The Portfolio for Multi-Generational Wealth | Brandon Averill, Erik Averill, Justin Dyer | AWM Insights #85
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Episode Summary
“Shirtsleeves to shirtsleeves in three generations.”
This is the expression commonly used to describe the reality that wealth is rarely sustained past the third generation. Building wealth is extremely difficult in the first place, and lack of planning for the next generation can destroy wealth in a hurry.
The families that have conquered this trend and sustained wealth for 5+ generations understand the expertise of a team of dedicated individuals working together to achieve success. This allows families to create legacy and impact - generation after generation.
Multi-generational wealth demands loyalty and independence from those advising them. It requires full customization and individualization. It must be integrated to be effective, because a family has only one Net Worth, and only one After-Tax Return.
Episode Highlights
(1:10) Market news: Alibaba has declined 344B in value recently. Tesla is the latest US company to achieve a $1 trillion valuation. Markets have hit new highs once again this year.
(2:14) UBS third quarter earnings driven higher by fees from wealthy clients. High fee products sold to their clients are great for UBS but bad for their clients.
(2:50) Facebook has renamed itself to Meta. CEO Mark Zuckerberg created a new holding company called Meta Platforms, Inc which includes Facebook, Oculus, and Whatsapp.
(3:15) Elon Musk now has a net worth great enough to buy every NFL, MLB, NBA, and NHL team combined. This gives perspective on pro sports value relative to the wealth creation capabilities of the biggest companies.
(3:30) Mark Zuckerberg, to his credit, utilizes a family office which eliminates many conflicts of interest, customization, and integration issues that plague the big banks and wirehouses (think Goldman Sachs, Morgan Stanley, Merrill Lynch, UBS).
(5:15) The problem with risk tolerance questionnaires for investors.
(6:20) Individualization and customization matters when building a portfolio. Cookie cutter model portfolios do not treat people as unique.
(8:17) The business model of Wall Street is to serve the masses and plug and play investors into model portfolios while avoiding liability with risk tolerance questionnaires.
(10:45) What a better solution looks like to maintain multi-generational wealth. Risk should be determined according to what success looks like for each client. Not a 5 minute survey.
(12:25) Those investment advisors that are not held to the fiduciary standard are incentivized to take more risk because they are not legally obligated to do what is in the best interest of the client. They only have to recommend “suitable investments” which may or may not be the best for that client.
(13:35) True customization only takes place at family offices and multi-family offices. It is too expensive for anyone else to offer this kind of service.
(13:50) Red Flag: Monte Carlo simulation. This is commonly used financial modeling that gives a false sense of security to whether you will run out of money with a given portfolio.
(15:10) Ignoring private investments like venture capital is a huge mistake not talked about by those new to wealth. This is money left on the table that the best endowments in the world allocate to.
(17:10) Tailored investing according to your vision of success is elegantly simple but demands a higher level of service than any of the big banks could ever hope to provide.
(18:06) A client being sold a portfolio to juice returns is reducing a client into an oversimplified portfolio. No investor, let alone, an ultra high net worth should accept this oversimplification.
(20:44) All listeners deserve fiduciary advice in their best interest that is customized and integrated across all parts of their life. Tax advice and tax awareness should never be ignored.
Stay Connected
AWM Capital: IG | LinkedIn | Facebook | AWMCap.com
Justin Dyer: LinkedIn
Brandon Averill: LinkedIn
Erik Averill: LinkedIn | Instagram
+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to AWM Insights, where we teach you to invest like a pro and each week, we try to cut through the noise of what Wall Street is selling you to bring you the knowledge, skills, and access to the information that you need to invest like a pro. And, today's topic is something we're super passionate about here at AWM. It's all about how do we build multi-generational wealth? This is something that is very elusive, that even those families that start off with millions or billions, like the Vanderbilt family, there is this famous saying of shirtsleeves to shirtsleeves. Meaning, the first generation will make all the money. The second generation kind of blows it. And by the third generation, it's completely gone. And so, this is the conversation we want to have today is, what does a portfolio construction look like for a multi-generational family? But, before we do that, let's jump on what's going on in the news. We got some pretty interesting stuff, some pretty epic stuff around some social media.
Justin Dyer (01:00):
Some Meta? Meta stuff? [crosstalk 00:01:04]. Yeah. We'll end there. But, kicking it off with Alibaba. This is, obviously the Chinese tech giant. We've touched on it a couple times as the Chinese government has really cracked down on the tech world over there. It's total value lost over the last 12 months is $344 billion. That is the single largest decline in value of a company in the world over that period of time. Tesla topping the $1 trillion value mark, going in the opposite direction after Hertz, the rental car company, placed a huge order for, I think something like 100,000 vehicles. Stocks are inching back to record highs. We're really in the heart of earning season and, in general, the reports have been pretty strong, and that good, positive news is backing companies back in the market. Tech has been a little weak, little choppy, but overall strong, and the markets are back near record highs. And then, this one hit hits close to home, here. UBS. Speaking of earnings, UBS third quarter earnings, driven higher by fees from wealthy clients. Really sticking it to those clients and trying to manage those conflicts of interest, right? Hey, they're managing it, so they're profiting from it, that's for sure.
Brandon Averill (02:29):
Yeah. The fiduciary standard doesn't really prevent the high fee products from being shoved down those wealthy clients' throats, does it?
Justin Dyer (02:36):
Most certainly does not. And, like we mentioned, Facebook rebranded or formed, I believe, a company called Meta in a nod to the concept of Metaverse. We're all going to be living in our computers in the not too distant future. So-
Erik Averill (02:53):
I think that's where Zuck wants to live right now. I mean-
Justin Dyer (02:56):
Yeah. He definitely does.
Erik Averill (02:57):
He's dodging reality given the scrutiny. The interesting thing I saw on social media though, around Elon Musk, tying it back to sports, he now has a net worth great enough to buy every major league NBA, NFL and NHL team combined. He could own all four leagues. It'd be fantastic. Just thought that that was completely wild. And the reality is, his family probably won't have any money in three generations.
Justin Dyer (03:24):
Yeah. And that's the unfortunate truth. So, let's move on to that topic.
Brandon Averill (03:28):
Well, around that, he probably at least is off to a good start, right? Because we do know that Zuck's got a family office, at least. He's not trusting some of these bone heads at these big banks to manage his money.
Justin Dyer (03:38):
This is true.
Brandon Averill (03:39):
I think, this is definitely hitting a nerve, because I'm staring at a portfolio that unfortunately was sent to us by one of these big wirehouses, big institutions. I won't name the... I don't know, silver bags company, if you can read between the lines there. But, it's just striking to me. You have an ultra high net worth person they know very little about, they spend time, one meeting with them and they come up with some portfolio that's based on, hey, what, are you risky? Are you moderate? What, what do you got here? Okay, great. You're aggressive. So let's throw you in a 70/30 portfolio. Folks, that is not the way to manage money, and is certainly not the way to manage money if you're going for multi-generational wealth. And so, Justin, maybe you can kick us off here a little bit. Why don't we use a risk tolerance? Why is risk tolerance only a piece of the puzzle and not the driving factor? Why do we orient portfolios in a different way?
Justin Dyer (04:40):
Yeah. Well, and you failed to mention that, that proposed portfolio was filled, riddled with the company's actual funds as well. So again, that conflict of interest, really being managed well there.
Brandon Averill (04:52):
Well, and they want to realize $160,000 in gains. So, apparently they really don't care about taxes like the disclosure says on the bottom of their emails.
Justin Dyer (05:00):
Yeah. So, risk tolerance is, it's a half baked way of building portfolios. I mean, it gets you maybe, I don't know, generously speaking, 20%, 30% of the way to a good portfolio, It is good from a behavioral perspective to understand how you might react to the volatility in a portfolio. How much the value, that bottom line will go up and down, given what can happen in the market. Let's be fair, I guess. Give a nod to that. But, within this multi-generational wealth component or concept, it's not geared towards that outcome. When we're talking about multi-generational wealth and, the multi-family office structure, you can be a lot more thorough in your overall portfolio construction. And, the conversations with the client. Really, the portfolio construction stems directly from the conversations with the client. And, most importantly, the priorities of the client.
Justin Dyer (06:15):
So, where we take it many, many layers deeper is, through the development and discussion of what your true priorities are, both as an individual in some cases, but also as a family. And then, thinking about the multi-generational goals of what that family is. Let's have those conversations. Is your desire, from an impact standpoint, to have an impact only on your family? Is there a charitable impact, a broader community impact that you really want to have? And, let's talk about that. Let's quantify that as best as we possibly can, and we can get into the details. But, we take the numbers, the output of those conversations, and build a portfolio specifically geared towards meeting those goals and those priorities.
Erik Averill (07:06):
And something I want to address here for the audience listening is, we're jumping in, straight into to the technical construction of a multi-generational portfolio. But, taking a step back and asking, what is the typical experience and why is this happening, right? What traditionally happens is that if you are an investor, whether you log on and you're at a robo advisor, whether it's, you're on betterment or, you sit down with an advisor at one of these brokerage firms, or really even a lot of the independent firms. The first thing that they're going to do, is they're going to give you a risk assessment. In this risk assessment, somehow they've got, 10 to 20 questions. And this is now all of a sudden going to somehow, put all millions of people into one of five portfolios. If we move out of the finding financial realm and think of, you've ever taken the Myers-Briggs, or you've taken one of these personality assessments, kind of the laughable thing is, is it fits all of humanity into 16 boxes.
Erik Averill (08:09):
And you're like, I think we're a little bit more complex to that. And I think what's happening in these situations is, you look at the business model of the financial service industry. You look at the business model of Wall Street. And what they've said is, we want to get a good enough half baked solution for the masses, right? That we're essentially giving them some type of portfolio, but there's risk mitigation for me as a company. Is that, I can see-
Justin Dyer (08:40):
Yeah. It's a CYA aspect-
Erik Averill (08:41):
It really is a CYA, right? The business model is, is if I have mass affluent clients where the average portfolio is about $430,000, $450,000, I go through these 10 assessments, because I want to know when the volatility of the stock market happens, that I'm not going to get sued.
Justin Dyer (08:58):
Right.
Erik Averill (08:58):
And that's really why the SEC, in these audits, they ask these questions. Did you do a risk assessment? Did you do a risk assessment? Because that's more about protecting the liability of the firm, than what we see a multi-generational wealthy family of a family office does, right? There's this seminal work done by a guy named Jean Brunel, Integrated Wealth Management, a book back in 2002, that really said, you can only do this for clients who have $25 million or more because, of the specialization. The individualization that sat down and said, the question isn't, are you going to panic in this portfolio? The question's really, what are the priorities that you want to achieve and how do we best execute those?
Justin Dyer (09:39):
Right.
Erik Averill (09:39):
And so, I just wanted to provide that framework of, really understanding, is this in the family's best interest, customized and individualized to them, or are you actually just being fit into one of the models based off of a risk assessment?
Justin Dyer (09:56):
Totally. Yeah. And, you're alluding to it, but part of the motivation there is, it's a scalable process. It's simple. Hey, go answer these 20 questions. You get a score at the bottom. I mean, you can automate it. And companies do, right? There are robo advisors out there, that automate this process. You get the score, put you into, again, one of five portfolios. And, to be fair, again, I'm in this mood of being fair, but, for the average investor, that's a better solution than them going and picking individual stocks and getting advice from their brother-in-law or whatever it may be. Those are good solutions for a good subset of society, but there are better solutions out there. And this is what we're talking about. To really ensure, and improve the likelihood of multi-generational wealth being there for are that second, third, fourth generation. I mean, it's not going to solve the interesting inner family dynamics, which we've talked about a lot and we probably will talk about on a podcast. But, the portfolio construction will certainly get the financial side of that equation really buttoned up and in good shape to, fulfill the family's goals. And then there's, all the interesting, again, family conversations, family dynamics, to actually help with that.
Brandon Averill (11:23):
And I think the other big thing, right? This multi-generational approach, it lends itself to actually making sure things are individualized, because it works on both sides of the coin, right? If you don't really understand the client you're sitting down with, and you're not building an individual solution for them, then you're going to end up on one side or the other. You didn't take enough risk, so you didn't gather all the return that they actually deserve.
Justin Dyer (11:50):
Right.
Brandon Averill (11:50):
And now you're impeding the future multi-generational wealth. Or, on the flip side, you're taking far too much. The client I was just talking about, he's a major league baseball player. He lives a pretty nice lifestyle. We have the CBA expiring here in December. There's a good chance there's a lockout next year. There's a good chance he makes zero dollars next year. And the proposal is to take his portfolio and make it take the fixed income allocation, the safe part of his portfolio and put it in equities.
Justin Dyer (12:23):
Yeah. Unbelievable.
Brandon Averill (12:23):
My question to him, so when he has to pull this money next year, because there's a lockout. He has to live off of it. What does the Goldman Sachs guy say? Well, we set him up with a line of credit, so he'll be able to tap into that and he'll be able to repay it later. So, great. Mr. Goldman Sachs guy, you get an extra four points, because you're charging interest on that line of credit, and he'll pay it back down the line. It is completely asinine, and we get fired up, or I get fired up on this because, it just goes back to the structure. Like you said, Erik, I think it's the CYA piece. It's why they're not held to what's called a fiduciary standard, right?
Brandon Averill (12:58):
And I think this just goes back, we're talking about portfolio construction, but that's why it's so very important to individualize these things. Because, if you are in the position to have an impact, we've got a saying around here that wasted wealth is wasted impact. Then, every decision like this just potentially wastes the impact that you could have on your family, on your community or the world at large. So, I think really taking the time to understand these things, make sure that you are in that individualized portfolio, which only really does happen, at really high end wealth management firms. Or, most ideally, multi-family or family offices.
Erik Averill (13:41):
And just, I think for you as an audience, some red flags, if we're already so in the weeds from a technical standpoint, if you want to know, am I getting this individualized portfolio construction, this financial structure we're talking about, or am I getting an off the shelf product? If you've heard the word Monty Carlo scenario, right? Or this, Mean Variance Optimization, MVO, is these are tools that we use in the financial services industry, that really oversimplify the reality of life. We try to almost turn an uncertain future into providing you with almost this guarantee of certainty that, if you have this risk based portfolio, you're never going to run out of money. The problem with that is, is that's not the way life truly works out. And we like to say, right? I go back to that famous quote we've all heard that, yes, everything should be made as simple as possible, but no simpler.
Erik Averill (14:43):
And I think, that's just, the truth is, these portfolios, we have very nuanced priorities that we want to achieve at different times of our lives. That it cannot fit into a simple portfolio. And, you brought another great thing, Brandon is that, a lot of times you may actually leave money on the table, which means you may leave impact on the table because, for a multi-generational family that has the ability to take what we would call illiquidity risk, that they can be patient, right? Patience is outperformance. Real patience is alpha. So, in that traditional portfolio, it's not even asking whether or not you should have, access in an allocation to venture capital. I mean, that blows up the whole risk profile stand where, yeah. What we know is, if you're in a situation where you have so much money, you're not going to need it, 30 years down the road, if you're having a continuing allocation to venture; it's why the Yale Endowment, it's why these pensions, it's why, when they have a timeline and perpetuity, they have allocations to this stuff. And so, these portfolios are actually going to rob you of growing your wealth.
Justin Dyer (15:58):
Totally. And, I would say, as well. I mean, I totally get what you're saying on simplicity. And I love that quote. But, we have set ourselves up to actually do just that within a better framework. So, the silly Mean Variance Optimization or Monte Carlo Score, that is an over oversimplification of the complex world and the complex situations that each and every client have. We, through good technology, good platforms and our own desire to do what is in the absolute best interest, keep pushing the boundaries. We have the tools at our disposal luckily now, to have a "simple solution", that has gone through a very complex process to generate that, output, if you will. So, there is an element of simplicity in how we even build custom tailored portfolios. And, I love going through our visualization with clients. The capital stacks that we have, the financial structure, those terms that we use quite a bit, looking at that visually, is a simple output.
Justin Dyer (17:14):
There's a heck of a lot of complexity that goes into that. But, that outcome being kind of the more elegantly simple version of simplicity. I've said simple probably 20 times now. But, it's an elegantly simple outcome, and it's tailored to your situation, tailored to those priorities, increasing your probability of success. Taking into account these things like the CBA coming up and just, not completely dismissing the nuances of the world in which we live in. It really is powerful. And it's unfortunate that more people don't understand it, because it is, there is this complex nature of it. But again, that elegantly simple outcome is powerful.
Erik Averill (18:00):
And when you're talking about the elegant simple outcome, going back to this example, unfortunately where, this client is trying to be sold by this huge brand on Wall Street that says you should take your money and put it in this portfolio because, you're going to juice your return. They've reduced this client down to a portfolio.
Justin Dyer (18:21):
Yeah.
Erik Averill (18:21):
Whereas, the reason that customized portfolio that, this guy's trying to blow up is because Brandon looked at it with the client and said, hey, it's really important over the next two years, that you can provide food, shelter, clothing, and water for your two children. You have this priority to get engaged. You have this priority to get married. You have a responsibility of a very expensive mortgage in your home in Arizona. You have a second home that you have to pay for. Oh, you told me your job, or your desire is to build multi-generational wealth. That you want to be able to have these flexibilities.
Erik Averill (19:01):
And what this, broker is doing is actually telling this client, you should risk all that.
Justin Dyer (19:07):
Yeah.
Erik Averill (19:07):
You should risk it all to put your money in this portfolio, based off of your risk tolerance. And so I think that that's a really good example of, when we're talking about, building these customized portfolios, what we're saying is, is we need to know, what are your priorities? What are the things that are important to you and what level of certainty do you want, or what level of confidence do you want to be able to achieve those priorities given at what time period in your life? And then we take all of that. And now, what comes out of is a very personalized, individualized, custom portfolio to you.
Brandon Averill (19:44):
I think you, I mean, I don't even have much to add to that. I think, really at the end of the day, hopefully what people take away from this is, you deserve an individualized portfolio. You deserve the time and care for an advisor who you pay good money to, to sit down and really understand your situation, be independent about it. Be a fiduciary, actually put together something in your best interest, and deliver upon that to you. And not try to fit you into some cookie cutter system that they can schlep to the next 20 clients as well. Throw you in their products that they make high fees on. Make you incur taxes, because they don't even understand what the tax impact is. I just think, you deserve everybody listening to this, deserves more than that. And, there are a lot of good options out there for the solution in this.
Erik Averill (20:42):
Yeah. And, the last thing I would say is, once again, if you're asking the questions of, is the advisor that I'm working with, do they have the ability to provide the type of individualized multi-generation portfolio? Here's one thing we know. By watching what the government's currently trying to do, right? To reset the table on wealth. The way that they're trying to destroy multi-generational wealth, right? Is increasing taxes. Estate taxes, federal taxes. Your advisor at the bottom of their website, they have this really interesting thing. The brokers, the ones that can't build your portfolios, they're going to have something at the bottom. And it says that it is, our company or us as advisors, do not provide tax or legal advice. Please consult your CPA before making any investment decision. And I think that that's a really interesting thing. And so, just making sure that somebody can provide you that independent, full customized advice that you deserve. And, ultimately, you guys worked hard for your money. You deserve to realize the life that you want and to pass money to future generations. And so, until next time make an impact and always be a pro.