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.