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 our conservative approach to wealth management emphasizes service and simplicity. Please click on the tabs below to see how we use these four factors to deliver true peace of mind.
Aaron Brask Capital is structured as an independent, fee-only registered investment advisor (RIA). This means we are held to a fiduciary standard, we do not sell any particulars firm's products or services, and we do not receive commissions that could bias our advice. We do not just work with our clients; we work for our 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 three primary classifications for licensed investment professionals: investment advisors, securities brokers, and insurance agents. Knowing which one you are talking to is critical as it determines the standard of care they should uphold as well as how their affiliations and compensation structure may impact their advice.
Different investment professionals are help to different standards for the advice and recommendations they provide. For example, brokers and insurance agents 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. We 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 and insurance agents typically receive commissions for selling investment or insurance products to clients. These monetary incentives may influence their advice and recommendations.
It is also possible for one professional to maintain multiple affiliations. For example, most advisors working for larger firms act as both advisors and brokers. They are said to be dually registered. This ambiguity is a contentious issue within the investment world as 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.
Sometimes adding to this confusion are the fee-only and fee-based designations. Fee-only investment advisors explicitly forego the ability to receive commissions in order to remove these potential conflicts of interests. A fee-only advisor's compensation comes solely from their clients - no commissions from third parties for selling particular products. The fee-only designation is widely recognized as the best for minimizing conflicts of interest. While the label looks similar, the fee-based designation simply indicates the advisor may charge clients directly for their services. In particular, it still allows for the receipt of commissions and monetary incentives from third parties.
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; we take nothing for granted and analyze everything.
Index investing provides one example of how our expertise gives us an edge over other advisors. While we generally advocate index investing relative to actively managed strategies for most mandates, our 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 us to request a copy of our research to learn more about these costly issues.
In addition to allowing us to identify and avoid index products with these issues, our experience constructing indices and index products allows us to offer Personalized Index Portfolios. We 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.
Our 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 our business model facilitates the highest level of trust possible and our competence can deliver superior performance, clients often find our personalized service the most appealing.
Starting with our initial exploratory meetings, you will feel the benefits of working with an independent firm. We strive to acquire a strong grasp of each prospective client's financial situation, risk profile, investment experience, and overall goals.
Once we are comfortable with one's balance of expectations and resources, we take the time to ensure our business model and investment philosophy provide a good fit. In particular, we educate clients on how our firm is structured and our investment philosophy.
This mutual understanding is important to us and our clients. An intimate understanding of each client's financial profile, feelings about investments, and goals is essential for us to serve as stewards of their wealth. Moreover, we find our clients experience more confidence in their financial well-being and peace of mind when they understand the basic principles underlying our firm and investment philosophy.
We 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 our approach to planning and investments embodies the principles behind Ockham's Razor; we prefer fewer and simpler assumptions. Indeed, our approach is more structured than the statistical strategies used by most other advisors. The simplicity and transparency of our 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, we are never surprised when investors come to us thinking of markets as nothing but unpredictable squiggly lines. This view of markets is superficial and misguided;Â there is much structure beneath the surface. Our expertise allows us to see past the volatility and media noise to distill relevant structure and mechanics - especially where income is concerned. We 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
Our research discusses these issues in detail. Please contact us to obtain a copy of or discuss our research on this topic.
We 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, we 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% ($200kÂ Ã· $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.
Our approach does not rely on rules of thumb. Instead, we take a more structural approach that targets the required income as a liability. In this case we 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, we 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
Our 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 we 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 us help you optimize our more structured approach to reflect your goals and risk profile.