Episode 07: Community Investing with CNote
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MENTIONED IN THIS EPISODE
Danielle Burns from CNote
CNote - Triple Protection Plan
Sarah Green from North Berkeley Wealth Management
TRANSCRIPT
Linda Rogers: [00:00:00] My name is Linda Rogers, and this is Investing Forward.
Linda Rogers: [00:00:22] Banks play an essential role in our economy by lending money to people and businesses. When people have access to a mortgage, a small business loan or workforce training, it has been proven to spur economic growth, which can build and support a thriving, equitable community. The problem is that not everyone has access to these products and services that many of us consider to be basic. For example, people with low income, minimal assets or limited credit histories are essentially boxed out of the traditional banking system. They can't open an account or get a loan. This broken link in the banking system was identified decades ago. At that time, national banks were guilty of redlining, which is a practice of systematically avoiding investments in certain neighborhoods based on demographics, which disproportionately affected Black Americans. The Kennedy administration was the first to experiment with a fix by funneling federal money to a new program. The goal was to see if community banks could fill the gap and therefore communities without access to traditional banking could organize their own financial resources and thrive. That was the beginning of Community Development Financial Institutions, or CDFIs as these institutions eventually became known and they are our focus for today's episode. In 1994, the CDFI Fund, which is part of the U.S. Department of the Treasury, started building a nationwide network of CDFIs and developed a variety of initiatives to help CDFIs continue to grow. CDFIs receive money, but also training, and traditional banks are incentivized to partner with and invest in CDFIs. They've shown that financing customers that traditional banks deem to be too risky is possible and even profitable. Standard and Poor's, also known as S&P, is one of the main credit rating agencies in the U.S. They've recently started rating CDFIs and they're finding the same thing. When evaluating the number of defaulted loans or how many people are behind on payments, CDFIs are keeping their numbers very low. CDFIs invest more in services such as business planning and credit counseling and they have more flexibility with borrowers that have trouble making payments. BlueHub Capital is CDFI which just got its rating in January of 2020 from S&P. Since 1985, BlueHub Loan Fund has experienced loan losses of less than 1/2 of 1% and all of their investors have been repaid on time and in full. Given that CDFIs are performing well financially and building wealth and opportunity in underserved communities, they naturally drew the attention of impact investors because remember, impact investors are looking for a financial return alongside a positive impact. This is where CNote comes in. This technology platform has made it extremely easy to invest in not just one CDFI, but a diversified basket of CDFIs while earning a market rate of return. They only invest in CDFIs that meet their strict due diligence standards, but unlike a traditional note, your money is supporting low-to-moderate income communities, women, minorities and entrepreneurs. We will learn more with Danielle Burns from CNote, who will be our first guest today, followed by Sarah Green from North Berkeley Wealth Management. Sarah is the Director of Impact and a Lead Advisor at the firm. Her firm is integrating impact investing into their investment process so I wanted to get her take on CNote. So let's get started with Danielle Burns from CNote.
Danielle Burns: [00:04:01] Yeah, good afternoon, Linda. My name is Danielle Burns. I the Vice President and Head of Business Development here at CNote and I'm so excited to be here this afternoon.
Danielle Burns from CNote
Linda Rogers: [00:04:10] Great. So why don't you go ahead and tell us about CNote?
Danielle Burns: [00:04:13] So CNote, we are a women-led impact investment platform that uses technology to unlock diversified and proven community investments that really helps to generate economic mobility and financial inclusion. Every single dollar invested on CNotes' platform funds small businesses owned by women and people of color, goes to support affordable housing and economic development and financially underserved communities across America. With the mission of really closing the wealth gap, CNotes' customizable products allow anyone to really generate social and economic returns investing in the causes in the communities that they care about.
Linda Rogers: [00:04:56] Wonderful. Thank you. Can you go ahead and explain what CDFIs are?
Danielle Burns: [00:05:02] Absolutely. CDFIs are Community Development Financial Institutions. CDFIs were established specifically to provide financial services in low income communities to people who lack access to traditional financing. And more specifically, CDFIs goals are to broaden economic opportunity among low income and minority communities by providing access to basic financial services for individuals and businesses. CDFIs - they provide a range of financial products like mortgages for low income and first time homebuyers and commercial loans for small businesses. There are currently over 1,000 CDFIs in operation across the country in the United States and they're located virtually in every state. And so you may your listeners might want to check out OFN.org. They have a really great CDFI locator tool on their website and they can see what CDFIs are in their backyard.
Linda Rogers: [00:06:03] And CNote, I know they started with one offering, which is their Flagship Fund, but I saw there's a couple of new offerings. So can you just explain the different offerings?
Danielle Burns: [00:06:15] Yeah, absolutely. So CNote, we have several core product offerings that range from short duration notes, fixed income and fully insured FDIC solutions. Each of our products are co-created with our CDFI partners and we're working in partnership with our CDFIs to really help ensure that they're getting the flexible and the low cost capital that they need so that they can do more lending and provide more access to financial services in the communities that they serve. So you mentioned our initial product offering, which was our Flagship Account. That is our short duration note, which really invests in a diversified pool of CDFIs across the United States. The Flagship Account Fund is generating a competitive return while directing 100% of the investment funds into community development organizations that fund loans for small businesses, help build affordable housing, as well as bring sustainable economic growth to communities across the country. The next is our Promise Account. This is our cash alternative and this is providing 100% impact on investor's cash. It is a fully insured FDIC, NCUA, NCUA, National Credit Union Administration. That's one that listeners may be less familiar with. That's the solution by which we're partnering with CDFI credit unions and banks. And the Promise Account is really helping to fill the gap for investors who want to support financially underserved communities across the country while generating competitive returns on their cash allocations. Then we have the Wisdom Fund. The Wisdom Fund is our fixed income vehicle that increases capital access and small business lending for women, women entrepreneurs, specifically targeting women of color and those in low income communities across the United States. And then our last one that I'll touch on today is our Rapid Response Fund, and this one is directly addressing the needs of small businesses affected by covid. The fund partners here directly work with small. We work with small and mid-sized CDFIs, many of which are providing small business capital and support to communities of color and low income in rural communities as well. The Rapid Response Fund is 100% focused on small businesses to help provide things such as bridge loans, loan restructuring, as well as urgent operating capital needs.
Linda Rogers: [00:08:56] Great. And do these have any fees associated with them or any minimums?
Danielle Burns: [00:09:01] Yeah, great question. So our Flagship Fund is available to both accredited and non accredited investors and then our Promise Account, our Wisdom Fund, and our Rapid Response - those are available to accredited investors only. On the Flagship Fund, there's no minimum, no fees for individual retail investors. And then on our for accredited investors or institutional investors, there is a small service fee that we charge for servicing of the portfolio. The Flagship Fund, to your question about minimum - no minimum, no fees. The Promise Account is a $250,000 minimum. The Wisdom Fund is $100,000 minimum, and the Rapid Response is $100,000 minimum as well.
Linda Rogers: [00:09:47] Ok, great. Thanks for breaking that down. And how does CNote make money?
Danielle Burns: [00:09:53] Yes, as I mentioned, you know, we don't charge any fees on our on our flagship account, particularly for our retail investors. And so we don't charge any fees there. And so otherwise, CNote makes money by the spread, which is essentially what we receive between the rate at which we lend the capital to our CDFI partners and the return that we provide to the investors.
Linda Rogers: [00:10:16] Great. And then just to give listeners an idea of the rates you're paying, The Flagship Fund is currently paying 2.75%. Again, there's no minimum with that. It's a 30 month term with quarterly liquidity. And there's a note - I'm just going to read it. It says, "CNote has management discretion around liquidity and currently offers clients quarterly liquidity up to $20,000 dollars or 10% of invested assets, whichever is greater. At a minimum, CNote investors will have access to 10% of their investment every quarter. For full investment terms see the Offering Circular. The Wisdom Fund, that's paying 3.50% and the Rapid Response Fund is 1.00%. So you really need to go on the website and read through the specifics with each offering to see what might be the best bet for you. So, Danielle, as you said, there's thousands of CDFIs. How do you choose which CDFIs are going to be in your portfolio?
Danielle Burns: [00:11:14] Yeah, I think our primary two considerations, Linda, are really financial performance. This is key, right? And so every partner must be solid here, first and foremost. And then second is impact. We're really looking for organizations that are mission aligned and doing great work in their communities. But more specifically, CNote, we have a 3-part proprietary diligence process to really effectively evaluate CDFI financial performance, organizational health, resiliency, ability to repay growth capacity as well as measurable impact. We have a baseline criteria for for evaluating that looks at such things such as the age of the CDFI. And right now there's no CDFI in our portfolio that's younger than 18 years old. And we also ensure that they have a track record of zero losses of investor principle and that they meet our minimum portfolio size.
Linda Rogers: [00:12:17] Ok good. So once you've selected the CDFIs for the portfolio, how do you then continue to monitor them and manage the risk of the portfolio?
Danielle Burns: [00:12:27] Yeah, you know, through our we leverage a lot on our technology. Through our technology we've developed our own proprietary risk model, which is really incorporating best practices from individual community finance, industry experts, longstanding CDFI underwriters and impact investment professionals to help create a tailored risk assessment and investment criteria specific for CDFI's forward looking evaluation. Our risk management really emphasizes diversification, stringent data and reporting requirements, consistent and standardized portfolio management, which helps to take out room for human error. And then our team's deep expertise and contacts familiarity with some of the idiosyncrasies of CDFI portfolios. I guess I'd say additionally, our ability to really focus on metrics like human capital, growth potential, board composition, guarantee structure, and a host of other factors really helps us to create a more in-depth understanding of how CDFIs operate as a business in both a competitive environment or periods of uncertainty like that of which we're experiencing now.
Linda Rogers: [00:13:52] CNote also has what they call a Triple Protection Plan. The details are on their website and I will put a link to it on the podcast website. But just to go through it quickly, first their CDFI partners have a general recourse obligation with CNote, which means they're obligated to pay CNote back even if their borrowers are unable to repay their loans. Second, there are state and federal programs that exist to protect money invested in CDFIs. Third, CNote has established a loan loss reserve fund for that additional peace of mind for users. So if for some reason, one of their partners suffers unexpected losses and the other capital preservation methods don't cover them, CNote will step in with its own loss reserve to cover some of those losses. And Danielle, to date, have any CNote investors suffer losses?
Danielle Burns: [00:14:46] No. To date, we have zero losses and zero defaults. I would be remiss if I said past performance is no guarantee of future results, but absolutely, we have not had any investor losses to date and we are very, very proud of that.
Linda Rogers: [00:15:04] And can you share how you are regulated and do you have independently audited financials?
Danielle Burns: [00:15:11] Yes. So, yes, we do have independently audited financials. And so while Cnote is not required to register with the SEC or FINRA, as in as an investment advisor or a broker dealer, we are subject to federal and state oversight. And in particular, CNote is subject to periodic state and federal reporting, among others. We must also disclose and file with the S.E.C. our annual reports on Form 1K, which really which which requires disclosure about the company's business and operations. We are required to disclose semiannual reports which include things such as fundamental changes in the company's business, material modifications to to to rights of security holders, changes in accountants, things like that changes and control, changes in key executive offices and all these filings are available to the public. And CNote must meet certain SEC eligibility requirements as well as to be able to offer our notes to investors. Investors can always view our full Offering Circular and disclosures by visiting the website.
Linda Rogers: [00:16:30] Great, Danielle. This was so helpful. Is there anything that you want to share before I let you go?
Danielle Burns: [00:16:35] You know, I guess I would just add that financial inclusion, social and or social justice and equality are at the core of everything we do here at CNote. We are working to close the wealth gap by increasing the amount of capital allocated to minority and women led businesses. Creating new jobs and strengthening local communities is key for us. One of the things that we often hear is that everyday folks write like you and me. They don't feel like they have a way to get involved in solutions for racial and economic justice. And we know that where you where you put your dollars matters. And so it doesn't have to necessarily be CNote specifically, but I would encourage folks to think about that. Where is their cash going? Consider MDIs, minority deposit institutions, or other CDFI credit unions and banks. You know, check out CNote's website. We've created a really great catalog that you can search by by state to find an MBI or a black-led community finance organization near you.
Linda Rogers: [00:17:45] And along those lines, I mean, you're tracking the impact that you're having. You have an annual impact report. It's on the website. I can link to that as well on the podcast website because it's I think it would be great for listeners to see.
Danielle Burns: [00:17:59] Yeah, absolutely. We do an annual impact report, but we also do quarterly impact reports. Right. And so, you know, we do those every quarter. And another another great thing is our borrower stories Linda. I don't know if you've had an opportunity to take a look at those, and I would encourage your listeners to check those out. Our borrowers stories are so inspirational. It is the 100% dose of inspiration that we could all use right now and their stories with actual borrowers who've received these dollars from to receive who's received dollars from your CNote investment. Right. And so you can see where the dollars are going and how it's making an actual difference in their lives and their community. So it's they're great. I would encourage you to check those out also.
Linda Rogers: [00:18:47] Great. Thank you for taking the time to do this. And we'll stay in touch.
Danielle Burns: [00:18:52] Yes, absolutely. Thank you so much for having me. It's been a pleasure.
Linda Rogers: [00:18:55] Next up, Sarah Green from North Berkeley Wealth Management.
Sarah Green: [00:18:59] My name is Sarah Green. I live in Hercules, California, and I'm a Lead Advisor and the Director of Impact Investing at North Berkeley Wealth Management in Berkeley, California.
Linda Rogers: [00:19:13] Great. Thanks for being here, Sarah. And can you share a little bit more about North Berkeley Wealth Management? And do you offer financial planning as well as investment management?
Sarah Green: [00:19:23] North Berkeley is is a financial planning and wealth management firm. We focused on creating a sense of calm for our clients lives with an actionable path wherever they are on their journey. And we have a quite capable and resilient team of 13 and we manage about $450M primarily for families, some non-profits and small businesses. The roots of our firm extend back into those of our founding partner, Kate Campbell King. And she got into the business with an interest in sustainable agriculture and socially responsible investing and built a sole proprietorship while she was steering the ship of a local securities brokerage. And then the seedlings of that business grew in to North Berkeley Investment Partners in 2005 with a slogan, a mission of "Invest in Living". And then Brian Kozel joined in 2011. And he really anchors the next generation of leadership. Then we became a B corp in 2013. In January of 2020, we rolled out North Berkeley Wealth Management and to deepen the clarity of our brand and we just could have no idea what a year this would be. Our firm mission includes an expansive vision of an entire community that is enlivened with collaboration and stewardship.
Linda Rogers: [00:21:05] Nice. And can you share about how you ended up at North Berkeley?
Sarah Green: [00:21:09] I joined the team about a year and a half ago, building upon work that I was already doing and deepening work that they were already doing. So it felt like a match made in heaven in some ways. You mentioned "The Biggest Little Farm" in your Iroquois Valley Farm episode. And and so I want to share a movie that our family is really excited about watching this evening called Wolfwalkers. It really relates for me. About my path coming to North Berkeley, I felt like a lone wolf when I in 2009 when I was founding my first business. And I reached out to Kate to be a mentor, and then I founded that firm and that business is a comprehensive financial planning business focused on sustainable investing and then a second business. And Kate was along the way providing reflection and mentorship, and so then when I was looking for the next step on my professional path, I found myself in a Zen center at a mindfulness retreat. And there was Kate again. And those paths that those clear steps led me to Solano Avenue and North Berkeley.
Linda Rogers: [00:22:40] That's so great that you found somebody in the industry and reached out to them to be your mentor. I think that is a wonderful thing to do. And I do recommend that to people because the professionals that I've met in this industry have been incredibly giving and they want to give back to the next generation and mentor when possible. So I highly recommend that. That's wonderful.
Sarah Green: [00:23:05] Yes. And the firm that she ran - the local securities brokerage that she ran - I started my first business at that securities brokerage. So there was this interweaving network and and it naturally led me full circle back to North Berkeley.
Linda Rogers: [00:23:30] Great. And do you have an ideal client?
Sarah Green: [00:23:33] I do. Families come to us who want a partner to steward their capital along a sustainable path. They want to protect and grow their assets with purposeful action and capable and trusted support to take them there.
Linda Rogers: [00:23:58] And I always love to ask my advisor guest, you know, how do you bring up impact investing with clients and how do you integrate it into your investment process? If you don't mind sharing a little bit about that.
Sarah Green: [00:24:11] Great questions. We begin with the belief that impact can be achieved alongside of financial return. That's our starting point. And we believe that impact centers around all stakeholders, not just shareholders. And so we integrate that through the entire universe of our investment offerings and we take an intentional approach to both the impact investing and also the spaces, the appropriate needs for each client. We allow clients to self-select their level of screening in their portfolio and we offer engagement opportunities to all clients, regardless of of where they self select. So what we want is we want a and we have that conversation in development of their investment policy statement. So to your question about when do we introduce the conversation, we're having that conversation with them in development of the investment policy statement. So we're collaborating on their values, what resonates with them, and then incorporating that into the mandate of how we invest the portfolio. We consider environmental, social and governance ratings to be material in the selection of both equities and fixed income on the publicly traded side, but also in the private and less liquid options that reach different areas of the market and not all of those solutions are good for all of our clients, but one of those areas I know that we both follow is food security and through small farms. That's just one example of the spaces that we reach through private investment.
Linda Rogers: [00:26:23] And speaking of private investments, are you familiar with CNote?
Sarah Green: [00:26:27] I am. I'm personally invested in a CNote. I just updated mine to reinvest at maturity, which you have to do to keep it working after the initial investment period. I feel very good about it. I bank with the CDFI. I am working right now with the CDFI to help my community church switch from an interest only loan to one that will be paid off in 10 years. This is the very, very powerful work that CDFIs do. No one else wanted that loan. And they understand communities and they put themselves in those places. So we quite we support the work of CDFIs. And CNote, they're doing the hard work to bridge the gap of capital need for toward these community development financial institutions, even though CDFIs have been around and the Community Reinvestment Act was passed in the 1970s with the controls in place for the Federal Reserve to make sure that these loans, first of all, certifying the banks, but then they're doing the loans to make positive impact in community - that's been in place. But the capital flow to those banks has not been sufficient. And so that's when CNote comes in and they act as catalyzing capital toward those community development financial institutions. And so we feel good about investing in we already feel good about investing in this lower risk pool of assets for clients. And so it made sense to us to extend that into another area. CNote tits well into our theory of communities being alive with collaboration and stewardship. And again, we believe that these lower risk pools have a sensible place in a diversified portfolio. They act as a ballast there. And so this is another dimension of that opportunity set for our clients.
Linda Rogers: [00:28:47] So do you have CNote in your client portfolios and how is that being integrated?
Sarah Green: [00:28:53] Personally, I have felt quite good about about participating. As a firm and for clients we've been going through we've spent about a year doing due diligence review for the opportunity set for clients. We're in process of placing some notes for some clients, but it is not appropriate for everyone. And so we are looking more deeply at that opportunity set and where it fits in on a more systemic basis. That's going to be a conversation with clients. We're taking an incremental approach and we're placing some for those clients that it really we're starting with a couple of accredited investors and it's going to be more of the alternative set of investments that lies a little bit outside of the traditional foundational portfolio.
Linda Rogers: [00:29:57] And as you could tell, the audio is getting a little choppy, so I just wanted to add, you know, Sarah did write to me email afterwards just to clarify that, yes, they find that CNote fits in either as an alternative or a less accessible portion of fixed income.
Linda Rogers: [00:30:14] Ok, Sarah, and when you say that you consider it as more of an alternative, I mean, why is that? Is it because it just has less liquidity?
Sarah Green: [00:30:24] Not all of their options are insured. Some are available for accredited investors and not. Much like Iroquois Valley Farms, I see it more access expanding and democratizing into more access to more investors where where you don't have to be an accredited investor. So it is a space where we want to be mindful of what are we bringing to a client? Are they accredited? Are they not? Are we choosing the right option for them? That aligns not just with their desire for a yield or a return, but also what are their liquidity needs? Can they have a little bit more patient capital? Do they need something that's insured? But maybe they're looking for the deeper impact and not as high of a yield? That's a conversation we're going to have in conversation with a client and not offer it. We just won't even bring that conversation to a client if it doesn't seem appropriate. So that's kind of the I think the art and balance of how the advisor plays into it. And I suspect that the more the needs - CNote's responding to the capital needs of the community and their partners. We're likely to see that shift over time. What is that solution set over time? So we see ourselves more as we're trusting them as a partner and beginning that conversation and we support what they're doing. So that's going to evolve over time and so will they and so will the marketplace and and that's really what it feels like to be, I like to use the firm, the terms being in the surf. And as we see this culture awakening and these changes coming forward, what does it feel like to be in the surf of these solutions? CNote is an excellent partner in doing the kind of work that we want to do to both bridge the economic, the wealth gap, as well as the funding gap for these these banks doing that work.
Linda Rogers: [00:32:43] Great, Sarah. And can you go ahead and just share the best way for people to stay in touch with you and your website?
Sarah Green: [00:32:49] North Berkeley Wealth.com. You can sign up for our newsletter there and you can find me on LinkedIn as well. Those are all good places to to find me.
Linda Rogers: [00:33:00] Wonderful. Thank you for doing this, Sarah. It was nice to meet you. Thank you so much, Linda.
Linda Rogers: [00:33:05] This is our last episode for 2020. Go to InvestingForwardPodcast.com to see the links mentioned in today's episode and to get the contact information for both Danielle and Sarah. Looking forward to seeing you next year.
Linda Rogers: [00:33:19] My name is Linda Rogers. You were listening to Investing Forward. If you liked what you heard leave us a rating, subscribe, and stay tuned for next time.
Linda Rogers: [00:34:39] Linda Rogers is the owner of Planning Within Reach, a Registered Investment Advisor. Planning Within Reach produces the podcast and makes it available on its website and through other distribution channels. Linda Rogers and any guest on the podcast are providing their own views and opinions and are not necessarily the views and opinions of Planning Within Reach. Nothing on the podcast should be construed as a solicitation or offer or recommendation to buy or sell any security investment. Advisory services are only provided to investors who become Planning Within Reach clients pursuant to a written Investment Management Agreement. Clients of Planning Within Reach may hold positions in securities discussed in this podcast. Past performance is no guarantee of future results. All investments involve risk and may lose money. The Investing Forward Podcast is for informational purposes only and should not be relied on for any investment decisions. Consult with a financial advisor, accountant, attorney, or conduct your own due diligence.