Revisiting the Aspirational Investor Framework

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It’s been over two years now that I’ve started as a ‘content creator’ in my little niche of family offices, wealth management, and alternative investments. Since then, things have come a long way - in terms of my audience (thank you to all my 1.400+ subscribers), but also in terms of what I want to do with my professional career (build a wealth management firm).

And I’m happy to seem to have made an impression. When people ask who they should talk to in Berlin’s family office ecosystem, they bring up my name. I recently made it on a “best family office newsletters” list. But what is the impact that I am most proud of? It’s when people tell me how they implemented something that I wrote about. And most frequently, that has been the often-mentioned Aspirational Investor Framework.

So today, I want to talk about a year of actually using the Framework in practice - in terms of how it helped clients better understand their finances, but also in regards to where I saw limits of the Framework in its basic form.

💡For those who didn’t read last week’s re-release of my post about the Framework (or those who just subscribed - welcome), you can read it here - or just get the book, it’s a quick read.

Where It Worked Well

In basic terms, I found the Framework to be best suited for affluent investors that showed two criteria: One, that they are self-driven - meaning that they take care of their investments themselves, or outsourced parts of their assets to a trusted partner. Two, they are not full-time investors - while they all had clear experience in a variety of asset classes, they either couldn’t or didn’t want to spend all of their time taking care of their investments, instead prioritizing other entrepreneurial projects or private matters.

To me, the second part is key: They are all individuals that know how to invest, and likely could take care of it themselves if needed, but reached a point where they didn’t want a more technical view - they wanted an approach more suited to matching investments and goals.

To make things a bit more clear, let me share with you two success stories of the Aspirational Investor framework in action.

Showing affluent investors how risky their portfolio really are

In the last year, I met an affluent individual who had successfully sold their business for a low eight-figure amount. Since the exit a few years back, they’d been very active as an investor - buying not only a personal property, but also investing substantial sums into both venture capital funds and direct venture capital investments. As the ‘tech bubble’ of ‘19-21 burst, they reached out to me to assist them with a critical view of their current setup.

One thing that we focus on at Cape May is making sure that our clients can always maintain their lifestyle - more precisely, by designing their Market Bucket so that it is invested in a way, and large enough, to have the highest probability of generating the required income over 10, 30, or 50 years. 

That is a view that the client had not considered, instead focusing more on the overall (considerable) size of their wealth. So when we categorized their assets according to the Aspirational Investor logic, things became a bit more clear: They had most of their assets invested in the Aspirational Bucket, and most of their Market Bucket in illiquid, long-term investments.

It suddenly became clear to them that they had much more risk than they had wanted to take, exposing themselves to significant illiquidity risk. The other banks they worked with never brought up that risk, focusing either on the overall size of the client’s assets or simply just caring about what (shrinking) liquid portfolio they were allowed to manage. Thanks to the Framework, they realized that their investment strategy didn’t quite suit them as well as they thought - and we helped them make the required adjustments.

Helping affluent individuals understand how much they can spend

Most affluent individuals that we work with have hit a professional jackpot: Through skillful investments or a successful exit, they have reached a level of wealth that would be impossible to achieve through sheer work. Instinctively, they know that they’ll never need to work again as long as they keep their expenses reasonable - but how much can they spend? Or how much do they have available to spend on leisure or more risky, aspirational investments? It is a question that we frequently receive.

Once again, it is a situation where the Aspirational Investor Framework has come in handy. First, as a way to categorize existing assets, fitting them neatly into the Safety Bucket (cash, personal residences, insurance policies), the Market Bucket (liquid, diversified portfolios, as well as diversified illiquid assets such as private equity or real estate), and the Aspirational Bucket (direct investments, own companies, crypto, and all other assets). Second, thanks to a thorough financial planning process, as a way to outline the ideal breakdown - i.e. by quantifying how big an income-oriented Market Bucket should be given a certain income and return goal, before then adjusting the other two Buckets accordingly.

To make this example more practical: If an entrepreneur sold their business for 10M€ and has an income requirement of 120.000€ per year (adjusted for inflation over the long-term), by our math, they would need to put aside 3M€ into a portfolio generating returns of 5,5% to 6,0% p.a. to sustain themselves for the long term. You might be surprised by that figure, after all, that is much higher than the 4% “Day 1” return that is required (i.e. 3M€ * 4% = 120.000€) - but that is the impact of long-term inflation, expenses, and of course, a safety buffer.

Beyond that, we’d advise to put 1-2 years of expenses, i.e. ~250.000€, into the Safety Bucket. That leaves them with 6.75M€ to be invested freely - perhaps into a personal residence or a new venture, or simply into additional long-term oriented, simple investments such as a diversified fund portfolio. But if the investor knows that they put enough capital into the Market Bucket to never have to work again, they not only have a clearer view on how they can invest the rest - they hopefully also can sleep a bit better at night.

Where It Reached Its Limits

As I always mentioned: The Aspirational Investor Framework is a great tool, but it can’t solve all issues - it is a mere first step aligning an investor’s assets with their respective goals, which then requires traditional, more ‘technical’ analysis in topics such as investment strategy or tax structuring.

So in the spirit of transparency, let me share with you where I’ve felt that the Framework has its gaps and issues.

Asset-Class Redundancy & Categorization

By nature, the Aspirational Investor Framework is a goals-based investing approach, matching a specific goal (i.e. a need for a safety buffer for emergencies) with a certain amount of certain assets (i.e. the aforementioned 250K€ liquidity buffer). 

As a consequence, perhaps driven by how we use the Framework, certain assets might appear more than twice, which can be confusing to clients. For example, liquidity might appear in the Safety Bucket, but also in the Market Bucket as cash earmarked for capital calls. Public equities might show up in the Market Bucket when invested in a diversified portfolio, but might also be purely in the Aspirational Bucket when talking about a risky, concentrated single-stock position.

And furthermore, there is the frequent question around how to categorize certain assets. Take one of the most common asset classes in the portfolio of our clients, venture capital: In my view, venture capital funds could be categorized in the Market Bucket, assuming that an investor has built a diversified portfolio of funds. If they have just one, then it could indeed be an Aspirational bet. However, I would categorize direct investments in venture capital into Aspirational Bucket, as client portfolios are typically not diversified enough to become fund-like - meaning they retain the substantial default risks of the asset class. Or take crypto: While technically a liquid asset, we would categorize it in the Aspirational Bucket given its short track record.

So how should assets be categorized - simply by associating each asset class with one of the Buckets? Or my preferred approach - should we consider their respective risk, i.e. differentiating whether they have a risk comparable to a diversified portfolio, or whether they have the binary return expectation associated with Aspirational assets? Unfortunately, or perhaps by voluntary omission, the Framework isn’t quite clear here - of course, leaving us with some flexibility.

In comparison, some goals-based investing approaches try to avoid these issues by always separating liquid and illiquid asset classes. I can see why, but that sometimes also leads to issues, for example a personal residence becoming mixed up with other illiquid but return-oriented investments - also not ideal.

Institutional-Grade Portfolios

I want to help investors, whether large and small, to be more institutional in how they invest. In other words: Anything you do in a certain asset class should be as if you’re opening your doors to outside investors tomorrow - so going back to the example of venture capital, your sourcing, your portfolio management, and your ongoing reporting should be as if you are a small venture capital fund yourself. If there’s an asset class where you feel like you can’t act at that level, opt for the ideal Beta-oriented investment and make use of Structural Alpha.

But admittedly, when it comes to being institutional in your asset allocation, the Aspirational Investor Framework alone starts to feel… insufficient.

If a client has a nine-figure fortune and reasonable annual expenses, separating some money into the Safety Bucket or even the Market Bucket starts to feel meaningless. At those levels, where there’s often also a staffed family office, the Framework’s pragmatic approach starts to feel a bit inadequate - instead requiring the scientific rigour at what is truly an institution level, comparable to a pension fund or insurance company.

In most cases, the Aspirational Investor Framework, paired with an institutional approach to individual asset classes, is already a massive improvement over the prior structure - but as we reach the higher echelons of wealth, it is not surprising that it reaches its limits.

What’s Next?

Despite those challenges, my verdict is clear: The Aspirational Investor Framework continues to be my preferred approach to helping affluent clients think about their assets. Goals-based investing is not only more approachable for the everyday investor, I’ve also experienced it as the ideal way to help clients better understand what risk level is truly appropriate to them - not an easy task when it comes to risk-tolerant entrepreneurs. 

So until I encounter an approach that I deem superior, I will focus my efforts on elevating the Framework through further emphasis of institutional-grade approaches to asset allocation. There’s a lot out there for me to learn - and you can be sure that I’ll share my learnings here with you on the newsletter. So with that: Until next year, when I can hopefully share some more experiences with the Framework.

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