Pre-Retirement Wealth Management Mixing a Dose of Pre-IPO Investing

Initial Public Offerings are booming again in 2021. The first half of the year saw 213 IPOs raise more than $70 billion, according to CNBC. June, in fact, was the busiest single IPO month since August 2000.

Recognized as a 5-star wealth manager by Chicago Magazine, Richard Babjak, ChFC®, president and partner of Midway Wealth Partners, is also Co- Founder of Midway Venture Partners, a hedge fund that manages and dedicates capital for late-stage IPO companies. Midway Wealth Partners is an entirely separate entity specializing in pre-retirement holistic financial planning.

But for the entrepreneurial Babjak, there can be some crossover and investment synergy between the two.

Rich oval“The market in the IPO space has changed,” Babjak told Advisors Magazine in a recent interview. “Companies are raising much more capital and staying private much longer than in the past; many times, the IPO is more of a liquidity event for pre-IPO investors rather than an opportunity for early-stage investors post-IPO as the valuation has already run up considerably before the IPO,” he explained.

This market, Babjak maintains, has few options for retail investors to access. Seeing this as an opportunity for some of his wealth management clients, he created two pre-IPO funds and brought in a manager as the other co-founder with 20 years of experience in the space. Their first fund was WEG Fund 1 and then came a second fund rebranded as Midway Venture Partners.

“Midway is a series fund that has included Impossible Foods, Space X, Palantir, Eat Just, Apeel Sciences, Klarna and The Zebra as some of the holdings,” Babjak noted. The focus is on later-stage companies that can generally go public within three years. “The disruptive companies, the gamechangers,” he added.

Such companies might have portfolio appeal to higher net worth clients seeking to diversify. Beyond such high-net-worth individuals, MVP services family businesses, pension plans, broker-dealers, and other institutions representing both buyers and sellers. Simply put, MVP provides liquidity.

“Family offices that are outside of our traditional wealth management are very active in this space,” Babjak said. “And having those institutions such as pension plans trade through us with larger amounts allows us to make larger transactions in this IPO space, which help our individual retail clients gain access to this market. We can provide more doors to pre-IPO opportunities,” he added.

Babjak did not start off in financial services but gravitated to the profession after graduate school.

“Growing up with little if any money I saw what lack of money and financial planning did to relationships,” he recalled. “I wanted things to be different for me and my future family.”
He chose to be a financial advisor and educated himself about wealth management and creation in order to help others avoid the pitfalls of poor planning and financial management that affected his family life growing up.

Babjak started in the industry with an insurance company, which he said provided a great training program but limited options to effectively implement a financial plan.

“I decided to become independent to provide a more objective way for products, services, and management, and built my own firm called World Equity Group that had close to 200 other financial advisors,” he said.

Babjak ran World Equity Group from 1998 to 2021 before selling to Wentworth Management Services.

“During that time, I always was managing and growing my own personal client base and adding to that team,” he said.

After the sale to Wentworth, his team was rebranded as Midway Wealth Partners, and he also maintained the presence in MVP, the hedge fund.

rich team
In addition to Babjak, Midway Wealth Partners has a team of three other experienced financial advisors and support staff. The team of planners is multi-generational to ensure a long-term consistent strategy with clients and natural succession plan. They act as fiduciaries but are not exclusively fee-based because, according to Babjak, some situations may arise when buying and holding are in the client’s best interest.

“We analyze everything in a client’s life that has a dollar sign attached to it,” Babjak said, “and then match a strategy to their risk profile, time horizon, and personal financial goals.”
An array of investment strategies is combined aimed at achieving a steadier rate of return with less volatility over time. Risk management is a cornerstone of the practice, and a recipe of passive, strategic and tactically managed portfolios help manage risk. Communication with clients is another core value.

“We want to constantly communicate with our clients and strive for 30 or more client touches through the year,” Babjak emphasized.

Education is also central to the firm’s process.

“Most of our clients have joined us after attending three evening financial classes we offer at different colleges or other teaching locations,” Babjak said. He added that such classes do not focus on specific companies or products but are purely educational.

“Having that educational base helps clients make better, more informed decisions,” he explained. “We strive to continue that client education through quarterly refresher programs, newsletters, economic updates, and a variety of communications each year.”

The pandemic did not change anything the firm does on a day-to-day basis except for face-to-face meetings. Its communication, educational approach, frequent updates all remained the same.

rich 410“During the onset of the pandemic and early market drop, we accelerated communications with weekly updates and more educational material,” Babjak recalled. “When we conducted full portfolio reviews, we did these via Zoom or other video services or simply had a conference call,” he said. “All material that was normally printed for a face-to-face meeting was either mailed in advance, emailed, or screen shared.”

Open again for face-to-face meetings, Midway Wealth Partners still makes on-line video conferencing available because some clients now prefer that to driving and meeting in-person.
“Other clients like the personal touch of a face-to-face meeting, so we will always have that option available and make the locations as convenient as possible,” Babjak said.

Adaptability is key during any event such as the pandemic, he elaborated, and being able to improvise is not solely confined to clients.

“We could be running portfolios very differently or have asset classes in a portfolio 10 years from now that we would not think of having today,” Babjak said. “The economic, political, and environmental world is always changing, and the advisor needs to change with it.”

Retirement planning handled by the firm is customized for each client depending on their available assets, sources of income, risk profile, time horizon and individual goals.

“We focus on clients that are generally 50 and over being five to 15 years from retirement in most cases.” Babjak said. “There are certain similarities between people in this age group, but risk and strategy can vary depending on each client’s individual scenario.”

High-risk to one person can be moderate risk to another person, he noted, stressing that a primary job for the firm is to fully understand each client.

“About one half of our clients are fully retired and taking income from their portfolios,” Babjak said. “We want to make sure each client has a long-term financial plan, risk management strategy, estate plan, and an income plan at retirement.”

This is especially important with Americans living longer than ever before—to nearly 80 years old now, according to a consensus of government studies. Such longevity is at the heart of financial planning in Babjak’s view.

“We need to build a solid financial plan and conservative income model for each client,” he said, “because we need to make sure that their money lasts longer if they do.”
As such, the firm uses conservative assumptions and variable rates of return based on how the markets have performed historically.

“We have never had a client have an income issue, regardless of market conditions, if they have followed the plan,” Babjak stated, emphasizing that the numbers and the plan also need to be updated on a regular basis to make sure all remains on track.

“A small adjustment over the years can avoid a much bigger adjustment down the road,” he warned. “Retirees not doing this are just flying blind adding significant risk to their long-term plan.”

Pitfalls of online trading platforms

Being mainly in the pre-retirement marketplace, Midway Wealth Partners is not overly concerned with the rapid growth of online trading platforms, robo-advisors, and handheld apps as a threat to its core business. Still, Babjak is glad to see such platforms coming under greater scrutiny and being held accountable.

In fact, in late June the Financial Industry Regulatory Authority fined Robinhood $57 million and ordered the online brokerage to pay some $12.6 million in restitution, plus interest, to thousands of customers for a total settlement of $70 million.

"The sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations," the authority wrote. FINRA cited "significant harm" to "millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so."

Babjak expressed concern with the free trading and selling order flow of online platforms in general.

second head“If you are not paying for a service, then you are not the client,” he said. “Whoever is paying for order flow is the client.”

Babjak added: “I am also concerned about the high level of margin through the industry, much of it in online platforms. We have never seen margin levels like these and when things turn the uneducated can be devastated.”

He remembered how such a scenario played out during the boom with people quitting their jobs to become day traders.

“When we reach bubble levels like at that time, things generally end badly,” Babjak said. “Our clients are looking for help, guidance, and assistance with all their financial affairs – not to be day trading with a mobile platform.”

Another industry concern of Babjak’s centers around the concept of risk and that feeling of complacency after steady, strong growth.

“The government has come to the rescue with huge stimulus during the pandemic and the Federal Reserve has been historically more accommodating than ever,” he observed. “This cannot go on forever and what happens when the free money stops?”

Babjak points to high-margin debt, mobile trading platforms, accelerating valuations and what he sees as “free money,” and wonders what the endgame is to unwind all of it.
“There is significant risk ahead, but what always happens is people lose the connection between risk and return unless they have a quality and experienced advisor in most cases,” he said.

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Securities and Investment Advisory Services offered through World Equity Group, Inc., member FINRA/SIPC


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