovered these notes, I had to know more.

“So I decided to launch a full-blown, 7-month investigation…

“I called up a company that provides these notes… I devoured articles, statistics, and every bit of research I could find.

“More important, I found dozens of real people who are investing real money in these notes and seeing incredible gains. (You’ll hear some of their stories in just a minute.)

“Of course, as with any investment opportunity, there is still an element of risk. But after you see some of the extraordinary returns I discovered, I bet you’ll agree—the potential here is staggering.

“I’m 100% convinced these notes could be the solution to baby boomers who are struggling to get retirement income.”

Well, the 99.9% number sound pretty good… though “99.9% reliable” is technically different from “guaranteed” — some more clues?

“How Mike Made $76,049 in Just 9 Months From These Notes

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“One of the first investors I met was Mike M., from Florida. His results were so incredible that I had to call him to make sure they were real.

“When he told me about his background, I quickly realized he wasn’t some kid off the block who falls for fads or scams.

“Mike is a serial entrepreneur who has worked on Wall Street, built his own venture capital fund and started his own tech companies.

“As a private equity investor, Mike tends to hear about innovations way before the general public does.

“… he started investing in these notes in November 2013. He even shared his bank statement with me….

“… Mike was getting thousands of dollars deposited into his bank account every month… like clockwork….

“I remember thinking to myself, “With such high returns, these notes have to be risky.”

“But when I asked Mike about it, he made a shocking revelation.

“He told me: ‘I have NEVER lost money. My account has gone up every single month.’

“That word ‘NEVER’ rung in my ears. It’s not something you hear often in the investment world.”

OK, so don’t overreact to that “Never” bit — if he started investing in these “retirement notes” in 2013, that means he’s been doing this for less than two years. That’s a blink of an eye, there are lots and lots and lots of investments that have “never” lost money over a two-year period — particularly if you get to choose the two-year period when selecting examples to use for your ad.

Some more about these “retirement notes?” Here’s a bit about the founder of a company that offers them:

“Ronald Lester, a serial entrepreneur and former Wall Street attorney, came up with an ingenious solution.

“He developed a revolutionary website that connects investors directly with borrowers, cutting the banks out of the equation.

“Mr. Lester had long been frustrated with the low interest rate he was getting from his bank.

“He noticed the ‘spread’ between the 1.5% interest on earnings from his “high yield” certificate of deposit and the massive 18% rate his credit card company was charging him may have been great for greedy lenders… but terrible for consumers like you and me.

“He realized that removing the banks from the equation would allow everyday Americans to collect much higher interest.

“Since then $25 ‘retirement notes’ have been growing steadily in popularity.

“When you buy a ‘retirement note,’ you’re essentially providing funds to someone who is looking for credit.

“Consumers asking for loans are put through a rigorous credit-verification process… income, credit-worthiness and dozens of other factors are taken into account and bad credit risks are screened out before you ever lend money.

“In exchange, you have the potential to collect a very high yield… as high as 28.99%.

“This allows everyday investors to literally ‘become the bank’… but without all the regulatory hassles and capital requirements that real banks have to put up with.

“And because you don’t have to loan out the entire amount… you can buy a fraction for as little as $25… you can spread the risk among thousands of notes so it’s much safer.”

So that’s a veiled reference to the founder of LendingClub, the largest of the so-called “peer to peer lenders” — his name is actually Renaud Laplanche (ad copywriters use these same-initials pseudonyms all the time), and Lending Club went public last year and got a lot of attention, eclipsing slightly earlier pioneers in the sector like Prosper. Lending Club is not so much a peer-to-peer lender as it is a direct syndicator of loans, most investors aren’t actually reading the story about each individual they’re lending to or evaluating them based on whether they’re a firefighter with children who needs a new truck or a college student with too much credit card debt, and they have an application process that’s not necessarily radically different from applying for a bank loan, but they do accept risky borrowers, using their proprietary risk analysis (and charge them higher interest), and they do break up their loans into smaller chunks — as small as $25.

Investors who want to buy those loans, which includes banks and institutional investors as well as individuals, can either select their own individual loans as they become available (at least a few hundred loans post every day for funding — often many more) or set up a programmatic investing program that gives Lending Club the authority to invest their money into a constantly rolling-over portfolio that matches some kind of risk profile you approve. To get expected yields of much over 10-12%, you’d have to cherry pick the riskiest loans either from their initial offerings of higher risk loans, or on their secondary markets (I know LendingClub works with a trading platform to buy and sell loans, haven’t checked to see whether others have similar offerings).

Prosper is essentially the same as LendingClub, also offering tiers of investments for prospective lenders, and allowing you to diversify across dozens or hundreds of loans automatically by choosing your “sweet spot” of risk and reward, and the numbers are pretty similar — Prosper’s best borrowers might qualify for a one-year 5.99% loan (the rate goes up to 36% for riskier first-time borrowers), and loans they sell to investors range from an expected return of 5.5-11.5% based on their “seasoned” data for borrowers across the risk spectrum. The returns for the different risk buckets for those two lending companies are almost identical.

LendingClub does say that 99.9% of their lenders who are diversified across at least 100 loans make money (which would mean you need $2,500 to start) — not that those 99.9% get their anticipated average return of 6% or 8% or whatever their risk bucket selection tells them to expect, but that they don’t lose money. Prosper, similarly, says that since 2009 100% of their lenders who have at least 100 loans have made money. These loans are largely for stuff like credit card refinancing, and it’s probably worth noting that over the last five years the rate of serious credit card delinquencies has also been trending down pretty steadily — with employment improving, I guess there haven’t been all that many people who had to look at their bills and decide whether to skip a credit card payment, a car payment or a LendingClub payment each month.

Both of these, and they’re the two biggest and longest-established lenders of the sort that I’m aware of, have been around for less than 10 years — including through the 2008 downturn when unemployment skyrocketed and their defaults were likely quite high. They say that this experience of 2007 and 2008 has helped them to improve their algorithms for setting interest rates, judging creditworthiness, etc., but we’re still talking about a very short period of time, and most of their borrowers and lenders have come on board over the last few years, when the economy has mostly been just fine and interest rates very low.

It’s a bit risky to guess what might happen to the marketplace over the next few years or decades, but so far it’s been working out pretty well for investors — they get a fairly stable income stream, no recent serious risk of principal loss on the better loans, and a dramatically higher interest rate than they’d earn with (much more secure and/or insured) 3-5 year investments in Treasury Notes or bank CDs (even a 5-year jumbo CD with a $100,000 requirement will only get you slightly over 2% today, 5-year Treasuries are at 1.5%).

And, of course, the big numbers in the ad make it sound a lot more compelling than saying “your $25 note will earn you 12 cents a month!” It’s always important to think about the capital you have to risk to earn the huge returns they’re teasing — and in this case, they also talk a lot about returns in the high teens that are probably not even worth shooting for… yes, it’s possible to build portfolios earning 15%+ on LendingClub or on Prosper or similar platforms, but those portfolios are going to have much higher default risk than the portfolios that are expected to yield 6-8%.

What would it take to turn a $25 “Retirement Note” into, say, a million dollars generating income (without touching principal) of about $60,000 a year under this kind of scenario? Well, with the 5.9% expected return of the “A and B weighted” automatic investment plan they offer, which means you buy mostly highly rated loans, it would take buying one of those $25 “notes” every day, seven days a week, for 35 years to get to that level. That’s an investment of $175 a week, or about $9,100 a year.

To get the much higher returns teased in the ad you have to both invest a much larger amount up front and take on much more “credit risk” by focusing on the lower-grade borrowers. That gets you away from the “this has made money for 99.9% of the people” history and into the realms where the high interest rate earned on the loans (20-25%) is matched by a very high chargeoff rate (10-15%) to accommodate the much larger number of people who aren’t expected to actually keep current on these loans. Someone earning $7,000 a month, like the examples in Coles’ ad, would have to invest $1.5 million to get that rate if they’re sticking to the “good credit weighted” projected returns of 5.9%, or about $1 million if they’re pushing to the other end of the credit spectrum and projecting an 8.1% yield. Or, of course, they’d have to be taking principal out each month when the notes mature, not just earnings (each loan is either for three years or five years, so if you have hundreds of $25 notes they’re constantly maturing and rolling over into new loans).

So no, there’s no free lunch where you can earn 15% interest without taking on genuinely substantial risk — rates are low all around… even the average credit card has a lower interest rate than that unless you have truly terrible credit, and there are obviously costs to be incurred in offering and distributing credit cards and in writing off bad debts. Your risk assessment of individual borrowers may be different, or your risk tolerance may be much higher and perhaps you’re willing to gamble a bit more to earn a higher return… and you could earn a higher return if you cherry pick high-yielding loans from a platform like Lending Club (or Prosper, or one of the other smaller companies), but that does mean you should be prepared for more risk of real capital loss.

The biggest mitigation for that risk is diversification — and there you have to have some faith in the platform to believe that lending $25 each to 50 people is much less risky than lending $1,250 to a single person. I think it obviously is, and that diversification is a “free lunch” of sorts, since it substantially reduces your risk of losing a large portion of your investment, but it doesn’t take away all risk of loss… particularly because they’re diversifying across a pool of borrowers who were all selected in the same way, and who may or may not be diversified geographically, or by whatever other criteria you might consider. They’re diversified just by the fact that they’re different people, so hopefully they won’t all have a medical emergency that drives them into bankruptcy, or get laid off, but they might all be exposed to very similar macroeconomic forces.

None of the peer-to-peer or social or “crowd” lending platforms are insured, to my knowledge. There is a risk, just like when you buy a corporate bond, that any one of these loans could go bad and be worth zero. If you’re lending $25 each to 50 people and expecting 6% returns, then that’s $75 in annual income from that group for yoru $1,250 investment. Three defaults, which means that 6% of the people you lend to can’t pay back the loan in any given year, and your income could be gone. If 10% of the people default, five loans, you’re losing money that year even if the other 45 loans stay current.

And your money is effectively tied up in these loans, though you can also sign up for the FolioFN trading platform at LendingClub and buy and sell loans instead of just investing in new loans and holding through the full term — there’s very likely the potential to do both much better or much worse by trading these loans than you would from just buying new loans and holding them, but if you’re an active lender you could also get in the habit of, say, selling (probably at a loss) loans where the borrower’s credit score drops or when they’ve made a late payment. I can’t imagine myself wanting to monitor 100 or 500 tiny $25 loans, or to even want to get into selecting individual loans, but presumably most of their lenders use their automatic management systems to maintain portfolios. You also take on some interest rate risks, since if rates do surge substantially higher over the next three or five years your returns from the loans you fund today would seem much less impressive (and if you had to sell those loans, you’d be taking a haircut to do so).

So how does this work in practice? I’m going to check it out and see, and I’ll report back on how it’s going from time to time to the Irregulars — I signed up for an account at LendingClub to be a lender, and funded it with a very small amount of money, the minimum to set up a diversified portfolio, so when that funding goes through I’ll have some idea of how they allocate the investment and, over the next month or so, what the returns are initially. The actual account setup was easy, and I have no interest in taking outsize risks so I chose the automatic investment strategy that weights the portfolio substantially toward low-risk and anticipates roughly 6% returns.

I did also try out a lending account a Prosper a few years ago, but that was in their very early days when their criteria and system were quite a bit different, and the account (it was only $100 or something like that, not diversified) was at least cut in half by a default or two in 2008 (my memory is not that good and I haven’t checked the specifics)…. the direct lenders have all come a long way since then, and that experience isn’t probably indicative of what larger, diversified accounts with Prosper might have earned, but above-average yields always bring at least some risk — whether it’s just the risk of something new and not well understood, or the risk that they’re taking a chance of screwing things up and people might lose money, remains to be seen… and I would expect it’s probably going to take another recession and a jump in unemployment to really test these lenders.

If you’ve tried out any of the peer-to-peer or social lending platforms, feel free to share your experience with a comment below — I’m willing to tinker, particularly because they make it so easy to diversify very widely across loans now, but I’m holding on to some small sliver of skepticism that their long-term returns on 3-year and 5-year loans can consistently remain 3X higher than CD rates without substantially higher risk.

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Kristina Kortis
Guest
Kristina Kortis
December 28, 2015 7:51 pm

I have just been reading all the comments and interest in different options to trade and create a retirement plan..

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OR, Checkout http://cashoutclub.com/iml/ts/ for all the details and fill in the form so that I can contact you back..
Happy New Year 2016

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wiser
Guest
February 2, 2016 12:07 pm

I came over to this page after having received one of those ads about a “weird website” and running a Google search to get the real scoop. For a small investor, there is a way to lend out funds to people with pretty good returns on a much smaller scale, if you’re willing to first convert funds to Bitcoin. There is a site called BTC Jam (http://tinyurl.com/zcenxuk) which allows you to lend out Bitcoin to borrowers. You can choose your own loans or you can participate in their autoinvest program which allows you to set some parameters based on borrower credit rating, etc. The biggest thing I like about the BTC Jam autoinvest program is that you can invest what amounts to just a few Dollars in each loan, so that even with a small amount you can be quite diversified. The minimum investment to set up an autoinvest program is one Bitcoin, worth about $400 right now, but you do not have to deposit the entire Bitcoin all at once. You can deposit it a little bit at a time. You can also opt to reinvest your earnings, so your little stash can grow. As with all loan programs you have the same liquidity issues that you would with Lending Club, but you can also issue notes to sell off your loans early if you need to. You can also pull funds out by temporarily turning off your autoinvest program so that repaid funds just accumulate in your balance.

Like I said, this is worth checking out, but you would first have to learn more about Bitcoin. The advantage I’ve seen with dealing in Bitcoin and other cryptocurrencies is that you truly can start out small, as in really truly only $25. You can invest a dollar into 25 different loans and that’s not too bad for a small investor. You do take risks on the volatility of Bitcoin itself, so you have to take that into account, but if that’s something you can live with, then you truly can play around in that world with actual pocket change for quite a while to gain some confidence putting larger amounts at risk. As with anything else, only invest what you can afford to lose. Good luck, everyone!

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ardoda
Irregular
ardoda
February 4, 2016 2:33 am

Does LendingClub actually go after delinquent borrowers? If they do, this doesnt seem to me that it would come at a cheap price. Is this cost directed back to the lender directly?

lovellah
lovellah
February 13, 2016 1:22 am
Reply to  ardoda

Yes, they do. But, there may be 500 investors on a loan – so the cost is distributed across all, and is minimal on a $25 investment – and if they collect – they put it in your account.

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lovellah
lovellah
February 13, 2016 1:02 am

I’ve been with Lending Club since 2009. At first I hand-picked the loans (only investing $25 each). I have between 8.5% – 9% net. I have a strategy for the past couple of years when I analyzed my loans. I’m not “financially inclined in figuring out returns, etc” so maybe someone here can help me understand something: I believe the total returns reduce over time (36 or 60 month loans). Some due to default, some to paying it off early, etc. but mostly because the total balance/investment is reduced as people start reducing their balances thru payments. I’ve always just let them re-invest and I have lots of $25 notes. But, yes, spreading the risk at only $25/a shot doesn’t really bother you much if someone defaults – SO….. I never pick “A” (the best); I believe “B” defaults the most; I think “C” is the best category and I throw in a small percentage of “D” and “E”….I’m thinking that the 24% interest they’re charged are worth more if they default after 6 months than the “A” 5-6% ones who pay theirs off! Some people pay off early because it’s probably a bridge loan.
And GUESS WHAT??!! I made a $25 piece of a loan to those San Bernadino T*rrorists. I had read they got a $24K loan online – I checked and sure enough, I was one of those – made me feel so bad!! Lending club just voided their loans and put the money back into our accounts – they’d only gotten approval a couple days prior.
I think you can only get a monthly income for <36 months because the loans will be paid off. I just roll them over and let them grow. Don't be afraid – just invest $25/note at a time.

I've been happy with it so far, as much as I can understand it. Tax time was a pain because it was manual and confusing – but good news! They've worked with TurboTax so it can be uploaded for 2015.
I asked them about what happens if they go under….the answers were that the "uninvested money" is in an FDIC bank…the invested money, they have something lined up to take the loans (can't remember what it's been a few years).

Good luck!

I surely don't understand Lending Club's borrower grading. Some of the best "borrowers" default – and rather quickly. I also noticed there are some key reasons these people borrow – and the ones you think are safest are the defaulters – go figure.

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Alice Charles
Member
Alice Charles
February 16, 2016 12:00 pm

Thanks stockgumshoe. Sound advice and great information.

richard
Member
March 10, 2016 7:27 pm

Stock GumShoe provides an outstanding service to the financial community and specifically to unsophisticated investors (as well as smart guys too). Thank you so much.

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Ronnie Thomas
Guest
May 14, 2016 1:54 pm

Reits are an income source to be considered.

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James Block
Guest
James Block
July 4, 2016 5:14 am

I tried Prosper, and I found that Prosper was keen to boast that I was doing well at an 8 – 10% return. But that was only the performing notes! Over the 3 year period of the notes, my loss was over 20%. They NEVER made an accurate accounting. Keep your own records, cause they won’t!

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Dan Patel
Guest
Dan Patel
July 11, 2016 9:26 pm

Hello Travis,
Dear sir how is $25 retirement plan working for you, is it true that ?

Regards
Dan Patel

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michael johnson
Guest
michael johnson
July 14, 2016 5:31 pm

HI IS THERE A PHONE NUMBER TO LENDING CLUB

James
Guest
August 24, 2016 4:11 pm

LOVE YOU, STOCK GUMSHOE! Got their pitch in the mail today, went to your site and in 10 minutes I know more than 90% of the people who will get the same info in their mail! Thanks, as always, to your excellent ‘Detective Work’!

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Emily Ellsworth
November 22, 2016 12:54 am
Reply to  James

Ditto Travis. I read the pitch online, searched your library, and found the full story. You are the awesomest best!

Alfred Jones
Member
January 10, 2017 1:45 pm

Would you let us in on the amount you invested and your results to date. Please.

takeprofits
Irregular
February 2, 2017 12:25 pm

Given the total level of debt in the world, it seems to me highly probable that anyone investing in DEBT instruments of any kind is highly likely to get burned badly over time. Defaults are inevitable, and Travis makes a good point, “it is early days for Bitcoin” it is really little more than a gamblers mecca and if you are okay with that fine. It is like going to Las Vegas with a few hundred dollars to gamble; win or lose, just for the fun of playing the slots, just don’t bet the farm or consider it investing. By contrast, gold and silver have intrinsic value and universal acceptance as money, and I would argue the ONLY SOUND MONEY as no fiat currency has ever succeeded in maintaining purchasing power like gold and silver. When first created “A DOLLAR” had a defined value of so many grams of gold or silver, and to-day is still called a DOLLAR with no intrinsic value and a purchasing power of only 2-3 cents depending on whose inflation statistics you trust. Granted, gold and silver does fluctuate in price like any commodity, based on market sentiment, but mostly through manipulation by bankers, so as long as you only buy on pullbacks, or practice buying regular amounts weekly or monthly to dollar cost average, you will do just fine. Another possibility for taking advantage of precious metals up trend is buying stock in GOLD MONEY XAU/V or opening a savings account to invest a specific amount each month which you can convert through a credit card denominated in gold at the prevailing rate at the time of purchase. Check it out, this is a very low risk way to save and at the same participate in the rising trend of the precious metals market without the hassle of buying and storing coins while at the same time protecting you against the decline in fiat currencies regardless of your country of residence. 5000 years of history gives you a better track record than Bitcoin.

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lydia
Guest
lydia
March 26, 2017 1:12 pm

hi Ryan my name is Lydia as a newbie to investing and haven’t done any actual investing yet, how may I established my portfolio to get started and can I start with as little as $500-1000, my interests are: $25 retirement notes and penny stocks

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Harry Jones
Member
Harry Jones
December 27, 2017 5:18 pm

This is a re-post with updated information.

There are better ways to get good returns.
ETY – Eaton Vance Tax Managed Diversified Equity Income Fund
As of 10/16/2015 close
ETY 11.31 11.02
11.34
11.31
Last Bid Ask Open
Current yield: 8.93%
52 Wk High 11.96 (6/19/2015)
52 Wk Low 9.64 (8/24/2015)
I realize that my way at looking at things might be a bit different than most but take a look at this.
I have 2 batches of this fund.
1st cost basis of 9.974 and it’s now at 11.31, nice gain. acquired in two batches
12/13/2012 Buy 300 @ 9.33
07/26/2011 Buy 200 @ 10.94

Additionally I keep track of dividends and now my “real” cash position in this is
6.542 as of 09-30-2015 which yields a 15.47 per cent dividend

Update:
current price $ 12.15 8.33% yield at today’s price
4.269 as of 12-27-2017 which yields a 23.7 per cent dividend

2nd cost basis of 8.93, even better gain acquired 8/22/2011
my “real” cash position in this is
4.827 as of 9/30/2015 which yields a 20.97 per-cent dividend

Update:
2.55 as of 12/27/2017 which yields a 39.7 per-cent dividend

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