Ideally, to match each spouse’s desired mix, we would construct and report two pots of money separately. The more accounts we have, the more complex the management and reporting task. Technology can make it a little easier for planners to keep things like asset location and wash sales under control, but complexity can make it harder on clients. They may have to put up with more 1099s and 5498s than they’d care for, for instance.
We can split many types of accounts but not a retirement account. More than a few couples have the majority of their investment assets in one spouse’s company retirement plan. These are universally reported as one portfolio, creating a perception challenge for clients.
The third approach I see is for the planner to pick an appropriate mix based upon the goals stated regardless of what the risk tolerance assessments say. The risk tolerance assessments are used as a tool to facilitate a conversation about risk. As long as the portfolio mix is appropriate to the goal, the planner’s task is mostly coaching clients to stick with it.
This can sound like the first approach but a key difference is in the first approach the couple decides on the mix they think they can live with. In this last approach, the planner is deciding on the mix and working to help the client live with that selection.
In fact, there are some firms using this approach that don’t use a risk tolerance assessment tool at all. They focus on risk capacity and the client’s total financial situation to create an appropriate mix. Then they spend their energy on managing risk perception and helping clients develop a better risk composure.
“Risk composure” is a relatively new addition to the risk glossary. It is essentially the degree to which one’s risk perception changes. Academic studies show risk tolerance is remarkably stable. Any planner with some experience knows for some clients changes in risk perception can be dramatic.
Of course, while all of these risk topics—capacity, tolerance, perception and composure—are interesting and important, let us not forget that changing the portfolio is not the only way to change the client’s odds of success.
A huge part of financial planning is dealing with trade-offs. Planners can help clients see the effect of choosing to save more, spend less, work longer, be more tax savvy, be more creative with their charitable giving, or to decide when to take Social Security among many other things.
Risk cannot be avoided, but it can be managed. It just takes some planning to do it well.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at www.moisandfitzgerald.com.