Where to Store Wealth
3 classes, 3 tiers
There is a lot that you can do on your own without high priced helpers. That’s good news because the high priced helpers are expensive. It requires a substantial amount of assets to justify. The top tier is the family office. Don’t even think about starting a single family office until you have at least $250 million and even that is marginal. Operating costs are typically 1–2% of assets, but don’t scale beneath several million dollars.
At $100 million, you can join a top tier multi-family office for similar, if somewhat less bespoke, services while spreading the costs. Some bare bones MFOs are open to people with as little as $30 million. But be careful with sharing services — if you’re the poorest and newest member of an MFO, it will feel like it. It could impact how you’re served or at least your perception of that service.
The mid-tier option is to be a private bank client. In the US, today’s best private bank options include JP Morgan (JPM), Citi (C ), Goldman (GS), and Bank of America (BAC). They need $10 million of assets to qualify, but more gets you better treatment. I used to be at US Trust before that was bought by Bank of America and integrated into their private bank. There was a timelessness to it in that they knew who you were, had nice offices, and could do things that made sense without losing you in the shuffle of a big bureaucracy.
For one small example, if there were checks floating around they could just take them and instantly clear them without any delays. I often wondered why they couldn’t treat all Bank of America customers more like that. It is somewhat similar to first class service on commercial flights. It is a lot nicer but in large part to attributes that could be replicated for everyone. The flight attendants are much friendlier, but could also be friendly in coach. Maybe in both cases it is easier to focus attention when the ratio of customers to workers is far lower.
After Bank of America, I went to First Republic, RIP. It was fantastic. $25 million got their best treatment but they had $10, $5, and $1 million tiers and were not that formulaic about it. If you were a good client on a net basis, they didn’t seem too worried about minutiae. They had intelligent private bankers who could handle everything. They offered a comprehensive line of credit and would lend against general partnership interest. If you had a demutualization, they’d seamlessly send out the checks and lend against the cash then the equity without a few frazzled days at the transfer agent when they worry that you lost millions of dollars of assets that was really just in transit. They did lots of other things that I thought was just normal but turns out that no one else does.
With less than $10 million, you’re pretty much on your own. A few institutions torture the definition of private banking with low minimums. Wells Fargo (WFC) requires a $500k opening deposit and $500k of new funding but their offering is minimal. TD (TD) requires $750k. But they aren’t real private banks. So, what do you do if you’re on your own? Keep it simple. Don’t overspend on fees. Avoid taxes.
Some specifics: the default allocation should protect principal. My favorite cash-like tool for this default is the Alpha Architect 1–3 Month Box ETF (BOXX) due to its tax efficiency and low volatility. It is optimal for a 6–12 month emergency fund, a down payment account for real estate purchases, and money set aside for capital calls. That could include demutualizations that can require several million dollars in a relatively short timeframe. Out of $10 million that you want to invest passively, this should probably be at least $1 million. If you have a good line of credit then you can be a bit tighter with this figure. If you don’t have access to pre-approved attractively priced leverage, then $2 might make more sense than $1. Net, you should keep several million dollars in the most liquid form. Always have more available liquidity than your counterparty. It lets you be at your most price-sensitive when they are at their most time-sensitive. Dislocations and crises should be your friends. As Charlie Munger put it,
“The way to get rich is to keep $10 million in your checking account in case a good deal comes along.”
While I agree 100% with the sentiment, I don’t have any foreseeable personal opportunities that big so scale this down a bit (like Charlie, if opportunities are much bigger than that, I can just seize them at work).
If you don’t need the money for at least a year, switch from BOXX to the Alpha Architect Aggregate Bond ETF (BOXA). It has similar tax efficiency characteristics to BOXX but is moderately more volatile. This volatility is worth it for more upside as long as you have a longer time horizon. Put the same $1–2 million in this.
Dump all the rest in the S&P 500. Contrary to the cliché, time doesn’t heal all wounds but it has healed all equity drawdowns for the past century. The most tax efficient way to get this exposure is via the Frec Direct Index which lets you harvest tax losses while you capture the index’s returns.
You need enough cash/BOXX to make it through a year and enough bonds/BOXA to make it through a few years then can just keep adding to equities beyond that. I see no limiting factor to this asset class. Start with $8 million. Don’t feel any need to complicate things further unless you want to.
I have endless ideas for improving upon this maximally simple combination, but you should complicate things only if you are good at it and enjoy it. You could get through life owning nothing beyond these three asset classes in these rough proportions.
Caveat
Know yourself. Know what drawdowns you can tolerate. If there’s any risk that you’ll panic at the worst possible moment, then own somewhat more BOXX and somewhat less Frec. Everyone — everyone — should direct index at least $20k to get started, but the upward limit is partially governed by your pain tolerance and only you can judge that.
Conclusion
I love researching event driven opportunities, special situations, Expert Market securities, litigation stubs, contingent value rights, Japanese net nets, demutualizations, and litigation funding. But one can live a fulfilling life without any interest in such things. If you don’t want to put in the work, you can excuse yourself from it by allocating to tax efficient, low cost cash and bond equivalents and equities.
There’s no perfect way to size but approximately BOXX for money you might need this year, BOXA for the subsequent few years, then the rest in Frec. If you don’t love this subject, good news: you’re done. If you love this subject, add to this base of cash, bond, and equity passive exposure.
TL; DR
Everyone should buy some BOXX, BOXA, and Frec Direct Index.
