Escaping the bonds of supermarket asset management silos constructed for the mass affluent can be done through a simple solution: a risk allocation framework.

The competing opinions coming from asset managers today are only eclipsed by the personal interests that generate them. Personally, I respect the opinions from small, boutique think tanks that also manage money. While they have skin in the game, they’re small enough to avoid getting caught up in the supermarket of asset managers who conflict out, falling prey to the allure of power and money that creates its own weather patterns.

For instance, I respect John Hussman as a smart, independent thinker. He and Jeremy Grantham agree that the current market is a “Real McCoy” bubble. I’ve also been a longtime fan of the thinking produced by The Leuthold Group, especially Jim Paulsen, who consistently offers constructive conversation on today’s market.

So, how should an executive prepare by positioning themselves smartly? The probability of muddle-through is low. There’s a higher likelihood of bifurcation: a huge up or a huge down.

My thoughts for your consideration are meant to help you escape the bonds of supermarket asset management silos constructed for the mass affluent. Doing so requires strategy, tactics, financial frameworks with short feedback loops, and progress-to-goal reporting. Seems like table stakes for an executive — but if you’ve been frustrated by asset managers or Wall Street as a whole, you’ve probably felt this disconnect.

Executives live in a unique ecosystem. You are not the typical investor. Your concentrated company stock position and lumpy annual incentive compensation often complicate your liquidity strategy — these make you more fragile to market disruption. Equally as challenging are “your people,” who offer uniquely competent advice: Merrill, Morgan, and UBS are uninterested in building a solution for you.

Let’s recap:

  • “Your people” are only 4% of the advisor population.
  • Your strategy must address your tightly coupled financial system.
  • The wirehouses are uninterested in building a solution for your execution.
  • Your cash flow is more fragile to market disruption than any other group of investors.

Have we got that right? What’s your gut tell you? “What got me here, won’t get me there”? I have a solution to address the problems surrounding your people, your strategy, your execution, and your cash flow.

A Case for Discipline

Executives at public companies have a tightly coupled financial system. Your income, your annual incentive compensation, and your concentrated company stock positions all go up and down together — it’s correlated. Whether it’s my list above or your own list of current uncertainties, I believe your situation as an executive at a public company is unique. As such, you require disciplined people, disciplined thought, and disciplined action (as Jim Collins puts it).

The CEO of an oil and gas company once told me of a bumper sticker he saw in the early ’90s that read, “Please, Lord, give me one more Boom; I promise not to screw it up this time.” The two of us were having that conversation in March 2020, right after he experienced an 80% drawdown in his concentrated stock position. I personally had over 50% of my wealth in Merrill Lynch stock in September 2008, when the stock plummeted from over $100 per share to $3 per share.

My team makes outbound calls to executives who have interacted with content on our website. When they’re fortunate enough to speak to an executive (rather than leaving a voicemail), the most common response is either “I’ve got a guy” or “I’m well taken care of.” That recurring statement generated an intense curiosity within me: Are they prepared like I was prepared in 2008 or like my CEO friend was in 2020? (Which is to say not prepared well enough.)

Today, investors are inclined toward speculation; greed and envy rule the emotional cycle. I don’t know when investor sentiment will shift from speculation to risk aversion, but the postmortem thought process is always the same for executives: “I should have spent time considering competing viewpoints; I got locked into an ecosystem that only supported my view and what I wanted to hear.”

I speak from experience when I say we base our office’s purpose on preserving and enhancing your walk-away money. When investor psychology is inclined to speculate, they tend to be indiscriminate about it. Conversely, when investors are inclined to risk aversion, they are increasingly selective.

Your Risk Allocation Framework

I’ve spent the past 30 years using frameworks and asset management to navigate these cycles. During that time, I learned how to design and maintain a risk allocation framework comprised of three “buckets” of risk to achieve three purposes.

  • Personal Risk: Protection from anxiety and poverty.
    We cannot jeopardize your basic standard of living.
  • Market Risk: The ability to maintain your standard of living and status in society.
    Investors must earn a rate higher than inflation after taxes.
  • Aspirational Risk: The opportunity to enhance your lifestyle.
    You want to increase your wealth substantially, meet your aspirations, and achieve your goals.

As an executive, I assume your concentrated company stock position is your Aspirational Risk, meaning it can significantly enhance your lifestyle. You may also own private equity, commercial real estate, or business interests in this risk category. Asset allocation within this bucket is important for many executives to achieve walk-away money. We encourage this.

If you build a SWOT analysis, your Aspirational Risk is one of your largest strengths. Our strategic designs itemize the assets in this risk allocation along with the assets in your Personal Risk bucket. Your Personal Risk bucket includes your properties, cash, money market, treasury bills, CDs, municipal bonds, and pension plans. Finally, stocks, bonds, and cash comprise your Market Risk bucket, which serves to maintain your lifestyle after taxes and inflation.

Our objective is to display your current allocation of risk across all assets, then ask you if it represents your goal. Is it aligned to your purpose? If you have 80% of your wealth in Aspirational Risk, with a concentrated oil and gas position and no real net worth to show in your Personal Risk bucket net of debt, does this accurately represent your priorities? Probably not. It would be a threat or weakness in your SWOT analysis.

I learned this lesson in the postmortem of 2008. I didn’t have a sufficient liquidity strategy to navigate the Great Recession. It was a difficult lesson to learn. But now, a component of my purpose is to use that experience to lead others around that pothole. Many executives will barbell the risk buckets and allocate most of their assets to the Personal Risk and Aspirational Risk buckets. This is a logical step in the executive-professional cycle, from VP, to SVP, up to the C-suite … until the Aspirational Bucket gets too large. Then, selling concentrated stock positions is recommended to start building the Market Risk bucket.

I consider your risk allocation framework to be your “chessboard.” On the first page, we have a strategic conversation based on the purpose of your capital (What are you trying to achieve?). On the second page, we consider what keeps you up at night — then, find a balance between the two. It is remarkable to me how this simple framework can align your purpose so effectively. It provides executives (and my team) with a scaffold that can be maintained and revisited in future quarters. While markets change, job security can be threatened, and liquidity is impacted by large purchases, this framework enables you to see your financial self in the mirror — and evolve.

Evolve With an Edge

Asset management strategies have come to sound like Charlie Brown’s teacher: “Wah, wah, wah.” Nothing is unique or tailored to the investor, and it all comes for an extraordinary fee. As I grow older, I learn what to do and what to avoid. The trend among advisor firms is to outsource portfolio management, as firms allocate resources to fulfillment strategies instead of managing money.

When I began my career in 1990, there were three investment edges to prove value:

  1. Information Edge
  2. Analytical Edge
  3. Behavioral Edge

Today, only the behavioral edge is left, and it’s done through discipline, time horizon, and concentration. So, our simplified asset management solution is disciplined and concentrated to maintain your lifestyle in the Market Risk bucket.

In 2020, our models managed the market volatility. But I think the enhancement to the executive walk-away money is accomplished by using the Market Risk bucket to enhance the Personal Risk bucket. This is done by expanding your liquidity strategy and creating a robust defense against your current list of uncertainties.

After a 30-year career, I left Merrill Lynch, and later UBS, to finally launch Pulliam Family Office for the benefit of executives. I have a vision of what I want to accomplish for executives — and it’s not possible to achieve it at Merrill, Morgan, or UBS. My experience and expertise help me lead and design strategies, execute frameworks with better success metrics, and preserve and enhance executives’ walk-away money. I will open Pulliam Family Office Tax and Pulliam Family Office Financial Planning in January 2021 as the next step in providing a robust solution for executives.

My ask of you is to consider competing viewpoints. Get out of your current ecosystem. Allow us to dismantle the silos of your asset management, risk management, tax, legal, banking, lending, and insurance. Many have made the mistakes in the past — it’s not necessary for you to repeat them in the future. It is the standard postmortem reflection from executives after all the choices are gone … after wealth has declined.

I encourage you to take a moment to schedule a brief, 15-minute discovery call here — or to at least say “yes” to my team when they call you to follow up.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance is not a guarantee of future results. Investing involves risk regardless of the strategy selected. Opinions expressed are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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