Trust and competence are critical ingredients for stewardship of your wealth. The absence of either can pose unnecessary risks by compromising the quality of the advice you receive or the investment performance you experience. It is also important to achieve the right balance of communication and interaction to help you understand your investments, manage expectations, and maintain confidence in your financial well-being. That is why my conservative approach to wealth management emphasizes service and simplicity. Please click on the tabs below to see how I use these four factors to deliver true peace of mind.
Aaron Brask Capital is an independent investment advisor. Being independent means I do not favor any particular firm’s products or services. Being an investment advisor (i.e., not a broker) means I always uphold a fiduciary standard. I do not just work with my clients; I work for my clients.
To put this into context, consider the seemingly endless array of labels for financial professionals (wealth managers, financial planners, investment advisors, etc). When one looks past these labels, there are only two primary classifications for licensed investment professionals: investment advisors and securities brokers. Knowing which one you are talking to is critical as it determines the standard of care tfhey should uphold as well as how their affiliations and compensation structure may impact their advice.
Different investment professionals are held to different standards for the advice and recommendations they provide. For example, brokers are held to a suitability standard. In other words, they only need to have a reasonable basis to believe the products they sell are suitable - even if they know they are not necessarily the best choice. Investment advisors are held to a fiduciary standard. This standard of care requires advisors to put the interests of their clients first, act with prudence, and disclose all important facts. I provide an example below to illustrate the difference between standards of care.
Compensation structures are perhaps even more important than required standards of care. For example, brokers typically receive commissions for selling investment products to clients. These monetary incentives may influence their advice and recommendations.
Conflicts of interest may exist at the firm level as well. For example, many large investment firms employ pay-to-play schemes. That is, they make product providers (e.g., mutual fund companies) pay them fees to be included on their platform for distribution to their wealth management clients. This naturally constrains the universe of investments for their advisors to provide to their clients, but it also encourages the firm to favor products from companies who pay them the most fees. While this issue has been flagged by some major financial publications (e.g., Barron's and SSRN), the private nature of these agreements make it difficult for investors to identify let alone understand the potential conflicts and their implications.
Complicating matter further is the overlap between brokers and advisors. Most investment advisors are said to be dually registered. That is, they are registered both as advisors and brokers. This ambiguity is a contentious issue within the investment world. Indeed, many question the ability of financial professionals to switch broker/advisor hats without misrepresenting themselves, the products they are selling, or their standards of care.
In addition to being able to trust an advisor intends to act in their best interests, clients should be able to trust their advisor possesses the competence to do so. Even the most well-intentioned advisors can fall prey to the industry's financial engineering. Aaron Brask Capital is a research firm at heart; I take nothing for granted and analyze everything.
My approach to financial planning and investments is evidence-based. That means each aspect is driven by rigorous analysis of historical data and backed by intuitive theory. I do not rely on rules of thumb or Wall Street's flavor-of-the-day strategies. While many such approaches may sound appealing, they are often based on short-term and backward-looking observations. In my experience, most of these strategies lose their appeal when properly scrutinized (using decades of data over multiple business cycles).
Index investing provides one example of how my expertise gives me an edge over other advisors. While I generally advocate index investing relative to actively managed strategies for most clients, my research highlights several subtle but significant embedded costs that can far outweigh the low advertised fees. Please read about the cons of passive investing or contact me to request a copy of my more detailed research to learn more about these costly issues. Knowing the difference between well and poorly constructed index products can improve performance by 1-2% per year or more over the long term.
In addition to allowing me to identify and avoid index products with these issues, my experience constructing indices and index products allows me to offer Personalized Index Portfolios. I develop the rules and mechanics for a personalized index to reflect your investment goals and risk profile. This provides an unprecedented degree of customization other advisors cannot with off-the-shelf funds and products.
My ultimate goal is to provide clients with the peace of mind of knowing their affairs are being handled with the care and expertise they deserve. While my business model facilitates the highest level of trust possible and my competence can deliver superior performance, clients often find my personalized service the most appealing.
Starting with my initial exploratory meetings, you will feel the benefits of working with an independent firm. I strive to acquire a strong grasp of each prospective client's financial situation, risk profile, investment experience, and overall goals.
Once I am comfortable with one's balance of expectations and resources, I take the time to ensure my business model and investment philosophy provide a good fit. In particular, I educate clients on how my firm is structured and my investment philosophy.
This mutual understanding is important to me and my clients. An intimate understanding of each client's financial profile, feelings about investments, and goals is essential for me to serve as stewards of their wealth. Moreover, I find my clients experience more confidence in their financial well-being and peace of mind when they understand the basic principles underlying my firm and investment philosophy.
I find the degree to which clients understand their financial plans and investments is strongly correlated to how much peace of mind they ultimately enjoy. That is why my approach to planning and investments embodies the principles behind Ockham's Razor; I prefer fewer and simpler assumptions. Indeed, my approach is more structured than the statistical strategies used by most other advisors. The simplicity and transparency of my approach allows clients to attain a stronger grasp of their financial plans and the roles each of their investments play.
Given the volatility of market prices, constant media hype, and complex statistical models many advisors utilize, I am never surprised when investors come to me thinking of markets as nothing but unpredictable squiggly lines. This view of markets is superficial and misguided; there is much structure beneath the surface. my expertise allows me to see past the volatility and media noise to distill relevant structure and mechanics - especially where income is concerned. I translate these dynamics into simple language and planning models even the most technically-challenged investors can understand and appreciate.
The traditional approach to financial planning involves feeding noisy stock market data into sophisticated statistical models. These models rely on assumptions regarding the future performance of the market in order to achieve various goals for growth, retirement, or income. The statistical assumptions and mechanics behind these strategies are brushed under the rug for investors.
The end result is typically a 60/40 portfolio (i.e., 60% stocks and 40% bonds). This portfolio is periodically rebalanced to maintain those percentage allocations and synthetic income is created by selling principal. This approach results in three significant problems:
- Increased dependence on market performance
- Systematic dampening of performance
- Increased risk of wealth depletion
My research discusses these issues in detail. Please contact me to obtain a copy of or discuss my research on this topic.
I prefer a simpler and more natural approach to providing steady and increasing income - especially in the context of income for retirement. Instead of selling principal to generate synthetic income, I target more reliable income sources to reduce dependence on market performance. The following example illustrates a hypothetical situation
Consider a couple with with $5,000,000 in liquid assets, $50,000 in annual social security, and a current spending budget of $250,000 per year. After social security, this couple requires $200,000 in annual income (including tax payments). This amounts to a required yield of 4% ($200k÷$5m) from their investments. Most advisors would suggest a 60/40 (or similar) portfolio and sell off a portion of the portfolio each year to generate the required income. Indeed, there is a popular 4% rule of thumb whereby advisors assume their investors can take 4% (of the original portfolio value) as a safe withdrawal rate (SWR) each year and maintain their principal over the long term. Depending upon subsequent market performance, the principal may grow, erode, or potentially deplete.
My approach does not rely on rules of thumb. Instead, I take a more structural approach that targets the required income as a liability. In this case I might suggest allocating 30% of the portfolio to a single-premium-immediate-annuity (SPIA). Even with currently low interest rates, this allocation could generate approximately 8% or $120,000 in income annually for as long as either spouse was still alive.
This leaves a residual budget of $80,000 which could then be easily covered by investing the remaining $3,500,000 of the portfolio in the market. Indeed, with a 3% dividend yield or interest rate, this would result in an additional $105,000 of annual income for a total of $275,000 (including social security). Moreover, I would typically suggest investing the bulk of this market portfolio in high-quality, dividend-paying stocks. This would reduce the risk as well as facilitate growth of the income.
There are multiple benefits to this approach:
- Reduced dependence on market performance
My approach relies first on guaranteed income from insurance companies (generally backed up by the state guaranty funds) and then on dividends which are much more stable than market prices - especially when one targets high-quality dividend payers.
- Reduced fees
Unlike the more complex annuity products brokers typically push, SPIAs typically embed minimal fees which are far smaller than the the fees of maintaining a 40% bond allocation.
- Growth of income
While the annuity income is typically fixed, dividend-paying stocks tend to grow their dividends through time. This is especially the case for the high-quality companies I target.
- Isolation and growth of principal
The market allocation within this approach is generally left untouched so it can grow. This directly contrasts the traditional approach whereby the market allocation is regularly rebalanced and sold to generate income.
While this is just one hypothetical example, there are different options and variations. Let me help you optimize my more structured approach to reflect your goals and risk profile.