We explore managing $1.8 billion in wealth, investment philosophy, and teaching kids about money. We’re joined by Brandon Johnson, CEO of JFG Wealth. We cover keys to successful family wealth management, the spectrum of risk and returns, and diversification and recency bias.
We explore managing $1.8 billion in wealth, investment philosophy, and teaching kids about money. We’re joined by Brandon Johnson, CEO of JFG Wealth. We cover keys to successful family wealth management, the spectrum of risk and returns, and diversification and recency bias.
“Once we have a starting point and a target, we can start to evaluate, do we turn left, do we turn right? How do we measure success? Then that dynamic process never stops." – Brandon Johnson
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This episode is our definitive guide to investment philosophy and wealth management. In it we cover:
ABOUT JFG MULTI-FAMILY OFFICE
Brandon Johnson is the CEO of JFG Wealth, where Brandon and his team manage over $1.8 billion for ultra high net worth families across the United States. Before taking a hard left turn into the world of investing, Brandon first trained as a chef at Le Cordon Bleu Culinary Institute in Paris. He also serves on the board of trustees for the University of Denver and the Children's Hospital of Colorado.
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Learn timeless lessons on work and life from iconic founders, world-renown investors, and bestselling authors. Outlier Academy is the forever school for those chasing greatness. Past guests include Gokul Rajaram of DoorDash, Scott Belsky of Benchmark and Adobe, Joey Krug of Pantera Capital, Mark Sisson of Primal Kitchen, Luke Gromen of The Forest for the Trees, and Brian Scudamore of 1-800-GOT-JUNK.
ABOUT DANIEL SCRIVNER
Outlier Academy is hosted by Daniel Scrivner. Over the last 15 years, Daniel has led design teams at Square and Apple, turned around a $3M+ ARR SaaS business, and invested in more than 100 companies. He launched Outlier Academy in 2020 to learn from the world’s best founders, investors, authors, and peak performance experts.
Daniel Scrivner (00:00:06):
Welcome to the show. I'm Daniel Scrivner, and this is Outliers. On Outliers, we explore the tactics, routines, and habits of the world's best and brightest minds to help you become healthier, wealthier and wiser. And in 2021, you can expect big things from Outliers. We'll bring you more one of a kind conversations from some of the most successful entrepreneurs and investors from around the world, and we'll continue to highlight remarkable, largely unheard voices alongside them, including bestselling authors and experts in health, fitness, nutrition, and so much more.
Daniel Scrivner (00:00:36):
To kick off the new year, my guest today is Brandon Johnson. Brandon is the CEO of JFG Wealth where Brandon and his team manage over $1.8 billion for ultra high net worth families across the United States. Before taking a hard left turn into the world of investing, Brandon first trained as a chef at Le Cordon Bleu culinary Institute in Paris. He also serves on the board of trustees for the University of Denver, the Children's Hospital of Colorado and A scholarships.
Daniel Scrivner (00:01:04):
In our conversation, we go deep on how Brandon thinks about investing, asset allocation and portfolio construction. We explore the world of family offices and learn why JFG considers itself a multi-family office platform. We talk about how great wealth often does more harm than good for wealthy families as money is passed on from generation to generation and what the best wealthy families get right. And we talk about how Brandon approaches money and investing with his kids, teaching his girls how to save, invest, and give a portion of everything that they earn. This episode and conversation is one of my all time favorites. For more, including full show notes and the transcript from this episode, go to outliers.fm. Without further ado, enjoy my conversation with Brandon Johnson.
Daniel Scrivner (00:01:49):
Brandon, welcome to the show. I am so excited to chat with you.
Brandon Johnson (00:01:52):
Well, I'm thrilled to be here. Thanks for having me. Appreciate it.
Daniel Scrivner (00:01:55):
Thank you for coming on, and thank you for making time. To kick things off, this episode, we're going to explore pretty deeply what a family office is, how you work with clients, how you kind of think about financial planning and investing. But to kick things off, I wanted to start with, just see if we can have you share a little bit of the history of the Johnson Financial Group. And part of that is, I know one, that you're a multi-generational firm and there's been four generations so far, and that you have a history that goes back 40 years. So would you mind just to kind of kick things off, sharing a little bit of that story with us?
Brandon Johnson (00:02:27):
So our story starts back in the late 1940s. My grandfather who lived in Chicago had started a small manufacturing company and it was a great time coming out of the war. He was making machine gauges and that company ended up taking off and being very successful. Along the way, he acquired a number of other businesses, and eventually he reverse merged that company into a railroad holding company called Katy Industries. So Katy was a publicly traded company seat on the New York stock exchange and it owned a railroad called the Missouri Kansas Texas Railroad, the MKT. It was a railroad from the 1800s. It had actually run into significant disrepair. It had 3000 plus miles of rail that was in pretty bad shape. And because of that, it had accumulated a number of carry forward losses. And so he was able to back when you were allowed to do this, merge his operating company underneath it, Katy Industries, he was able to take advantage of all those carry forwards.
Brandon Johnson (00:03:30):
And so that became his operating company. He actually sold the railroad back to Union Pacific. It had started off as the Southern branch of Union Pacific's operations back in the 1800s. And he held onto Katy and he continued to build out his manufacturing operation underneath it. But then he got into a number of different business lines as well. And at its peak, it actually had 43 different operating subsidiaries and they weren't all large, but they weren't all in the same industries either. They were kind of all scattered around. He had a railroad holding company that owned a shoe making company in Germany, a shrimping boat operation in the far east. Two silverware making companies, an airbag initiation trigger company. So it was kind of all over the board.
Brandon Johnson (00:04:15):
But as a part of his success, he had formed back in the early seventies, what we would now call a family office. And back then it was just referred to as a private investment company. And the idea was that he needed a group to help oversee his investments, financial planning, his estate planning, his gifting, philanthropic strategies, real estate, and kind of all the associated moving pieces. And so that group started off in Chicago just overseeing our family's kind of financial assets and other pieces of the financial picture. And what ended up happening is that group continued to run it out of Chicago until he passed away in 1991. And at that point, my father took over as the chairman of Katy Industries and he lived out here in Denver. He moved the corporate headquarters from Chicago out to Denver and moved the family office operation out here as well.
Brandon Johnson (00:05:08):
And so 1990 on, family office has been out here. In 2002, I came into the family office. At that point, we were still just overseeing our own investments and all the associated pieces. And we continued to run that as a single family office until 2010. 2010, we opened up and started to work with a handful of other families. And one of the ideas that we had was having a single family office that has all the resources that are needed to be able to oversee the investments, the tax planning, the estate planning, asset protection strategies, all those different kinds of things is very resource intensive. And so when we thought about talking with other families to join forces, what we really came to the conclusion of was that we were all kind of reinventing the wheel if we were running our own operation. By joining forces, we believe that there would be a few benefits to that. And those have really played out over the years.
Brandon Johnson (00:06:05):
The first benefit that we saw really was by being able to leverage other families' resources, we didn't all have to have our own offices. We didn't all have to have our own software systems. All go through the same kind of analyst due diligence efforts that we were all doing. We could all kind of throw our best ideas in the pot, combine resources and really benefit from that leverage. So we got to move from having a handful of employees up to 10, eventually 15. Now we're up to about 30. And so we really got to institutionalize the team that we had. So you don't have as much of the key man risk associated with that. You have duplication of roles so that you have more redundancy and you just have a more sophisticated approach than trying to run a single family office.
Brandon Johnson (00:06:49):
Additionally, when we think about some of the benefits of having a larger network that has come together, all of the relationships and experiences and the network effect that you get from having multiple families engaged really just extends everybody's reach as far as, not only the investment opportunity set, but really benefiting from learning how families are handling a lot of different things. Family education, family governance systems, the philanthropic aspect. How, and when do you get the next generation involved. Concepts of stewardship, how do you really avoid that trap? That so many families fear, which is, I don't want to create a trust fund kid. I don't want to create entitlement, but at the same time I want my kids and their kids to develop the skill sets and the tools to be able to eventually engage with and at some point assume leadership roles within the family enterprise.
Brandon Johnson (00:07:41):
So that's kind of the history of a family office. Today, we have about 20 families that have come together on the family office platform. They're spread out throughout the country and you have some really large families. You have some families that are not as large, but what we found is that the ability to come together and really have this co-op where we are all benefiting from all the other families that have joined the group and really have been accretive to the group. In addition to it, when we think about just the pure investment side of things, the ability to find really interesting opportunities to deploy capital has really grown exponentially since we've moved into this role of having multiple families and the multifamily office.
Daniel Scrivner (00:08:26):
So I'm guessing just to talk practically for a second, the way that probably works on the investing side is all those families are sharing the deals and the things they're looking at, it's going through one team of analysts that are doing the due diligence. Is that all right?
Brandon Johnson (00:08:38):
That's exactly right. Yep. So think about it. Everybody kind of throwing their best ideas into the pot. We have some families that are long time expert successful real estate investors. We have other families in the oil and gas business, other families in manufacturing. And so in some cases, you'll have these families that have continued for 30 or 40 years to be executing their investment theses, and they built out some different operations or strategies. And you have some of these families that are from a different industry that have no experience where that family is an expert, and they're able to invest alongside that family.
Brandon Johnson (00:09:09):
In other cases, we've been able to find really attractive opportunities outside of the group of families and through the process of evaluating the appeal of that type of investment. As we go through our due diligence process here, we have a very rigorous process. It goes through four different tiers. Each one of those tiers, we have an investment committee where we have to vote it on to actually take a deeper, deeper dive into it. If an opportunity gets all the way through, and we actually approve that for investment, I'm almost always going to be one of the lead investors in that. And we'll then take that opportunity to each one of the families that's indicated some interest in that type of investment and we'll outline for them the high level characteristics, explain how it fits into the buckets that they've identified they're trying to fill.
Brandon Johnson (00:09:56):
Each one of the families though remains in control of making the decision. So each family can opt in or opt out and you have individual family members in some of those families that will either opt in or opt out, depending on what type of approach they're looking to deploy. Some families have more of a impact approach. You might have somebody that's more interested in renewable energies versus another family member that's more interested in typical petroleum or whatnot.
Daniel Scrivner (00:10:19):
Yeah, it's a fascinating approach. And we're definitely going to come back and talk more about that due diligence process, because I've had a chance to see a little bit of that and talk with you about that quite a bit. And I think it's a fascinating approach. You guys certainly do it to a degree that I don't normally see, which is a wonderful thing. One of the things, just going back to that story that I have to dig into a little bit more is so you joined and effectively kind of took over and began leading the family office in 2002. What attracted you to the firm? What did you find interesting and compelling about the opportunity?
Brandon Johnson (00:10:51):
That's a very good question. I was not on this career path. I was in the world of cuisine. So I had been working in restaurants for a number of years. I actually got my undergraduate degree in hotel. Restaurant management had gone to culinary school abroad and was very much on track for my career as a chef. And it was interesting because the family was going through a transition at that time. And there was some succession planning that was taking place. And we were trying to identify what the next chapter was going to look like. We were kind of going through a generational rotation and the opportunity presented itself for me to leave the world of cooking and what was my passion at the time and come into the family enterprise. And it was an interesting decision for me, kind of two components really drove it.
Brandon Johnson (00:11:39):
One was, I was very much honored to be asked to do that. And the confidence that the family showed in me was something that was very meaningful and I appreciated that and felt honored to be able to be in a position to be considered. And then two, I felt a sense of obligation and knowing that we wanted to have a family member involved, these were going to be resources that were going to be overseen, not for consumption by my generation or the generation below, but we really view this as more of a stewardship relationship with our family success. And the job is to protect and to grow these assets for future generations to be able to really provide for a trampoline effect. And that's how our family views passing down resources through generations. If you stand on a trampoline, it doesn't do anything. If you start bouncing, it allows you to jump a little bit higher than you could on your own and to reach a little bit further.
Brandon Johnson (00:12:33):
And so this idea of feeling a sense of obligation to come in and be a steward of those resources for at least some period of time was the other component that really drove my decision to do that coming in. I didn't know how long I would be in that role. And to be perfectly honest, if we would've continued on as a single family office, I don't know that I would still be in this role. There are some interesting family dynamics in being an employee of the family. There's a lot of hats that you wear. I'll come into a Thanksgiving meal and I'll sit next to my sister. And at that point, my sister is a client of mine because I'm overseeing all of her investments and planning and trust administration. At the same time, she's the executive director of our family foundation. And so that sense I'm kind of a client of hers, because I'm a trustee and she works technically for the group of trustees and at the same time we're siblings as well. And so there's a lot that goes into family enterprises and anybody who's been in one understands that.
Brandon Johnson (00:13:32):
Obviously, we had sold, and I hadn't mentioned this, we had sold our interest in Katy Industries over a period of time. And so the family office became the operating entity. And so when I think about the appeal, I think there was an initial appeal that really kind of drove me to want to contribute and really create that next chapter for our family. But when we actually made the decision to open up and work with outside families, it took really the role that I was playing from more of a steward of family resources into actually being able to utilize some of the experiences and lessons that we've learned along the way to add value to other families and to really start to create an enterprise that was much different than it was when it was just our family. And I was kind of helping to be a steward and see it through a certain phase.
Brandon Johnson (00:14:23):
So it's changed over time. And I think the addition of outside families has really been something that has been a chapter I didn't see coming, but has been very, very meaningful to me. And one that it's quite humbling to be able to be in this position, working with the families that we work with.
Daniel Scrivner (00:14:39):
So in a second, we're going to stop and kind of define what a family office is. And we can potentially do this with this next question. But one of the things that I wanted to just clarify for people listening is what you guys do, at least in my experience is pretty different where at the end of the day, it's a single family office, but it's opened up into a platform and other families can join. And there's like this pooling of resources and talent and ideas. Am I correct that that's pretty different than a traditional family office? And can you kind of define what a traditional family office is?
Brandon Johnson (00:15:07):
The name family office gets thrown around in a lot of different contexts. Certainly the approach that we take is very different and it's based off of the fact that we created this company for ourselves. So everything that we have and the structures that we have in place, the way that we've designed the service offering, the level of engagement that we have with family members, it was really all built for ourselves. And so the approach that we get to employ today is something that I think a lot of families, if they were to be able to start with the resources and the time and have the runway to be able to put something together, I think a lot of families would build something very similar to what we have today.
Brandon Johnson (00:15:43):
And we have an interesting approach in that the way that we're structured, I'm actually a client of Johnson Financial Group as are all of my family members. So we actually all pay the exact same fees into the company that every other family pays. We don't have any difference in economics at all with any families. We don't have any proprietary products. We don't sell anything. We don't have revenue sharing arrangements with other firms. You literally have all these families on the same side of the table. And when we're out there negotiating terms on an investment, we're negotiating those terms on behalf of this entire group. And so one of the advantages to that is there's a larger pool of capital that we're negotiating on behalf of. And that allows us to have a significant advantage over if we were trying to just do that on our own, or if each one of these families was trying to do that on their own.
Brandon Johnson (00:16:33):
We also view the world a little bit differently than a traditional "family office" that was being offered through a banking platform or-
Daniel Scrivner (00:16:42):
Brandon Johnson (00:16:43):
Trust company or yeah, exactly. When we think of the world, we think of kind of two different pieces of the family office. The first is the financial capital and that's what comes to mind for most people that involves all of the investment strategies, the asset allocation, the risk management, the tax planning, all of the gifting asset protection, all of the kind of mechanical pieces of managing wealth are what we would refer to as the financial capital piece. On the other hand, you have what we refer to as the human capital and the human capital are simply the people that are involved, the family members that are a part of the family, and that is all the family dynamics and the leadership development, the financial education, all of the different softer side of things. And when we think about success and I think personally about what I'm trying to achieve for my own family and what the majority of our families are really focused on and have articulated success is not just the financial capital side of things.
Brandon Johnson (00:17:40):
It really is more broad than that. We really strive for what we would call a healthy thriving fulfilled family. And we think about that in terms of a concept called self-actualization. How can each family member in the context of the resources and the success that they've had really discover and pursue and realize their own unique dreams and to create the impact on the world that they were born to have. And that involves all kinds of different things. There is intellectual capital and relational capital, spiritual, reputational, all kinds of different pieces to a family that when you think about what does that thriving family member look like, we really understand and have learned along the way. And we've learned the hard way in some cases. And we've learned from this other group of families that have come together of approaches that families have taken that have really worked and we've learned what hasn't worked.
Brandon Johnson (00:18:32):
So we look at kind of that complete picture with really the understanding of how do you identify and reinforce the family culture in a way that is articulating what their north star is defining the guiding principles that they have as a family, and then having that financial capital really exists to support the success of the human capital.
Brandon Johnson (00:18:56):
So for us in the way that we approach things, it's not a transactional type of model that we have. It's much more of a relational model and helping each one of the families and the subsequent generations that are involved, understand the responsibilities and the opportunities associated with their success is a large part of what we do. And it's different than what you would typically get from a larger institution that is more focused on that transactional side of things. And not that there's anything wrong with that model. It's a very different model. And we've just decided as a family, we were a part of a trust company platform for a while, and we made the decision as a family that we wanted to become independent. And for us and the families that we work with, it's certainly been the right decision.
Daniel Scrivner (00:19:45):
I'm curious, is part of that difference the fact that you guys have had four generations of kind of learning and evolving and changing how you think about money and success?
Brandon Johnson (00:19:55):
It is. And when I mentioned that there are a lot of lessons, some of them learned the hard way we've been, I think, the poster child for really being authentic and sharing our story and sharing what has worked and what hasn't worked. And a lot of the horror stories that you hear of families that have multi-generational wealth that's being passed out. We've lived a lot of those out and have learned along the way that there are resources available that we didn't have at the time that we would've greatly benefited from.
Brandon Johnson (00:20:25):
And I think one of the challenges there is that families are families. It doesn't matter how much or how little or whatever you have. You have family dynamics. And one of the challenges is that a lot of these issues are things that can't be worked through by the family without an outside facilitator, because it's just mom and dad telling me the same old stuff again. Everybody has their baggage and the filters that they see and hear from the various family members. And when you're able to bring somebody in to help create structure and facilitate exercises and opportunities to learn about how to approach some of these tough conversations. It's really beneficial. I wish we would've had those resources in the past. I'm generation three. My kids are generation four. We'll be at a generation five at some point here.
Brandon Johnson (00:21:15):
I think certainly the experience that we've had along the way has not only taught us a lot of lessons, but it's reinforced how important it is to be able to be open, to learning about how to tackle some things that are just they're uncomfortable. And no family wants to focus their attention on that more difficult sticky area. But our experience has been that if you don't pay enough attention and spend the time working through some of these issues while you have the decision makers alive and able to participate, it just becomes more difficult later.
Daniel Scrivner (00:21:51):
It's like with anything difficult or important, you just have to confront it. You have to have those conversations.
Brandon Johnson (00:21:57):
We say, you no family's going to wake up on Saturday morning at eight o'clock in the morning and say, okay, we're going to talk about the top three kind of elephants in the room right now. They just don't do it. And our experience has been that gets put off and put off and put off. And then eventually you have that vacuum that occurs when you no longer have the leadership in place that the family had been relying on. When you have that leadership, people understand how decisions are made. They understand what we refer to as how the family governance structure works. And that's the time that you want to really engage in conversations about how things will transition. Because if you get to a point where you haven't done that and the transition starts to happen, all of the little perceived slights amongst family members over the years, and differences in values and political beliefs will start to rise to the surface. And then you'll start to experience assumptions.
Brandon Johnson (00:22:46):
And when people start to assume things, they're typically not assuming things positively. They're typically assuming things from a negative perspective. So certainly we've learned a lot. And I think one of the benefits of starting this work earlier rather than later is that the less you have to fix, and the more you can just set up the best of breed, kind of best of class structures before you have things that go awry, the better off a family's going to be.
Daniel Scrivner (00:23:16):
There's so many great things you shared there, but I'm going to try to not go back and ask the five questions I want to, but there's one thing I do want to go back on that you did touch on, which is you referred to it as I forget, maybe it was financial mechanics, but maybe just to put it in kind of layman's terms, it sounds like a typical family office is purely focused on finances, and clearly that's going to help potentially grow a family's money or kind of keep that money there.
Daniel Scrivner (00:23:40):
But if you don't address, if you don't kind of zoom out and think about the bigger picture and think about, okay, well, at the end of the day, money's not going to make us a better family or a worse family on our own, but it's a resource we have. And if we work on these other things, we can kind of do more good with the money or be able to kind of be in a position to control the money. Is that a fair way of describing it? Can you flesh that out a little bit more? It seems almost inverted.
Brandon Johnson (00:24:04):
It is. I can tie this back to a personal experience. I believe that if my grandfather would've seen into the future and seen how the money passing through subsequent generations has played out, I don't think he would've passed anything on. I think he would've allowed all of it to go to charity and would've allowed each family member to make their way in the world on their own. And it's unfortunate because success and the money that comes with it could be such an incredibly powerful force for good. Businesses are creating jobs. They are improving the lives of the members of their community. They're able to contribute to organizations that are supporting people that are marginalized and less fortunate in their communities. They're able to provide goods and services that enhance people's lives. And the money that families dedicate towards charity obviously is going to go to support organizations that are helping people to thrive and to live out the highest use and version of themselves, and to really seek fulfillment. The opportunity for money to be a force for good and for success to be a force for good is enormous.
Brandon Johnson (00:25:14):
Too often I think the focus is on the money itself. And one of the questions I hear from people on a fairly regular basis is how much should I leave to my kids? And that's an interesting question, my response, and I think it shocks a lot of people is to say, you shouldn't leave anything to your kids. I don't want my kids to look at an inheritance that I'm passing on as something for them to consume that replaces their need to go out and earn their own way in this world. I believe that happiness comes from being self-sufficient and adding value to the world, adding value to other people's lives and where I've seen money really impair people and stunt their growth is when it is provided to them in a way where it short circuits their need to actually go out and contribute to the world.
Brandon Johnson (00:26:02):
And so looking at the idea of what those financial resources can be used for is something that I go back to the trampoline effect. How can you create a structure within a family that allows for that concept of stewardship whereby the family members can enhance their lives in a way that's positive and prevents them from having that feeling like the money is the point and when the money is the point, and that's what the focus is, and you lose the aspirational, dreams and path that somebody would've taken otherwise, that's where I see that negative aspect and influence of money on a family's life.
Brandon Johnson (00:26:45):
And so when we look at that, we just have this very clear picture after having seen so many families go through this exercise in this journey that the best approach towards long term successes, really to have that financial capital exists to support that human capital. It's a concept that doesn't necessarily come to mind, especially with wealth creators. Now, if you are in a position where you're a second or third or fourth generation of a family that has had success, then I think there's a clearer understanding of what some of those pitfalls are. And oftentimes there's been personal experiences there.
Daniel Scrivner (00:27:23):
I want to dig in a little bit further into something you kind of described. You've talked a little about family governance. You've certainly talked about you guys work with, it sounds like somewhere around the order of kind of 20 different families. And so I imagine you've seen it all. You've seen families that get it right. You've seen families that get it really wrong. And I'm curious if you could try to break down the things that the families that get it right, get right. Like what are those things? And I know some examples of those that I've heard are things like doing a family board meeting, things like clarifying your family values and mission statement. So I'm sure that's some of it, but can you, I guess, expand on that a little bit.
Brandon Johnson (00:27:57):
I think it starts at the top. I think it starts with vision. And if you look at any organization that's successful, there's clarity around vision. What is the purpose? What is the DNA? What is the north star? And a large successful family is an organization it's a complex organization. So starting with the defining exercise of what does it mean to be a part of this family? What is it that we value? What drives us? What do we hold dear? What are those guiding principles and engaging all family members in that, having a top down message that's being repeated throughout the generations doesn't work.
Daniel Scrivner (00:28:35):
It's not empowering.
Brandon Johnson (00:28:35):
It's not empowering at all. And when you talk about empowering, which I think is such an important word, you have to get buy-in and to get buy-in, people have to feel like their opinion and their presence is valued and that their judgment is being appreciated.
Brandon Johnson (00:28:49):
And so to do that, one of the most simple ways that I've seen is for families to conduct regular family meetings. And I would suggest that it be at least annually. The families that do it really well, incorporate a lot of fun. They go someplace that's different. It's not just going to grandma and grandpa's house. It's going and taking an adventure together. And they mix in programming for educational at age appropriate opportunities. They have exercises with the initial one going through and actually creating this family mission or vision statement. And there's really neat ways to do that.
Brandon Johnson (00:29:21):
One of my favorites is a values exercise where a family will take a deck of cards. And there's 50 pictures in each one of these decks. Every family member gets their own deck and each one of these cards has a picture on it. And the picture doesn't have any words and they can be very kind of vague. So one might be a picture of somebody looking at the stars. Another one might be a baby that a mom has put the wedding ring around this newborn baby's finger. A Paralympic athlete that's struggling to cross the finish line. These different kinds of things. And then each family member goes and identifies their top five cards that are most important to them. And they get to assign whatever that card means and the value and the words. And then they rank them.
Brandon Johnson (00:30:02):
And then the family will all come back together and will go around the circle and each family member will articulate what their top five cards are, what they mean to them and why. And it's interesting how many overlapping cards you end up typically seeing. And then what we do is this is personal experience that we've gone through. Different people do it differently, but we'll come up with common themes that say, okay, here's kind of the five or six or eight things that we've really identified that the family has figured out that kind of have similarities. And then they'll go through this exercise of having kind of widowed that down. And then you'll go around over the course of another hour or hour and a half and a family will come up with either a couple sentences or a paragraph or two that captures what it means to be that family member to be a part of that family.
Brandon Johnson (00:30:47):
And to me, that's where you start. And that's where the most successful families start. From that, some family members or some families, especially the larger ones, will create a family constitution. And it will lay out in more clarity what governance looks like. In some cases, you have an investment committee for a family, you have a philanthropy committee, you have a committee that's focused on education. And so different family members get to participate in different roles within that organization. It's a chance to create that feeling of empowerment, but it really helps people to understand from a transparent perspective how things work.
Brandon Johnson (00:31:20):
And I think if I were to say one thing that successful families do well, they're transparent. And that doesn't mean telling all family members and the 12 year old how much they're going to inherit at some point in time. It means that the idea of discussing these things is okay. And it means that it's okay to have questions. And no question is off limits. Now, the family or the advisor, whoever it is might say, it's a great question. We're not at a point right now where we're prepared to talk about that, but we certainly will. And we really appreciate you thinking about that. And if you have other things that come up along the way, please share those with us. But that's something that we're going to get to. We just want to make sure we go through this in a way that we've seen other families really flourish, because if you don't do it really thoughtfully, it can backfire on you. So the whole idea behind this is really to have a successful outcome. And our job as a family is to provide each one of you the best opportunity to flourish in this world and to be happy and fulfilled.
Brandon Johnson (00:32:20):
And when you say that, and that's the message that's reinforced in the family, and then you provide transparency and say, this is not taboo. Too often I think families don't talk about money because they don't want to create entitlement. Well, I understand that, but at the same time, you're not preparing family members to ever come into a position of leadership. And in our family's experience, there's a point at which in my parents' generation, a big check fell in their lap and they weren't prepared to deal with it. And it was not a positive experience at all.
Brandon Johnson (00:32:50):
So I think that starting with the north star, having clarity around how decisions are made. Who can serve on the family foundation? Is that only lineal descendants? If we have a fiance and we're talking about going and buying a house together, is there a prenuptial requirement within our family? Having clarity, because it's very different if you have a session for the young adults where you talk about these kinds of things and say, these are topics, they are going to come up that we're going to work through as a family in a family office, versus if your daughter brings home a fiance and says, dad, guess what? We're getting married. You say, fantastic. Let's talk about a prenup. Same outcome, very different messages.
Brandon Johnson (00:33:29):
And I'll tell you that the families that get hung up on things that end up having significant disagreements that break up relationships, which in my opinion is the worst outcome, they're not often really big issues. Oftentimes, they're smaller issues. It's how they were dealt with, how they were communicated and the message that people hear about that. So I think it's transparency. It's understanding how things work and it's having this regular opportunity to get together, to review, to have fun, to celebrate the relationships, but also to have this dynamic kind of education process where people understand kind of I am where I am today. But if I'm curious, I know that I'm going to have the opportunity to learn and grow.
Daniel Scrivner (00:34:13):
Well. And you can learn it gradually, just listening to you say that I was just imagining what it would be like being in the shoes of say kids that are, I don't know, when they're say they're teenage years getting ready and they know at some point in time, they're going to have this potential kind of windfall effect. And almost breaks down as a visual where it's like, there's kind of two, I don't know, there's a large room or something with tape down the middle. And it's like, do you want to cross over that tape just all at once at a certain point in time and have to grapple with all the challenges there, or do you want to bite it off kind of one at a time and get used to it and be able to talk about it and be able to ask questions? And I imagine it helps it feel more like you're a part of it and not an outsider.
Brandon Johnson (00:34:52):
That's exactly right. And I think what is so important is this idea that it's a journey and that it's not a destination because there's not some point at which all of a sudden it all makes sense and it's over and you don't have to worry about the work anymore. This is something that life happens and life changes and new generations come in and you have divorces and you have mixed marriages and you have operating companies that end up going different directions and you have family members that choose to do. And so all of the moving pieces that come along with this are changing all the time. And so having the idea in your mind and the philosophy as a family, that this is dynamic and that it's a journey. And in fact, it doesn't end with me when you talk about multi-generational wealth.
Brandon Johnson (00:35:34):
Some families will say now, okay, I want to make sure that the kids they're not able to access this until they're 50 years old. And when they're 50 years old, I want to have some extra provisions in place and they're setting up a rules based system. And the rules based system might work fine to prevent the kids from misappropriating assets during their lifetime. What is that message that they're hearing though? And then what is the culture you've created in the family for how they're going to handle their kids? And to me, you can govern from the grave and I've seen plenty of people do it. And as soon as the rules expire, as soon as the beneficiary turns 55 or 60 years old, they act like a kid and they go blow it and they're like literally the epitome of a trust fund kid.
Brandon Johnson (00:36:13):
Where I want to focus my family is on developing that culture so that my kids are learning to engage with this process. And I view it very differently. I think that from a overall kind of trust perspective, I want my kids to become co-trustees of their own trust at a certain age. And for my kids, I've identified that as 25 at this point. I then want them to be an apprentice and learn about all of the responsibilities that come with being a trustee. What is fiduciary duty? What are investments? What are asset allocation decisions? How do I need to think about the tax implications of this? And allow them to have a seat at the table to feel that their opinion is valued. And then at some point, they get to make a decision as to who they want to be their other co-trustee. In essence, that makes them their own trustee, but it has the additional protection of having another person that's involved so that a creditor couldn't come back to them and say, you're your own trustee. You could distribute it well, you're really in control of those assets. And so that shield, that bail has been pierced.
Brandon Johnson (00:37:17):
To me, that represents the opportunity for them to develop the skills and the judgment and the understanding of the intent behind that trust. And the biggest outcome from that is that I want them to be in a position that by the time they're 35, 40, 45 years old, they're teaching their kids that same thing, and that you are governing through a cycle of this learning and this cultural transfer of values, as opposed to trying to create a rules based system. And it feels very different to a beneficiary to have that structure in place. And it is certainly putting them in a position and your family in a position to have better long term outcomes, because you've actually created the life within the family that continues on that kind of trajectory, as opposed to trying to limit people because you don't trust them.
Daniel Scrivner (00:38:08):
I mean, there's so many things I love about what you just shared. I mean, one of those is just that sense that it's a progression and you have to first become a certain age and there's kind of an apprenticeship model where they're learning. And I think another piece too, that you kind of touched on ties into one of my favorite themes and things to think about, which is just how often we only think about kind of first order consequences and rarely think about second and third order and so much of what you've just described as families getting caught in that trap. And they're only thinking about this kind of initial issue and not all the subsequent issues that are going to come out of how they're handling that.
Brandon Johnson (00:38:41):
And I think asking questions and then sharing kind of insights and being vulnerable and having other families be vulnerable has just been completely eyeopening because some of those things are very hard to see unless somebody that's been through it is able to reflect on it. And when you have the benefit of being able to learn from others without having to go through that same learning curve yourself, to me, why would you not take advantage of that? It saves so much pain and so much frustration. And I think it's almost just transforming the conversation, looking at it from a different perspective. And I think being able to do that and have people that ask you questions and to dive into that really helps.
Daniel Scrivner (00:39:21):
That's amazing. So I want to transition now to begin talking a little bit more about investing, but one thing, maybe a way we can transition in the conversation and kind of build on something you were just sharing is. So you've talked about for your kids, that 25, they become a co-trustee, then there's a apprenticeship period. And we're going to talk about kind of investing at a high level, how you think about asset allocation. We're going to talk about a bunch of that stuff in a second, but one thing I'm curious is so for your kids, so say they become 25, they go through that apprenticeship kind of period. And they're now at a point where they can begin to kind of take more control over their investments. Is it totally okay for them to say, I don't want to invest anything in natural gas. I really care about these causes. I want to have these sorts of investments. Is that part of how that kind of model and transition goes? So they can then express their values with the investments?
Brandon Johnson (00:40:11):
I think there's some relativity to that. So I'm a believer that when your kids get to middle school, they can start to learn about investments. And what we've chosen to do is create a program where we have financial literacy that we start working with kids at age five. And that's when we started working with our girls. There basically is a kind of a simple concept of give, save, spend. So they have their allowance. There's a portion of it that they are giving away to charity. In our kids' cases, they give 10% to charity. Of the remaining, they have half that they can spend and half that they can save. And on the saving side, we've had a bank account at Young Americans Bank that they've contributed to. On the spending side, they've always gotten to make the decisions for themselves. We obviously weigh in, but they've earned that money and they're able to make that decision.
Brandon Johnson (00:40:59):
On the give side, at the end of the year, we've always sat down and with a smaller amount with the younger kids, we talk about what they're interested in. It might be horses, it might be babies. Those are two prominent things in our family. If we identify a cause, we typically, as a family will go and volunteer time at one of those organizations. We'll take either some toys to a children's hospital or some clothes to a Precious Child or one of those programs. But we'll volunteer with our time and our resources and the girls will actually be able to give a check.
Brandon Johnson (00:41:27):
Then, as the girls start to get older, as the kids start to get older, they're able to eventually start having their own jobs and the money becomes more significant. We still maintain those three buckets. But what we've done is say that when we get to middle school, so seventh grade was our threshold that the save side, the girls can choose to put it into an investment account. And we use a NUTMA account, a Uniform Transfers to Minors account and whatever they put into the account, we match. And in that case, we, because it's a small amount, now the girls have been able to put $500 in. So we've matched that 10 times.
Brandon Johnson (00:42:00):
So we'll put $5,000 in and then we'll sit down and say, "Okay, what is it that we're trying to achieve?" So we get to start with real money. The girls have no access to it, obviously, at this point, but we get to talk about, okay, what are investments? What is risk? What kind of returns do bonds generate? What does cash generate? What do stocks generate? And how do we think about diversification? Are there individual companies that you really like? My girls like Starbucks and Apple. We talk about the difference between investing in single stocks versus investing in a more broadly diversified strategy. And we allow them to make their own decisions.
Brandon Johnson (00:42:36):
So my daughter's, one of them has chosen to employ for the most part a fairly broadly diversified, very low cost, kind of an index approach with a couple stocks being Apple and Starbucks. The other daughter says going through the exercises, she's very into economics and finance. She says, "I'm going to do all of my investments through that more diversified approach." So they're in control of these, what would I call it-
Daniel Scrivner (00:42:57):
Brandon Johnson (00:42:58):
[inaudible 00:42:58] accounts. They're totally into it. So we do full quarterly reviews. We sit down, we talk about what the markets have done. We talk about interest rates. They have some bonds in their portfolio. These are tiny little portfolios, but it's creating interest. And that interest is allowing them to start to ask questions, to feel like they're engaged in a part of that conversation.
Brandon Johnson (00:43:17):
Now, as they get older, they're going to have trusts that they're beneficiaries of. And those trusts, they're eventually going to be able to have a seat at the table and to be able to learn about what those trusts do, how they're distributed, how they're invested. Now, their input into those investment decisions will be limited because it's not something that they're in complete control of, but they will always have the ability with their own assets that they're contributing towards their investment accounts, to be able to have that influence over.
Brandon Johnson (00:43:44):
We'll talk about what kinds of trade offs you're potentially making. So if you have an ESG focus, environment or social governance or impact investment focus, or it's something you don't want to participate in, petroleum types of investments, you'd rather it be renewables. Well, those are all things that are absolutely valid and they are expressing an interest in being engaged with that process. And to me, that's gold, that's invaluable. And so I think that's really something that I embrace and look at as an opportunity for dialogue, and to continue to help them down the path of developing more and more knowledge and interest and tools for what is going to serve them very well in the future.
Daniel Scrivner (00:44:27):
Yeah. I love that approach and I'm absolutely going to listen back to this once we're done recording and make a bunch of notes for kind of how to think about that with our kids. But one of the things that stands out to me about what you just walked through is it feels like typically the way people think about interest is in terms of teaching their kids about finances is just almost like kind of barking orders at them. Make sure you save some of this money, are you sure you want to spend it all? And what that process you just described is, well, number one, part of it to me is the conversation you're having with your girls, with your kids, is conversations that people aren't even having in their twenties and their thirties. So one, that's already remarkable. But part of that too, is sure, you're creating a little bit of interest, but more than anything, you're creating ownership. You're giving them a chance to get to take ownership of this thing and be able to do it. It's really cool.
Brandon Johnson (00:45:14):
It's a great point. And I think what it just came to mind was another concept that I think is really important that we embrace as a family and as a family office, we help families with, when you think about developing financial responsibility for kids that are going through middle school, high school, college, and eventually out on their own, you start to think about, well, at what point should they be contributing to their own spending? And now that they have a job, should they be contributing to their own clothing allowance, for instance? So we go through an exercise where we talk about needs versus wants.
Brandon Johnson (00:45:45):
And one of the things that families will come to us with, they'll say, "Okay, I want my kids to start paying for this. It's that top down, I'm telling you." Barking orders at you thing. And we'll say, "Okay, we understand." Humorous. Let's sit down with the kids and let's actually ask them what their needs versus wants are and how they would define those. And we can help them think through that, but let's ask the kids at what point they think they should start contributing to those different categories. And the parents are like, oh yeah, okay. I'm sure they'll say they never want to do it.
Brandon Johnson (00:46:15):
We've never had an experience where the kids didn't want to contribute earlier than the parents had originally suggested. It's just looking at it from a different perspective. It's not being told what to do. It's feeling the excitement of being asked what I think, and that is really powerful for kids. And it puts them in the driver's seat and all of a sudden they feel the sense of responsibility and they want to demonstrate that they are capable of that trust from their parents. And so they jump ahead. Now, oftentimes, we have to scale that back because the kids aren't quite able to do that, but just changing the conversation and approaching it in a different way creates a very different dynamic around what those kinds of future conversations are going to be.
Daniel Scrivner (00:46:56):
Yeah. That's wonderful. Just really quickly on that before we transition. For any parents that are listening, are there any books you recommend that are about kind of how to talk to your kids about finances, how to approach that?
Brandon Johnson (00:47:08):
There's a lot of different books. I'd be happy to provide you a list. There's approaches, I think from a Jay Hughes, when you talk about family governance systems, a Cycle of the Gift is probably the best book. There's a lot in there as relates to family meetings, concepts of stewardship. He really has this term of rising generation instead of next generation to put more emphasis on that growth, as opposed to just I'm next in line. So I think that Jay Hughes, there's a few of those. Preparing heirs by Vic Preisser and Roy Williams is a wonderful book. There are some others that talk about some of the pitfalls of not doing things the way that we're talking about right now. So Navigating The Dark Side of Wealth would be one of those. There are a number of books. I think having a resource kind of library to be able to tap into would be helpful for people. And if that's something that they could access, I think that'd be helpful and I'd be happy to put together suggestions.
Daniel Scrivner (00:48:03):
I will definitely send you an email after this.
Brandon Johnson (00:48:05):
Daniel Scrivner (00:48:05):
And get a full list from you. And that'll be in the show notes at danielscrivner.com once this gets posted. So to transition a little bit and start talking kind of a little bit more tactically. My understanding is for your firm, the kind of minimum account size is typically around 30 million, which is for a lot of people listening, it's a significant amount of money, and we've already established a little bit that it sounds like for these families, they're typically managing a lot of that themselves. And so they're coming more to partner, not necessarily to kind of get... they're coming with an idea of what they're working with and what they want to achieve. So I'm curious to kind of go through this scenario of what does it look like when a family approaches you, potentially wants to join? What does that conversation look like? And how do you go about vetting those people?
Brandon Johnson (00:48:47):
Everybody comes from a completely unique set of circumstances. Some people have an operating company they're considering a sale, or they're getting large distributions that are coming off of it. And they're looking for guidance as far as not just kind of setting up current plans, or they've heard about changing potential tax laws and losing out on these lifetime exemptions. And they want to take advantage. A lot of people are hearing those things right now with the changing administration. So all of those conversations are very different and in fact, people have very different pain points.
Brandon Johnson (00:49:13):
In some cases, it's I have a whole lot of liquidity, it's sitting in cash right now. I kind of feel paralyzed. I'm not sure what to do. Can you guys help me think through this? Other families have a need for very complex estate planning or have gone through a transition where patriarch or matriarch has passed away. Things have kind of started as far as the estate transfer process. In other cases, people are just getting out ahead of the curve and they say, I've created this operating company that is substantial. And I want to make sure that I am structuring things in the right way for today. That it's dialed in the way that I need it, but I also want to maintain as much flexibility as possible so that I can make adjustments as life happens. And the transitions of kids getting older and potentially going through some sort of liquidity event at some point, and just want to make sure I kind of have my ducks in a row.
Brandon Johnson (00:50:00):
So when it comes to the families that we work with, one of the things that we want to really articulate is culture. And for us, there needs to be a cultural fit. And there's a lot of different models out there. Not all of them are right for one person. And what might be right for me might be different for you. We really have kind of three components that we really articulate as being important to us. The first one is we work with people who value the golden rule. And the opposite side of that is we don't work with jerks. Life is too short. There are people that don't treat others very nicely or value people higher or less because of how much money they have. And that's just not something that we want to be a part of. So we make that very clear, and there's not that many people out there that you come across, but we all unfortunately have come across people that we would prefer not to work with.
Brandon Johnson (00:50:47):
Number two is we work with families who value the human capital, at least as much as the financial capital. When we think about long term success, if a family is not aware of how this money might impact their kids and their future generations, and they don't want to pay any attention to that, we don't want to be a part of that. I don't think we can be helpful. And it's just going to be trying to push a rock up a hill. And that partly comes from our personal experience of having seen what happens when you don't pay attention to that. And then thirdly, we work with families who value philanthropy, and it's not a number. It's not a percentage. It's not suggesting anything as far as what a family is doing with their own resources.
Brandon Johnson (00:51:26):
What it means to us is if a family is able to work with a family office, it means that they've had tremendous success and they've had great teachers and mentors and employees and support systems from their community along the way. And we believe that any family that's in a position that has achieved that is in a position where they need to support their community and help those that are less fortunate. And it's really this concept of philanthropic heart and understanding the opportunities, but also the responsibilities that come with success. And so those three components are really important to us culturally. We like to work with families who we want to hang out with. We become very close. This is a relationship that once you engage with it, it is very intimate. And we're talking about money and death and differences in abilities of kids and divorces and new marriages and a lot of things that are the most important and most scary things for people to talk about. And we really become a part of and a partner with their family.
Brandon Johnson (00:52:31):
So for us, making sure that we really have a good bond and a good fit with the family is really important to us. And then when we think about the kind of ongoing engagement that a family's looking for, if it's more of a transactional approach and they want help for this set period of time to kind of get things dialed in, that's not probably a fit for us either. We're much more focused on being a partner on the journey than we are being a partner through a transaction. So once again, just a different approach that we take. But I think it's important that we articulate that because really success is measured on expectations. And if we're able to live up to and exceed the expectations that a family has and vice versa, then I think that's really what makes the magic happen. And so being clear about that in the beginning is important
Daniel Scrivner (00:53:25):
Just to kind of repeat back a couple of those things. So it seems like clearly you guys are approaching it more like a marriage than like dating or like helping out for a short period of time.
Brandon Johnson (00:53:33):
Daniel Scrivner (00:53:34):
Which is important. And then maybe another way to sum it up or maybe to kind of encapsulate what it sounds like is very different about Johnson Financial Group versus other family offices is it's this 360 degree approach to capital where it really is like maybe the wealth that was created is the core that lives at the center of that. But you're only spending a little bit of time there and you're kind of making sure that you spend as much time on all the other layers around it.
Brandon Johnson (00:53:58):
With the end goal being simplicity and peace of mind. When we do our jobs well, a family understands there's all these front burner issues that they're dealing with in life. And that is their family, their job, their communities, their kids' school, their friends, all of the things that make up your day. And then there's all these back burner issues. And the back burner issues are things that people know they need to get to, but they don't have the time and they don't have the interest. And it's kind of confusing to them, but they know they have to get to it. What we're doing is we're coming in and we're basically doing an audit of the family and painting the most clear picture that they've ever had of all the different moving pieces. That's the insurance, the investments, the tax planning, the estate planning, the gifting, the philanthropy, the asset protection, all of those different pieces. And we're putting it down on a table and painting this picture of where they are today.
Brandon Johnson (00:54:51):
Then we're saying, okay, now that we have a starting point, let's start talking about, if you have a magic wand, what does life look like in a year? What does life look like in five years? That starts to create a target for us to move towards. Once we have a starting point and a target, we can start to evaluate, do we turn left? Do we turn right? How do we measure success? And then that dynamic process never stops. So once you have that kind of roadmap is to what it is that you're trying to achieve, you're able to start to implement different types of solutions, use different types of tools to help a family get there. Every one of the families is going to be obviously very different as far as what that looks like. But I think helping families to really think through some of those possibilities is something that is a critical piece to them being able to live out and realize that dream and that vision for themselves.
Daniel Scrivner (00:55:41):
It's bringing all the important stuff that maybe doesn't get as much time and attention to the surface. And I love that metaphor of once you kind of nail down the starting point and the target that then you can course correct. It seems super clarifying. Just to focus in a little bit more on the investing side. So if we think back to that metaphor of the kind of starting point and the target. So when a family comes to you, you clearly are spending time with them figuring out that starting point. And then you're also shaping with them through that partially. I mean, I know it's a lot more complicated than that, but partially through that magic wand exercise you just described. So someone obviously comes with a set of investments and an asset allocation that was either intentional or not intentional. How do you guys work through that process? Is there a type of portfolio you try to kind of move people towards? Is it more of an exploratory conversation of what feels right for them? How do you think about it, particularly on the kind of investing asset allocation side?
Brandon Johnson (00:56:35):
Sometimes people approach this in what I would consider to be the opposite order of what they should really be doing in my mind. The investments are the final stage in the process that a family needs to be going through. That's the engine that makes everything else work. That's what's creating the return stream, the yield, the long term wealth engine appreciation that's filling up the various buckets and providing for the family to be able to achieve what it is that they're trying to achieve. That really is something that you can't understand what it needs to look like until you've done all the other work upfront. Understanding a family might have 5, 6, 10 different entities. You might have a family foundation or donor advised fund, a family limited partnership, a retirement plan. You have your kind of spending needs that you are needing to fund from assets inside of your state.
Brandon Johnson (00:57:26):
Oftentimes, you've set up some sort of generational skipping trust, some sort of spousal lifetime access trust. You have all the different kind of entity structures. Each one of those might have its own unique investment strategy and needs because the time horizons are different. When we think about how you would evaluate for kind of risk as a starting point, you'd say, okay, there's three pieces. There's an ability to assume risk. And that would be measured by the time horizon, the liquidity needs and the overall level of wealth compared to what is being spent annually. So moving from ability, you would have willingness to assume risk, and that's what I would call sleep ability. How do you feel when the market sells off 30% in 22 days, we just lived through that. Some people look at that and it terrifies them and they can't sleep at night. And it's a very different reaction than somebody who looks at that as one of the great buying opportunities that they'll ever have in life. So that willingness or that emotional response to risk or to volatility would be something that's very important to work through.
Brandon Johnson (00:58:28):
And then finally, what is the need to assume risk? And the need is really simply a discount rate that we need to be able to achieve, to be able to hit whatever our target is. If I'm starting with $10 today, and I need $20 in 10 years, I need to achieve around a 7% return to get there. Now, a family foundation that's going to exist in perpetuity has a 5% required annual minimum distribution, and you want the assets to be able to achieve growth after inflation in that distribution over time, that's going to have a very different profile, especially because it's a tax advantage account and doesn't pay income taxes versus something that potentially is inside of an IRA, which if a family has substantial wealth, the IRA is a very interesting entity because it's the last thing that you want to pass down to your kids.
Brandon Johnson (00:59:19):
Because from a tax perspective, they're only getting a very small percentage of what the total value of the IRA is because assuming you have an estate tax liability, then those assets, as they're a distributor, are going to be taxed from an income tax perspective, and you might only get 25 or 30 cents on the dollar there. So you might utilize that IRA more for gifting strategies right now. And you can, at this point, take a hundred thousand dollars tax free distribution a year to give to charity. So that's kind of a planning aspect to it. That generational skipping trust, you might own an underlying operating company, or you might own a ranch for instance, a guest ranch or something.
Brandon Johnson (00:59:55):
So each one of those different buckets that you have have totally different profiles surrounding them, different ownership interests, different beneficiaries. Some trusts might have one of the parents as one of the beneficiaries as well. And so there needs to be some liquidity provision there you might have another that is intended literally to be a 50 year asset that is not even going to be touched by generation two. And it's really intended to be generation three and beyond. You also then might have a family bank, which is becoming more of a prominent theme. And that would be a trust that is not intended to ever distribute out, but it's intended to be a permanent source of capital for family members to access once they've gone through the appropriate betting and due diligence of whatever that board is that sits at that family bank level, but allows family members to be able to have access to cheap capital that needs to be repaid over time. That's treated in a very different way.
Brandon Johnson (01:00:44):
So when you think about the investment side of things, there's so much that goes into analyzing what the optimal structure for the family is to allow them to achieve kind of that vision for what it is that they're intending to do. And then that investment piece is really that final component that kind of bolts it all together. That allows everything to work mechanically. But I think oftentimes people start with that upfront. And I think that that's not serving the families long term interest in the best way.
Daniel Scrivner (01:01:13):
I think it's a great encapsulation. It's a great point. One of the things that you mentioned at the beginning of that was this idea of kind of your investments being an engine and having a bunch of outputs, and those can be yield. Those can be return streams and filling up buckets. I would love for you to talk a little bit more about that, because that sounds like something you've clearly thought through a lot. Is that a framework that you use and can you share that?
Brandon Johnson (01:01:34):
It is. Yeah. So when we think about investments, we really think about the concept of risk versus return. And if I'm looking at my investments and I have a line in front of me and I go all the way over to the left hand side, that's going to be the least amount of risk that I could possibly take. So we're going to measure risk on that horizontal access. If I'm trying to preserve my assets and that's my highest goal, my highest value, I'm going to invest in cash. I'm going to have my money sitting in bank account or, and my mattress. What am I earning on that? I'm earning zero on that.
Brandon Johnson (01:02:06):
For somebody then to take incremental risk beyond a risk free asset, they're going to demand an additional expected return. So if you move from that cash position over into a one year treasury, you're going to get a few more basis points. You move over into a ten year treasury, you're going to get 90 basis points. You move over into a municipal bond, over into a corporate bond. You're moving up the risk spectrum of fixed income, but you're being compensated for doing that.
Brandon Johnson (01:02:33):
Now, there are different mixes of those. You don't typically just have all your assets in one of those buckets, but as you think about what I'm trying to achieve just on that fixed income side, we're looking at what is the purpose of this particular account that we have? Is it intended to be generating liquidity? If it's a taxable account, municipal bonds oftentimes play a substantial role in that whereas they wouldn't when you're in a tax advantage space. But as I move out into a high yield bond and eventually onto the equity section, so I'm moving right down my line here, moving into a big blue chip US large cap stock, but S&P 500, it's got a great dividend yield. These are very stable, large companies. Great credits.
Brandon Johnson (01:03:13):
If I think about the return that I'm looking to generate there, and I took an average of all the big banks and trust companies around the globe and said, what is the average expected return of a US large cap stock per year over the next 10 years? It's going to be about six and a half percent. That's historically quite low compared to what it's been in the past. Now, thinking about investments, everything kind of wheels off of a risk free rate. So there's going to be an equity risk premium. Now that interest rates are lower, that equity risk premium is starting at a lower point to build. So kind of thinking about mid single digits on my equity portion for US large cap.
Brandon Johnson (01:03:49):
If I continue to take another click towards the more risky side, I'm going to move into small cap stocks, kind of international developed markets, that's going to be somewhere around a seven and a half percent expected return. And then finally over into emerging markets. And that's going to be the highest expected return over time on average of the set of equity markets across the globe. And that's going to be somewhere around 9%.
Brandon Johnson (01:04:12):
Now, it doesn't stop at that 9%, but that is the end of the public market space. So I now have built out my public market risk versus return profile, and that line's going up into the right. Now, once I've crossed that kind of 9-ish percent, I've now moved into private capital. So private capital offers substantially higher returns than public capital. And it's simply because you have iliquidity risk associated with it. So there's no free lunch. Anytime you want to increase your returns, you're going to have to increase the risk associated with that investment. So once I look at my private capital, there's really three broad buckets.
Brandon Johnson (01:04:47):
I would start at private credit. So that's going to be the most conservative piece of my private space. And those returns are going to start where the public returns stop. So kind of starting at 10% and it's going to be generally 10 to 13% annual returns. Those are going to be very cash flow focus, typically quarterly distributions that I'm getting. And those are going to be things like direct lending, mezzanine debt, asset back loans, and specialty finance. And you're looking at kind of senior secure debt at the 10% range, moving out into kind of more of the mezzanine debt at the 13%.
Brandon Johnson (01:05:21):
Moving one step over, you move into private real assets. And that's four broad categories. It's real estate, energy, infrastructure, and agriculture. Those are by definition, real assets. You're typically going to have a hybrid there where it's partly cash flow focus and partly capital appreciation. Now, certainly in real estate, if you're doing a development, less cashflow, more capital appreciation, but those are generally 13 to 18% returns. And if I move to the final piece, which is going to be private equity, those are going to be the most aggressive and the highest returning, highest potential returning assets. Those are generally 15 to 25%. Those are going to be things like growth and buyout and moving out the spectrum venture capital.
Brandon Johnson (01:06:01):
And when I think about investments from that standpoint, I have a choice all along that spectrum as to how much risk I want to take, whether that's risk is measured by volatility or risk is measured by iliquidity. And I want to select a mix or what I'd call an asset allocation that best is able to accomplish the targeted return with the associated yield that I'd need from this portfolio while also minimizing that amount of risk. And we would call that the efficient frontier. What I know is that I would view all investments as a wealth engine. And really a larger family, the context you have multiple entities in different accounts, but really we view it in the context of a wealth engine.
Brandon Johnson (01:06:44):
So when you think about what it is that you're trying to achieve, typically you're going to need some component of your investment portfolio that is paying out some distribution to you for annual living expenses, or to be able to fund some liability stream that you have anything that's not being needed for spending at this point needs to be reinvested back into that portfolio. Now, the interesting thing on the public side, you can, in the public equity markets, buy a share of Apple and continue to own it so along as Apple's in business. On the fixed income side, you're continually having those bonds mature and then you're reinvesting into new issues.
Brandon Johnson (01:07:19):
On the private capital side, it is very much a limited time horizon. So player capital might be invested for 5, 7, 10 years. You're constantly getting distributions coming back. So even if you're in a private equity fund and it's a 10 year life, typically by year five or six, you've gotten all your capital back. And if I want to have $10 million in private capital exposure, economic exposure, I'm typically going to have to commit 13 or 14 million to that because it's not all going to be called. And when the final dollar is called, I've already started to receive distributions back. So I'm not out of pocket the entire amount. Now, we view that really as what we would call that flywheel.
Brandon Johnson (01:07:57):
So the flywheel, once you have your private capital invested and it's continually being called and distributed back to you, the family might say, okay, we want 500 grand out of our $2 million a year of income being siphoned off into our checking account. And we're using that for spending. The other million and a half, we want to just go back into that flywheel. And so with private capital, you continually need to have new opportunities to invest that capital into because if you get a large distribution that comes back and sits in cash, the returns are being dragged down significantly. So you're constantly looking at new opportunities to invest that capital back into, and you really have to time those cash flows and understand what you're expecting to come back in so that you have a home for that.
Brandon Johnson (01:08:41):
And that flywheel then just continues to pick up pace and get larger and larger. And the family then can adjust that spigot to whatever they want it to. They say, "Look, we're retiring. We're going to start traveling quite a bit more. We're going to use private aviation. We want that to go up to a million and a half." So the spigot just got bigger. The overall growth has slowed down and they say based off of kind of where we are, we want to invest in a little bit more high growth opportunities to make up for the fact that we just increased the amount that we're taking out of that.
Brandon Johnson (01:09:08):
So when we view that, we look at the private capital as a way to significantly enhance returns. And they're typically two to three times the returns of the public markets, but you are sacrificing liquidity for it. So we want to ensure that we've taken into consideration all of those different pieces and that you have the appropriate mix. And that that mix is able to be either adjusted over time or the amount that's being recycled back into the portfolio versus the amount that's coming out through distributions is able to be adjusted to whatever the current situation for the family is.
Daniel Scrivner (01:09:40):
That was a masterful lesson. And what that kind of looks like the way you broke down that horizontal line that made up the risk spectrum and how you described some of those returns there. One of the pieces that I want to ask is a follow-up question is around diversification. It's something I've been reading about, thinking about a lot recently. And I think at a high level, one of the ways that you can, I don't know, maybe I'll use my own language for it, but one of the ways that I try to think about it is how much are you opinionated? And what that might mean is these are the things that I really believe in. These fit my makeup. I think these fit the way that I view the world and kind of my strengths and weaknesses, or just the peculiarities around me.
Daniel Scrivner (01:10:18):
Now, on the other end of the spectrum, there's, not to give it a bad reputation, but diversification or some people I think the better label I've heard is divorsification, where the goal is just more and more, more. You don't really have a great idea about why or what that's doing. How do you think about that? Is there a point at which you're comfortable with someone being really opinionated and how do you make sure on the flip side that when you're diversifying a portfolio, you're never getting into that divorsification territory?
Brandon Johnson (01:10:44):
I look at it in kind of two different buckets. I look at private capital and public capital very differently. On the public side, it's really interesting. I think we all have a tendency to project recent market performance into the future. We call it recency bias. So one of the most fascinating topics to me is behavioral finance. Behavioral finance is this concept that came about kind of in the seventies and Daniel Kahneman and Amos Tversky came up with this concept that eventually won them the Nobel Prize that has a number of different concepts in it that are very counter to what an objective rational investor would do with their money. One of these things is recency bias. There's a whole other litany of these.
Daniel Scrivner (01:11:24):
It's a very long list.
Brandon Johnson (01:11:27):
Enough for another conversation. But the idea that we oftentimes view what has transpired over the last five or six or 10 years as something that's likely to continue into the future is something that we typically develop over confidence in.
Brandon Johnson (01:11:41):
And when people think about just looking back to 08, 09 and the performance of the US equity markets, they have trounced all of the international markets both developed and emerging over that period. If you go back prior to 2008, 2009, you look at the last 20 years, the US markets have absolutely lacked. They were in the bottom third and in many cases, the worst performing asset class versus the other alternatives out there over that extended period of time, going back to 2001. And people are always shocked when they go and they look at that. Emerging markets were just on fire. They outperformed the US market by about four and a half percent per year, over the last 20 years.
Brandon Johnson (01:12:19):
Now, you look at the most recent five years, six years, and you say, why would I ever invest in emerging markets? Well, over time, emerging markets are going to produce and have historically produced significantly higher returns. And the reason is that they have more risk associated with them. And it goes back to that conversation that we talked about. Nobody, no individual would choose to increase the risk that they're taking without an increased additional expected return that's coming to them. So looking at the public markets, in the past, and I would say going back to kind of as late as the mid nineties, there was not as much efficiency as there is today. You had large brokerage houses until Schwab came along and kind of broke everything up, but there was regulated brokerage commissions back in the day. And you had less people that had access to the information that they needed to make intelligent investment decisions.
Brandon Johnson (01:13:10):
As you've created a broadly syndicated amount of that information that is basically free now, you have so many more market participants that are engaged, that the ability for individuals to select individual stocks from a pool of stocks. So look at the S&P 500 and say, okay, I'm going to buy 20 or 30 positions in here. And I'm going to try to out guess the market and believe that those 20 or 30 are going to outperform. Historically, that was something that could be done. It was not easily done, but it could be done. And I think an example of that today would be looking at Warren Buffet. So people look at Berkshire Hathaway and they say, most famous investor of all time, he's crushed the S&P 500. Well, they crushed the S&P 500 until five years ago. Now, for all time periods that Berkshire's been in existence, Berkshire's now underperformed the S&P 500. Something even when he was outperforming, Buffet made the bet and offered anybody that could beat on a persistent basis over a 10 year period, the S&P 500 to pay million dollars to, and nobody would take them up on the offer.
Brandon Johnson (01:14:12):
So when I think about diversification, over a short period of time, diversification is something that if you're a US investor and you have invested in international markets, those international markets have dragged down your returns. There's no question about it versus a pure S&P 500. If you look at that 10 year period prior to the last 10 years, it's going to be the exact opposite. Your US returns would've dragged those down. So we're living in a time right now where having invested just in the US makes sense. So anything else has hurt your returns.
Brandon Johnson (01:14:44):
And then when we look at the performance of the technology stocks over the last several years, those have outperformed all other components of broad based indexes as well. So we have this notion that is the best way to invest. If you look at the go forward next 10 years, or next 20 years, I find it hard to believe that you're going to have the reemergence of individuals who are able to continually outperform on a risk adjusted after tax and after fee basis. And then one of the things we never talk about is the tax aspect. Because all investment returns are reported in pre-taxed dollars.
Brandon Johnson (01:15:20):
So from my perspective, you can absolutely over diversify. And I think that's something that people need to be made aware of. And I think as you look at the ability to access diversified strategies, people need to understand the pros and cons of doing that. Now, over on the private side, I think it's a very different ballgame. You can't index, there's no such thing as accessing a broad diversified passive group of investments. So from that perspective, I think the alpha that is available to investors who have the capacity and the insight to be able to select superior top quartile, top decile types of strategies, they have the ability to create 5, 6, 900 basis points of alpha out above and beyond the 50th percentile.
Brandon Johnson (01:16:04):
At the same time, I do think you need to have diversification across those three buckets. I would say you probably want to have three different sub strategies underneath each one. So you don't want to buy one private equity manager one real estate investment and say, I'm going to stick with this. I think an institutional approach would suggest that you don't have 50. You have somewhere between 20 and 25 of those underlying investments.
Daniel Scrivner (01:16:26):
Yeah. That's a great way to describe it. And it definitely makes sense. I mean, even just for a data point on a couple of things you were talking about. Yeah. I was just looking yesterday at how the NASDAQ has performed against the S&P 500 and it is insane over the last couple of year period just the outperformance of that one index versus some of the others. And then just one other little thing I would add is on that note about having sub strategies, but kind of focusing over on the private side of that spectrum. This is I think the data point there of how is it true that you have these groups of people or these firms or these investors that are able to outperform you? Definitely do. I mean, that's why in the venture capital space there's firms like Sequoia and A16Z, that it is impossible to get your capital into those funds. Everybody wishes that they could and the same is true in the private equity space. So I think that makes a ton of sense.
Daniel Scrivner (01:17:10):
So I want to transition now I could ask you questions for another handful of hours, but I'm so thankful for your time. S I'll move on to the closing questions. And one thing that I wanted to start with, and I'm sure this could be a long answer, so you don't have to give a long answer to it. But as I was preparing for this interview and over the last few years as I've gotten a chance to know you more and more, you just have always struck me as somebody that has it all down. Like you're very responsive. You are always so punctual. You're so well spoken. I'm curious, if we kind of dig under the surface there, what are the things that you focus on day in and day out and kind of, what is your definition of success as you think about what that looks like both personally, and I think professionally?
Brandon Johnson (01:17:52):
I have you fooled, if in fact you thought that I have it all dialed in. I'm as much of a work in progress as my wife would attest to as anybody is.
Daniel Scrivner (01:17:59):
That's true if you ask anyone's wife, they'd say that.
Brandon Johnson (01:18:02):
There you go, there you go. There are some universal truths out there. So I would say success to me is kind of going back to that idea of it being a journey and not being a finish line that you're trying to get to. I think there's a lot of different parts of my life that are meaningful to me, that I work very hard on leadership is one that fascinates me. I'm certainly every day trying to become a better leader to help really, to not only to support and to nurture, but to help inspire. And how do you inspire others? And to me, the self-actualization concept is so important and I certainly aspire to that. And to me that really represents how can I live out the highest and best use of who I was born to be and how can I unleash my potential as a leader? How can I unleash the potential in others and inspire them to seek, to achieve that very lofty expectation of themselves?
Brandon Johnson (01:19:06):
So I think in one capacity, as a leader of our company, as somebody who's very involved in our community, I really view success in that context of how do I help others to live out the fulfilled life that they have inside them. I think adding value to other people's lives is what makes all of us happy, honestly. And so to the extent that I'm able to do that in some small part, that's a very meaningful thing for me and something that I aspire to learn how to do better and better. And so whether that's learning from my mentors, whether that's from reading and consuming resources and information on people that have perspectives that are unique, that can add to my ability to understand how I can more fully show up in other people's lives like that.
Brandon Johnson (01:19:54):
I think all of those to me really represent what I would consider success. My faith is an incredibly important part of my life. I don't believe that anything that I "have" today or that I lead today is because of me, or is mine. I believe that I'm a temporary steward of all the resources that I've been entrusted with. And I feel a very significant sense of responsibility because of that. And all of us certainly can get wrapped up in the day to day kind of animal instincts that we have and the competitive nature that we have. We can get down on ourselves. We can get down on others, we can measure things by score, but that's a very base part of who we are. And I believe that there's so much more introspection and learning and growing that we can all do as individuals that I can certainly do that allow me to see the grander picture of the purpose of what we're all here to do every day. So to me, that's another piece of success is really understanding and living out that stewardship role.
Brandon Johnson (01:20:58):
And I think a third would be this idea of being a lifelong learner and of having a growth mindset and being able to recognize opportunities that otherwise I might perceive to be stumbling blocks or disappointments in my life or painful experiences that I've been through as opportunities to grow as an understanding that there is nothing that we go through that is more impactful and creates more growth than disappointments than failures. And it's hard to embrace those. And it's something that I don't think I'll ever get used to. And I honestly hope I don't get used to, but it's something that as I look at my ability to experience and learn from and grow from the mistakes that I've made, from the times that I look back and I wish I would've done things differently, I think a lot of those inflection points in life that at the time, you don't really necessarily understand how important they are, but if you can, and if I can look at each one of those as an opportunity that's been put before me to really unlock another piece of who I am and to become stronger and become more sympathetic and more empathetic. And to incorporate that into my life in a way that I can then pass that on to others, whether that's my kids or my wife or the nonprofit community that I'm involved with or to our team here, that's success to me.
Daniel Scrivner (01:22:25):
Yeah. That's beautifully said, I love that nowhere there was any mention of money. Secondly, that your definition of success is literally all the hard things. It's just all the things in life that you have to keep butting your head up against to try to improve at.
Brandon Johnson (01:22:38):
I'll tell you, I think we've all seen the people that place material success at the peak of the mountain that they're trying to climb. And the ones that I've seen that have done that I respect that have reflected authentically when they've gotten there or they thought that they've gotten there is that there's nothing on top of that mountain. And that there's a hollowness that comes from that that can't be filled through just that focus on that material success. And that's maybe one of the great blessings that I've had is to be able to learn from others who got to that point and found it not to fill their hearts and their bucket in a way that they thought it was going to.
Daniel Scrivner (01:23:18):
Yeah, I thought there was going to be a beautiful temple there. Just nothingness.
Brandon Johnson (01:23:23):
There's a gentleman, a friend of mine, a gentleman that I've had a chance to get to know and has been very, very successful. And he has a great line. He says, "I've been climbing, climbing, climbing to the top of that mountain that I've been seeking. And when I got up there, there was just a pigeon, nothing more." So.
Daniel Scrivner (01:23:38):
And probably not a friendly pigeon.
Brandon Johnson (01:23:42):
I don't know if there is a friendly pigeon, but it's just, there are a lot of things in life that are counterintuitive and the more that we can recognize what has true meaning to all of us, I think the better off we'll all be.
Daniel Scrivner (01:23:54):
Okay. Last closing question. I have to go back to your roots of loving cooking. Do you have a favorite restaurant anywhere in the world or a favorite cooking book?
Brandon Johnson (01:24:01):
Oh geez. Oh, favorite...
Daniel Scrivner (01:24:09):
So you can also just be like, I like these, but.
Brandon Johnson (01:24:10):
I'll tell you here in Denver, it's an oldie, but goodie. Sushi Den has been my favorite restaurant for a long, long time.
Daniel Scrivner (01:24:16):
It's a great.
Brandon Johnson (01:24:16):
There's a lot of great restaurants in Europe, here in the US. Wonderful places that I've been. I don't know that consistently last 30 years that I've ever had a restaurant that I've enjoyed more honestly than Sushi Den. Culinary books. Bobby Flay Grilling is one of the great books. We still utilize that a lot. I mean, there's a lot of simple rustic kind of American concepts that he pioneered that have become very influential in a lot of different cuisine and restaurants, not just here in the US, but abroad. I think that's probably one that jumps out to me. And Julia Childs is a hero of mine. She went to the same culinary school that I went to and I look back at her and watching her on television, sitting there with my grandmother, that was kind of where I fell in love with cooking. And it certainly brings back those memories.
Daniel Scrivner (01:25:02):
It's an amazing origin story of that passion. Thank you so much. This has been an amazing conversation. You're so generous and with everything that you've learned and that you are now helping us learn. So thank you so much, Brandon.
Brandon Johnson (01:25:13):
Oh, Daniel. It's my pleasure. Thank you for having me on. It's been a real treat and really enjoyed the opportunity.
Daniel Scrivner (01:25:22):
Until next time, thank you so much for tuning in. For show notes, including links to everything mentioned in this episode, visit danielscrivner.com. There you can also sign up for my weekly newsletter where each week I send out a single email with all of the best quotes, themes and ideas from the latest episode. To sign up for that, visit danielscrivner.com/email. Just one more thing before you take off. If you enjoyed this episode, please leave a quick review in iTunes or Apple Podcasts. Great reviews help us land great guests. So if you've enjoyed this episode, take 30 seconds to leave a short review. We would so appreciate it. Thank you so much.