The Aspirational Investor Framework

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Note from the author: I first wrote about the Aspirational Investor Framework in the summer of 2023, before re-working the series into a newsletter that I published in February 2024. Since then, I’ve heard many cases of affluent investors and family offices that discovered the Framework through my writing,  offering them a worthy alternative to the traditional, hard-to-grasp asset allocation models provided by private banks and asset managers. What have I learned from what will soon be two years of using the Aspirational Investor Framework in Cape May’s advisory process? More on that next week.

Every client I’ve ever worked with started out with what they thought was their final, long-term asset allocation. 

And every single one ended up changing it along the way. 

The reasons are diverse. One realized that individual venture investments are a lot of work, so they pivoted back to funds. Another realized they didn’t like illiquidity of alternative investments, so they went with ETFs instead.

Why does this happen? It’s because the models used by private banks and wealth managers — the people affluent individuals turn to when considering asset allocation — often fail to reflect the realities of people’s financial priorities.

To be clear, private banks and wealth managers mean well, and they really do help you think about how to invest. I’ve had more than one “eureka!” moment while discussing asset allocation with them. Their internal research capabilities and decades of financial data can take a client’s needs and turn them into a customized asset allocation model that can assess whether the client will have enough money to last a lifetime or to endure various crisis scenarios. Their models are great - on paper.

But in practice, I’ve found them challenging to translate into the real world. They are too theoretical, too static and too inflexible. They don’t take into account how a client is actually going to go about the task of going from 100% cash to their target allocation, or how much time that is going to take them, especially when it comes to private assets. They can measure risk and return, and show you how those parameters might change if you shift between asset classes. But they aren’t able to tell you how those changes relate to your actual Investment Objectives, or what the trade-offs between those asset classes are. Most importantly, they don’t respond to how a client’s preferences, or perception of risk, might change over time - perhaps triggered by a review of a prior year’s investment performance.

The challenges above are real. As I started my work as a financial advisor in 2023, I was unhappy with the traditional, scientific models, and sought my own investment approach - and eventually, I found one that fits with my own investing philosophy.

(Admittedly, I’ve since encountered both small advisory firms and large banks starting to use goals-based investing approaches - in my view, a great development.)

Introducing the Aspirational Investor Framework

The Aspirational Investor Framework was pioneered by former Merrill Lynch Wealth Management CIO Ashvin Chhabra, who believed the asset management industry’s focus on indexing and ideal benchmarks didn’t respond to the realities of a personal life. Individuals don’t want to invest for the sake of a financial return: They seek to generate returns so that they can pay for their kids’ educations, protect themselves in an unexpected crisis, and fulfill their personal dreams and desires.

As Chhabra explains in The Aspirational Investor (a book which, unsurprisingly for frequent readers, I highly recommend), the framework incorporates “three seemingly incompatible objectives […]: the need for financial security in the face of unknowable risks, the desire to maintain current living standards despite inflation, and the opportunity for life-changing wealth creation.”

So how does the Aspirational Investor Framework work? Chhabra says investments can be allocated into three “Buckets”:

• Safety: Assets that make sure an investor can always meet their basic needs, regardless of any change in income. Examples include cash, fixed income, a private residence, or insurance policies.
  

• Market: Assets that allow an investor to maintain their lifestyle by generating returns on the financial markets, offsetting any increases in the cost of living. Examples include public equities, riskier fixed income such as high yield, or real estate. (I’ve written a deep dive into how we see the Market Bucket in light of potential income requirements - you can read it here.)
  

• Aspirational: Assets that allow an investor to achieve aspirational goals like buying a home or significantly increasing their wealth. These are risky investments with the potential for total loss of capital. Examples include direct investments into start-ups, crypto, or your own business.

The Framework is simple, but can be easily tailored to an investor’s individual goals. Whether that's a well-diversified, income-oriented portfolio in the Market Bucket, or the right balance of high-risk, high-risk reward investments in the Aspirational Bucket - if done right, investors are clear on how individual investments serve their personal goals. And lastly, the Framework is also compatible with the scientific approach used by private banks and wealth managers: Once an investor has decided how to categorize his assets into the Safety, Market and Aspirational Bucket, they are still free optimize their portfolio according to optimization techniques used in the traditional, scientific approaches to asset allocation. 

See the Framework as your first step of the asset allocation process: First, you define your goals, second, you size the respective Bucket according to the needs and limits of the respective goal, and third and last, you construct the ideal, customized sub-portfolio for each of those goals.

The Aspirational Investor Framework in Action

So what does the Aspirational Investor Framework look like in practice?

Imagine a tech entrepreneur who just sold their startup. After taxes and buying a new home, they now have about €5M left to invest. They still work for their start-up, with a salary of €150,000 that covers living expenses. They don’t expect to leave this job any time soon.

After the sale of their business, the client has spent time contemplating their Investment Objectives, which has helped them set a number of investing goals for themselves: They want to invest in long-term return-oriented investments. They are familiar with public equities but would also like to start investing in private equity, looking to do so in the most time- and knowledge-efficient manner. Through their start-up background, they have what they deem to be proprietary, high-quality deal flow, and want to allocate 10% of their portfolio to early-stage direct investments.

Here’s how they can do that:

Safety Bucket

Since they own their home and have a salary for the foreseeable future, this can be on the more conservative side at €300,000, i.e. two years’ worth of salary. Half of this would be kept in cash at the prevailing short-term interest rate, the remainder in short- to medium-term, safe investments such as term deposits and fixed income investments.

Aspirational Bucket

They’d like to allocate €500,000 (10%) of their portfolio to angel investments. There are best practices around how and how fast they would invest those funds — personally, I would advise them to act like a pre-seed venture capital fund, which would invest into 50-100 companies over 3-4 years (more on that here and here). While they are identifying those opportunities, they can invest the earmarked funds into low-risk assets, such as bonds or term deposits, to generate incremental yield - similar to the Safety Bucket.

Market Bucket

This is where the remainder of the money goes after deducting the Safety and Aspirational Bucket from the investor's overall net worth. In our example, that’s €4.2M. In the example at hand, the client would like to start investing in private equity. Here in Germany, the minimum ticket size for private equity funds starts at €200,000, which is sizable relative to their overall portfolio. Accordingly, it might make sense for the client to look into a fund of funds, or into an evergreen fund (which have become much more popular since I first published this series).

There are many other important considerations we can’t cover in full detail here, such as risk management, tax structuring, or the choice between self-directed or ‘outsourced’ investing. The Aspirational Investor Framework doesn’t solve those — but it gives you a great starting point to tackle them. Once you have decided on your rough asset allocation, you have a better feeling for the individual asset classes, and can then work with your advisors to figure out at what level to best hold them to realize your individual goals. (As always, if you are looking for support at implementing the Framework yourself, don’t hesitate to reach out.)

And you can of course ask your wealth manager what they think of your allocation, and how they might optimize it. After all, they might be the one who put you on your asset allocation quest to begin with.

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