a16z Wealth Manager: Embrace 40% market drawdowns; don't invest 80% of your "first pot of gold" in friends' startups.

Source: Sourcery Podcast

Compiled by: Felix, PANews

Michel Del Buono, Chief Investment Officer of Perennial, a multi-family office under a16z that provides investment services to entrepreneurs, leaders, and institutions within the a16z ecosystem, recently shared insights on the Sourcery podcast about how top Silicon Valley founders and investors manage their initial capital and prepare for potential major events like the SpaceX IPO. PANews has compiled some highlights of the conversation.

Host: You are the Chief Investment Officer of a16z Perennial. Is this the family office of Marc and Ben (founders of a16z) or a multi-family office?

Michel: Perennial is essentially a multi-family office that serves entrepreneurs or investors who have already partnered with Perennial. They may not all have received investment from our company, but many are actually supported by a16z.

Host: What is the structure of Perennial?

Michel: The reason we founded Perennial (about four years ago) was a reflection on the state of the wealth management industry. Partners like Marc and Ben had previously worked with traditional wealth management firms. They saw that a16z's LPs (limited partners), such as large sovereign wealth funds and large pension funds, had very high-end and professional investment teams, but their wealth management services for individuals, especially the quality of investment advice and investment acumen, were disappointing. This doesn't refer to the overall service, but specifically to the investment aspect.

Another purpose of Perennial is to build a community around a16z, as the community is at the heart of a16z. This helps the founders on another dimension of their personal lives; if you can lighten their load, they can focus more on the business. This makes our relationship with the founders much longer. Because you typically begin building a relationship during their early stages, and after they achieve their initial success, the relationship doesn't have an artificial end. You can continue to help them plan for life after achieving that success, such as philanthropy, asset management, and wealth transfer.

Host: I'd like to learn more about Perennial's strategy and structure, but before that, it would be helpful to delve deeper into the current state of wealth management. What are the biggest problems right now? What structural issues have you observed in wealth management approaches?

Michel: If you are a wealthy individual, there are basically two ways to manage your wealth: one is through traditional RIA (Registered Investment Advisor) or wealth management channels; the other is through traditional asset management companies, such as hedge funds and PE (private equity) firms. Of course, both of these approaches have their own problems when an individual owns institutional-level wealth and is required to pay taxes.

First, most traditional wealth management companies spun off from banks, which themselves don't train employees to be professional investors. These employees are trained to be responsive and helpful service providers. As a wealth manager, your returns depend on the growth of your business. So essentially, you've never received training to be an investment expert, and therefore, when you spun off to build your own large, independent company, investment remains a secondary focus. Therefore, I primarily categorize these products or services as retail products, simply cloaked in a very high-end service guise when it comes to investment, along with all the ancillary services like housekeeping, dog walking, and nannies. But overall, it falls far short of what one would expect from someone with an institutional-level balance sheet.

Furthermore, there's a misalignment in the fee structure. Most companies rely on a "flat fee" (charging the same amount regardless of what you do). It's human nature to choose the easy task if the rewards are the same as the difficult one. We see many portfolios that are extremely simple, focusing only on standard market stocks and bonds, with almost no attention to alternative investments. Offering alternative investments requires hiring highly paid, ambitious professional investors, who are difficult to integrate into an organization that isn't investment-centric. Therefore, this uniform flat fee arrangement discourages them from investing in building alternative investment teams, as buying stocks and bonds is easier.

Another approach is through traditional institutional asset management companies. Their largest clients are non-profit organizations (pensions, endowments, sovereign wealth funds, etc.), which do not pay taxes. Therefore, these institutions don't focus on tax factors at all. In California, however, individuals may have to pay more than 50% in taxes. For individuals, the easiest "alpha" to obtain is "tax alpha," but these institutions are not even allowed to optimize after-tax returns due to their fiduciary responsibilities, because the vast majority of their clients only care about pre-tax returns. Therefore, they are structurally unable to serve individuals.

Therefore, an awkward "no man's land" has emerged: taxable individuals who should have access to institutional-level asset allocation cannot obtain it through either of these standard channels.

Host: Dave, who brought us together, would like to hear what you've observed across different generations of wealth. From the long-term accumulation of industrial wealth to what a16z excels at today: creating billionaires very quickly through AI and innovation cycles. Along with this shift, what changes have occurred in wealth management?

Michel: Wealth management approaches differ significantly across different generations. When I meet a family, I can even guess which region they're from. The industrial boom was in the old industrial areas (the Midwest). If I meet a Chicago family, they typically sold their businesses a generation or two ago, and their current "business" is managing family assets. Therefore, they are very knowledgeable about all the terminology and asset classes, and they focus on performance.

When you come to the West Coast, you're dealing with the very people who have just created wealth. They're incredibly business-minded, but they haven't treated wealth management as a full-time profession like multi-generational families. They typically face two choices: create a single-family office (which is extremely difficult) or join a multi-family office. When they join a multi-family office, they face many questions that I think are not so easy to answer: What am I paying for? What am I getting? What do I want? Because they may not necessarily understand the industry, they tend to retreat to what they can understand. For example, how quickly do people reply to my emails? How much help can they provide when I'm in trouble? These are important things, but not the only things. Evaluating investment performance is crucial because, over a person's lifetime, just a few hundred basis points of extra performance can mean a difference of hundreds of millions of dollars, which could be used for philanthropy or other purposes. But this point is often overlooked in communication.

Host: I remember you mentioned that there's a big difference between other wealth management firms that lure you in with all sorts of customer service, making you overlook the actual performance of your portfolio. What have you seen in this regard?

Michel: This brings us back to the fixed-fee arrangement based on AUM (Assets Under Management). If I'm selling you a bunch of services, why should I charge you based on your total assets? Imagine you go to get your car repaired, and the mechanic comes out and says, "It'll cost you 10 basis points off your balance sheet to fix this car." We'd all be baffled, right? It should be billed by the hour. But for them, charging by AUM is clearly more profitable than charging by services. They treat investment management as a cost center, just going through the motions, focusing on the service. That's why these portfolios are often very simple. Building a VC portfolio takes 10 years to see results, and many companies don't have that patience. If you don't build an in-house professional investment team, you can only invest in other people's funds, becoming a fund of funds (FOF), which results in double charging. This is a huge burden for clients. If we hire professional investors who were previously paid purely based on investment performance, we can do the underwriting or direct investment ourselves, saving huge amounts of hidden costs. Even saving half is still hundreds of basis points of alpha. Therefore, I believe that proper structural design is very important.

Host: Family offices are very popular right now. But you've said that running a single family office is difficult. Why should people avoid making creating a family office their first step?

Michel: Having your own family office sounds cool, but you need to be clear about your goals. If you're just hiring people to do your financial statements, you can call it a family office. But if you want to build a global, multi-asset portfolio, you'll need to hire at least five to seven professional investors from different fields (fixed income, equities, venture capital, private equity, real estate, etc.). If your balance sheet isn't in the billions of dollars, the salaries you pay to these teams will eat up all your profits.

Another challenge is retaining talent. These professionals are ambitious, while the family head is essentially a manager registered as an asset management company, and many founders have no desire to hold weekly meetings to manage the team. Therefore, it's difficult to retain talent in a vacuum. Furthermore, many people establish single-family offices to unite the family, but statistics show that when family elders pass away, the family office often falls apart, assets are hastily liquidated (sometimes we are the bargain buyers), or heirs take the money and go their separate ways. Therefore, single-family offices face multiple challenges.

Host: At what level of wealth should people consider choosing wealth management over home management?

Michel: For wealth management firms that offer extensive investment expertise (like Perennial), the minimum threshold is roughly $25 million to $50 million, but it's actually more suitable for clients with hundreds of millions or billions of dollars and a multi-generational perspective. So they're more like endowments than simply individuals.

Host: How many families do you serve now?

Michel: We deliberately keep our scale small, working with only a few dozen families across all our programs because we value a high degree of customization. Many companies in the industry operate on a "template" basis, categorizing you based on your risk appetite and liquidity, and then applying standard procedures. We don't do that. We believe our partners are people with multi-generational wealth. Therefore, they should have tailor-made asset allocations and investment projects. We've done a lot of work around their concentrated shareholdings, and we've built a dedicated team for this.

Host: Is this the main difference between Perennial and Silicon Valley-oriented companies like Iconiq?

Michel: I think most other Silicon Valley-oriented companies try to offer a full-stack product that provides all services. But at a certain revenue level, there's a limit to what you can build internally, so many of these companies don't even have professional investors. I often ask people, "Guess how many professional investors this investment advisory firm has?" People will guess 20%, 30%, but in reality, it's often zero, one, or two. That's the huge difference between us and them.

Host: There are going to be many large-scale wealth creation events coming up, with rumors suggesting SpaceX will have a $2 trillion IPO. What are your thoughts on this? How can we prepare for these kinds of liquidity events for early employees and founders?

Michel: If it happens, it will be the largest IPO in history, and whether the market can absorb it will be a very interesting test. In terms of preparation, it's crucial to properly structure tax, estate, and trust arrangements before the IPO; after the IPO, the key is how to gradually diversify investments. I wouldn't claim to know more about SpaceX than someone who has worked there for 20 years, and I wouldn't advise them to immediately sell 100% of their stock to buy bonds. Part of the strategy is diversification, and another part is long-term holding and thinking about how to profit from stock volatility (such as the options strategy we've developed) without having to sell the stock.

Host: That's really interesting. I've spoken with several people in Los Angeles about this IPO. I've spoken with Shawn Maguire of Sequoia Capital, who has invested billions of dollars in SpaceX and Musk's company. I've also spoken with engineers and people who have worked at SpaceX. It turns out there's not only a shortage of wealth managers, but also a severe shortage of those with the expertise for family offices—a service vacuum. I know SpaceX isn't just in Los Angeles, but also in Texas, and there are definitely differences between the two locations. What are your thoughts on this? Who should they contact?

Michel: Because many engineers and other professionals there aren't in the wealth management circle, they lack the ability to evaluate various options, so the result is often that they go where I think they shouldn't. So the challenge for them is to invest enough time to understand this field, even if it's not your area of ​​interest.

I always advise people to look at the background, education, and work experience of the people you hire . If they've never actually worked in professional investment, don't expect professional investment advice from that firm. I believe that taking the time to do your homework is an extremely important first step. People often say they got a referral from an acquaintance, "Oh, my friend uses so-and-so, he's a good guy, so I chose him." I always like to use a medical analogy because it highlights how absurd this decision-making process is. Suppose you have serious cancer and need major surgery. Would you ask your neighbor, "Hey, do you know a good neurosurgeon?" Of course not. You would read hospital reports to find out which surgeons perform this type of surgery the most, and the same applies here. Your wealth is the culmination of a lifetime of work. This is not a game; it's extremely important. So invest the time to understand what you're buying , because I'm often the recipient of this outcome. I see people go somewhere, and then they come to us saying they didn't like the service, and when you ask, "Why did you choose them in the first place?" the answer is almost always, "My neighbor, my friend, or my colleague recommended them."

Host: How easy or difficult is it to switch to a wealth management company?

Michel: It's incredibly difficult. This industry is designed to "trap you." They have all your account numbers, wire transfer instructions, trustee information, and so on. Even in large custody firms, if you're an individual client, you can do many things yourself, but once you switch to an RIA platform, those self-service functions are disabled, locking you into their ecosystem. That's why there's such fierce competition in the industry for clients who have just gained liquidity, because once a client chooses someone, the probability of them switching is extremely low.

Host: When you actually collaborate, what products do you showcase to them? Do you guide them into the world of art? For example, how did you initially set up these typical investment portfolios for them? You mentioned a gradual process, but how do you balance the various services?

Michel: In our partnership, asset allocation is a gradual process. We are very open with our clients, telling them they don't need to put all their assets with us (while most in the industry would require you to hand over everything). We prefer to work with people in a more linear way. We acknowledge that their portfolios will change over time. Therefore, we don't ask clients to exit a position entirely on day one. We provide forecasting tools.

Yes, unusual and unconventional alternative assets are also included. For example, some clients are interested in art. While I'm not an expert, I know experts who can help. More importantly, we offer advice. Many companies simply list options and leave it to you to choose because they're afraid of taking responsibility. We, on the other hand, will clearly tell you that if you're investing heavily in art, you'll need to balance your portfolio with other assets. Going back to the medical analogy, you want your doctor to clearly tell you, "You need surgery; herbal tea won't help," rather than leaving you to choose between surgery and herbal tea. We're proud of this.

Host: What are your thoughts on the current market volatility (AI, geopolitics, war, etc.)? How do you help clients navigate these challenges?

Michel: My favorite quote is: "Volatility is not the enemy." Many people are afraid of volatility, but if your balance sheet is deep enough and you maintain a certain level of liquidity, volatility is a huge opportunity. The stock market experiences a 40% drawdown every four or five years , which is like a "fire sale." You should maintain flexibility and seize the opportunity when an advisor calls you saying, "It's 40% off now, it's time to send your truck over and stock up."

Host: How much do you like to allocate in areas such as cash and real estate?

Michel: Real estate is a very cool asset class for taxable individuals. It's not correlated (if you have a lot of risk in tech stocks). Many wealthy Americans (including a certain president) made their fortunes in real estate. Because when tax laws were drafted in the 1920s and 30s, only tangible assets were considered, the tax laws were extremely favorable to tangible assets (they could obtain stable returns through depreciation deductions). If you can tolerate low liquidity, you should have a lot of real estate in your portfolio.

As for cash or highly liquid bonds, people don't like the 3-4% return on bonds. But I tell them, you hold bonds not for that 3-4%, but for the flexibility and option value of being able to cash out and buy other assets at any time. During the global financial crisis, the only thing that could be liquidated was US Treasury bonds. Treasury bonds are safe-haven assets, and their prices can even be higher during wars or crises. You take that cash and then buy distressed assets.

Host: What is the most important lesson you learned from Marc and Ben?

Michel: It's about building teams. When I first arrived, they told me, "We don't hire people because they have no flaws; we hire people because of their skills." I used to work at a large management consulting firm where performance reviews were all about correcting my weaknesses, never mentioning my strengths, which was incredibly frustrating. Here, it's the complete opposite. If you're good at something, we celebrate it; we're all human, we all have flaws, but we can learn to live with them. The result is that everyone I've met in every function here is exceptionally talented; the talent pool is astonishing.

Host: What is the biggest mistake people often make when it comes to wealth?

Michel : For startup founders, because they grew up in the venture capital world, when they acquire their invaluable "first pot of gold," instead of setting aside some for a rainy day, they immediately reinvest it in a bunch of very early-stage startups recommended by friends. Listen, if you're going to be a VC, at least be systematic. Don't throw 80% of your newly acquired cash at the expense of three friends. This almost always ends in tragedy. Because they themselves are survivors of this phenomenon, they struggle to see the overall industry statistics, always assuming that investing in three will guarantee at least one success, but usually none will. Reinvesting hard-earned liquidity back into highly uncertain, illiquid ventures is the biggest mistake I've seen.

Host: Has the IPO window opened? Which will go first, SpaceX or OpenAI?

Michel: I think SpaceX will go public first . OpenAI and Anthropic are currently in fierce competition. These companies can still raise huge sums of money in the private market (like OpenAI's fundraising with large VC funds), so as long as they can still raise tens of billions of dollars in the private market, the pressure on them to IPO isn't significant. Ironically, when the economy slows down and private capital becomes less readily available, they might be forced to IPO.

Related reading: Interview with a16z co-founder Marc Andreessen: Founders are better off not introspecting; humans are always accompanied by fear when it comes to new things.