Hire the Architect: Building Your Financial Structure | Erik Averill, Brandon Averill | AWM Insights #68
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Episode Summary
With markets continuing their unpredictable ebbs and flows, one important piece of news emerged in a ProPublica article that reported Paypal founder Peter Thiel turned $2,000 in his Roth IRA in 1999 to now more than $5 billion.
Its stories like this that highlight the fundamental importance of financial structure.
We mention financial structure ad nauseum here at AWM, but what exactly do we mean when we say that?
In this week’s episode, two of AWM’s co-founders, Erik and Brandon, discuss this topic and the framework of growing your wealth through sound financial architecture.
Episode Highlights
(00:32) The importance of financial structure - returns are only a part of your structure
(00:58) All the market news you need to know
Back to all time market high – so hard to predict which way market will go in short term
Biden’s bipartisan infrastructure bill
Peter Thiel’s Roth IRA going from $2000 to $5 billion
(2:43) What do we mean when we say financial structure?
(3:13) “What the wealthy understand is that your financial structure is really what matters.” -Brandon Averill
(3:44) Even the smartest only succeed about 15% of the time
(4:16) Financial Structure: Taking advantage to all the opportunities that are available to you and don’t increase your risk
(4:50) Identify the outcomes you’d like
(6:33) How financial structure is like building a home
“When you’re building a custom home, you actually never start with, ‘What pieces of furniture are we going to put in the house?’” – Erik Averill
(7:49) The actual definition of investing success
(8:22) It starts with the architecture
“The first thing you do is you hire an architect and say, ‘All right, what is the master plan of the home that we want to build?’” – Erik Averill
(9:30) What are your advisor’s motivations?
(10:54) Would you gamble in Vegas with a 15% success chance?
(11:30) What the world’s biggest Wall Street firms can’t tell you
(12:34) Nassim Taleb’s book “Skin in the Game”
(13:56) The real purpose of money
(14:26) Don’t put your earnings at risk
(15:24) “Winning the Loser’s Game” by Charles Ellis and “Goals Based Wealth Management” by Jean Brunel.
Stay Connected
AWM Capital: IG | LinkedIn | Facebook | AWMCap.com
Brandon Averill: LinkedIn
Erik Averill: LinkedIn | Instagram
+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to AWM Insights. It's your power two today. We're missing Justin, our CFA, but it is Brandon and Erik. And here at AWM, we're a community of athletes, founders, and investors on a journey to be the best at what we do. And we believe you deserve the same when it comes to your wealth. And so each week on this podcast, we cut through the noise of what Wall Street is selling you to bring you the knowledge, the skills and the access you need to invest like a pro.
Erik Averill (00:32):
This week we're going to tackle the topic of financial structure. This is a term, if you have been following us for a while, that you hear us talk about ad nauseum, of the importance of financial structure and that returns are only a subset of your financial structure. But before we dive into that conversation, let's visit what's been going on in the markets just within a quick week.
Erik Averill (00:58):
We have seen a correction from last week. We covered that. Markets had the worst week that they had had since October of 2020. Fast forward a week, and now we're back to all-time highs. And so just another example of how hard it is to predict which way the market is going to go on the short term.
Erik Averill (01:17):
The big news of the week, President Joe Biden announces a potential bipartisan infrastructure bill that has around 600 billion in new federal spending. This is where the markets reacted on the short term. And then, the big story that is going to lead us into our conversation about the importance of financial structure is the PayPal founder, Peter Thiel, there's this article that comes out that somehow he turns $2,000 inside of a Roth IRA into $5 billion through his investment in Facebook.
Erik Averill (01:58):
And for those that are not familiar with the power of the Roth IRA, any money that is invested inside a Roth IRA, you will never pay tax on ever again. So all of those investment gains, when you go to take those out, are completely tax-free. So just the most powerful type of investment account out there. There are so many limitations of how to get money into it. It's a little bit of a black box for so many people, and we're going to bring that to light, of how you can take advantage of that and the financial structure in general. And so, Brandon, can you bring us up to speed, when we hear this term or we use this term financial structure, what exactly are we talking about?
Brandon Averill (02:43):
I think it's a great topic for us to hit on today. I mean, at the end of the day, you just pointed out, Peter Thiel, he really pulled a Mitt Romney, right? We heard about this years ago. He got a bunch of his options that he acquired when he was with Bain into a Roth and really kind of deferred those taxes. But I think this goes back to a story that we brought up a couple of weeks ago that was released by ProPublica on the IRS leak and the wealthy and how they don't pay taxes, et cetera.
Brandon Averill (03:13):
And I think that just really highlights this point. What the wealthy understand is that your financial structure is really what matters. It's the strategies that you can control that really matter. You know, you have all these people out there picking individual stocks. We know the pros, the pros, the best in the world, the people that sit in front of their screens and predict the markets and pick the stocks and all that kind of stuff, they're successful maybe 15% of the time.
Brandon Averill (03:44):
Those odds aren't very great. I think the wealthy understand that. There's a lot of people out there that have a lot of noise. It's a great story to tell. I mean, we've got players saying they like tech and growth stocks and you should invest in this, and I'm going to read the earnings report and it's like, "Dude, if you're focused on the field, do you really think you can compete on this side against the Harvard MBAs and the CFAs and all these types of people?" So, and we know that those smart people only succeed 15% of the time.
Brandon Averill (04:16):
Anyways, that's my rant. But I think it all does come back to financial structure. So what is financial structure? It is quite simply just making sure that you are taking advantage of all the opportunities that are available to you and that don't increase your risk. So, it starts basic. It starts with identifying your priorities. Pretty boring stuff you would think, but that's what this is all about anyways, right? It's about, if you're wealthy or you aspire to be wealthy, the reason you do that is because you want certain outcomes.
Brandon Averill (04:50):
So it's identifying what those outcomes are that you'd like. What are your essential priorities? What do you got to make sure that if the world goes to hell in a hand basket, your life still is protected? What do you have to have? So then it's starting with there. It's identifying your important priorities. "Okay, above the essential, what do I want to achieve and what's realistic within my earnings potential?"
Brandon Averill (05:14):
And then ultimately, identifying, "Okay, what's the discretionary? If I really have some success here, what do I aspire to have?" And what all that does when you do that, you can actually quantify those things. You can understand that it might cost... You need to invest $4 million today to provide a $200,000 lifestyle, for instance, for the rest of your life potentially. So you start to put numbers to these and it helps you then to formulate an investment portfolio.
Brandon Averill (05:44):
That's the pro way to do it, rather than just guessing, right, and having some portfolio full of stocks, you have no idea what the heck it is, you don't know when it's going to go up and down, you don't know if it's appropriate. You start to control those things and then when you start to do that, you've got this understanding of where your assets should be and you start looking at, "Hey, am I doing the backdoor IRA contributions to convert to Roths? Am I taking advantage of an individual 401k so I don't blow up that opportunity to get into a backdoor, a non-deductible IRA contribution?" There are all these little nuances that I think, unfortunately, people miss because they get so excited about the noise and the stories that are going on.
Erik Averill (06:33):
That's helpful. An analogy that we talk a lot about with our clients is if you're building a home, right, a custom home. And this is what you're really doing, is you're building a custom financial home and trying to achieve your priorities, right? You're trying to set your life up into, "How do I create my ideal life? How do I create my custom home?" When you're building a custom home, you actually never start with, "What pieces of furniture are we going to put in the house?"
Erik Averill (07:06):
And that's really what investments are. Investments are a means to an end. It's, "What pieces of furniture am I going to put inside of my custom home to help make it the best home? What investments am I going to put in my financial structure to help me achieve my priorities?" And it can feel, as us as humans, we love to think that things aren't related, we treat our lives very fragmented, so we see this in the deal section, right? Especially in the private spaces. "I want to do a real estate deal here. I want to do a theoretical venture capital deal over here that I got through the clubhouse that everybody else has already passed on."
Erik Averill (07:49):
And you start to think that the definition of success is returns, when Brandon already pointed out, the definition of success is actually priorities. And then, once I've laid out my priorities, here's the thing: you want the most amount of money after tax, because that's what you get to spend on your priorities. And so unfortunately, when most people approach investing, they're only worried about gross returns. And so, they do these deals and they say, "Oh, I got a great return." But did you factor in your taxes? And then did you also look at a benchmark?
Erik Averill (08:22):
So if you earned 40%, 30% on the individual equity last year, congratulations, you underperformed the broadly diversified market, right? So when I think about this financial structure, go back to building your custom home, it starts with the architecture. The first thing you do is you hire an architect and say, "All right, what is the master plan of the home that we want to build?"
Erik Averill (08:46):
Then we bring in the craftsmen, right? We bring in the master builders that start to architect a house, lay a foundation. They make sure that the right rooms are in there. So the analogy of asset location. How you invest and where you put your investments are going to have different tax consequences. Going back to Peter Thiel's deal, is you may have heard of 401k. Well, there's a traditional 401k, which means money is tax deferred. Then there's a Roth 401k. That means it's after tax tax-free investment growth. And so the moral of the story is if you're starting with picking individual investments and you don't have an infrastructure laid out, you are completely pulling an amateur move.
Brandon Averill (09:30):
Yeah, no, I think that's a great point. And I think at the end of the day, too, right, most people I would think that are listening to this have an advisor. And so you need to be thinking about this. What are the motivations? Do they actually invest their money the same way that you invest your money? I think that's a fantastic question. Do they have their financial structure in place?
Brandon Averill (09:53):
I think those are all fair questions. I know if our clients asked us that, we could pretty easily, most of our potential wealth, our financial structure is tied up into AWM. So how do we invest our money? Well we're going to be alongside our investors, make sure that we're participating in the same things. You're not going to find us out there picking some meme stock because we think it's fun or some crypto, because we think it's going to take off, because we would never put that in our clients' portfolios because most likely it won't fit within their financial structure.
Brandon Averill (10:25):
So I think that's just another good point, is you want to find people that understand this financial structure concept, make sure that they're taking advantage of the right places to put money. Don't get fixated on somebody trying to predict the market. I haven't found anybody yet that has that crystal ball. If anybody listening to this does have that crystal ball, especially in the public markets, hide it because you're going to make a lot of money because you're the only one.
Brandon Averill (10:54):
But you know, what the wealthy understand is like you said, Erik, it's setting up that financial structure. What that does, it puts odds back into your favor. That's what this whole game's about. Right? It's, if I told you you could go to Vegas and I will give you a 60% chance of winning, you would play every single day. If you went to Vegas and I told you, "Hey, go sit at a blackjack table. You're going to win 15% of the time." Are you going to play? No chance. Yet we see everybody play that game day in and day out. And in reality, they don't even have a 15% chance of winning.
Erik Averill (11:30):
The other learning lessons, I think this is where we... It's the history of our firm, right? A little bit over a decade ago, we're sitting at the biggest firm on Wall Street and we're like, "This is a complete joke," right? We literally can't give advice on taxes, yet our clients are in the highest tax bracket. A complete disregard for financial structure. Oh, wait a second, if Peter Thiel would have been our client back then, A, that would have been nice, but B, we wouldn't have even been able to tell him whether or not to invest in Facebook because it was a private investment off the platform, right. It's called trading away.
Erik Averill (12:11):
And so, it's these situations where so many investors are sitting in a situation thinking that they're getting financial advice. They're not. They're getting limited investment advice. And so this is why it's so important to work with an advisor who has open architecture, meaning they can go anywhere in the investment world and that their training is far more about comprehensive, integrated financial structure.
Erik Averill (12:34):
The thing you mentioned, Brandon, is like, Nassim Taleb has this great book called Skin in the Game. Does your advisor have skin in the game? Can they open up their investment portfolio and say, "Hey, the way that I'm allocating you, I'm taking the same risk." And we were talking about it before we logged onto this, right, I was joking around. Peter Thiel, this is fantastic, this is exactly what we've done with our clients, right? We have used their individual 401ks to allocate to some of the venture capital investments. And for some of them we've been able to use a Roth IRA. Me personally, I have a Roth IRA that I am holding my venture capital investments inside of.
Erik Averill (13:16):
So this same strategy. You don't have to have some huge liquidity event like Peter Thiel to be able to put a huge amount of money in. This starts with $2,000, right? These are small little wins. And we sat down with a retired major league baseball player yesterday here in the office and he's got money sitting in his MLB Vanguard 401k. He had never even thought about or heard of rolling that account out, and then when he's in these lower tax brackets, these first years of retirement, of converting. Converting it into a Roth IRA is, this is what we're talking about. The power of financial structure.
Brandon Averill (13:56):
Yeah. I think it's a great point, Erik, and we're definitely belaboring it, but it just, it's so darn important. Right? It's realizing what money is for. It's to achieve your priorities. We'll go back to that. And then it's just setting up that house, like you said, Erik, and finding the right craftsmen to actually execute things and bring the real stuff that matters to the table, as opposed to some sales story about what's going to be hot. And you know, "I'm going to invest you this way and we're going to get this."
Brandon Averill (14:26):
I mean, that story, it's just tired at this point. And I think it's time to move on. It's time to grow up, especially people listening to this podcast, you've won the lottery. Yes. You've put in the hard work, most likely, to get to where you're at and earn what you have. So why are you going to take the 15% chance of actually outperforming or really just putting your family's future and financial structure in jeopardy. It's just really silly at that point.
Brandon Averill (14:58):
And so, I just urge everybody on this, that's listening to this, find somebody that understands financial structure, find somebody that will sit down with you, help you identify those priorities, and then put the stuff that you can control into your lap so that way you can make those decisions, set up your financial structure for success, and ultimately just achieve all those outcomes that you're looking for.
Erik Averill (15:24):
I could not agree with you more. And I just want to point you guys to two incredible resources that are obviously independent of our firm, is that there are just evidence overwhelming about what you can and cannot execute and when in the public stock market. And so highly encourage you, there's this book called Winning the Loser's Game by Charles Ellis, that I promise you, if you read that book, you'll stop picking individual stocks. You're going to understand the importance of financial structure.
Erik Averill (16:01):
And then an incredible book that is really reserved for the ultra wealthy, but if you're in the highest tax bracket, this book is going to be so powerful. And it's called Goals-Based Wealth Management. Goals-Based Wealth Management by Jean Brunel, one of the luminary advisors for the ultra wealthy.
Erik Averill (16:21):
And so, both those resources, highly encourage you to check them out. And as always, we super appreciate your guys' attention. We're excited to be on this journey with you. We would love to hear from you. Head over to awminsights.com, drop us a note. There's tons of resources over there for you. And until next time, own your wealth, make an impact and always be a pro.