Mo Al Adhem Transcript
Clint Betts
Mo, thank you so much for coming on the show. You are the CEO of Frec and its co-founder. Tell us, I mean, give us your story. How did you become the CEO of this company?
Mo Al Adhem
Yeah, thanks for having me here. I'm excited to talk to you today. So I founded this company in 2021 and it was founded out of a personal pinpoint that I had with the money management/wealth management industry. When I sold my first company and came to have a bit of money, I, like anyone else, went through the traditional paths of finding an advisor, trying to figure out how to possibly invest my money so that I don't lose it all on a bad investment. And I was a bit frustrated by the state of the industry. In almost every other aspect of life, you have a modern application, some self-serve way to accomplish what you're trying to do, all the way from getting a ride from somewhere to ordering food to even finding an apartment to rent or buying a house.
All of these processes have become very much driven by technology. There have been some good advancements in our experience with them, except for money and money management and investing for the long term. And get access to sophisticated strategies that they feel are reserved for the ultra-wealthy. You'd have to basically be with Goldman or Morgan Stanley to get access to a low-cost line of credit against your stock or get some tax-advantaged account; they call them the SMAs, a tax loss harvesting account. And I didn't really love that I needed to work with a human to do these things, and I felt that was sort of like something my parent's generation maybe would do. But to me, I just wanted an app. And I did. Initially, I did hire the advisors, and they had to send emails to get a wire out, or they'd be like, "Hey, come to the ballgame with me." I was like, "Well, what are you going to sell me there?" So it was kind of born out of frustration to be state of the art.
Clint Betts
So tell us what Frec does because it's actually fascinating and the tax benefits of it in particular are super interesting. So tell us what it does and why it's been so successful up to this point.
Mo Al Adhem
So our main product is called direct index. And the direct index think of it as a more modern way to manage and invest in a passive way. And so what I mean by that is there's been a lot of talk about passive investing in general. I don't know if you... John Bogle, the founder of Vanguard and investing in ETFs. A lot of folks invest in VOO, which is the S&P ETF, or VTI, the Total Stock Market.
And it's kind of a way of life. A lot of folks like to put their money in some kind of a reasonable portfolio and then get back to work on their career. They don't want to actively manage and stock pick. And to them, putting their money to work should be done on autopilot. The traditional way it's been done is through these vehicles called ETFs. ETFs, obviously, you buy an index fund, and the index fund underneath it sort of exposes you to a certain segment of the market, like the S&P 500, for example. A direct index is an evolution of that. So, instead of buying the ETF, it actually buys the underlying stocks underneath that make up that index. So, instead of buying the S&P 500 ETF, SPY, or VOO, you're actually buying all 500 stocks in the index. What we do is tax loss and harvest those stocks in the background. Because what we believe is at the core of it, there are only two things in your control as a passive investor to optimize your returns.
The first one is lowering your fee. You don't want to pay too much to get exposure to a passive investment. You want to pay as little as possible. And frankly, Vanguard does a great job at that. The expense ratio of VOO is like three basis points, 0.03. That's kind of one element. But the second element is what we bring to the table that's unique to us. Not only do we get the low fees that Vanguard gets you, but we also get you the tax advantages. We get you the tax loss harvesting.
So we do these two things together in one product. So you get the low fees, and we're able to tax loss harvest for you. So what that means is when we buy the 500 stocks in an index like the S&P 500, we're able to sell the losers and buy them again after a wash sale window has occurred. That way, you actually, at the end of the year, you're getting a tax document from us called the 1099-B that has tax losses on it that you can offset your income with.
Clint Betts
That is so fascinating. How has it been going? At what point... How come no one had ever done this before maybe is my first question?
Mo Al Adhem
So this has been, by the way, going on for decades. You're a family office; if you're an institution, and you want exposure to public markets, you're buying a direct index, and you're not buying like an ETF. And you're buying a direct index through these big custodians like Northern Trust, for example. And you have people managing that account and so on. And so what has happened since then is that technology has evolved. So now we don't need a million-dollar minimum to buy this thing. You can buy it with 10, 20k. You also don't need humans to manage it. Software can do it for you. The software can execute the trades.
And so all we've done is we've taken this strategy that has existed that's been sort of used extensively by institutions and large family offices and we made it available to everyone else. So anyone now can buy a direct index. Anyone can take advantage of the tax savings on a 20k account, on 100k account, on a million or $2 million account. You don't need 50 million or $300 million to execute the strategy.
And I have to say that there are 76 companies out there that do direct indexing last time I checked. And so it's a crowded space, but everyone does it through advisors. So people build these platforms, and they sell it to that advisor, and that advisor then sells it to the end customer. The way we are different is that we've built this and are selling it directly to the customer. And it's sort of a different approach because I guess the common wisdom, at least in the VC community and within amongst founders and other really smart people, is that you never want to go direct with wealth. It's very difficult. Your cost of acquisition is very high. It's just not worth it. You should definitely build something, give it to an advisor, and let that advisor sell it for you. And that's conventional wisdom, and we figured out it's absolutely wrong. Actually, going to the consumer is sort of where the opportunity is in wealth tech, in my opinion, at least.
Clint Betts
Yeah. And Robinhood kind of showed that early on, just the simplicity of being able to invest in a stock. And I mean, there are some challenges with that because I think a lot of people have tried to day trade on that app or things like that, which is a little risky.
Mo Al Adhem
Totally.
Clint Betts
And what you're doing is quite... What is your revenue model? How do you make money?
Mo Al Adhem
Sure. So we are just like Robinhood; we are a brokerage, but we're also advisors. And so, in our managed products, meaning in our direct indices, you have a collection; you can choose from one of 14 indices. You can buy the Russell 3000, you can buy the S&P 500, you can buy the information technology sector.
And so for these managed products, we charge an AUM fee or a management fee, which is basically the same, very close to the price of an ETF. That's simply if SPY is 0.0945 percent in expenses to you; ours is 0.1, right? It's basically the same. And so the idea is like, "Hey, instead of paying SPY the expense ratio, pay us the expense ratio, and with us, you're going to get the tax loss harvesting in addition to the SPY performance." And so that's the business model, especially since every index is priced a little differently. Some of our international indices are more expensive, and the more classic US large caps are priced more competitively.
And so that's one revenue stream is the management fees that are associated with money in a direct index. But then as a brokerage, we also make money from PFA, from securities lending, from cash balances on the platform, from margin debit on the platform. So those are additional revenue sources.
And then maybe I'd say just the last one is an emerging revenue source for us is all these additional services that customers are beginning to ask us for. Like," Hey, how do I donate to a donor advice fund?" "Can I get an estate plan?" "Do you guys offer mortgages because I want to buy a house and please, I don't want to deal with a traditional mortgage lender. Can you guys do that?"
Clint Betts
Well, the opportunities you have are kind of endless there, particularly if you could set up the DAFs and market in with their already account seems really interesting. Do you think you'd go into mortgages? I mean, that's kind of interesting as well.
Mo Al Adhem
Well, I think, in general, our customers tend to be the types that really want the best of breed of everything. When they want to get a DAF, they're going to shop around and get the best DAF out there. When they want to get an estate plan, they're also going to shop around and get the best estate plan. And they don't mind using three, four, or five different service providers. So I don't think we're going to be able to make those products of the quality that our customers expect of us.
And so I think we're going to do direct indexing at an extremely high quality. We're going to be the best, hopefully, fingers crossed, the best direct indexing platform out there. And we're going to partner. I think we're going to look for and seek out partners who can provide our customers with the best mortgage, the best estate plan, the best DAF, and, hopefully, an integrated experience so it doesn't feel disjointed. Customers on Frec can donate to their DAF for a partner.
Clint Betts
Did you raise venture capital-
Mo Al Adhem
We did.
Clint Betts
... to get this started?
Mo Al Adhem
We did. We raised $26 million from Greylock and other investors in the valley, and that was back in between '21 and '23.
Clint Betts
Yeah, that's an incredible amount. That's a good start. How big is the company now?
Mo Al Adhem
We are 16 people.
Clint Betts
Oh, so you're keeping it lean, too, which is incredible.
Mo Al Adhem
Absolutely. Yeah. I think, and maybe this is a bit different than how other companies like to run, but as a second-time founder and also as someone who's worked in the industry as well, there is this sweet spot where teams can be extremely effective I feel. And anything above maybe a 20-person team, you start to need a bit more structure and more of your thinking goes around, well, how do I manage and operate this team and so on.
So I'm selfishly trying to extend the amount of time we stay below 20 people as much as possible. But that also means the bar is higher when it comes to hiring. But it's such a fun period. I'm trying to enjoy it as much as possible, having the team size be this small and so effective like that.
Clint Betts
Yeah, it's way fun to be that nimble and go that fast and put the whole team in one direction. I'm assuming most of them are software developers that you've hired?
Mo Al Adhem
Yeah, software engineers and designers. But they really have a superpower that I look for when hiring, which is are you able to be also a pseudo product manager as well? Can you understand the customer needs? Can you empathize with the customer? Can you come up with a solution? Otherwise, we're going to need an army of PMs here as well, which we don't want to do.
Clint Betts
Exactly. So, what does a typical day look like for you?
Mo Al Adhem
So yeah, I work really hard. To me, my workday starts at around 8:00 a.m. and ends at about 8:00 p.m. And I like to start my day fresh every day, as in me, like everyone else, have a running to-do list, but I like when I start my day, I'm like, "Okay, assume I'm starting from scratch today. Let's come up with our to-do list for this day based on all the information." I try my best not to get biased by what was going on yesterday because things change very quickly, and what was important yesterday may not be important [inaudible 00:13:45], right? And so, to me, that's kind of how the day starts with a bit of planning.
My first company was done very differently than the second company. One lesson that I learned is that there is so much value in doing a bit of planning and a bit of thinking upfront before anything we take on, including planning the day, planning the sprint, planning the quarter, and planning the year. There's a lot of value in doing that work, and you end up producing at a much higher quality if you invest the upfront capital or the time and try to figure out what is the best way to spend your time.
Clint Betts
So what is your sales strategy? Are you selling into family offices? Just going direct to those folks? How do you get people on the platform?
Mo Al Adhem
Yeah, we're going direct. Our customers are, I would call them high-net-worth individuals, 2 to $20 million in net worth. They are doctors, they are lawyers, they're finance folks, they're engineers, they're founders. A lot of people work at Coinbase and Meta and Nvidia and there's folks who are NVC and doctors all over the country and dentists.
We have learned that building a great product is your best marketing. There's nothing better than that because our customers talk about us to their friends and bring us up at dinner. I get intros and personal intros from, "Hey, just introducing my friend to you and to your team." And so the distribution strategy is literally just building a great product, caring about the customer, understanding their needs, and then having people be delighted and happy.
And we tried a bunch of other marketing. We do dabble with sponsoring an event or putting out something in a newsletter, but that's kind of a nice to have at this point. Yeah, the core growth engine for us is word of mouth.
Clint Betts
That's incredible. I'm sure you have read Paul Graham's essay about founder mode, and I just want to go back a little bit, keeping the team small and making sure the founder retains control. That seems like that's really important to you. Are you seeing that more and more with your peers in Silicon Valley? What advice would you have for first-time founders or folks like that around founder mode, I guess?
Mo Al Adhem
Yeah, I would just question everything that is common conventional wisdom out there. I'll give you an example. One thing that was taken as a rule in Silicon Valley was like, "Hey, you absolutely need a co-founder. When you start a company, you should have someone else be there." And maybe that's a good thing for investors because it gives them some redundancy in case one founder burns out. But the way I thought about it for the company was from a different point of view, I was like, "Well, if I have a co-founder, then I'm splitting the company equally with them with one person. What if my first 20 people are extremely highly motivated to be at the company? So what if I'm overly generous in equity grants to our first 20 people, and can they collectively be the co-founders?"
And so I think in overall, the Founder Mode essay is an example of you questioning the status quo and thinking for yourself. And I think that's a very healthy thing to do. I guess the advice I'd give to people is just have the courage and confidence to question conventional wisdom and do things your own way that makes sense to you.
Clint Betts
What do you read? What reading recommendations would you have for us?
Mo Al Adhem
Yeah, I read a lot of technical things about my job and my work at Frec. And then every now and then I like to read a little bit outside of that, just stay... I have other interests. Of course, I love my work, and I wake up every morning extremely excited about it. But I also, in general, am a huge health enthusiast. I love reading about the latest and greatest research in terms of increasing longevity, living a healthy life, and mental health. I also am a history geek as well. I like reading history. So, I'm on Wikipedia. Every now and then, when I need a bit of a mental break, I go and read about something or the other that happened in the past and try to see what learnings we have from that.
And so nothing specific I guess, no specific book recommendations or anything like that. But as a founder, it's pretty hard to find time to actually deep dive into a book. But if I had the time, I'd read more biographies for sure.
Clint Betts
Yeah, yeah, for sure. So 2024 was kind of a bit of an interesting economic environment, right? It's kind of like this mixed bag. There was a lot of uncertainty, particularly going into the election, not just in the United States, but there were 25 countries that had elections. Now that all of those are over, we're looking into 2025. How are you looking at that economic environment?
Mo Al Adhem
It seems like the vibe has shifted a little bit in terms of there's clearly a bit more excitement about investing and assets in general, whether it's real estate or the stock market. I've always been of the point of view that if you have a long-term horizon, what matters is whether you invest your money this week, next month, or next year. It doesn't really matter. If you're going to invest it for the next 30 or 40 years, your entry point doesn't need to be micro-optimized for that right week or month. But I certainly think that in the grand scheme of things, maybe the next two or three years are going to be good for assets in general, such as stocks, real estate, and certainly crypto, such as Bitcoin. But it doesn't really matter that much in the very, very long term. I think if you take a longer arc and look at it in the years 2060 and 2070, would it have mattered who was president in the next four years? I'm not so sure.
Clint Betts
Yeah, exactly. That's an interesting point. I was going to ask you about Bitcoin, actually, and in particular, what Michael Saylor is doing over there at MicroStrategy, which is just a fascinating model. But what is your take on Bitcoin, and how do you think about it in comparison to the product that you offer?
Mo Al Adhem
I certainly think it is when it comes to portfolio allocation that folks have different points of view on how to allocate their money. Some folks are like, "I'm going to go 90% stocks and 10% PBO, and I'm good with that." And other folks are like, "Well, no, I want some commodity exposure." And I think Bitcoin fits into that commodity bucket. Maybe gold and Bitcoin together make up for a nice commodity slice of a portfolio. It's not a force that can be ignored anymore. I think it's certainly a legit sort of place to park a bit of money as a hedge against potential inflation. And that's my point of view on it. I have a bit of Bitcoin, and I have a tiny amount of exposure personally. And yeah, I think it's a responsible thing to buy a bit of it just to hedge against inflation, mostly.
Clint Betts
Yeah. Finally, we end every interview with the same question. And that is at ceo.com, we believe the chances one gives is just as important as the chances one takes. When you hear that, who gave you a chance to get you to where you are today?
Mo Al Adhem
I always think about this because, in my first year of college, I went to the University of Waterloo in Canada. It's a very technical school. Some folks call it the MIT of Canada. But it's a very competitive school, extremely. And we have this co-op program. So basically, you have to alternate between school and work every four months until you graduate with two years of experience.
And I, in my first year, struggled to get an internship. For some reason, all my friends, my colleagues landed really jobs early on and some of them wanted to stay in Toronto, some of them wanted to be close to family, etc. I wasn't really hell-bent on a specific area or anything like that. And also first year college, you don't have experience, so no one's looking at your resume and who's going to interview you.
And I feel like I really lucked out. During the last week of school, I got an interview at ATI, which is now AMD, and walked in. I was very excited to have my first interview. And the hiring manager clearly just took a bet on me. He just went in and said, "Okay, we're going to try it." I was clearly very desperate to get the first internship, but I'm very thankful to him for believing in me. And that sort of started me out on this path of working in tech and understanding what I want to be doing in the future. And I don't know that I'd be here today if it wasn't for the hiring manager taking a chance on me as an intern; as a first-year, 18-year-old intern, I didn't really know much about anything.
Clint Betts
That's incredible. Mo, thank you so much for coming on the show. Congratulations on everything you've done. I'm sure we'll check in again at some point down the road and thanks for coming on.
Mo Al Adhem
Yeah, really appreciate it. Thanks, Clint.
Edited for readability.