“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
Brandon Johnson is the CEO and CIO of JFG Wealth, which oversees more than $1.8 billion in wealth for families across the United States. In this episode, Brandon and Daniel discuss the history and nuances of family offices, how to approach wealth, the spectrum of risk, teaching kids about saving and investing, and so much more.
Brandon serves on the Boards of Trustees for the University of Denver, Children’s Hospital Colorado Foundation, and ACE Scholarships. Brandon regularly speaks at industry conferences across the country and is a thought leader in the family office and wealth management industries.
Chapters in this interview:
- 00:00:39 – History of the Johnson Financial Group
- 00:08:30 – Brandon’s path to wealth management
- 00:12:50 – What is a family office?
- 00:15:38 – How JFG is different from other family offices, and the importance of a relational approach to wealth management
- 00:25:34 – Keys to successful family wealth management
- 00:37:32 – Teaching kids about saving, investing, and giving back
- 00:46:17 – JFG’s process for working with new families
- 00:53:52 – Working with families with investments as the final stage of the process
- 00:59:24 – The spectrum of risk and returns
- 01:08:29 – Diversification and recency bias
- 01:15:41 – Defining success
- 01:22:05 – Brandon’s favorite restaurants, as a Le Cordon Bleu-trained chef
Links from the Episode
- Connect with Brandon: LinkedIn | Website
- Johnson Financial Group launches wealth management arm | Denver Business Journal
- Katy Industries
- Missouri Kansas Texas (MKT) Railroad
- Union Pacific Railroad
- Hotel restaurant management degree and culinary school (Le Cordon Bleu Paris)
- Young Americans Bank
- Daniel Kahneman
- Amos Tversky
- Growth mindset
- Sushi Den
- Bobby Flay’s Grill It!
- Julia Child
- Family Office
- New York Stock Exchange (NYSE)
- Trust Company
- Fiduciary Duty
- Uniform Transfer to Minors Act (UTMA) account
- Environmental, Social, and Governance (ESG)
- Impact-focused investing
- Generational-Skipping Trust (GST)
- Spousal Lifetime Access Trust
- Behavioral Finance
- Individual Retirement Account (IRA)
- Treasury Note
- 10-Year Treasury Note
- Basis Point
- Municipal Bond
- Corporate Bond
- High-Yield Bond
- Blue Chip
- Small Cap Stocks vs. Large Cap Stocks
- Developed Market
- Emerging Market Fund
- Private Equity vs. Public Equity
- Direct Lending
- Mezzanine Debt
- Asset -Backed Loans
- Specialty Finance
- Senior Security
- Real Assets
- Venture Capital
- Asset Allocation
- Diversification (and “Diworsification”)
- Recency Bias
- S&P 500
- Warren Buffet
- Berkshire Hathaway
Brandon’s Favorite Books on Wealth
- The Cycle of the Gift: Family Wealth and Wisdom by James E. Hughes, Jr.
- Complete Family Wealth by James E. Hughes, Jr.
- Silver Spoon Kids: How Successful Parents Raise Responsible Children by Eileen Gallo and Jon Gallo
- Navigating the Dark Side of Wealth: A Life Guide for Inheritors by Thayer Cheatham Willis
- Beyond Gold: True Wealth for Inheritors by Thayer Cheatham Willis
- The Blessing Of A Skinned Knee: Raising Self-Reliant Children by Wendy Mogel
- Bridging Generations: Transitioning Family Wealth and Values for a Sustainable Legacy by Amy A. Castoro and Roy O. Williams
- Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values by Roy O. Williams
- Children of Paradise: Successful Parenting for Prosperous Families by Lee Hausner
- The Little Book of Behavioral Investing: How not to be your own worst enemy by James Montier
- Make Your Kid A Money Genius (Even If You're Not): A Parents' Guide for Kids 3 to 23 by Beth Kobliner
Brandon’s Favorite Books on Investing and Giving for Kids (Age 13+)
Brandon’s Favorite Books on Leadership
- Transfluence: How to Lead with Transformative Influence in Today's Climates of Change by Walt Rakowich
- Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies by Charles Koch
- Extreme Ownership (How U.S. Navy SEALs Lead and Win) by Jocko Willink
- Leadership and Self-Deception: Getting Out of the Box by The Arbinger Institute
- 5 Levels of Leadership: Proven Steps to Maximize Your Potential by John Maxwell
- Start with Why: How Great Leaders Inspire Everyone to Take Action by Simon Sinek
The Spectrum of Risk
Lower risk, public capital:
- 1-Year Treasury Bills
- 10-Year Treasury Bills
- Municipal Bonds
- Corporate Bonds
- High-Yield Bonds
- Blue Chip Large Cap Stocks
- Small Cap Stocks in International Developed Markets
- Small Cap Stocks in Emerging Markets
Increased risk, private capital:
- Private Credit (direct lending, mezzanine debt, asset-backed loans, and specialty finance)
- Private Real Assets (real estate, energy, infrastructure, and agriculture)
- Private Equity (growth, buyout, and venture capital)
Teaching Kids about Giving, Saving, and Spending
At age five, introduce the concept of give-save-spend. When children receive their allowance, or any other income, teach them to give away 10%, save 45%, and spend the remaining 45%. This simple 10-45-45 split helps kids understand that a portion of everything they earn should be given away, saved, and invested.
- For Giving: Talk to your children about what they’re interested in and passionate about. Let them decide which charity or charities they’d like to give to each year. You can go even further by volunteering at your children’s favorite charities and allowing them to present each charity with a check of their own gift so that it feels real to them.
- For Saving: Set up savings accounts (such as at Young Americans Bank) for your children and have them start contributing to it as early as possible. When they reach the 7th grade, let them choose whether to put their savings into a savings account or a UTMA investment account. Talk to your kids about how you think they should approach investing, but ultimately let them invest their money into the companies that they love and believe in. Review their investments with them every 3 or 6 months so they begin to understand how investments grow (and shrink) over time, depending on factors like the economy and the broader stock market.
- For Spending: Let your children make their own decisions about how to spend their money. You can weigh in, but ultimately respect that it is your children’s money to manage. Full ownership and empowerment are important.
Brandon, welcome to the show. I am so excited to chat with you.
Well, I'm thrilled to be here. Thanks for having me. Appreciate it.
Thank you for coming on. 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 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 a history of the Johnson Financial Group. 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. Would you mind, just to kick things off, sharing a little bit of that story with us?
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. 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 1800. It had actually run into significant disrepair. It had 3,000 plus miles of rail that was in pretty bad shape. Because of that, it accumulated a number of carry forward losses.
He was able to, back when you were allowed to do this, merge his operating company, underneath it Katy Industries was able to take advantage of all those carry forwards. That became his operating company. He actually sold the railroad back to Union Pacific, and it started off as the Southern branch of Union Pacific's operations back in the 1800s. 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. At its peak, it actually had 43 different operating subsidiaries, and they were all large but they weren't all in the same industries either. They were all scattered around. He had a railroad holding company that owned a shoemaking company in Germany, a shrimping boat operation in the far East, two silverware making companies, an airbag initiation trigger company.
He was all over the board. But as a part of his success, he had formed back in the early '70s, what we would now call a family office. Back then, it was just referred to as a private investment company. 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 all the associated moving pieces. That group started off in Chicago just overseeing our family's financial assets and other pieces of the financial picture. What ended up happening is that group continued to run it out of Chicago until he passed away in 1991. 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. 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. We continue to run that as a single family office until 2010. 2010, we opened up and started to work with a handful of other families. 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, estate planning, asset protection strategies, all those different kinds of things, is very resource intensive. When we thought about talking with other families to join forces, what we really came to the conclusion of was that we were all reinventing the wheel if we were running our own operation.
By joining forces, we believed that there would be a few benefits to that, and those have really played out over the years. 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 analyst due diligence efforts that we were all doing. We could all throw our best ideas in the pot, combine resources and really benefit from that leverage. We got to move from having a handful of employees up to 10, eventually 15, now we're up to about 30. 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.
You just have a more sophisticated approach than trying to run a single family office. 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 skillsets and the tools to be able to eventually engage with, and at some point assume leadership roles within the family enterprise. That's 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. 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 a creative 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 in the multifamily office.
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 right?
That's exactly right. Yep. Think about it. Everybody 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. In some cases, you'll have these families that have continued for 30 or 40 years to be executing their investment thesis 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. 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 and 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. 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. I explained how it fits into the buckets that they've identified, they're trying to fill. Each one of the families though remains in control of making the decisions. 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.
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 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?
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. 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. You're 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. It was an interesting decision for me. Two components really drove it.
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. Then two, I felt a sense of obligation. Knowing that we wanted to have a family member involved, these were going to be resources that we're going to be overseeing, not for consumption by my generation or the generation below, but we really view this as more of a stewardship relationship with our family's 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. 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. In that sense, I'm 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. There's a lot that goes into family enterprises, and anybody who's been in one understands that. Obviously, and I hadn't mentioned this, we had sold our interest in Katy Industries over a period of time. So the family office became the operating entity. When I about the appeal, I think there was an initial appeal that really 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 the 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 helping to be a steward and see it through a certain phase. 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.
In a second, we're going to stop and 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 this pooling of resources and talent and ideas. Am I correct that that's pretty different than a traditional family office, and can you define what a traditional family office is?
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. 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. 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. 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.
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. When we're out there negotiating terms on an investment, we're negotiating those terms on behalf of this entire group. 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. We also view the world a little bit differently than a traditional "family office" that was being offered through a banking platform or-
Trust company. Exactly. When we think of the world, we think 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 mechanical pieces of managing wealth are what we 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 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.
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. It really is more broad than that. We really strive for what we would call a healthy thriving fulfilled family. 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. 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. We've learned the hard way in some cases, and we've learned from this other group of families that have come together. [inaudible 00:16:39] approaches that families have taken that have really worked, and we've learned what hasn't worked. We look at 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.
For us and 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. 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 family that we wanted to become independent. For us and the families that we work with, it's certainly been the right decision.
I'm curious. Is part of that difference the fact that you guys have had four generations of learning and evolving and changing how you think about money and success?
It is. 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. A lot of the horror stories that you hear of families that have multi-generational wealth that's being passed down, 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 have greatly benefited from. 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. 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 you the same old stuff again.
Everybody has their baggage and the filters that they see and hear from the various family members. 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 have 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. 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 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.
It's like with anything difficult or important, you just have to confront it. You have to have those conversations.
We say no family is going to wake up on Saturday morning at 8:00 in the morning and say, "Okay, we're going to talk about the top three elephants in the room right now." They just don't do it. Then our experience has been that 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 have 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.
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. 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, best of class structures before you have things that go awry, the better off a family's going to be.
There are 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 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 keep that money there. But if you don't address ... if you don't 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 do more good with the money or be able to 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.
It is. I can tie this back to the personal experience. I believe that if my grandfather would have seen into the future and seeing how the money passing through subsequent generations has played out, I don't think he would have passed anything on. I think he would've allowed all of it to go to charity and would have allowed each family member to make their way in the world on their own. 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. Too often, I think the focus is on the money itself. One of the questions I hear from people on a fairly regular basis is how much should I leave to my kids? It'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. Where I've seen money really impair people and stunt their growth is when it is provided to them in a way where it's short circuits their need to actually go out and contribute to the world. 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? When the money is the point, and that's what the focus is and you lose the aspirational dreams and path that somebody would have taken otherwise, that's where I see that negative aspect and influence of money on a family's life. 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 success is 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.
I want to dig in a little bit further into something you 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 20 different families. 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. What are those things? 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. I'm sure that's some of it, but can you, I guess, expand on that a little bit?
I think it starts at the top. I think it starts with vision. 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? A large successful family is an organization, it's a complex organization. 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 from that. Having a top down message that's being repeated throughout the generations doesn't work. You have to-
It's not empowering.
It's not empowering at all. 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. 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'd 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. There's really neat ways to do that. One of my favorites is a values exercise where a family will take a deck of cards.
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 vague. 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. 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 to the value and the words, and then they rank them. Then the family will all come back together and we'll go around the circle, and each family member will articulate what their top five cards are, what they mean to them and why. It's interesting how many overlapping cards you end up typically seeing.
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 the five or six or eight things that we really identified that the family has figured out that have similarities. Then they'll go through this exercise of having winnowed 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 of sentences or a paragraph or two that captures what it means to be that family member, to be a part of that family. 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 in 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. 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. I think if I were to say one thing that successful families do well, they're transparent. 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 or whoever it is might say, "That'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. 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."
When you say that, and that's the message that's reinforced at 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. 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. I think the 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 if those ... 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 that 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. I'll tell you, 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.
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 education process where people understand 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.
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, let's say, kids that are ... I don't know, when they're in say their teenage years getting ready, and they know at some point in time they're going to have this potential windfall effect, and it almost breaks down as a visual where it's like there's two ... I don't know, there's a large room or something with tape down the middle, and it's 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 one at a time and get used to it and be able to talk about it and be able to ask questions? I imagine it helps it feel more like you're a part of it and not an outsider.
That's exactly right. 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, 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 [inaudible 00:33:29] All of the moving pieces that come along with this are changing all the time. 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, 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. When they're 50 years old, I want to have some extra provisions in place," and they're setting up a rules-based system. The rules-based system might work fine to prevent the kids from misappropriating assets during their lifetime. What does 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? To me, you can govern from the grave, and I've seen plenty of people do it. 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 literally the epitome of a trust fund kid.
Where I want to focus my family is on developing that culture so that my kids are learning to engage with this process. I view it very differently. I think that from a overall trust perspective, I want my kids to become co-trustees of their own trust at a certain age. 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.
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 can distribute it at will. You're really in control of those assets, and so that shield, that bail has been pierced." To me that represents the opportunity for them to develop the skills and the judgment and the understanding of the intent that trust.
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 rule space system. It feels very different to a beneficiary to have that structure in place, and it is certainly putting them in a position in 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 trajectory as opposed to trying to limit people because you don't trust them.
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, then there's an apprenticeship model where they're learning. I think another piece too that you touched on ties into one of my favorite themes and things to think about, which is just how often we only think about first order consequences and rarely think about second and third order, and what you just did ... So much of what you've just described is families getting caught in that trap, and they're only thinking about this initial issue and not all the subsequent issues [inaudible 00:36:50] going to come out of how they're handling that.
I think asking questions and then sharing 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. 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. I think it's almost just transforming the conversation looking at it from a different perspective. I think being able to do that and have people that ask you questions and to dive into that really helps.
That's amazing. 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 build on something you were just sharing is, you talked about for your kids that are 25, they become a co-trustee. Then there's this apprenticeship period. We're going to talk about 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 for your kids, so say they become 25, they go through that apprenticeship period, and they're now at a point where they can begin to 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 model and transition goes, so they can then express their values with the investments?
I think there's some relativity to that. 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 simple concept of give-save-spend. They have their allowance, there's a portion of it that they are giving away to charity and 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. On the saving side, we've had a bank account at Young Americans Bank that they contribute to.
On the spending side, they have 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. On the gift's side, at the end of the year, we've always sat down and with a smaller amount with the younger kids and 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 children's hospital or some cloths to 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. 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 is our threshold, that the save side, the girls can choose to put it into an investment account. We use a Nutmeg account of [inaudible 00:40:01] to minors account. Whatever they put into the account, we match. In that case, because it's a small amount, now the girls have been able to put $500 in, so we've matched that 10 times. So we'll put $5,000 in.
Then we'll sit down and say, "Okay, what is it that we're trying to achieve?" 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. We allow them to make their own decisions.
My daughters, one of them has chosen to employ for the most part, a fairly broadly diversified, very low cost 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." They're in control of these-
... [crosstalk 00:41:09] accounts. They're totally into it. We do full quarterly reviews. We sit down and we talk about what the markets have done, we talked about interest rates. They have some bonds in their portfolio. These are tiny little portfolios, but it's creating interest. That interest is allowing them to start to ask questions, to feel like they're engaged in a part of that conversation. Now, as they get older, they're going to have trust that their 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. We'll talk about what kinds of trade offs you're potentially making. If you have an ESG focus, environmental social governance, or impact investment focus, or it's something you don't want to participate in petroleum types of investments, you'd rather be renewables, well, those are all things that are absolutely valid and they are expressing an interest in being engaged with that process.
To me, that's gold, that's invaluable. 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 in tools for what is going to serve them very well in the future.
Yeah. I love that approach, and I'm actually going to listen back to this once we're done recording and make a bunch of notes for 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, in terms of teaching their kids about finances, is just almost like barking orders at them. Like, make sure you save some of this money. Are you sure you want to spend it all?
What that process you just described, 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 20s and their 30s. 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.
It's a great point. I think what 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? Now that they have a job, should they be contributing to their own clothing allowance, for instance? We go through an exercise where we talk about needs versus wants. One of the things that families will come to us with, they'll say, "Okay, I want my kids to start paying for this since that top-down, I'm telling you backing words that you think."
We'll say, "Okay, we understand. Humor us, let's sit down with the kids and let's actually ask what their needs versus wants are and how they would define those, so 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." The parents are like, "Oh yeah. Okay. I'm sure they'll say they never want to do it." 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. 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. 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.
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 how to talk to your kids about finances, how to approach it?
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, The 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 generations instead of next generation to put more emphasis on that growth, as opposed to just I'm next in line. 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. Navigating the Dark Side of Wealth would be one of those. There are a number of books. I think having a resource 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.
I will definitely send you an email after this and-
... get a full list from you, and that'll be in the show notes at danielscrivner.com once this gets posted. To transition a little bit and start talking a little bit more tactically, my understanding is for your firm, the minimum account size is typically around 30 million, which for a lot of people listening, it's a significant amount of money. We've already established a little bit that it sounds like for these families, they're typically managing a lot of that themselves. So they're coming more to partner, not necessarily to get ... They're coming with an idea of what they're working with and what they want to achieve. I'm curious to 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? How do you go about vetting those people?
Everybody comes from a completely unique set of circumstances. Some people will 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 setting up current plans, or they've heard about changing potential tax laws and losing out on these lifetime exemptions. They want to take advantage. A lot of people are hearing those things right now with the changing administration. All of those conversations are very different, and in fact, people have very different pain points. In some cases, it's why I have a whole lot of liquidity sitting in cash right now. I 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 a transition where a patriarch or matriarch has passed away, things have 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 have my ducks in a row."
When it comes to the families that we work with, one of the things that we want to really articulate is culture. For us, there needs to be a cultural fit. 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 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.
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. 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 of 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. That partly comes from our personal experience of having seen what happens when you don't pay attention to that.
Then thirdly, we work with families who value philanthropy. 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. 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. 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. It's really this concept of philanthropic heart and understanding the opportunities, but also the responsibilities that come with success.
Those three components are really important to us culturally. We'd 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. We're talking about money and death and differences and abilities of kids and divorces and new marriages and a lot of things that are the most important and scary thing for people to talk about. We really become a part of and a partner with their family. For us, making sure that we really have a good bond and a good fit with the family is really important to us. Then when we think about the ongoing engagement that a family is looking for, if it's more of a transactional approach and they want help for this set period of time to 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. 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. So being clear about that in the beginning is important.
Just to repeat back a couple of those things. It seems like clearly you guys are approaching it more like a marriage than dating, or helping out for a short period of time.
Which is important. Then maybe another way to sum it up or maybe to 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 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 making sure that you spend as much time on all the other layers around it.
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. Then there's all these back burner issues. 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 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. 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? Then that dynamic process never stops.
Once you have that roadmap as to what it is that you're trying to achieve, you're able to start to implement different types of solutions, use 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.
It's bringing all the important stuff that maybe doesn't get as much time and attention to the surface. I love that metaphor of once you nailed down the starting point in the target, that then you can course correct. It seems super clarifying. Just to focus in a little bit more on the investing side, if we think back to that metaphor of the starting point in 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 ... I mean, I know it's a lot more complicated than that, but partially through that magic wand exercise you just described.
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 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 investing asset allocation side?
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 longterm wealth engine appreciation that's filling up the various buckets and providing for the family to be able to achieve what is 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 five, six, 10 different entities.
You might have a family foundation or donor advise fund, a family limited partnership and retirement plan, you have your spending needs that you are needing to fund from assets inside of your state. Oftentimes, you've set up some sort of generational skipping trust, some sort of a spousal lifetime access trust. You have all the different 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 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.
Moving from ability, you would have willingness to assume risk, and that's what I would call sleepability. 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. That willingness or that emotional response to risk or to volatility would be something that's very important to work through. Then finally, what is the need to assume risk? 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 advantaged account that 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.
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. You might utilize that IRA more for gifting strategies right now, and you can, at this point, take $100,000 tax-free distribution a year to give to charity. That's a planning aspect to it. The generational skipping trust, you might own an underlying operating company, or you might own a ranch, for instance, that's a guest ranch or something. 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. 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 bedding 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. 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 that vision for what it is that they're intending to do. Then that investment piece is really that final component that 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.
I think it's a great encapsulation and it's a great point. One of the things that you mentioned at the beginning of that was this idea of your investments being an engine and having a bunch of outputs, and those can be yield, those can be returned 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?
It is, yeah. When we think about investments, we really think about the concept of risk versus return. 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 axis. 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 my mattress. What am I earning on that? I'm earning zero on that. 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 moving up the risk spectrum of fixed income, but you're being compensated for doing that. 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 on the equity section, so I'm moving right down my line here, moving into a big blue chip US large cap stock. The S&P 500, it's got a great dividend yield. These are very stable, large companies, great credits. 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 wheels off of a risk-free rate. 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. Thinking about mid single digits on my equity portion for US large cap, if I continue to take another click towards the more risky side, I'm going to move into small cap stocks, international developed markets that's going to be somewhere around a seven and a half percent expected return. 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%.
Now, it doesn't stop at that 9%, but that is the end of the public market space. 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 nine-ish percent, I've now moved into private capital. Private capital offers substantially higher returns than public capital, and it's simply because you have illiquidity risk associated with it. 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. Once I look at my private capital, there's really three broad buckets. I would start at private credit, so that's going to be the most conservative piece of my private space.
Those returns are going to start where the public returns stop. So starting at 10% and it's going to be generally 10% to 13% annual returns. Those are going to be very cash flow focused, typically quarterly distributions that I'm getting, and those are going to be things like direct lending, mezzanine debt, asset backed loans, and some specialty finance. You're looking at senior secured debt at the 10% range moving out into more than mezzanine debt at 13%. 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 cashflow focus and partly capital appreciation.
But certainly in real estate, if you're doing a development, less cashflow, more capital appreciation. But those are generally 13% to 18% returns. If I move to the final piece, which is going to be private equity, those are going to be the most aggressive in 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. 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 as measured by volatility or risk as measured by liquidity.
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 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. In really a larger family, the context you have multiple entities in different accounts, but really reviewed in the context of a wealth engine. 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 as long as Apple is a business. On the fixed income side, you're continually having those bonds for sure, and then you're reinvesting into new issues. On the private capital side, it is very much a limited time horizon. So Player Capital might be invested for five, seven, 10 years. You're constantly getting distributions coming back. Even if you're at a private equity fund and it's a 10-year life, typically by year five or six, you've gotten all your capital back.
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. The flywheel, once you have your private capital invested and it's continually being called the 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."
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 out significantly. 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. 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 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." 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. We want to make sure 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.
That was a masterful lesson in what that looks like, the way you broke down that horizontal line that made up the risk spectrum and how you describe some of those returns there. One of the pieces that I want to ask as a followup 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'd try to think about it is how much are you opinionated? 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 my strengths and weaknesses, or just the peculiarities around me.
Then 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 diworsification, where the goal is just more and more and 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 in how do you make sure on the flip side that when you're diversifying a portfolio, you're never getting into that diworsification territory?
I look at it in 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 protect recent market performance into the future. We call it recency bias. One of the most fascinating topics to me is behavioral finance. Behavioral finance is this concept that came about in the '70s, 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.
It's a very long list.
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 overconfidence in. 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 lagged. 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.
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. 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. 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.
Looking at the public markets, in the past, and I would say going back to as late as the mid '90s, there was not as much efficiency as there is today. You had large brokerage houses until Schwab came along and 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. 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 outguess 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. I think an example of that today would be looking at Warren Buffett. So people look at Berkshire Hathaway and they say they're the most famous investor of all time. He's crushed the S&P 500. Well, he crushed the S&P 500 until five years ago. Now, for all time periods that Berkshire has been in existence, Berkshire's [inaudible 01:12:09] underperformed in the S&P 500. Something even when he was outperforming, Buffett made the bet and offered it to anybody that could beat on a persistent basis over a 10 year period, the S&P 500 would pay million dollars to, and nobody would take them up on the offer.
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 have dragged those down. We're living in a time right now where having invested just in the US makes sense. So anything else that has hurt your returns. 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.
We have this notion that that is the best way to invest. If you look at the go forward next 10 years and next 20 years, I find it hard to believe that you're going to have the re-emergence of individuals who are able to continually outperform on a risk adjusted after tax and after fee basis. Then one of the things we never talked about is the tax aspect, because all investment returns are reported in pre-taxed dollars. From my perspective, you can absolutely over diversify. 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.
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 [core tile 01:14:06], top decile types of strategies, they have the ability to create five, six, 900 basis points of alpha out above and beyond the 50th percentile. 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. 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.
Yeah, it'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. Then just one other little thing I would add is on that note about having sub strategies, but 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. I think that makes a ton of sense. I want to transition now. I could ask you questions for another handful of hours, but I'm so thankful for your time. I'll move on to the closing questions. 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 is I've gotten a chance to know you more and more.
You just have always struck me as somebody that has it all down. You're very responsive, you are always so punctual, you're so well-spoken. I'm curious if we dig under the surface there, what are the things that you focus on day in and day out, and what is your definition of success as you think about what that looks like both personally and I think professionally?
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. That said-
I'm sure if you asked anyone's wife, they would say that.
There you go. There you go. There are some universal truths out there. I would say success to me is 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 worked very hard on. Leadership is one that fascinates me. I'm certainly every day trying to become a better leader to help really not only to support and to nurture, but to help inspire, and how do you inspire others? To me, the self-actualization concept is so important, and I certainly aspire to that. 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?
And as a leader, how can I unleash the potential in others and inspire them to seek to achieve that very lofty expectation of themselves? 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. 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.
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. 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.
I feel a very significant sense of responsibility because of that. All of us certainly can get wrapped up in the day-to-day 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. To me, that's another piece of success is really understanding and living out that stewardship role.
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. 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 to really unlock another piece of who I am and to become stronger and to 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.
Yeah. That's beautifully said. I love that nowhere there was any mention of money. Secondly, 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 that.
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. The ones that I've seen that have done that, that I respect, that have reflected authentically when they've gotten there 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 material success. 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.
Yeah, they thought there was going to be a beautiful temple there. Just nothingness.
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. 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."
And probably not a friendly pigeon.
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.
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?
Oh jeez. Oh favorite?
You can also just be like, "I like these," but ...
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.
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 the 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 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. Julia Child is a hero of mine. She went to the same culinary school that I went to, and I looked back at her and watching her on television, sitting there with my grandmother. That was where I fell in love with cooking, and it certainly brings back those memories.
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.
Daniel, it's my pleasure. Thank you for having me on. It's been a real treat and really enjoyed the opportunity.
On Outliers, Daniel Scrivner explores the tactics, routines, and habits of world-class performers working at the edge—in business, investing, entertainment, and more. In each episode, he decodes what they've mastered and what they've learned along the way. Start learning from the world’s best today. Explore all episodes of Outliers, be the first to hear about new episodes, and subscribe on your favorite podcast platform.
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