By the time Aaron Izenstark and his partner, Howard Nixon, opened IRON Financial in 1994, they were veterans at managing downside risk. Both were members of the Chicago Board of Trade when the stock market crashed in 1987 and when the first Gulf War erupted in 1991-events that left a lasting impression on their investment philosophies. 

"When you're in the middle of these events in terms of financial markets, you get scars that never leave you," says Izenstark. "You're concerned that the next morning when you wake up, some other disaster is going to hit."

This sense of foreboding helped shape the new firm. "We tried to create a culture that manages for all times," he says, "not just an up market, not just a down market, but for all markets. The key is being prepared for all market conditions all the time. The strategies need to implement that."

IRON Financial, a registered investment advisor in Northbrook, Ill., with $1.3 billion under management, provides asset management services to individuals and institutions and corporate retirement services to employer-sponsored retirement plans.
The firm serves some 600 family offices and other private wealth clients across the country, with accounts of up to nine figures. The average allocation is in the $2 million to $5 million range.

Although IRON Financial's private client business is substantial, it's also "happenstantial," says G. William McCoy, the firm's chief development officer. "Those are clients who have approached us over time," he says. "We've never marketed for private clients. Our primary business, asset management and corporate retirement services, is focused solely on wholesale distribution channels-other intermediaries, including wealth managers."

"The best way to put it is, we're the wealth managers' asset manager," Izenstark says. All private clients, regardless of how they come to the firm, are in the same asset management programs, he adds.

Communicating Risk
Clients come to IRON for asset management, says Izenstark. "Our goal is always to communicate about how much risk the client wants to take. Many times, the client doesn't understand what that means," he says.

Education is a major component of the firm's initial interaction with clients, he says. "In my experience in talking with these clients, they always tell you how much they want to make, not how much they want to lose," he says. "Typically, the high-net-worth individual, and even the super high-net-worth individual, doesn't want any lifestyle change. So it's very important to make sure they understand the risk they're communicating to you and what that means."

Whatever understanding of risk clients do have tends to come from checking out financial software online, plugging some numbers in and looking at average annual returns, as opposed to drawdown or losses, Izenstark says. "We first focus on the worst possible scenario the investor might confront, " he says. "Many times, just because of their lack of knowledge, they're not schooled on what that risk would have been."

Once clients have established the level of risk they are willing to expose themselves to, the next step is portfolio construction, says Izenstark. "You first explain to them how they're invested and why they're invested and what that means in terms of beta, their general exposure to stocks and bonds," he says. "We don't think it makes sense to pay for beta. If you're just getting expensive exposure to the stock market, then there's a cheaper way to do that."